9911796707
TMI Blog2012 (12) TMI 417X X X X Extracts X X X X X X X X Extracts X X X X ..... s either from the assessee or from Indian Bank. The Officer pointed out that there was no agreement between the assessee and the Indian Bank about this payment. Held that:- when after a full-fledged trial, a Court of competent jurisdiction had pronounced on the relationship between the parties, that A2, the assessee herein, acted as a broker only, in the absence of any contra evidence produced by the Revenue, the Tribunal should have considered this finding as answering the question on the role of the assessee as a broker. Contrary to the view of the Tribunal, the evidence spoken therein by the prosecution witnesses, clearly establish the role of the assessee as a broker, that he never acted as a principal to deal with the securities on his own without any instruction from the Indian Bank. The status of the assessee vis-a-vis Indian Bank was only that of a broker of Indian Bank and nothing else. - The assessee could not be mulcted with any liability as regards the sum of Rs.14,78,91,000/- as his income. - Decided in favor of assessee. - Tax Case (Appeals) Nos.366 to 368 of 2005, W.P.Nos.38858 to 38860 of 2005 and W.P.Nos.7279 and 25811 to 25813 of 2008 and W.P.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment years under consideration herein are 1991-92, 1992-93 and 1993-94 respectively. He is a stock broker registered with the Madras Stock Exchange. He is stated to be an approved broker of the Indian Bank for carrying out certain security transactions on their behalf during the previous years relevant to the assessment years 1991-92, 1992-93 and 1993-94. The assessee is an individual and the proprietor of Chandrakala and Company. 3. It is seen from the facts herein that in the course of the assessment proceedings for the assessment year 1991-92, the assessee was asked to submit the report on the types of security transactions done by the assessee, the transactions made in securities, profit and loss accounts for each head of income, transactions in shares and debentures where the assessee acted as a broker and transactions in shares and debentures where the assessee had acted on his own. Apart from that, details sought for also included the details of call money transactions and the brokerage received. The assessee accordingly submitted these details. 4. It is seen from the facts herein that one of the transactions undertaken by the assessee related to purchase of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Rs. 14,33,000/- 8. Nuclear Power Corporation : Rs. 1,78,52,000/- --------------------- Rs. 14,78,91,000/- --------------------- Bank charges --------------------- : Rs. 33,715/- --------------------- The assessee submitted that the sale proceeds received from Indian Bank was in the nature of advance and not his earnings. He filed a confirmation letter from Indian Bank, which confirmed about the receipt of Demand Drafts favouring the Public Sector Undertakings amounting to Rs.14,78,91,000/- as for additional interest on deposits received by the Bank. 5. On enquiry made with the public sector undertakings, it was learnt that these organisations did not have any agreement with the assessee. On enquiry, Indian Bank pointed out that during the period 01.04.1990 to 31.03.1991, the Bank's advances were more than the prescribed rate of term liabilities and current liabilities. If the Bank had to borrow heavily in call money market, it would have to pay exorbitant rate of interest ranging upto 72%. The total interest paid for the year was around Rs.212 crores. In order to contain this expenditure, the Bank approached the Pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as business expenditure arising in the normal course of business. 8. The Assessing Officer, however, rejected the case of the assessee that the payments made to the public sector undertakings were not falling under the category of diversion of income by overriding title at source. The Assessing Officer held that the letter from Bank of Madura revealed that Bank of Madura was purchasing securities from various Banks and financial institutions at a particular rate and selling the same to Indian Bank at a very high rate and debiting and crediting the amounts in the account of the assessee. Bank of Madura was charging only service charges. The amounts were duly credited to the account of the assessee and thereafter, the Demand Drafts were taken in favour of the Public Sector Undertakings. The Assessing Officer viewed that only when the income is diverted at the source by an overriding title before it started flowing into the assessee's account, then the same could be excluded from the assessee's assessable income. Thus, applying the decision reported in [1969] 74 ITR 17 (SC) (Commissioner of Income Tax Vs. Imperial Chemical Industries), the Assessing Officer rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate Authority allowed the appeal. The First Appellate Authority agreed with the alternative plea made, holding that the assessee was justified in claiming it as an expenditure under Section 37(1) as an expenditure wholly and exclusively laid out for the purpose of business within the meaning of Section 37(1) of the Income Tax Act. 10. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the Revenue went on appeal before the Income Tax Appellate Tribunal. It is a matter of record that in the meantime, criminal prosecution was laid against the assessee as accused No.2 and on Mr. Gopalakrishnan, the then Chairman of Indian Bank as accused No.1 before the Principal Special Judge of C.B.I. in C.C.No.17 of 1999 and the criminal case was decided on 27.04.2004. On the appreciation of evidence, the C.B.I. Court held "the charges had not been proved beyond reasonable doubt and the circumstances taken collectively cannot be said to be compatible only with the hypothesis of the guilt of the accused and totally incompatible with their innocent. However, there have been some irregularities committed in the matter of crediting of cheques in A2's amount for payment of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertakings and the deposits were there for three years. The banks were competing with each other and were quoting competitive interest rate. 13. As regards the role of the assessee as a broker and the authority given to act so, P.W.3 B.B.Shetty deposed that the notes put up for confirmation of the securities transactions were signed in the order of the Chief Officer, AGM, GM, Executive Director, i.e., himself, and the Managing Director. It was also deposed by B.B.Shetty that the price of securities were loaded for the purpose of giving higher rate of interest to the public sector undertakings. The said statement was reiterated in the evidence of P.W.6 Nagappan, the then AGM, Investment Department of Indian Bank. He further deposed that the decision for purchase and sale of securities was to be taken by the Chairman, Executive Director and the General Manager collectively. Once a decision was taken, steps were taken to effect sale or purchase of the securities. He pointed out that the availability, saleability and the price would be informed to the Chairman, Executive Director and General Manager. Once the deal was concluded, it would be placed before the Chairman through the Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taken by the committee and the system of payment