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  • u/s 69D of the Income-tax Act, 1961.
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  • u/s 69D of the Income-tax Act, 1961.
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Smart Summary

Factual and Procedural Background

This opinion concerns an appeal by the assessee (Shri Kunj Behari, proprietor of M/s Kunj Behari Roshan Lal) against an assessment by the Income-tax authorities. The assessee originally took three grounds of appeal but pressed only two before the Tribunal:

  • Whether notices under sections 148, 142 and 143(2) were invalid because they were issued in the name "M/s Kunj Behari Roshan Lal" while the assessment was finally made in the name of Shri Kunj Behari as proprietor of M/s Kunj Behari Roshan Lal.
  • Whether loans aggregating Rs. 15,00,000 were wrongly added to the assessee's income under section 69D of the Income-tax Act, 1961 on the basis that the relevant documents constituted hundis.

The record shows that notices dated 12.11.2002 (s.148), 14.12.2001 (s.142(1)) and 04.02.2003 (s.143(2)) were issued in the name of the proprietary concern at the stated address. The assessee's counsel had previously informed the Assessing Officer by letter dated 16.11.2001 that no firm under that name was functioning from that address. The assessment order, however, was made on Shri Kunj Behari, Proprietor of M/s Kunj Behari Roshan Lal. The Tribunal heard submissions on both issues and rendered a partly favorable decision for the assessee, as described below.

Legal Issues Presented

  1. Whether notices issued under sections 148, 142 and 143(2) in the name of "M/s Kunj Behari Roshan Lal" (the proprietary concern) were invalid when the assessment was completed in the name of the individual proprietor, Shri Kunj Behari.
  2. Whether amounts totalling Rs. 15,00,000 borrowed in cash and evidenced by three documents should be includible in the assessee's income under section 69D because those documents constituted hundis.

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The notices were issued in a different name (M/s Kunj Behari Roshan Lal) but the assessment was made on Shri Kunj Behari in his individual capacity as proprietor, rendering the notices invalid and the assessment bad in law.
  • The addition of Rs. 15,00,000 under section 69D was incorrect because the documents relied upon by the revenue do not constitute hundis; thus section 69D should not apply. The assessee contended that loans were in fact taken from Shri K.C. Jain and, if the documents are not hundis, the department had no case for the addition.

Respondent's (Revenue / Department Representative) Arguments

  • The proprietary concern M/s Kunj Behari Roshan Lal is the proprietary concern of Shri Kunj Behari; notices in the name and style of the proprietary concern were effectively notices to the assessee as proprietor. The assessee participated fully in assessment proceedings and raised no substantial grievance from the notice names.
  • Section 292B cures mistakes or defects in notices, returns or proceedings which are in substance and effect in conformity with the intent and purpose of the Act; therefore the notices are to be regarded as valid.
  • Regarding the addition under section 69D, the revenue relied on earlier findings (including reference to another case, M/s Tara Chand Ramesh Kumar, and to the assessment order's paragraphs) and case-law establishing that the taxing authorities may look at surrounding circumstances and apply human probability tests to conclude that undisclosed cash borrowings had occurred.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT Vs. Durga Prasad More (1971) 82 ITR 540 (Supreme Court) The taxing authorities need not apply the criminal standard of proof; they may examine surrounding circumstances and apply the test of human probabilities; an apparent fact is to be considered real until reasons show otherwise. The Tribunal relied on this to support the proposition that the department may probe documents and surrounding circumstances to determine the reality of transactions and recitals in documents when examining alleged undisclosed borrowings.
CIT Vs. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (Supreme Court) Authorities regarding evidentiary standards and the extent to which taxing authorities may draw inferences from surrounding circumstances (as cited in the impugned order). Referenced by the assessing officer (and reproduced in the impugned order) to fortify the conclusion that borrowings from the Kamal Chand Jain group were established to the extent possible.
Govindarjulu Mudallar Vs. CIT (1958) 34 ITR 807 (Supreme Court) Principles on the burden and standard of proof in income-tax proceedings (as cited in the impugned order). Used as a supporting precedent in the assessment order to justify findings about undisclosed borrowings from the relevant group of parties.
Sumati Dayal Vs. CIT (1995) 214 ITR 801 (Supreme Court) Authoritative guidance on evidentiary approach and probative value of documents in tax proceedings (as cited in the impugned order). Relied upon in the assessment order and reproduced in the impugned order to support the AO's conclusions on undisclosed borrowings.
Hari Chand Virender Paul Vs. CIT (1983) 140 ITR 148 (P & J) Case law cited for evidentiary/legal principles applicable to tax assessments (as cited in the impugned order). Referred to as part of a cluster of authorities supporting the AO's approach to surrounding circumstances and burden of proof.
Nanak Chander Laxman Dass Vs. CIT (1983) 140 ITR 151 (All) Case law cited for legal principles relating to evidentiary standards in tax proceedings (as cited in the impugned order). Referenced by the assessing officer to support the departmental conclusions.
M/s Tara Chand Ramesh Kumar (appellate order referenced) Used in the impugned order as a factual/comparative precedent involving parties who had borrowed undisclosed cash from the Kamal Chand Jain group. The assessing officer reproduced the appellate order in that case and applied the conclusion to the facts of the present case to treat the assessee as having borrowed undisclosed cash.
CIT Vs. Dexan Pharmaceutical Limited (1995) 214 ITR 576 (Andhra Pradesh High Court) Enumerated indicators/tests to determine whether a document is a hundi (e.g., presence of three parties: drawer, drawee, payee; negotiability; language; bilateral vs tripartite nature). The Tribunal applied the Dexan tests (quoted in the opinion) to the three documents before it and used those tests to conclude that the instruments were not hundis.
CIT Vs. Paranjothi Salt Company (1995) 211 ITR 141 Set out essential characteristics of a hundi: an unconditional order signed by the maker directing a certain person to pay a certain sum to or to the order of a certain person or to bearer, i.e., a tripartite arrangement. The Tribunal used this precedent to support the conclusion that the impugned documents lacked essential hundi characteristics (being bilateral and not tripartite), and therefore were not hundis.

