Section 69D prescribes that a borrowing on hundi and its
repayment should only be by account payee cheque. The article deals with what is an hundi
and consequence of violation of the requirements of section 69D. It also deals with the
responsibilities of an auditor reporting on audit carried out u/s 44AB.
Section 69D provi des that 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. The provisions of
Section 69D have been introduced w.e.f. 1st April, 1977. Under Section 69D person affected
is the borrower. No burden has been cast on the lender.
Explanation to Section 69 D provides that the amount repaid shall
include the amount of interest paid on the amount borrowed. The interest on the hundi
borrowing is also to be repaid by account payee cheque drawn on a bank.
If in any case any amount borrowed on a hundi has been deemed under
the provisions of this section to be the income of the borrower because of the fact that
hundi loan proceeds were received otherwise than through an account payee cheque, he shall
not be liable to be assessed again in respect of such amount if the repayment of such loan
is made otherwise than through an account payee cheque. The proviso to Section 69D averts
the chance for a double taxation.
The provisions of Section 69D do not offend Articles 14 and 19 of the
Constitution of India. This has been held in Dulichand
Loulsarilal Jain vs. Union of India 226 TTR 753 (MP).
Section 69D is applicable only to those loans which are covered by a
negotiable instrument called "hundi". A hundi in general terms means a bill of
exchange written in the vernacular language. CBDT Circular No. 208 dated 15-11-1936 also
confirms the fact that the provisions of Section 69D are applicable only in respect of
hundies and does not cover other types of loans. The term "hundi" has not been
defined in die Income Tax Act, 1961. In common commercial parlance, it denotes an
indigenous instrument in vernacular language which can be used by the holder thereof to
collect money due thereon without using the medium of currency. It may also be regarded as
an indigenous form of a bill of exchange expressed in vernacular language which has been
in use in the mercantile community in India for the purpose of collecting dues.
There are different varieties of hundies. The hundies can be Darshani
Hundi. Muddati Hundi, Shaha Jog Hundi. Jokhmi Hundi, Nam Jog Hundi, Dhani Jog Hundi,
Jawabi Hundi and Zickri chit. The characteristics of hundies differ according to the
varieties of the same. The following features are found in most of the hundies:
A hundi is payable to a specific person or order or negotiable
without endorsement by the payee.
A holder is entitled to sue on a hundi without an endorsement in his
favour.
A hundi accepted by the drawee could be negotiated without
endorsement.
If a hundi is lost, the owner could claim a duplicate or triplicate
from the drawer and present it to the drawee for payment.
CBDT has also issued Circular No. 221 dated 6-6-1977 clarifying that
in certain type of Darshani Hundi transactions, the provisions of Section 69D will not be
applicable. CBDT has explained the Darshani Hundi transactions by way of examples. CBDT
has clarified that the transaction of Darshani Hundi has to be examined with reference to
the facts and circumstances of the case so as to determine whether or not there is
borrowing on hundi.
Hundies are negotiable instrument but is unaffected by the provisions
of the Indian Negotiable Instrument Act, 1881. Section I of the Negotiable Instrument Act,
1881 provides that local usage relating to any instrument in an oriental language is not
affected by the provisions of the said Act. One of the reasons for bringing Section 69D on
the statute book is to cover hundi transactions. A bill of exchange may include a hundi
but a hundi does not include a bill of exchange. (See the Memorandum explaining the
provisions in the Finance Bill, 1984 - 146 ITR (St.) 157, 162.
Also see Circular No. 387 dated 6 July, 2001 issued by the Central Board of Direct Taxes
("CBDT") – 152 ITR (St.) 1, 22.)
Hundies are those instruments which are written in vernacular
language and documents which are written in English cannot be treated as hundies. This
view has been upheld by the Madras ITAT in the case of M.K.A.
Chimiaswamy Nadar & Sons 14 TTJ 546 and in the case of Grahalakshmi
& Co. 2 ITD 420.
Section 69D will be applicable when the borrowing or repayment of
hundies is otherwise than by an account payee cheque. It is immaterial whether borrowing
is genuine or not. Section 69D does not refer to genuineness at all. Hundi is transferable
like cash by delivery and it becomes difficult to spot the person giving it and therefore
the source becomes difficult to trace. In order to trace the source it is provided that
the borrowing or repayment should be by account payee cheque which would identify the
person while in the process.
In order to decide whether a particular instrument is a hundi or not,
the principal test is the test of negotiability. If a document is negotiable only by
endorsement because it is payable to order the same will not satisfy the test of
negotiability. The hundi is negotiable without endorsement. Madras ITAT in the case of M.K.A. Chimiaswamy & Sons 14 TTJ 546 has dealt with this
issue and has laid down certain tests to decide as to which document can be treated as
hundi. For applicability of Section 69D it is essential that the transaction should be a
hundi transaction arid if it is held that the instrument is not a hundi then provisions of
Section 69D cannot be invoked. A hundi is a transaction like cash by delivery. If it is
not transferable like cash by delivery, it does not become a hundi. If negotiation of
hundi is only by an endorsement then it cannot be a hundi. In case of Ranbir Raj Kapoor 25 ITD 56 (Mumbai) (SB) the provisions of
Negotiable Instrument Act were analysed and it was held that the document in question was
made payable to order and it was negotiable only by endorsement and delivery. It was held
that if a document is negotiable by endorsement and delivery then it becomes bill of
exchange and not a hundi. The Mumbai High Court in the two cases of CIT vs. Paiamjothi Salt Co. 211 ITR 141 and CIT vs S. Ramanathan 215
ITR 79 has held that the document must be hundi before the provisions of Section
69D can be involved.
One of the important features of hundi is that the document must
contain an order on a person to pay a certain amount. If the borrowing is not on the basis
of any such document, in which there is an order on a person lo pay a certain amount but a
promissory note, it cannot be a borrowing on hundi. Even if the words "hundi" is
engraved in the stamp paper, the same will not be treated as hundi if it is in the nature
of promissory note. The Madras ITAT in the case of K.A. Khader
Sons 6 ITD 65 has discussed various aspects of promissory note and hundi.
In case of hundi if the repayment is by demand drafts issued by a
bank then it will be treated as compliance of Section 69D. This has been held in two cases
namely CIT vs Intraven Pharmaceuticals (P) Ltd. 219 ITR 225 (AP)
and CIT vs. Bakhear Ahmed & Co. 221 FTP. 574 (Matos).
Form 3CD prescribed under Section 44 AB cast a duty on the tax
auditor to report under clause 23 about the borrowing or repayment otherwise than by
account payee cheque on hundi transaction. The auditor must examine the document in
question and first come to conclusion that the instrument or the document is a hundi and
then only report under the clause. If the tax auditor is satisfied that the document
cannot be treated as hundi then he should not report. If he is not in a position to
conclude then he must give a disclaimer to the effect that he is not in a position to
conclude as to whether the borrowing is on hundi or not.
Any payment of interest on hundi borrowing will attract the
provisions of Section 194A of the Income Tax Act, 1961 and the payer of interest will be
liable to deduct tax at source at the applicable rate.
