Per Shri T. N. C. Rangarajan, Judicial Member - This appeal by the revenue is directed against an order of the AAc deleting an addition made under Section 69D of the Income-tax Act, 1961 (the Act).
2. The assessee is a registered firm. While going through the accounts of the previous year ending 9-11-1977, corresponding to the assessment year 1978-79, the ITO noticed that the assessee had taken loans on hundi and had also repaid loans taken on hundies and such borrowals and repayments had not been made through account-payee cheque or bank drafts. He, therefore, added back the amounts so borrowed or repaid along with the interest amounting to Rs. 41,650 under Section 69D. On appeal, the AAC found that the hundies had been written in English and following an order of the Tribunal dated 24-10-1980 in the case of Paranjothi Salt Co. in IT Appeal No. 1162 (Mad) of 1979, he held that the documents written in English cannot be considered to be hundies and, therefore, the provisions of Section 69D could not be applied. He, accordingly, deleted the additions.
3. In this appeal the contention of the revenue is that merely because the documents are written in English, they cannot be taken to fall outside the meaning of the word hundi because though hundies being written in local languages, there is nothing to prevent the hundies being written in English. It was pointed out that the documents in question were written on hundi papers and understood by the parties to the documents as hundies and, therefore, they could not be disregarded in applying the provisions of Section 69D. On the other hand, the contention of the assessee, apart from the point that being written in English they could not be regarded as hundies, is that the wordings of documents showed that they were only promissory notes and, therefore, even otherwise the provisions of Section 69D could not be applied.
4. In order to understand the scope of Section 69D which was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976, we have to see what was the situation before the introduction of the Section, what was the mischief and effect which was ought to be suppressed and whether the remedy proposed by the introduction of the Section cured the mischief. The Direct Taxes Enquiry Committees Final Report (page 63, para 2.220) recommended as follows :
'Hundi loans - Until sometime back Hundi loans provided one of the important outlets for profitably investing or utilising black money. As a result of sustained efforts by the department, the hundi racket is stated to have been tackled to a considerable extent. We would however recommend that Permanent Account Numbers, which are to be assigned to taxpayers by the department should be statutorily required to be quoted on hundi papers and further that advances of loans on hundies and their re-payments, including interest, should be made through account payee cheque only. This should serve as an effective check on bogus hundi loans.'
From this recommendation it will be apparent that there were borrowals on hundies which were not genuine. Hence, the remedy proposed was to see that the borrowals from hundies are always genuine in the sense that the hundies are traceable with existing parties. For this purpose, Section 69 D was introduced in the following terms :
'where any amount is borrowed on a hundi from or any amount due thereon is repaid to, any person otherwise, than through an account payee cheque drawn on a bank the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount as aforesaid for the previous year in which the amount was borrowed or repaid as the case may be.'
4A. Before we understand the scope of the phrase amount borrowed on a hundi in this Section we have to understand what a hundi is, and in what circumstances there can be a borrowal on hundi. The word hundi has not been defined in any statute. The text book definition of a hundi as found in Kherganwallas Commentary on the Negotiable Instruments Act, 15th edition by M. S. Parthasarathy is :
'Hundies - A bill of exchange in the vernacular language is generally called a hundi. Hundies are negotiable instruments written in an oriental language. They are sometimes bills of exchange and at other times promissory notes and are subject to local usages and are unaffected by the provisions of the Indian Negotiable Instruments Act.'
When a hundi is drawn up as a bill of exchange, there are three parties to it, namely the person who gives the order to pay, called the drawers, the person ordered to pay, called the drawee, an the person to whom money is directed to be paid, called the payee. In such cases obviously the drawer is not the person who receives the money and, therefore, if the assessee is the drawer he neither borrows from, nor repay any money to the same person. For instance, A, who is an assessee, pays money to B the drawer, who gives the hundi drawn on C, the drawee, in favour of D the payee, to whom A may be indebted for the payment of the price of the goods supplied. In this illustration there is no borrowal or repayment though the hundi itself is made negotiable thus facilitating either the transmission of the money or even the availability of credit for a period of time until the ultimate payment for a small discount. Such hundies drawn as bills of exchange are generally known as Darshani hundies, payable at sight or on presentation and it is admitted that such Darshani hundies are not governed by the provisions of Section 69D, as clarified by the CBDT in the Circular No. 221 dated 6-6-1977 in the following terms :
'1. Reference is invited to Boards Circular No. 208 (F. No. 208/7/76 IT (A-II) dated 15th November, 1976 (reproduced below) in which the provisions of Section 69D of the Income-tax Act, 1961 were explained.
