High Court rules demand draft equivalent to account payee cheque for Income Tax Act disallowance

The Andhra Pradesh High Court ruled in favor of the assessee in a case involving the interpretation of section 69D of the Income Tax Act. The court held that repayment through a demand draft should be considered equivalent to an account payee cheque drawn on a bank for the purposes of disallowance under section 69D. As a result, the addition made by the Income-tax Officer was deleted from the total income of the assessee, emphasizing that the legislative intent behind section 69D is to ensure transparency in transactions and verify the authenticity of repayments.

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Issues:
1. Interpretation of section 69D regarding repayment through demand drafts.
2. Distinction between account payee cheque and demand draft for disallowance under section 69D.

Analysis:
The judgment by the Andhra Pradesh High Court involved a dispute regarding the interpretation of section 69D of the Income Tax Act. The assessee had borrowed money on hundis and repaid the same through demand drafts during the relevant assessment year. The Income-tax Officer disallowed the repayment amount under section 69D, as it was not made through an account payee cheque drawn on a bank. The Appellate Tribunal, after considering various decisions, concluded that the effect of an account payee cheque and a demand draft in this context would be the same. The questions referred to the court were whether the assessee fulfilled the requirements of section 69D by repaying through demand drafts and whether the Tribunal was justified in deleting the addition from the total income of the assessee.

The court analyzed the legislative intent behind section 69D, which aimed to unearth black money and ensure transparency in transactions involving borrowal by hundis. The court observed that the object of identifying the payee is achieved whether payment is made through a crossed account payee cheque or a crossed demand draft. The court noted that while other sections like 40A(3), 269T, and 269SS explicitly mentioned account payee bank drafts as an alternative mode of payment, section 69D did not. However, the court opined that the omission to refer to an account payee demand draft in section 69D was likely inadvertent. The court emphasized that the purpose of disallowance under section 69D is to ensure verifiability of transactions, and since repayment through an account payee demand draft serves this purpose, it should be treated similarly to an account payee cheque drawn on a bank for the provisions of section 69D.

In conclusion, the court held in favor of the assessee, answering the questions in the affirmative and against the Revenue. The judgment clarified that for the purpose of disallowance under section 69D, repayment through an account payee demand draft should be considered equivalent to an account payee cheque drawn on a bank, thereby allowing the deletion of the addition from the total income of the assessee.

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