2019 (3) TMI 162 - AT - Income Tax

ITAT rules instruments as bills of exchange, not hundies, under section 69D

The Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee in a case concerning the interpretation of section 69D of the Income Tax Act. The ... Addition u/s 69D - Hundies v/s bills of exchange - loans/borrowing in the Hundies which were repaid in cash from undisclosed income - CIT-A held that the instruments against which the appellant had borrowed were bills of exchange and not Hundies - HELD THAT:- We note that in the case of Dexan Pharmaceuticals Pvt Ltd. (1995 (1) TMI 54 - ANDHRA PRADESH HIGH COURT) has noted that “A bill of exchange in the vernacular language is generally called as 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 Instrument Act.” Thus we find that in the present case also the instrument as submitted in the paper book before us are in English language and are all bilateral and not tripartite. In the facts and circumstances of the case, as per the precedent as above, it cannot be treated as hundi. Hence, the disallowance u/s. 69D is unsustainable. Accordingly, we set aside the order of the ld.CIT(A) and decide the issue in favour of the assessee. Issues Involved:Interpretation of section 69D of the Income Tax Act - Whether the instruments borrowed were hundies or bills of exchange.Detailed Analysis:Issue 1: Interpretation of Section 69D - Hundi vs. Bills of ExchangeThe appeal by the assessee challenged the order of the Commissioner of Income Tax (Appeals) regarding the addition of Rs. 14,25,000 as loans/borrowings in hundies. The assessee contended that the instruments borrowed were bills of exchange, not hundies, and thus not covered by section 69D. The ITAT had previously remitted the issue to the CIT(A) to determine the legal distinction between hundies and bills of exchange. The CIT(A) upheld the addition, citing the assessee's admission during search proceedings. However, the ITAT found the CIT(A)'s order unsustainable as it disregarded the legal difference between hundies and bills of exchange. The assessee provided evidence that the borrowing was through bills of exchange, not hundies, supported by judicial precedents and legal arguments.Issue 2: Application of Legal PrecedentsThe assessee relied on various judicial pronouncements to support the contention that bills of exchange were not subject to section 69D. The ITAT referred to the Andhra Pradesh High Court's decision, emphasizing that the absence of oriental language and bilateral nature of the transactions indicated they were not hundies. The High Court concluded that the transactions, although titled as hundies, did not meet the criteria of a hundi transaction. The ITAT applied this precedent to the present case, noting the English language and bilateral nature of the instruments, leading to the conclusion that they were not hundies. Consequently, the disallowance under section 69D was deemed unsustainable, and the order of the CIT(A) was set aside in favor of the assessee.In conclusion, the ITAT ruled in favor of the assessee, allowing the appeal and setting aside the addition made under section 69D. The judgment highlighted the legal distinction between hundies and bills of exchange, emphasizing the need to apply the relevant legal precedents and criteria to determine the nature of the instruments borrowed.