2. A hundi in common commercial parlance, denotes an indigenous form of bill of exchange, by and large in vernacular language, which is being used by the mercantile community in India. The hundies can be broadly classified as (i) darshani hundies (sight or demand hundies), and (ii) muddati hundies (usance hundies payable after a stipulated period of time mentioned therein). Darshani hundies are of different varieties, viz., (i) shahjog hundies, (ii) dhanijog hundies, (iii) namjog hundies, (iv) dekharnarjog hundies, (v) farmanijog hundies, and (vi) jokhmi hundies.
3. It has been represented to the Board that a darshani hundi created solely for the purpose of remittance of funds of financing inland trade or for operating accounts through indigenous banking channels, does not involve borrowal of amounts and as such does not fall within the scope of section 69D. There are more than two parties in darshani hundi. Normally four parties are involved in the case of a darshani hundi, viz., (i) the rakhya (the holder of purchaser), (ii) the drawer (an indigenous banker or a vyapari), (iii) the drawee normally an indigenous banker but can also be a vyapari, and (iv) the payee. If the payee is also the rakhya, the parties will be three. Darshani hundi is payable at sight, i.e., immediately on presentation. A muddati (usance) hundi, generally involving two parties is payable after a stipulated period of time mentioned in the hundi.
4. The matter has been considered by the Board. We have been advised that the provisions of Section 69D are not applicable to darshani hundi transactions mentioned hereafter :
(i) (a) A, who is the rakhya, obtains on payment from B, the drawers, a hundi, drawn on C, the drawee, in favour of D, the payee.
(b) A, the rakhya having a running account or an overdraft, account with B, obtains from him a hundi drawn on C, the drawee, in favour of D, the payee.
(ii) (a) A, a purchaser of goods from B, draws a hundi on C, the drawee in favour of B, or a third party D for the purpose of payment of the price of goods purchased or for settling the account.
(b) For such purposes B can also draw a hundi on A either in his own favour or in favour of a third party D.
(iii) A has an account with an indigenous banker C who has granted a credit facility to A and handed over a hundi book to him. `A draws amounts through such hundies payable either to self, or bearer or third party. Such an arrangement arises out of the credit facility already granted and, therefore, no debtor-creditor relationship has arisen between the parties because of the drawl of a hundi.
5. Normally borrowal on hundi arises when a person gets money by execution of a hundi but in the instances cited above the hundi is given in the nature of a security and there is no borrowal on such hundies. Thus in cases of transactions referred to at (i), (ii) and (iii) of para 4, Section 69D is not applicable. The settlement of account between any of the parties such a darshani hundi can thus be otherwise than through an account payee cheque within the meaning of Section 69D.
6. This circular covers darshani hundi transactions of the types referred to at (i), (ii) and (iii) of para 4 above. However, it could not be said that there could be no borrowal on darshani hundi. The transactions not of the type referred to above on darshani hundies have to be examined with reference to the facts and circumstances of such cases so as to determine whether or not there is a borrowal on such hundies.
CIRCULAR REFERRED TO ABOVE
1. The Taxation Laws (Amendment) Act, 1975, has added a new Section 69D in the Income-tax Act, 1961, with effect from 1st April, 1977, which provides that if any amount is borrowed from any person on a hundi or any amount due on it is repaid to any person, otherwise than through an account payee cheque drawn on a bank the amount so borrowed or repaid shall be assessed as the income of the taxpayer borrowing or repaying the said amount, for the previous year in which the amount in borrowed or repaid. This will also apply to the amount of interest paid on the amount borrowed on hundi. This provision is applicable only in respect of hundies and does not cover other types of loans, such as repayment of loan by employees to employers, repayment of loan to banks co-operative societies, etc.
2. The term hundi has not been defined in the Income-tax Act, 1961. In common commercial parlance, it denotes an indigenous instrument in vernacular language which can be use by the holder thereof to collect money due thereon without using the medium of currency. It may also be regarded as an indigenous form of bill of exchange expressed in vernacular language which has been in use in the mercantile community in India for the purpose of collecting dues. There are numerous varieties of hundies for example darshani hundi, muddati hundi, shahjog hundi, jokhmi hundi, namjog hundi, dhanijog hundi, jawabi hundi and zichri chit. The characteristics of hundies differ according to the varieties of the same. The following characteristics are found in most of the hundies :
(i) A hundi is payable to a specified person or order or negotiable without endorsement by the payee.
