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TMI Blog1982 (3) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered to be hundies and, therefore, the provisions of section 69D could not be applied. He, accordingly, deleted the additions. 3. In this appeal the contention of the revenue is that merely because the documents are written in English, they cannot be taken to fall outside the meaning of the word 'hundi' because though hundies are generally written in local languages, there is nothing to prevent the hundies being written in English. It was pointed out that the documents in question were written on hundi papers and understood by the parties to the documents as hundies and, therefore, they could not be disregarded in applying the provisions of section 69D. On the other hand, the contention of the assessee, apart from the point that being written in English they could not be regarded as hundies, is that the wordings of documents showed that they were only promissory notes and, therefore, even otherwise the provisions of section 69D could not be applied. 4. In order to understand the scope of section 69D which was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976, we have to see what was the situation before the introduction of the section, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it, namely the person who gives the order to pay, called the drawer, the person ordered to pay, called the drawee, and the person to whom money is directed to be paid, called the payee. In such cases obviously the drawer is not the person who receives the money and, therefore, if the assessee is the drawer he neither borrows from, nor repays any money to, the same person. For instance, 'A', who is an assessee, pays money to 'B' the drawer, who gives the hundi drawn on 'C', the drawee, in favour of 'D' the payee, to whom 'A' may be indebted for the payment of the price of the goods supplied. In this illustration there is no borrowal or repayment though the hundi itself is made negotiable thus facilitating either the transmission of the money or even the availability of credit for a period of time until the ultimate payment for a small discount. Such hundies drawn as bills of exchange are generally known as 'Darshani hundies', payable at sight or on presentation and it is admitted that such Darshani hundies are not governed by the provisions of section 69D, as clarified by the CBDT in the Circular No. 221 dated 6-6-1977 in the following terms: "1. Reference is invited to Board's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of a third party 'D'. (iii) 'A' has an account with an indigenous banker 'C' who has granted a credit facility to 'A' and handed over a hundi book to him. 'A' draws amounts through such hundies payable either to self, or bearer or third party. Such an arrangement arises out of the credit facility already granted and, therefore, no debtor-creditor relationship has arisen between the parties because of the drawal of a hundi. 5. Normally borrowal on hundi arises when a person gets money by execution of a hundi but in the instances cited above the hundi is given in the nature of a security and there is no borrowal on such hundies. Thus in cases of transactions referred to at (i), (ii) and (iii) of para 4, section 69D is not applicable. The settlement of account between any of the parties to such a darshani hundi can thus be otherwise than through an account payee cheque within the meaning of section 69D. 6. This circular covers darshani hundi transactions of the types referred to at (i), (ii) and (iii) of para 4 above. However, it could not be said that there could be no borrowal on darshani hundi. The transactions not of the type referred to above on darshani bundies have to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he requirements of this provision regardless of whether the hundi was executed prior to the said date or on or after that date. CIRCULAR NO. 208 [F. NO. 208/7/76-IT(A-II)], DATED 15-11-1976. 5. Thus we find that the acceptation of the word Hundi is derived from the exception provided in section 1 of the Negotiable Instruments Act. Section 1 provides that nothing therein contained affects any local usages relating to any instrument in an oriental language. In other words, what is excluded from the operation of the Act is the local usages relating to instruments in oriental languages and not the instruments themselves. The important local usages generally accepted are that (a) though the hundi is payable to a specified person, it is negotiable without endorsement by the payee, (b) that a holder is entitled to sue on a hundi without an endorsement in his favour, (c) that a hundi accepted by the drawee could be negotiated without endorsement, and (d) if a hundi is lost, the owner could claim duplicate or a triplicate from the drawer and present it to the drawee for payment. It follows that even if a hundi is written in the form of a promissory note, if it is established to be a hun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid, is recognised in the Law of Merchant. In the text book mentioned above (12th Edition at page 205) there is a description of such hundies as follows : "Miadi Hundi or Muddati Hundi---Payable after specific period of time, on security of which loans are advanced. It is the usual practice of the capitalists to deduct the interest in advance for a period up to the due date. This hundi records the agreement stating the loan advanced, the rate of interest and the other conditions of the loan." In Madras for instance, Thavanai Hundis for loans are drawn up in the following manner: "Place and date..... at..... days after date we jointly and severally promise to pay...... or order at the Imperial Bank, Madurai, the sum of Rs....... only for value received in cash. Signature" If the document is a hundi in respect of which the local usages are saved, then even a holder of such hundi may without endorsement raise money thereon. The result will be that there will be no record of the transfer of the hundi on the face of the hundi itself. Secondly, it had been found in a number of cases that the drawee in such hundies were only name-lenders and the holder introduced his undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it could advance the remedy. As we have seen above, only in a case of an instrument written in oriental language the local usages are saved. In the cases of hundies written in oriental languages, in addition to special rules of evidence, there is an additional factor of the hundies being transferable without endorsement. But in the case of instruments written in English, endorsement is essential for negotiation. Prima facie, therefore, section 69D supplies the method of tracing the flow of money through account payee cheques where the hundies lack such information. The other difficulty posed by the special rules of evidence is common to all negotiable instruments. But the section is confined to borrowals on hundies and is therefore restrictive in scope, in the absence of a more generic term as borrowal on any negotiable instruments. Having chosen a specie of negotiable instruments it is difficult to say that section 69D covers any instrument other than a hundi. 8. We must therefore address ourselves to the question whether the instrument on which the amount was borrowed by the assessee was a hundi or not. The instruments drawn up by the assessee in English are in the following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. But the holder may at his option treat it as a bill of exchange or a promissory note by reason of section 17 of the Negotiable Instruments Act. However, it has been held by the Full Bench of the Calcutta High Court in the case of Harshukdas v. Dhirendranoth AIR 1941 Cal. 498 that an instrument containing the usual promise to pay a certain sum of money to a certain person cannot be treated as a hundi merely because of the use of the hundi stamp and writing of the word 'accepted' on it by the executant. It was observed that to determine the character of the document, the provisions of the document itself must be looked into and since the document contained a promise and not an order it was a promissory note and not a hundi or bill of exchange. 9. It may be noted that in a case of an instrument coming within several descriptions of the entries in the Stamp Act, section 6 provides that it shall be charged only with the highest of such duties. But it has been held by the Madras High Court in the case of Alagappa Chettiar v. Narayana Chettiar AIR 1932 Mad. 765 that the right of election given by section 16 of the Negotiable Instruments Act to the holder of an instrument to treat it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the books of both the parties, it is difficult to assume as a matter of course that the amount borrowed should be added back merely because it was not by way of an account-payee cheque. The Supreme Court has pointed out in the recent decision in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 that where the plain literal interpretation of statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature or even do some violence to it so as to achieve the obvious intention of the Legislature and produce a rational construction. In the present case, it is not necessary to do any violence to the language. It is sufficient to understand the section in the light of the intention of the Parliament and consider the failure to take the amount by an account-payee cheque as nothing more than a contravention of a statutory obligation, which implies that such a contravention need not carry the penalty when it is venial. We must also remember that section 69D is not a revenue raising measure nor is it a punitive section but only a provision to ensure that certain transactions are visibly made and so traceable as to exclude tran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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