Substance over form in hundi transactions: a promissory note and genuine traceable loan fall outside the tax mischief.

An instrument written on hundi paper must be characterised by its substance, not its form. Where the document contained an unconditional promise to pay and was negotiable only by endorsement, it was a promissory note rather than a hundi. The section targeting bogus hundi loans and untraceable cash-style transactions therefore did not apply. Even on the alternative assumption that it was a hundi, the transaction was genuine, recorded in both parties' books, and traceable, so the absence of payment by account-payee cheque was only a venial breach and did not justify tax addition.

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Issues: Whether an instrument written in English on hundi paper, containing a promise to pay, was a hundi for the purposes of section 69D of the Income-tax Act, 1961, and whether the amount borrowed on it could be brought to tax when payment was not made through an account-payee cheque.

Analysis: Section 69D was enacted to curb bogus hundi loans and to ensure a visible trace of the transaction through account-payee cheques. The character of the instrument had to be determined from its contents and legal incidents, not merely from the fact that it was written on hundi paper. The document contained an unconditional promise to pay, not an order to pay, and was negotiable only by endorsement. It therefore answered the description of a promissory note rather than a hundi. Even if treated as a hundi, the transaction was found to be genuine, identifiable, and duly recorded in the books of both parties, so the statutory mischief sought to be prevented was absent. The failure to use an account-payee cheque was held to be only a venial contravention in the circumstances.

Conclusion: Section 69D did not apply, and the addition was rightly deleted.

Final Conclusion: The revenue's challenge failed because the instrument was not a hundi within the statutory mischief, and the genuine, traceable nature of the transaction also took it outside the intended reach of the provision.

Ratio Decidendi: A document must be treated according to its substantive legal character; an instrument that is in truth a promissory note, and in any event represents a genuine and traceable transaction, cannot be taxed under section 69D merely because payment was not made by account-payee cheque.

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