Court's Reasoning and Analysis

The Tribunal conducted a two-part analysis corresponding to the two pressed issues.

1. Validity of Notices (Sections 148, 142, 143(2))

  1. Fact-finding: Notices were issued in the name "M/s Kunj Behari Roshan Lal" (the proprietary concern) and the assessment was framed on Shri Kunj Behari, proprietor of that concern. The notices correctly stated the address. The assessee had earlier informed the AO by letter (16.11.2001) that no firm by that name functioned from the address, yet the assessee participated in assessment proceedings.
  2. Legal principle invoked: Section 292B of the Income-tax Act was cited by the revenue. Section 292B provides that procedural mistakes, defects or omissions in notices, assessments or other proceedings shall not render them invalid if they are in substance and effect in conformity with the intent and purpose of the Act.
  3. Application: The Tribunal found that the proprietary concern was the assessee's proprietary concern and that there was no real grievance suffered by the assessee from the naming of the notices. Given participation in proceedings and the conformity of the notices to the substance and purpose of the Act, the Tribunal held the notices were validated by section 292B.
  4. Conclusion on this issue: The contention that notices were invalid for being in a different name was dismissed and the assessment was held valid.

2. Addition under Section 69D (Whether Documents Were Hundis)

  1. Statutory framework: The Tribunal reproduced section 69D, which deems any amount borrowed on a hundi (or repaid) otherwise than through an account-payee cheque to be the income of the borrower for the relevant previous year. The Tribunal noted that the provision contains an irrebuttable presumption of law and thus operates in favour of the revenue where a hundi exists and the transaction is otherwise than through an account-payee cheque.
  2. Factual details: The addition of Rs. 15,00,000 was founded on three documents dated 17.10.1997, 23.10.1997 and 20.11.1997, each stating roughly that Rs. 5,00,000 was received and credited and bearing interest at 1% per month. The documents were in Hindi on the letter-head of M/s Kunj Behari Roshan Lal and signed by either Shri Kunj Behari or Shri A.K. Garg.
  3. Applicable tests from case-law: The Tribunal considered the Andhra Pradesh High Court decision in CIT vs. Dexan Pharmaceutical Limited, which lists several indicators of a hundi (notably: tripartite character—drawer, drawee and payee; negotiability; capacity to be sued in holder's name; customary oriental language). The Tribunal also referred to CIT vs. Paranjothi Salt Company which emphasises that a hundi is an unconditional order payable to order or bearer and that a tripartite arrangement is characteristic.
  4. Analysis applied to the documents: Although the documents were written in Hindi, the Tribunal found them prima facie to be bilateral (not tripartite), not negotiable, and such that a holder in due course would likely be unable to sue on them. The drawer appeared to be the same as the drawee in these transactions, which is a strong indicator that the instruments are not hundis but more akin to promissory notes.
  5. Outcome on section 69D: Because the instruments did not satisfy the essential characteristics of hundis under the cited authorities, the Tribunal concluded that section 69D did not apply to these documents; therefore the addition under section 69D could not be sustained.
  6. Consequential findings: The Tribunal accepted that the assessee had in fact received monies from Shri K.C. Jain which were unaccounted in the lender's hands; therefore the amounts could not be treated as unexplained in the hands of the assessee and provisions such as section 68 were not applicable on that basis.

