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Deputy Commissioner of Income Tax, Chennai v. T. Jayachandran

Civil Appeal · 2018 INSC 401Decided 24 Apr 2018
Civil Appeal No. 4341 of 2018
Justice R.K. Agrawal · Justice Navin Sinha

Background

T. Jayachandran was a stockbroker registered with the Madras Stock Exchange and an approved broker for the Indian Bank. During assessment years 1991-92 to 1993-94, he purchased securities on the Bank's behalf, and a large sum (over Rs. 14.7 crore) was routed through him, which the Income Tax Department treated as his personal taxable income. The Madras High Court had ruled in his favour, relying on findings from parallel CBI criminal proceedings that this money was only handled by him as a broker on the Bank's instructions, to be passed on as additional interest to public sector undertakings, not retained as his own earnings.

Decision Breakdown

The Supreme Court upheld the High Court's reliance on the criminal court's factual findings, holding that such findings, based on evidence including bank officials' testimony and the Bank's own correspondence, could properly be considered to establish the true relationship between the broker and the Bank. It found that the money had passed through Jayachandran purely as a conduit: the price of securities was fixed by the Bank, the differential amount was used to arrange demand drafts for additional interest payable to PSUs, and he ultimately handed the money back to the Bank. Since what counts for taxability is income that genuinely accrues to a person, and this amount never became his to keep, the Court held he held it only in trust and it could not be taxed as his income. The main appeal and all fourteen connected appeals were accordingly dismissed with no order as to costs.

Lesson Learnt

Money that merely passes through someone's hands as an intermediary or trustee, never belonging to them beneficially, is not their taxable income, even if it is formally received in their name; what matters for tax purposes is whether income has genuinely and beneficially accrued to the person, not just physical receipt.

Official source (sci.gov.in)View Judgment (PDF)

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