1982 (3) TMI 162 - AT - Income Tax

Tribunal rules promissory note, not hundi, under Income-tax Act. Revenue appeal dismissed.

Second Income-Tax Officer. Versus Grahalakshmi And Company.

Second Income-Tax Officer. Versus Grahalakshmi And Company. - ITD 002, 420, TTJ 014, 287, Issues Involved:1. Applicability of Section 69D of the Income-tax Act, 1961.2. Definition and characteristics of a 'hundi'.3. Determination of whether the instrument in question is a hundi or a promissory note.4. Interpretation of statutory provisions in light of genuine transactions.Issue-wise Detailed Analysis:1. Applicability of Section 69D of the Income-tax Act, 1961:The revenue's appeal contested the AAC's deletion of an addition made under Section 69D. The ITO had added back amounts borrowed and repaid on hundies, as these transactions were not conducted through account-payee cheques or bank drafts. Section 69D was introduced to ensure the genuineness of hundi transactions by mandating that borrowals and repayments be made through account-payee cheques. The AAC had deleted the additions, holding that documents written in English could not be considered hundies, based on a prior Tribunal order.2. Definition and Characteristics of a 'Hundi':A hundi is generally defined as a bill of exchange in vernacular language, subject to local usages and unaffected by the Negotiable Instruments Act. Hundies can be either 'darshani' (payable at sight) or 'muddati' (payable after a stipulated period). The CBDT Circular No. 221 clarified that darshani hundies used for remittance or financing inland trade do not fall within the scope of Section 69D. The local usages include negotiability without endorsement and the right to claim duplicates if lost.3. Determination of Whether the Instrument is a Hundi or a Promissory Note:The instrument in question, written in English, contained all characteristics of a promissory note as defined in Section 4 of the Negotiable Instruments Act. It included an unconditional undertaking to pay a certain sum of money. The instrument's nature as a promissory note was further supported by the fact that it was negotiable only by endorsement, unlike hundies which are negotiable without endorsement. The use of hundi paper did not alter its character as a promissory note.4. Interpretation of Statutory Provisions in Light of Genuine Transactions:Even if the instrument were considered a hundi, Section 69D's purpose was to prevent the introduction of unaccounted money through bogus hundi loans. In this case, the transaction was genuine, the parties were identifiable, and the amounts were duly accounted for in the books of both parties. The Supreme Court's decision in K.P. Varghese v. ITO emphasized that statutory provisions should not produce absurd or unjust results. The failure to use an account-payee cheque in this genuine transaction was deemed a venial contravention, not warranting the addition of the borrowed amount to the assessee's income under Section 69D.Conclusion:The Tribunal concluded that the document in question was a promissory note and not a hundi. Therefore, Section 69D did not apply. Even if it were a hundi, the genuine nature of the transaction and proper accounting justified the AAC's deletion of the addition. The revenue's appeal was dismissed, and the assessee's cross-objection was also dismissed as it sought no additional relief.