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 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 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. 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 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]
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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