Holding and Implications

PARTLY ALLOWED

Holding — The Tribunal delivered the following principal determinations:

  • The notices under sections 148, 142 and 143(2) issued in the name of "M/s Kunj Behari Roshan Lal" were held to be valid. The assessment made on Shri Kunj Behari (proprietor of the concern) was therefore held to be valid (the assessee's objection to the notices was dismissed).
  • The addition of Rs. 15,00,000 made under section 69D was held to be not sustainable because the documents relied upon did not constitute hundis under the tests and authorities examined; consequently section 69D was not applicable to those instruments and the addition was deleted.

Practical implications for the parties:

  • Direct effect on the assessee: The appeal succeeds on the substantive point (deletion of the addition under section 69D for Rs. 15,00,000) but the assessment itself remains valid in view of the Tribunal's conclusion on the notice issue.
  • Direct effect on the revenue: The revenue's invocation of section 69D failed in this instance because the instruments did not have the essential features of hundis as developed in cited case-law; however, the revenue's position on validity of notices was upheld via section 292B.

The opinion does not purport to lay down a novel legal principle beyond applying existing authorities to the facts; it resolves the present dispute by applying established tests for a hundi and the statutory saving in section 292B. No new binding precedent was announced by the Tribunal in this short order beyond the outcome in the specific facts of this appeal.

Order pronounced in open court on 25.02.2011. Members: I.P. Bansal (Judicial Member) and K.G. Bansal (Accountant Member). Copies forwarded to the assessee, the Income Tax Officer, the CIT and the CIT(A), New Delhi.

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    Sh. Kunj Bihari,, Delhi v. ITO, New Delhi

    PER K.G. BANSAL: AM: The assessee has taken three grounds in this appeal. However, in the course of hearing before us, only two issues were pressed. The first issue is that the notices u/s 148, 142 and 143(2) were issued in the wrong name of Kunj Behari Roshan Lal and, therefore, the assessment finally framed in the name of Shri Kunj Behari, Proprietor of M/s Kunj Behari Roshan Lal is bad in 3428-2010-KB 2 law. The second issue is that the loans taken by the assessee, aggregating to `15,00,000/-, were wrongly added to the income of the assessee u/s 69D of the Income-tax Act, 1961. In view of the aforesaid, other grounds are dismissed as not pressed.

