Deputy Commissioner Of Income Tax, Chennai vs T. Jayachandran

R.K. Agrawal, J.

1) Leave granted.

2) The present appeal has been filed against the impugned judgment and order dated

29.10.2012 passed by the High Court of Judicature at Madras in Tax Case (Appeal) No.

368 of 2005 wherein the Division Bench of the High Court allowed the appeal filed by the

respondent by absolving the additional tax liability imposed by the Assessing Officer, vide

order dated 25.01.1996.

3) Brief facts:-

(a) The Respondent - an individual and the proprietor of M/s Chandrakala and Company, is

a stock broker registered with the Madras Stock Exchange. He is stated to be an

approved broker of the Indian Bank. The assessment years under consideration herein

are 1991-92, 1992-93 and 1993-94 respectively. During all these relevant assessment

years the Respondent acted as a broker to the Indian Bank in purchase of the securities

from different financial institutions.

(b) It is the case of the Revenue that the Indian Bank, in order to save itself from being

charged unusually high rate of interest on borrowing money from the market, lured

Public Sector Undertaking (PSUs) to make fixed term deposit with it on higher rate of

interest. The rate of interest offered to the PSUs for making huge term deposits was

to the extent of 12.75% of interest on fixed deposits against the approved 8% rate of

interest in accordance with the RBI directions.

(c) In order to pay higher interest to the PSUs who made a fixed term deposit with the

Indian Bank, the bank requested the Respondent to purchase securities on its behalf at a

prescribed price which was unusually high but adequate to cover the market price of the

securities, brokerage/incidental charges to be levied by the Respondent on these

transactions, apart from covering the extra interest payable to the PSUs. The

Respondent, on the instructions of Indian Bank, purchased securities at a particular rate

quoted by the Bank and sold them to Indian Railways Finance Corporation. Bank of

Madura was the routing bank through which the securities were purchased and sold to

Indian Bank for which Bank of Madura charged service charges. The Respondent was

paid commission in respect of transactions done on behalf of Indian Bank. Under

instructions from Indian Bank, a portion of the amount realized from the security

transactions carried on behalf of Indian Bank was paid by way of additional interest to

certain Public Sector Undertakings (PSU) on the deposits made with the Indian Bank and

out of eight PSUs three has confirmed the receipt of such additional interest through

demand drafts.Â

(d) The Respondent filed his return of income for the Assessment Year 1991-92 on

01.11.1993 and declared his income at Rs. 4,82,83,620/-. The total income was

determined at 4,85,46,120/vide order dated 30.06.1994. However, later on, the case was

taken up for scrutiny and assessment was framed under Sec 143(3) of the Income Tax

Act, 1961 (in short ‘the Act’). The Assessing Officer, vide order dated 25.01.1996,

raised a demand for a sum of Rs. 14,73,91,000/- with regard to the sum payable to the

PSUs while holding that the Respondent has not acted as a broker in the transactions

carried out for the Indian Bank rather as an independent dealer and that there was no

overriding title in favour of the PSU’s with regard to the additional amount earned

out of the securities transactions and it is a case of application of income after accrual

and, hence, the said amount is liable to be assessed as the income of the Respondent.

(e) The Respondent, being dissatisfied with the order, preferred an Appeal before the

Commissioner for Income Tax (Appeals). Learned Commissioner of Income Tax

(Appeals), vide order dated 08.08.1996, set aside the demand for additional tax while

deciding the issue in favour of the Respondent and held that the alleged additional

interest payable to the PSUs could not be considered as the income of the Respondent.

(f) Being aggrieved by the order dated 08.08.1996, the Revenue filed an appeal bearing

No. ITA No.2297(Mds)/1996 before the Income Tax Appellate Tribunal (hereinafter

referred to as ‘the Tribunal’). The Tribunal, vide order dated 05.01.2005, allowed

the appeal filed by the Revenue and held that the amount received at the hands of the

Respondent which is alleged to be payable to the PSUs is the income of the Respondent

and there is no overriding title exists in favour of the PSUs so as to cause diversion of

income.

(g) It is pertinent to note that in the meanwhile criminal proceedings which were

initiated with respect to the present transactions in question against the Respondent

along with others bearing No. CC 17 of 1997, was decided on 27.04.2004 by the CBI

court. The court, while acquitting the Respondent has observed that the relationship

between the Indian Bank and the Respondent is that of principal-agent and with regard to

the transactions in question the Respondent acted in the capacity of a broker and not as

an individual dealer. However, the Tribunal refused to rely on the evidence produced in

the trial court on the ground that the assessment proceedings are different from the

criminal proceedings and the evidence adduced in the trial court couldn’t be relied to

absolve the Respondent from the tax liability.

(h) Being aggrieved by the order of the ITAT dated 05.01.2005, the assessee filed Tax

Case Appeal No. 368 of 2005 before the High Court. The High Court, vide order dated

29.10.2012, set aside the order of the Tribunal while relying on the evidence given in the

criminal case in this regard. Hence, this appeal is filed before this Court.

Point(s) for consideration:-

4) The only point for consideration before this Court is whether on the facts and

circumstances of the present case the High Court was right in holding that the alleged

additional interest payable to PSUs cannot be assessed as income of the Respondent?

Rival contentions:-

5) Learned counsel appearing on behalf of the Revenue contended that the High Court

erred in relying on the evidence given in the criminal proceedings as the nature of the

criminal proceedings is different from that of assessment proceedings. Learned counsel

further contended that the High Court, while passing impugned judgment, relied on the

letter dated 25.03.1994 of M/s Indian Bank. However, the High Court failed to consider

the factual position that out of 8 PSUs  only 3 have confirmed the receipt of demand

drafts. The remaining 5 PSUs denied to have received any such Demand Draft either

from Shri T. Jayachandran, the Respondent or from M/s Indian Bank and the High Court

was not justified in accepting the Respondent’s contention that there was some

overriding title in favour of the PSUs in the alleged additional interest payable to them by

the Indian Bank.