(ii) A holder is entitled to sues on a hundi without an endorsement in his favour.
(iii) A hundi accepted by the drawee could be negotiated without endorsement.
(iv) If a hundi is lost, the owner could claim a duplicate or triplicate from the drawer and present it to the drawee for payment. Interest can be charged where usage is established.
3. This provision will come into force with effect from 1st April 1977, Accordingly, any payment on or after 1st April, 1977 in respect of an amount borrowed on a hundi will have to comply with the requirements of this provision regardless of whether the hundi was executed prior to the said date or on or after that date.
CIRCULAR NO. 208 [F. NO. 208/7/76-IT (A-II)], DATED 15-11-1976.
5. Thus we find that the acceptation of the word Hundi is derived from the exception provided in Section 1 of the Negotiable Instruments Act. Section 1 provides that nothing therein contained affects any local usages relating to any instrument in an oriental language. In other words, what is excluded from the operation of the Act is the local usages relating to instruments in oriental languages and not the instruments themselves. The important local usages generally accepted are that (a) though the hundi is payable to a specified person, it is negotiable without endorsement by the payee, (b) that a holder is entitled to sue on a hundi without an endorsement in his favour, (c) that a hundi accepted by the drawee could be negotiated without endorsement, and (d) if a hundi is lost, the owner could claim duplicate or a triplicate from the drawer and present it to the drawee for payment. It follows that even if a hundi is written in the form of a promissory note, if it is established to be a hundi these local usages may apply and it would be possible for the payee to negotiate that document without endorsement. Under Section 48 of the Negotiable Instruments Act a promissory bill of exchange or cheque payable to order is transferable only by endorsement and delivery thereof. Therefore, the provisions of the Negotiable Instruments Act will apply to a document written in English since only documents written in oriental languages have the benefit of the local usages under Section 1 of the Negotiable Instruments Act. It is interest to note that even in its 11th report of 1958, the Law Commission of India had recommended as follows :
'There is no reason to exclude the applicability of any of the provisions of the Act to an instrument (in whatever language it may be written) which fulfills the requirements of one or other of the instruments dealt with under the Act. Thus, if a hundi, in spite of the name that is given to it in the document by the parties, comes within the definition of a promissory note or a bill of exchange or a cheque it should be governed by the provisions of the Act alone notwithstanding any usage or custom applicable to it which may be at variance with such provisions. To this extent, we think, indigenous instruments should be brought within the scope of this Act. With this end in view, we have proposed a new provision in place of the existing saving clause in Section 1. We would also like to point out that with the increasing emphasis on the use of Indian language a growing number of negotiable instruments will come to be made in these languages and it is necessary that these instruments should be brought within the ambit of the provisions of the Act. Many of the commercial bodies consulted by us have expressed agreement with our proposal.'
But since this recommendation of the Law Commission has not yet been implemented while other recommendations have been given effect to, the position remains as stated above.
6. We may now consider how an amount is borrowed on a hundi. If a hundi is written in the form of a promissory note, the assessee can draw a hundi, hand it over to the creditor and borrow the amount from him. All kind of hundies, which may resemble a promissory note and have only two parties to the document, namely, the maker of the note, who promises to pay, and the payee, the person to whom money is promised to be paid, is recognised in the Law of Merchant. In the text book mentioned above (12th Edition at page 205) there is a description of such hundies as follows :
'Miadi Hundi or Muddati Hundi-Payable after specific period of time, on security of which loans are advanced. It is the usual practice of the capitalists to deduct the interest in advance for a period up to the due date. This hundi records the agreement stating the loan advanced, the rate of interest and the other conditions of the loan.'
In Madras for instance, Thavanai Hundis for loans are drawn up in the following manner :
'Place and date ... at ... days after date we jointly and severally promise to pay ... or order at the Imperial Bank, Madurai, the sum of Rs. ... only for value received in cash.