    2. In regard to the first issue, the learned counsel referred to page No.1 of the paper book, which is the copy of the notice u/s 148 issued on 12.11.2002 to M/s Kunj Behari Roshan Lal at the address of 4127, First Floor, Naya Bazar, Delhi. Further, he referred to page No.2 of the paper book, being a letter addressed by the counsel of the assessee to the Assessing Officer on 16.11.2001 intimating that now there is no firm under the name and style of M/s Kunj Behari Roshan Lal functioning from the aforesaid address. He also referred to Assessing Officers notice u/s 143(2) issued to the assessee on 04.02.2003 in the name of M/s Kunj Behari Roshan Lal. Such is also the case in respect of notice u/s 142(1) issued on 14.12.2001 and placed in the paper book on page Nos. 4 & 5. He also referred to the assessment order in which the assessment has been made on Shri Kunj Behari, Proprietor, M/s Kunj Behari Roshan Lal. It is argued that .the notices were issued in the different name while the assessment has been made in the status of individual in the case of Shri Kunj Behari as proprietor of M/s Kunj Behari Roshan Lal. Since the notices were issued in different name, those were invalid and accordingly the order of assessment is also invalid. 3428-2010-KB 3 2.1 In reply, the learned DR submitted that M/s Kunj Behari Roshan Lal is a proprietary concern of Shri Kunj Behari. The notices were issued in the name and style of the proprietary concern, being Kunj Behari Roshan Lal. Even as per assessee, no firm of this name was existing on that date at the given address, therefore, there could have been no confusion in the mind of the assessee that the notices were issued to him in his individual capacity as proprietor of the firm. The assessee has been heard at length in the course of assessment proceedings and various submissions have been made. This also shows that no real grievance could have occurred to the assessee on account of mentioning the name of proprietary concern in the notices. Therefore, the notices were validly issued and consequently the assessment made on the assessee is also valid. The aforesaid arguments were further buttressed by taking recourse to the provision contained in section 292B regarding return of income, etc., not to be invalid on certain grounds, which reads as overleaf: 292B: No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been /furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such returns of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons, or other proceeding is in 3428-2010-KB 4 substance and effect in conformity with or according to the intent and purpose of this Act. 2.2 We have considered the facts of the case and submissions made before us. We find that the notices have been issued in the name of Kunj Behari Roshan Lal, which is the proprietary concern of Shri Kunj Behari. The address has been correctly mentioned in the notices. At the relevant point of time, there was no partnership firm functioning from this address. The assessee has participated in the assessment proceedings. Therefore, no real grievance has occurred on the assessee. Further the provision contained in section 292B cures such mistake, defect or omission in the notices issued by the Assessing Officer, which were in substance and effect in conformity with the intent and purpose of the Act. In view of this provision also, the notices will have to be held to be valid. Accordingly, the submissions made are dismissed. Thus, it is held that the assessment is valid.

    3. Coming to the merits, a number of arguments were taken before the learned CIT(A) in respect of addition of `15,00,000/- u/s 69D. Most of these arguments were dropped by the learned counsel except that the addition should not have been made under aforesaid provision because loans were not obtained on hundis. It was his case that once this legal position gets decided 3428-2010-KB 5 in his favour, the department will have no case for the addition as the admitted position is that loans were, in fact, taken from Shri K.C. Jain. In this connection, he drew our attention to three documents filed before us along with letter dated 09.02.2001, which have been held to be hundis by the lower authorities. These documents have been written in Hindi on the letter-pad of Kunj Behari Roshan Lal, General Merchants and commission agent, 4127, 1st floor, Naya Bazar, Delhi-6. The same have been signed by the proprietor/manager of the aforesaid concern being Shri Kunj Behari or Shri A.K. Garg. The narration in the documents can be translated roughly as that `5,00,000/- have been received and credited to your name which bear interest @1% per month. The documents have been written on 17.10.1997, 23.10.1997 and 20.11.1997. Therefore, the aggregate of the loans taken by the assessee and computed on the basis of these three documents works out to `15,00,000/-, which has been added under the provision of section 69D. The case of the learned counsel is that these documents do not constitute hundis. Therefore, the aforesaid provision cannot be invoked. 3.1 In reply, the learned DR referred to paragraph No.4 of the impugned order, in which a reference has been made from the decision in the case of M/s Tara Chand Ramesh Kumar, who was also one of the parties who had borrowed unaccounted money from Kamal Chand Jain Group. The appellate order in that case has been reproduced. Further, he referred to paragraph 3428-2010-KB 6 Nos. 8, & 9 of the assessment order, in which it has been held that the conclusion arrived at in other cases is applicable to the facts of this case. These paragraphs are reproduced below:-

    8. And it must always be borne in mind that the standard of proof beyond reasonable doubt, has no applicability in so far as the determination of matters under the direct tax statutes are concerned. It is settled that /the taxing authorities are entitled to look into the surrounding circumstances to find out the reality of the matter by applying the test of human probabilities (CIT Vs. Durga Prasad More (1971) 82 ITR 540 (Supreme Court) at pages 545, 547). The principle has been exposited by the Apex Court thus: It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding 3428-2010-KB 7 circumstances to find out the reality of the recitals made in those documents.