6) Learned counsel for the Revenue finally contended that the impugned judgment is bad

in law on the facts and circumstances of the present case and requires to be set aside by

this Court.

7) Per contra, learned senior counsel appearing for the Respondent submitted that the

role of the Respondent was only that of a conduit for taking demand drafts in respect of

additional interests payable to the PSUs and the demand draft taken on behalf of the

Indian Bank did not form part of the total income of the Respondent and there exists an

overriding title in favour of the PSUs with reference to the amount in question i.e., the

additional interest payable to the PSUs.

8) Learned senior counsel further submitted that though the assessment proceedings are

different in nature from that of criminal proceedings but the same could not be a ground

to throw out the legitimate conclusion arrived at by the trial court on the basis of proved

evidence. Learned senior counsel finally submitted that the High Court was right in

taking note of the developments in the criminal case in coming to the conclusion that the

respondent was acting as a broker or agent to the Indian Bank and the order of the High

Court was well within the parameters of law and requires no interference.

9) We have heard learned counsel for both the parties and perused the factual matrix of

the case.

Discussion:-

10) The answer to the short question whether the alleged interest payable to the PSUs

can be assessed as an income of the Respondent depends on the determination of true

nature of relationship between the Indian Bank and the Respondent with regard to the

transactions in question and the capacity in which he held the amount of 14,73,91,000/-

. Now, coming to the question of relationship between the Indian Bank and the

Respondent, the normal settlement process in Government securities is that during

transaction banks make payments and deliver the securities directly to each other.Â

The broker’s only function is to bring the buyer and seller together and help them to

negotiate the terms for which he earns a commission from both the parties. He does

not handle either cash or securities. In this respect, the broker functions like the

broker in the inter bank foreign exchange market. The conduct of the Respondent in the

transaction in question cannot be termed to be strictly within the normal course of

business and the irregularities can be noticed from the manner in which the whole

transactions were conducted. However, the same cannot be basis for holding the

Respondent liable for tax with regard to the sum in question and what is required to be

seen is whether there accrued any real income to the Respondent or not.

11) It is required to be seen in what capacity the Respondent held the said amount-

independently or on behalf of the Indian Bank. The Assessing Officer, while passing order

dated 25.01.1996, has held that there exists no agreement between the Respondent and

the Indian Bank about the payment of additional interest to the PSUs and there was no

overriding title in respect of the additional interest for the PSUs. However, the position

in this regard is very much settled that an agreement need not be in writing but can be

oral also and the same can be inferred from the conduct of the parties.

12) Further, while considering the claim of the Respondent and the view of the Assessing

Officer, how the bank itself had treated the Respondent, is a matter of relevance. At the

outset, learned counsel appearing on behalf of the Revenue contended that the

proceedings under the Income Tax Act are independent proceedings and the High Court

committed a grave error in relying on the findings of the criminal Court. We do not find

any force in the contention of the appellant herein as the High Court has not held that

the findings of the criminal court are binding on the Revenue authorities. Rather the

High Court was of the view that the findings arrived at by the criminal court can be

taken into consideration while deciding the question as to the relationship between the

parties to the case. When the findings are arrived by a criminal court on the evidence and

the material placed on record then in absence of anything shown to the contrary, there

seems to be no reason as to why these duly proved evidence should not be relied upon by

the Court. The High Court has specifically appraised the findings given by the CBI Court

in this regard. The relationship between the Indian Bank and the Respondent is very

much clear by the evidence led during the criminal proceedings. The Executive Director

of the Bank has specifically spoken about the role of the Respondent as a broker

specifically engaged by the Bank for the purchase of securities and that the Bank has

included the interest money too in the consideration paid, for the purpose of taking

demand drafts in favour of PSUs. Further, the evidence led by other bank officials points

out that the price of securities itself were fixed by the bank authorities and as per their

directions the Respondent had purchased the securities at the market price and the

differential amount was directed to be used for taking demand drafts from the bank itself

for paying additional interest to the PSUs. Further, the letter dated 25.03.1994 by the

Bank wherein the Bank had acknowledged the receipt of Demand Drafts taken by the

Respondent gives an unblurred picture about the capacity of the Respondent in holding

the amount in question. Consequently, the conduct of the parties, as is recorded in the

criminal proceedings showing the receipt of amount by the broker, the purpose of receipt

and the demand drafts taken by the broker at the instance of the bank are sufficient to

prove the fact that the Respondent acted as a broker to the Bank and, hence, the

additional interest payable to the PSUs could not be held to be his property or income.

13) The income that has actually accrued to the Respondent is taxable. What income has

really occurred to be decided, not by reference to physical receipt of income, but by the

receipt of income in reality. Given the fact that the Respondent had acted only as a

broker and could not claim any ownership on the sum of Rs. 14,73,91,000/- and that the

receipt of money was only for the purpose of taking demand drafts for the payment of the

differential interest payable by Indian Bank and that the Respondent had actually handed

over the said money to the Bank itself, we have no hesitation in holding that the

Respondent held the said amount in trust to be paid to the public sector units on behalf of

the Indian Bank based on prior understanding reached with the bank at the time of sale

of securities and, hence, the said sum of Rs. 14,73,91,000/- cannot be termed as the

income of the Respondent. In view of the above discussion, the decision rendered by the

High Court requires no interference

14) In view of the above discussion, the appeal is hereby dismissed with no orders as to

cost. In view of the above, all the connected appeals are also disposed of accordingly.