DEPUTY COMMISSIONER OF INCOME TAX, CHENNAIT. JAYACHANDRAN versus T. JAYACHANDRAN

Citation: [2018] 5 S.C.R. 619 · Decided: 24-04-2018 · Supreme Court of India · Bench: R.K. AGRAWAL · Disposal: Disposed off

Judgment (excerpt)

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DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI
v.
T. JAYACHANDRAN
(Civil Appeal No. 4341 of 2018)
APRIL 24, 2018
[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
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
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
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
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
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
   [2018] 5 S.C.R. 619
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SUPREME COURT REPORTS
[2018] 5 S.C.R.
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
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
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
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.
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.  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]
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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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 dem

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