If the document is a hundi in respect of which the local usages are saved then even a holder of such hundi may without endorsement raise money thereon. The result will be that there will be no record of the transfer of the hundi on the face of the hundi itself. Secondly, it had been found in number of cases that the drawee in such hundies were only namelenders and the holder introduced his undisclosed income as the amount borrowed on the hundi. It is this situation which was required to be met by legislation as reported by the Wanchoo Committee. In meeting this situation also it is necessary to consider the effect of the special rules of evidence contained in the negotiable Instruments Act. Section 118 of the Act states that until the contrary is proved the following presumptions shall be made : (a) that every negotiable instrument was made or drawn for consideration, and (b) that every such instrument when it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated or transferred for consideration. No doubt it has been pointed out by the Supreme Court in the case of Kundanlal v. Custodian, Evacuee Property AIR 1961 SC 1316 that this is only a presumption of law which throws the burden of proof of failure of consideration on the maker of the note or the endorser and such burden of proof may be shifted by another presumption of law or fact and may also be rebutted not only by direct, but even by circumstantial evidence. Further, the presumption is only for consideration passed and not about the quantum of consideration. Therefore, when a third party of the document, namely, the ITO, enquires as to the genuineness of the instrument in question, the presumption of law raised by Section 118 (a) of the negotiable Instruments Act, may be offset by the presumption of law raised by Section 114 of the Evidence Act and in, particular illustration g, which shows that he may presume that evidence which could be and is not produced is presumed to be unfavorable to the person who withholds it. Section 118 itself states with the phrase until the contrary is proved, but when it is read along with the definition of the word disproved in the Evidence Act it still create considerable difficulty for the ITOs to establish that consideration had not passed when the assessee asserts that the consideration has passed on the hundies by producing the hundi Rokas and his account books. It is in this background that Section 69D was enacted to provide a visible trace of the consideration and prevent the hundies written in the form of promissory notes being utilised as a cover for introduction of the assessees own undisclosed income as borrows funds.
7. We may now turn to the question whether Section 69D suppresses that mischief and see how it could advance the remedy. As we have seen above, only in a case of an instrument written in oriental language the local usage are saved. In the cases of hundies written in oriental languages, in addition to special rules or evidence, there is an additional factor of the hundies being transferable without endorsement. but in the case of instruments written in English, endorsement is essential for negotiation. Prima facie, therefore Section 69D supplies the method of tracing the flow of money through account payee cheque where the hundies lack such information. The other difficulty posed by the special rules of evidence is common to all negotiable instruments. But the Section is confined to borrowals on hundies and is therefore restrictive in scope, in the absence of a more generic term as borrowal on any negotiable instruments. Having chosen a specie of negotiable instruments it is difficult to say that Section 69D covers any instrument other than a hundi.
8. We must therefore address ourselves to the question whether the instrument on which the amount was borrowed by the assessee was a hundi or not. The instruments drawn up by the assessee in English are in the following terms :
Tuticorin 17th May, 1977.
Due date 15th August, 1977.
At ninety (90) days after date without grace days, we GRAHALAKSHMI & CO., Salt Merchants, 2-B Periara Lane, Tuticorin-1 promise to pay jointly and several to Smt. G. Ananthalakshmi, Bankers, Khanagasabhapathy Pillai Street, Tuticorin-2 the sum of rupees one thousand only for value received in cash by cheque and that with interest at 18 per cent per annum after due date.
For GRAHALAKSHMI & CO.
A perusal of this instrument shows that it contains all the characteristics of a promissory note defined in Section 4 of the Negotiable Instruments Act which is in the following terms :
'A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
A signs instruments in the following terms :
(a) I promise to pay B or order Rs. 500.
(b) I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received.
(c) Mr. B, IOU Rs. 1,000.
(d) I promise to pay B Rs. 500, and all other sums which shall be due to him.
(e) I promise to pay B Rs. 500, fist deduction thereout any money which he may owe me.
(f) I promise to pay B Rs. 500 seven days after my marriage with C.
(g) I promise to pay B Rs. 500 on Ds death, provided D leaves me enough to pay that sum.
(h) I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.
The interments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.'
Section 2(22) of the Stamp Act also defines a promissory note to be a promissory note as defined in the Negotiable Instruments Act. A bill of exchange is defined in Section 5 of the Negotiable Instruments Act as follows :
'A bill of exchange is an instrument in writing containing on unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.'
A bill of exchange in which the drawer and the drawee are the same person is in the nature of a promissory note. But the holder may at his option treat it as a bill of exchange or a promissory note by reason of Section 17 of the Negotiable Instruments Act. However, it has been held by the Full Bench of the Calcutta High Court in the case of Harshukdas v. Dhirendranath : AIR1941Cal498 that an instrument containing the usual promise to pay a certain sum of money to a certain person cannot be treated as hundi merely because of the use of the hundi stamp and writing of the word accepted on it by the executant. It was observed that to determine the character of the document, the provision of the document itself must be looked into and since the document contained a promise and not an order it was a promissory note and not a hundi or bill of exchange.
