2018 (4) TMI 1473 - SC - Income Tax

Accrual of additional interest - transfer by overriding title to the PSU - additional interest income belongs to the assessee or not - investment on behalf of Banks - determination of true nature of relationship between the Indian Bank and the Respondent with regard to the transactions in question - relationship between the Indian Bank and the Respondent - Held that - 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. 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. 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. 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 payable to the PSUs 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, 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 cannot be termed as the income of the Respondent. The decision rendered by the High Court requires no interference.

Summary

Issues Involved:
1. Whether the alleged additional interest payable to Public Sector Undertakings (PSUs) can be assessed as income of the Respondent.
2. The nature of the relationship between the Indian Bank and the Respondent.
3. The applicability of findings from criminal proceedings to tax assessment proceedings.

Detailed Analysis:

Issue 1: Whether the alleged additional interest payable to PSUs can be assessed as income of the Respondent

The primary issue before the Supreme Court was whether the additional interest payable to PSUs could be assessed as the income of the Respondent. The Assessing Officer had initially determined that the amount of ?14,73,91,000/- payable to the PSUs was the Respondent's income, as there was no overriding title in favor of the PSUs. However, the High Court overturned this decision, relying on evidence from criminal proceedings and the conduct of the parties involved, indicating that the Respondent acted merely as a broker and not as an independent dealer. The Supreme Court upheld the High Court's decision, concluding that the Respondent held the amount in trust to be paid to the PSUs on behalf of the Indian Bank, and thus, the sum could not be considered as his income.

Issue 2: The nature of the relationship between the Indian Bank and the Respondent

The Court examined the nature of the relationship between the Indian Bank and the Respondent concerning the transactions in question. The Respondent, a stockbroker, was engaged by the Indian Bank to purchase securities at a higher price to cover the market price, brokerage fees, and additional interest payable to PSUs. The High Court found that the relationship was that of a principal-agent, with the Respondent acting as a broker for the bank. This conclusion was supported by the evidence presented in the criminal proceedings, which showed that the Respondent's role was to facilitate transactions on behalf of the Indian Bank and not to act as an independent dealer.

Issue 3: The applicability of findings from criminal proceedings to tax assessment proceedings

The Revenue contended that the High Court erred in relying on findings from criminal proceedings, as the nature of criminal proceedings differs from tax assessment proceedings. However, the Supreme Court found that the High Court did not consider the criminal court's findings as binding but used them to understand the relationship between the parties. The criminal court's evidence, including testimonies from bank officials and documents, clearly indicated that the Respondent acted as a broker for the Indian Bank. The Supreme Court agreed with the High Court's approach, noting that the proven evidence from the criminal case could be considered while determining the true nature of the transactions and the Respondent's role.

Conclusion

The Supreme Court concluded that the additional interest payable to the PSUs could not be assessed as the Respondent's income. The Respondent acted as a broker for the Indian Bank, holding the amount in trust for the PSUs. The Court found no reason to interfere with the High Court's decision, which was based on a thorough examination of the evidence and the conduct of the parties involved. Consequently, the appeal was dismissed, and all connected appeals were disposed of accordingly.