Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Dexan Pharmaceuticals Pvt. Ltd. And ... on 23 January, 1995
Equivalent citations: [1995]214ITR576(AP)
Bench: A. Somakant Bhate, S.S. Mohammed Quadri
JUDGMENT
1. The common question of law propounded to us in these three references is in general terms and is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transaction described as hundi loan is not a hundi transaction ?"
2. In R. C. No. 60 of 1987, an additional, albeit a consequential, question referred is :
"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the provisions of section 69D cannot be applied in respect of the transactions where the identity is established or the loan is genuine ?"
3. We may make it clear at this stage itself that if we are to answer in the affirmative the common question referred to us then the second question formulated in R. C. No 60 of 1987 will really not survive and need not be answered.
4. In all three references the assessee happens to be a company, The facts in R. C. No. 52 of 1987 are stated for the sake of convenience. The facts are almost similar in all the three references for the purpose of understanding the question referred.
5. During the year ending on March 31, 1980, i.e., assessment year 1980-81, the assessee borrowed amounts totalling Rs. 2,10,000. The borrowing was made from more than one party. Interest was paid on these borrowings. The amounts were received by account payee cheques but the repayments were made in cash. The Income-tax Officer made an addition of Rs. 2,10,000 under section 69D of there Income-tax Act, 1961 (for short "the Act"), and also added interest amount of Rs. 16,445. In the appeal before the Commissioner the contention that section 69D was not attracted, did not find favour with, the Commissioner who deleted Rs. 70,000 holding that the sum was not on hundi loans but were loans on demand repayable with interest. A further sum of Rs. 41,000 was deleted on the ground that the same had been received through account payee cheques though the repayment might have been done in cash. Next a sum of Rs. 7610 was deleted being the amount of interest received by account payee cheques. A total relief of Rs. 1,24,235 was given in the appeal by the Commissioner.
6. The assessee went in second appeal before the Tribunal. The Tribunal examined the documents of loan, which were more or less similar in their contents. The contents of the documents were somewhat as follows :
"At (90) ninety days after this date without grace days pay to Rawalmal Naraindas or order at the office of.... the sum of rupees five thousand only for the value received in cash/cheque this day.
To Dexan Laboratories, For Dexan Pharmaceuticals Pvt. Ltd.
16-2-705/1-12, (Sd.) New Malakpet, Managing Director Hayderabad -500 036.
Notice of dishonour, Waived."
7. The Tribunal, on a close examination of the facts and the legal position broadly obtainable found that the borrowing on such documents was in the nature of pro note and though the document was styled and titled as hundi payable, the borrowings had not been raised in the money market by issue of hundis, but the borrowing was done directly or through a broker from recognised money-lenders. The tribunal held that, in the facts and circumstances, the provisions of section 69D of the Act were not attracted. The Tribunal remanded the case to the Income-tax Officer for examination of the genuineness of the loans.
8. The reference is made by the Tribunal to us on a reference application made by the Commissioner of Income-tax. The questions referred are already set out in the beginning.
9. It is necessary to point out that nobody appeared on behalf of the assessees in R. C. Nos. 1 and 52 of 1987, however, advocate, Sri Ratnakar, appearing for the assessee in R. C. No. 60 of 1987 has very studiously put forth the assessee's case. Sri Habib Ansari, learned standing counsel for the Income-tax Department, in his usual suave manner argued the case on behalf of the Department.
10. Before we discuss the facts and law applicable as seen by us it is useful to have a look at the provisions of section 69D of the Act. the said section runs as follows :
"69D. 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 aforesaid for the previous year in which the amount was borrowed or repaid, as the case may be :
Provided that, if in any case any amount borrowed on a hundi has been deemed under the provisions of this section to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount.
Explanation.- For the purposes of this section, the amount repaid shall include the amount of interest paid on the amount borrowed."
11. It may be pointed out that there is no definition of "hundi" either in the Income-tax Act or in the Negotiable Instruments Act. The Indian Stamp Act of 1899, while defining "bill of exchange" in section 2(2), has provided as follows :
"'Bill of exchange' means a bill of exchange as defined by the Negotiable Instruments Act, 1881, and includes also a hundi, and any other document entitling or purporting to entitle any person, whether named therein or not, to payment by any other person of, or to draw upon any other person for, any sum of money."
12. The definition is thus inclusive and shows that a hundi is also a specie of bill of exchange. There is no dispute that there is no direct authority under the Act of any High Court on the point referred to us.
13. Sri Habib Ansari has contended that the documents evidencing the borrowings are hundis and, therefore, section 69D at once applies. According to him, it has been wrongly held that the documents are not hundis as they have been scribed in English and not in a vernacular language. He submits that all the ingredients of hundi are present in the transaction represented by the document. Sri Ratnakar, however, points out various reasons of for the transaction not being a hundi transaction. He supports the reasons given by the Tribunal. He also relies upon the instructions issued by the Central Board of Direct Taxes by Circular No. 221, dated June 6, 1977 (see [1977] 108 ITR (St.) 10). However, Mr. Ratnakar has placed reliance on the reasoning adopted by the Madras Bench of the Income-tax Tribunal while deciding Appeal No. 377 of 1981 on March 29, 1982. The said decision is Second ITO v. Gruhalaxmi and Co. [1983] 2 ITAT (Selected Orders) 317. We do not propose to rely upon the judgment of the Tribunal referred to nor shall we refer to the circular of the Central Board of Direct Taxes.