    9. To my mind and applying the ratios laid down in the authorities supra to the facts of the present case, the conclusion seems inescapable that like so many other parties, the appellant had also borrowed undisclosed cash amounts from the Kamal Chand Jain group of cases in No.2 account. To my view, the learned Assessing Officer has sufficiently established this case to the extent possible and it would not be out of place to mention that one has to remember the legal maxim-lex non cojit ad impossibilia-, which means the law does not compel a man to do that which he cannot possibly perform. I am firmly of the opinion that impossible burdens of proof cannot be placed either on the department or indeed even on the assessee. I am further fortified by the principles laid down in CIT Vs. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (Supreme Court); Govindarjulu Mudallar Vs. CIT (1958) 34 ITR 807 (Supreme Court); Sumati Dayal Vs. CIT (1995) 214 ITR 801 (Supreme Court); Hari Chand Virender Paul Vs. CIT (1983) 140 ITR 148 (P&J) and Nanak Chander Laxman Dass Vs. CIT (1983) 140 ITR

    151 (All). 3.2 We have considered the facts of the case and submissions made before us. The provision contained in section 69D reads as under:- 3428-2010-KB 8 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. 3.3 On perusal of the provision, it can be inferred that if any amount is borrowed on a hundi from any person otherwise than through an account payee cheque, the amount so borrowed shall be deemed to be the income of the person borrowing the money. The provision contains an irrebuttable presumption of law and, therefore, it has to be necessarily invoked at the very instance in favour of the revenue. It is an admitted fact that the amounts have been borrowed in cash i.e. otherwise than through an account payee cheque drawn on a bank. However, the question is whether, the documents 3428-2010-KB 9 are hundis or not? In the case of CIT Vs. Dexan Pharmaceutical Limited (1995)

    214 ITR 576, Honble Andhra Pradesh High Court examined the indicators which will decide whether a document is a hundi or not. The major considerations are that there have to be three persons, the drawer; the drawee; and the payee, but the drawer cannot himself also be the drawee. If the transaction is by bi-lateral, it is a very strong indicator to show that it is not a hundi transaction. A hundi is normally written in oriental language as per the mercantile custom. For the sake of completeness, the tests listed by the Honble Court on page No.581 of the report are reproduced below:- 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. 3428-2010-KB 10 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 original language as per the mercantile custom. 3.4 The Honble court also mentioned the contents of the impugned document before it on page No.578 of the report, which had been signed by two parties. It was mentioned that the contents of the documents are in English and not in oriental language. The transactions are not between three parties as they are by bi-lateral. The drawer himself is the drawee in all the transactions. It is further mentioned that though it may not be wholly accurate to say that documents in English cannot be hundis, there is no doubt whatsoever that the absence of oriental language in the document coupled with that the transaction is only by bi-lateral and not tripartite, is conclusive to show that the instrument though titled a hundi is not really a hundi. The document is on the lines of a promissory note. 3428-2010-KB 11 3.5 In the case of CIT Vs. Paranjothi Salt Company (1995) 211 ITR 141, the Honble Court mentioned on page No.143 of the report the essential characteristics of a hundi, i.e., an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument are absent. This judgment also holds that for a document to be a hundi, it should be a tripartite arrangement. 3.6 Coming to the facts of this case, the borrower acknowledges receipt of an amount by way of loan with stipulation of interest at 1% per month. It is of course written in Hindi. However, it is only a bilateral arrangement and not a tripartite arrangement. It is not negotiable prima facie and, therefore, the holder in due course may not be in a position to sue Kunj Behari Roshan Lal. Thus, we are of the view that the document is not a hundi. Accordingly, it is held that the provision contained in section 69D is not applicable. 3.7 It is an accepted position of fact that the assessee received the monies from Shri K.C. Jain, which were unaccounted in latters hands. Accordingly, the amount cannot be said to be unexplained in the hands of the assessee. Thus, provisions contained in section 68 etc. are not applicable.

    4. In result, the appeal is partly allowed as indicated above. This order was pronounced in open court on 25.02.2011. 3428-2010-KB 12 Sd/- sd/- ( I.P. BANSAL ) ( K.G. BANSAL ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dt. 25/02/2011 Copy forwarded to:-

    1. Shri Kunj Behari, Prop, M/s Kunj Behari Roshan Lal, 4127, Naya Bazar, Delhi-6.

    2. Income Tax Officer, Ward-29(1), New Delhi.

    3. The CIT

    4. The CIT (A), New Delhi.

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    Comments

    Sh. Kunj Bihari,, Delhi v. ITO, New Delhi
    (Feb 25, 2011)