DEPUTY COMMISSIONER OF INCOME TAX, CHENNAIT. JAYACHANDRANversusT. JAYACHANDRAN

                          [2018] 5 S.C.R. 619                            619


   DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI                            A
                                  v.
                       T. JAYACHANDRAN
                   (Civil Appeal No. 4341 of 2018)
                          APRIL 24, 2018                                 B
          [R. K. AGRAWAL AND NAVIN SINHA, JJ.]
        Income Tax Act, 1961 – Additional interest – Respondent, an
approved broker for Indian Bank – Case of revenue was that Indian
Bank raised its funds by way of receiving amount from the PSU and        C
making fixed term deposit on higher rate of interest – In order to
pay higher interest to these PSUs, the bank requested the
respondent to purchase securities on its behalf – Thereafter,
respondent purchased securities at a particular rate quoted by the
bank and was paid commission in respect of transactions done on
behalf of Indian Bank – Under instructions from Indian Bank, a           D
portion of amount realised from the security transactions carried
on behalf of Indian Bank was paid by way of additional interest to
certain PSUs on the deposits made with the Indian Bank –
Assessing officer made demand from the respondent with regard to
the sum payable to the PSUs holding that the respondent did not          E
act as a broker in the transactions carried out for Indian Bank
rather as an independent dealer and that there was no overriding
title in favour of PSUs with regard to the additional amount earned
out of the securities transactions and the said amount is liable to be
assessed as the income of the respondent – Held: Whether the
alleged interest payable to the PSUs can be assessed as an income        F
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 – The normal settlement process in Government
securities is that during transaction banks make payments and            G
deliver the securities directly to each other – 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 – The

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620            SUPREME COURT REPORTS                      [2018] 5 S.C.R.


A     evidence led by bank officials show 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 which is sufficient to prove the fact that the respondent
B
      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.

            Disposing of the appeals, the Court

C           HELD: 1. 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
      Rs. 14,73,91,000/-. The normal settlement process in Government
D     securities is that during transaction banks make payments and
      deliver the securities directly to each other. 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.
E     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
F     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. It is required to be seen in
      what capacity the Respondent held the said amount-independently
      or on behalf of the Indian Bank. [Paras 10, 11] [625-E-G; 626-A]
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            2. 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

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  DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI v.                           621
               T. JAYACHANDRAN

specifically engaged by the Bank for the purchase of securities           A
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
                                                                          B
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. 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         C
of the bank were 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. [Para 12] [626-F-H; 627-A-B]

      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4341                D
of 2018.

     From the Order dated 29.10.2012 of the High Court of Judicature
at Madras in TC No. 368 of 2005
                                                                          E
                                WITH

      Civil Appeal Nos. 4342-4243, 4349-4350, 4344, 4346-4348, 4351,
4352, 4353, 4354, 4355, 4345, 4350 and 4357 of 2018.

       Arijit Prasad, Ms. Sadhana Sandhu (for Mrs. Anil Katiyar) Advs.    F
for the Appellant.

      Biswajit Bhattacharya, Arvind P. Datar, Mukul Rohatgi, Sr. Advs.,
Elam Bharathi, Sumit Kumar, Pratap Venugopal, Ms. Surekha Raman,
Anuj Sarma, Ms. Niharika, Ms. Kanika Kalaiyarasan (for M/s K.J. John
& Co.), Preetesh Kapoor, Sanjay Kapur, Ms. Megha Karnwal,                 G
Ms. Shubhra Kapur, Sanjay Kapur, Ms. Vanita Bhargava, Ajay
Bhargava, Roy O. John (for M/s. Khaitan and Co.), Advs. for the
Respondent.


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622            SUPREME COURT REPORTS                           [2018] 5 S.C.R.


A           The Judgment of the Court was delivered by
            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
B     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:-

C            (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
D     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
E     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
F     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
G
      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
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  DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI v.                                623
        T. JAYACHANDRAN [R.K. AGRAWAL, J.]

from the security transactions carried on behalf of Indian Bank was            A
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.
       (d) The Respondent filed his return of income for the Assessment        B
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         C
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,      D
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,             E
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            F
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
      (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
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624             SUPREME COURT REPORTS                           [2018] 5 S.C.R.


A     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
B
      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
C     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
D     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
E     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
F     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
G     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.

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  DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI v.                                625
        T. JAYACHANDRAN [R.K. AGRAWAL, J.]

      7. Per contra, learned senior counsel appearing for the Respondent       A
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
                                                                               B
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         C
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       D
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             E
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          F
the securities directly to each other. 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           G
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

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626             SUPREME COURT REPORTS                            [2018] 5 S.C.R.


A     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
B     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
C     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
D     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
E     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
F     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
G     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
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  DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI v.                                 627
        T. JAYACHANDRAN [R.K. AGRAWAL, J.]

was directed to be used for taking demand drafts from the bank itself           A
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
                                                                                B
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           C
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           D
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/-       E
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      F
are also disposed of accordingly.


Devika Gujral                                            Appeals disposed of.

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