14. Sri Habib Ansari has brought to our notice the decisions in Kerala Financial Corporation v. CIT , wherein it was held that circulars, etc., issued under section 119 of the Act are merely for the proper administration of the Act. Such orders or circulars, etc., cannot override the provisions of the Act. Therefore, it would be improper to rely upon the text of the circulars for interpreting the law points involved. We propose to approach the question independently for obvious reasons.
15. The documents under consideration in the references at hand are admittedly in the English language. They purport to be hundis. All the documents are addressed by the assessee to itself. To put it slightly differently, the drawer and the drawee are the same in all these transactions. The documents are written on printed forms of hundi.
16. We are in full agreement with the view expressed by the Full Bench of the Calcutta High Court in Harsuk Das v. Dhirendranath, AIR 1941 Cal 498, that the use of the word "hundi" on the stamped document is not decisive. The total contents and effect of the document have to be looked into for finding out as to whether the transaction is or is not a hundi.
"Hundi" having not been defined, anywhere as pointed our already, it is necessary to find out what are the well recognised characteristics of a hundi. In the Commentary on the Negotiable Instruments Act by Sri Khergamwalla, XV Edition, by Sri M. S. Parthasaradhi, an attempt is made by the author to define "hundis" as follows :
"A bill of exchange in the vernacular language is generally called a hundi. Hundis 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."
17. In the 15th Edition of Bhashyam and Adiga on the Negotiable Instruments Act the author describes hundi as follows :
"Bills of exchange in vernacular languages are generally called 'hundis'. The name is derived from the Sanskrit word 'hund' which means to 'collect' and well expresses the purposes for which the hundis are put. They have been in circulation in this country long before the Act came to be passed, and usages attaching to them varied with the locality in which they came into existence or were circulated. Under the Hindu law, a hundi payable to order was held negotiable without an indorsement by the payee. Again, it has been held that the indorser of a hundi to whom the hundi is returned dishonoured without any indorsement in his favour, might sue upon it and in an earlier case the indorsee of a forged hundi was compelled to cancel the indorsement."
18. In the Calcutta case, referred to above, it has been held that to determine the character of the document the provisions of the document itself must be looked into. The word "hundi" on the stamp could not determine the character of the document and since the document contained a promise and not an order, it was a promissory note and not a hundi, or bill of exchange. The word "acceptance" meant assent on the part of the drawee.
19. There are numerous sub-species of hundis. They have been illustrated by the learned authors Bhasyam and Adiga in their above-referred book. Other authors have also given similar illustrations. From all the authorities describing the hundi transaction the common denominator to be found out regarding the hundi transaction may be stated as follows :
1. There are always three parties to such a transaction. They are the drawer, the drawee and the payee. The drawer cannot himself also be the drawee. If the transaction is bilateral it is a very strong indication to show that it is not a hundi transaction.
2. A hundi is payable to satisfy a person or order but negotiable without endorsement by the payee.
3. The holder of a hundi is entitled to sue on its basis without any endorsement in his favour.
4. A hundi once accepted by the donee, could be negotiated without endorsement.
5. In the case of loss of a hundi, the owner can claim duplicate or triplicate from the drawer and present the same to the drawee for claiming payment.
6. A hundi is normally in the oriental language as per the mercantile custom.
20. The above characteristics emanate from the long standing custom of hundi transactions. Section 1 of the Negotiable Instruments Act in terms provides that the local usage relating to any instrument in an oriental language, is not affected by the provisions of the said Act.
21. We feel that one of the reasons for bringing section 69D of the Act on the statute book is to cover the hundi transaction in view of the wording of section 1 of the Negotiable Instruments Act. Now. considering the present transactions as pointed out already, we find that apart from the fact that the contents of the documents are in English and not in the oriental language, the transactions are not between three parties at all. The transactions aforesaid are all bilateral. The drawer himself is the drawee in all the transactions under question. Though it may not be wholly accurate to say that all the instruments which are not drawn in the vernacular cannot be hundis, there is not doubt whatsoever that the absence of oriental language in the document coupled with the fact that the transaction is only bilateral and not tripartite is conclusive to show that the instrument though titled a hundi was not really a hundi transaction. The transactions are very much on the lines of a promissory note where it is a bilateral transaction. It is not the form but the substances of the document and the true transaction which is really to be seen. A plain reading of section 69D of the Act shows that it can be brought into service only when the loan transaction is of a hundi loan. It may also be pointed out incidentally that the documents under consideration have waived the notice of dishonour in advance and no grace period so granted. This is also indicative of the transaction being not a hundi transaction.
22. In view of the discussion made above, we are of the opinion that the Tribunal was right in its conclusion that the transaction was not a hundi transaction. We answer the reference in the affirmative.
23. The second question referred to in R. C. No. 60 of 1987 does not survive in the circumstances of the case and hence need not be answered. We think that no order as to costs should be made in the circumstances of the case.