Income Tax Dispute: Supreme Court Upholds High Court’s Decision on Additional Interest Payment to PSUs

The case of Deputy Commissioner of Income Tax, Chennai vs. T. Jayachandran revolves around the taxability of additional interest payments made to Public Sector Undertakings (PSUs) in securities transactions. The Supreme Court examined whether the additional interest payable to PSUs should be assessed as the respondent’s income or treated as a pass-through transaction.

The dispute arose when the Income Tax Department assessed the respondent’s total income by including Rs. 14.73 crores as taxable income, arguing that there was no overriding title in favor of the PSUs. The High Court ruled in favor of the respondent, holding that the amount did not constitute his income but was merely routed through him as a broker.

Background of the Case

The respondent, T. Jayachandran, a stockbroker registered with the Madras Stock Exchange, acted as a broker for Indian Bank in purchasing securities from various financial institutions. The transactions were structured in a way that Indian Bank offered PSUs a higher rate of interest (12.75%) on fixed deposits instead of the prescribed 8% rate.

The additional interest payable to PSUs was embedded in securities transactions, with the respondent facilitating the transfer of funds through demand drafts. The Income Tax Department treated this additional amount as his income, leading to a tax dispute.

Arguments by the Parties

Petitioner’s Arguments (Deputy Commissioner of Income Tax, Chennai)

The Revenue contended that:

• The High Court erred in relying on criminal proceedings, which have different standards from tax assessments.
• Only three out of eight PSUs confirmed receiving additional interest, while five denied receiving any payments.
• The respondent acted as an independent dealer rather than a mere broker, making the additional amount part of his taxable income.

Respondent’s Arguments (T. Jayachandran)

The respondent argued that:

• He acted solely as a conduit for Indian Bank in transferring additional interest payments to PSUs.
• The criminal court’s acquittal and findings supported his role as a broker, not an independent dealer.
• The money was never part of his income but was meant for onward payment as directed by Indian Bank.

Supreme Court’s Analysis

The Supreme Court examined the nature of the transactions and the respondent’s role:

• The settlement process in government securities involved brokers bringing buyers and sellers together without handling cash or securities.
• The respondent’s conduct indicated he was acting under the instructions of Indian Bank and did not have discretion over the funds.
• The High Court correctly considered criminal court findings, which provided clarity on the respondent’s role in the transactions.

Key Observations by the Court

The Supreme Court ruled:

“The respondent acted only as a broker and could not claim ownership of Rs. 14.73 crores. The amount was held in trust to be paid to PSUs on behalf of Indian Bank. Therefore, the said sum cannot be termed as the income of the respondent.”

Final Judgment

The Supreme Court dismissed the appeal and upheld the High Court’s ruling. It stated:

“The decision rendered by the High Court requires no interference.”

Conclusion

This ruling clarifies that intermediaries facilitating financial transactions under explicit instructions are not liable for tax on amounts merely routed through them. The judgment sets an important precedent in determining the taxability of structured financial transactions.

Petitioner Name: Deputy Commissioner of Income Tax, Chennai.
Respondent Name: T. Jayachandran.
Judgment By: Justice R.K. Agrawal, Justice Navin Sinha.
Place Of Incident: Chennai.
Judgment Date: 24-04-2018.

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