of higher rate of interest was in vague even during the period of Shri M.G.K. Nair, the predecessor of A". ... "The above evidence clearly established that the purchase of all the securities was carried out by the investment department in the normal course of business. The decision to purchase securities was a collective decision from the dealer to the Chairman. For obvious reasons to avoid default in SLR banks maintain little above the prescribed limit during the relevant period." On the deposits taken from public sector undertakings the Criminal Court pointed out to the evidence of Shetty and observed as follows: " P.W.3, Shri . Shetty, the then Executive Director himself admits in the cross examination by A1 "To borrow from PSU for interest of little over 12% is more prudent than borrowing at the rate of 25% to 50% in the call money market". Therefore there is no surprise in the subject transaction and the decision with regard the payment of interest at the rate of 12.25% and 12.75% for Rs.80 crores (40+40)Deposit obtained from BDL when the choice was to get bulk deposits at a particular yield or borrowing call money market, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out that having regard to the nature of the transaction, it was evident that the assessee had acted as principal and not as agent. Consequently, the question of diversion by overriding title did not arise. Consequently, it rejected the assessee's case that the amount paid to the public sector undertakings by way of demand drafts was not its income. Thus, the Revenue's appeal was allowed. Aggrieved by this, the assessee is on appeal before this Court. 17. Learned senior counsel appearing for the assessee, while taking us through the decision of the CBI Court in C.C.No.17 of 1999 dated 27th April 2004, pointed out to the evidence of the Executive Director of the Bank deposing before the Criminal Court about the status of the assessee as a broker in the matter of purchase of securities and the need for paying higher amount than what the securities were actually sold for. He pointed out that due to difficult financial circumstances in raising money from the open market at high interest rate as in the case of other Banks, Indian Bank also resorted to luring public sector undertakings to make fixed deposits by assuring them a higher rate of interest than the normal rate paid. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The evidence as regards the receipt of the amount by the broker, the purpose of the receipt and the demand drafts taken by the broker at the instance of the Bank for payment of additional interest to public sector undertakings by the Bank are all fully dealt with by the Criminal Court. The import of the transactions and the nature of relationship between the parties, which are factual matters, cannot be different for the purpose of Income Tax proceedings, since the result flowing from the transaction and the relationship between the parties were the very basis and the subject matter of consideration in the assessment made on the assessee. The assessee had thus proved his case through the evidence of all those who had a role in this transaction and the findings of the Criminal Court, based on the evidence thus have relevance and material value in considering the claim of the assessee. He further pointed out that even though the Revenue raised a question as regards the Commissioner of Income Tax (Appeals) accepting the case of the assessee on the alternative plea for deduction under Section 37, the Tribunal had not rendered its finding on this aspect. He further referred to the awar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included the value of the securities purchased. Evidence of the Executive Director and other officials point out that price of the securities itself were fixed by the Bank authorities and as per their directions, the assessee had purchased the securities at market price and the differential amount was directed to be used for taking demand drafts for paying additional interest to public sector undertakings. Leaving that aside, the question that arises for consideration herein is as to whether the assessee could be termed as a broker for Indian Bank, that the assessee could not claim any interest on a sum of Rs.14,78,91,000/- at the time when Indian Bank paid the consideration for the purchase of securities. The second question herein is that whether the said sum could be held to have been given to the assessee for the purpose of taking demand drafts payable to the 9 public sector undertakings as by way of extra interest, payable by the Bank on the fixed deposits maintained by the public sector undertakings. The third question is as regards the relevance of the Criminal Court's decision. 22. As far as the decision of the C.B.I. Court in the criminal case is concerned, we may poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members of stock exchange acting for Indian Bank as a broker; that the contract note, in fact, is an agreement between the parties, which contained the date of the contract, the details of the said purchase, the Bank's conditions and the clauses on arbitration in the event of a dispute. It is no doubt true that the contract need not be in writing and it could be oral too. In the face of the fact that there existed a specific contract note, which is statutory in character, we do not find any justifiable ground in the Tribunal ignoring this as a material evidence as regards the relationship of the parties and as spoken to by the Bank itself. If the findings were arrived at in a summary proceedings before a forum without a full-fledged trial, then there may be a case for the Revenue to contend that the findings are not final. Given the fact that the evidence was let in in a trial before a Court of competent jurisdiction, even though the question raised in the criminal prosecution for the offences under the Indian Penal Code and the Prevention of Corruption Act, 1988, yet, the evidence let in, as spoken to by the prosecution witnesses, are relevant to this case for the purpose of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, we do not find that the said decision would be of any assistance to the Revenue, for the simple reason that there is no quarrel over the proposition that the proceeding in an assessment is different from a civil dispute and the Assessing Officer having a duty to assess and recover tax, is not deciding a litigation between the citizen and the State as in a suit. The decision of Punjab and Haryana High Court reported in [2008] 301 ITR 37 (R.P.Vashisht Vs. Deputy Commissioner of Income Tax (Appeals)) (P H), relied on by the Revenue, is also not of any assistance to the Revenue. In the said decision, the Punjab and Haryana High Court held that the scope of a proceedings in a criminal case is different from the scope of proceedings in an income tax assessment. The criminal charge is required to be proved beyond all reasonable doubt, whereas, the assessment under the Act is on the basis of preponderance of probabilities on the basis of the evidence recorded. 28. As far as the above decision of the Punjab and Haryana High Court is concerned, we do not find anything repugnant therein to our view on the materials available, to speak on the status of the assessee vis-a-vis the Bank, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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