9. It may be noted that in a case of an instrument coming within several descriptions of the entries in the Stamp Act, Section 6 provides that it shall be charged only with the highest of such duties. But it has been held by the Madras High Court in the case of Alagappa Chettiar v. Narayana Chettiar : AIR1932Mad765 that the right of election given by Section 16 of the Negotiable Instruments Act to the holder of an instrument to treat it as a promissory note or a bill of exchange is a privilege which cannot be taken away by anything contained in the Stamp Act. A promissory note (entry 49) when payable otherwise than on demand is exigible to the same amount of stamp duty as a bill of exchange (entry 13). Since the stamp duty is the same, this difficulty does not arise. In any event Section 35 of the Stamp Act prohibits admission of an under stamped bill of exchange as well as a promissory note in evidence and the question will be relevant only for suing on the instruments when claimed and not for ascertaining the character of the instrument accepted by the parties to it. Another vital point relevant for our purpose is rule 5 of the Indian Stamp Rules which provides that a hundi payable otherwise than on demand shall be written on stamp paper bearing the word hundi. Rule 6 states that promissory notes and bills of exchange shall be written on stamp paper of proper value with or without the word hundi embossed thereon. Therefore, the fact that the document was written on hundi paper is of no consequence in determining its real character.
10. It is, therefore, our consideration opinion that the document in question is not a hundi at all. It is written in English and as we have discussed earlier, it does not enjoy the privilege of negotiability without endorsement available by local usage for hundies. It is negotiability without endorsement available by local usage for hundies. It is negotiable only by endorsement, and even under the circulars of CBDT an instrument which is negotiable only by endorsement cannot be a hundi. It contains a promise and not an order to pay. It is, therefore, a promissory note even though it is permitted to be written on hundi paper by reason of the special rules under the Indian Stamp Act. Since it is not a hundi the amount borrowed on such a promissory note cannot be deemed to be the income of the assessee under Section 69D merely because the payment or repayment was not made by an account-payee cheque.
11. Even assuming for the sake of argument that the document that the document is a hundi, the provisions of Section 69D are not attracted by the peculiar facts of the case. As we have seen earlier, the aim of Section 69D was only to capture those transactions which involved unaccounted money passed off in the guise of loans borrowed on hundies. But, where, as in this case, the transaction is admittedly genuine, the parties identifiable and the amount accounted in the books of both the parties, it is difficult to assume as a matter of course that the amount borrowed should be added back merely because it was not by way of an account-payee cheque. The Supreme Court has pointed out in the recent decision in the case of K. P. Varghese v. ITO : 131ITR597(SC) that where the plain literal interpretation of statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature or even do some violence to it so as to achieve the obvious intention of the Legislature and produce a rational construction. In the present case, it is not necessary to do any violence to the language. It is sufficient to understand the Section in the light of the intention of the Parliament and consider the failure to take the amount by an account-payee cheque as nothing more than a contravention of a statutory obligation, which implies that such a contravention need not carry the penalty when it is venial. We must also remember that Section 69D is not a revenue raising measure nor is it a punitive Section but only a provision to ensure that certain transactions are visibly made and so traceable as to exclude transactions which are not genuine being passed of as genuine transactions. Obviously, such a Section cannot apply to a transaction which is admittedly genuine and traceable. In that situation, when there is a contravention of the statutory obligation to receive the money by an account-payee cheque only we cannot avoid looking into the question whether that contravention was without reasonable cause. In the present case, the question whether the document is a hundi was itself doubtful because, while it was written on a hundi paper it was in fact promissory note written in English, transferable only by endorsement and not enjoying all the privileges available to a hundi. When there is a doubt about the construction of a negotiable instrument, the Negotiable Instruments Act allows the parties themselves to decide what the document is and they have treated it as a promissory note, especially when a promissory not could be written on a hundi paper under the provisions of the Stamp Act. In the circumstances, the belief of the assessee that the document is a promissory note and not a hundi is, in our opinion, sufficient cause for not obtaining the money by way of account-payee cheque. When it is not in dispute that the transaction was genuine and the amount was duly accounted for in the books of both the parties to the document the contravention of the statutory obligation is venial and cannot carry with it the rigour of the law requiring the amount in question to be added back to the total income of the assessee under Section 69D. Therefore, for this additional reason also, we are of the opinion that the AAC was right in deleting the addition made under Section 69D. We accordingly, confirm his order. The appeal is dismissed.
12. The assessee has filed a cross-objection only to support the order of the AAC. Since no relief is asked for it is also dismissed.