2008-VIL-427-ITAT-PNE
Equivalent Citation: TTJ 125, 705,
Income Tax Appellate Tribunal PUNE
Date: 30.12.2008
HIMALAYA DISTRIBUTORS.
Vs
INCOME-TAX OFFICER.
BENCH
Member(s) : PRAMOD KUMAR., MUKUL SHRAWAT.
JUDGMENT
These four appeals are directed against CIT(A)'s consolidated order dt. 3rd July, 2008, in the matter of assessments under s. 143(3) r/w s. 153C of the IT Act, 1961 for the asst. yrs. 2000-01 to 2004-05. The grievances raised in these appeals are as follows:
ITA No. 1146/Pn/2008 (for asst. yr. 2003-04):
"1. On the facts and in the circumstances of the case and in law the addition sustained by learned CIT(A) of Rs. 1,08,000 as interest and brokerage under s. 69C is not justified. The same be deleted.
2. On the facts and in the circumstances of the case and in law the provisions of s. 153C are not attracted to the facts of this case. The assessment being bad in law be quashed.
3. On the facts and in the circumstances of the case and in law the assessee denies its liability to pay interest under s. 234A of Rs. 3,419, under s. 234B of Rs. 1,78,600. The levy of interest be deleted."
ITA No. 1147/Pn/200B (for asst. yr. 2002-03):
"1. On the facts and in the circumstances of the case and in law the learned CIT(A) was not justified in sustaining the addition of Rs. 2,00,000 made by AO treating it as income by invoking s. 69D of the Act. Since it is an undisputed position that the borrowing, though not admitted by the assessee, as per records was said to have been done on the basis of promissory notes, therefore, the provisions of s. 69D are not attracted to the borrowings raised by executing such promissory notes. The addition be quashed.
2. On the facts and in the circumstances of the case and in law and in view of ground No. 1 above addition sustained by learned CIT(A) of Rs. 69,500 treating it as interest and brokerage under s. 69C is not justified. The same be deleted.
3. On the facts and in the circumstances of the case and in law the provisions of s. 153C are not attracted to the facts of this case. The assessment being bad in law be quashed.
4. On the facts and in the circumstances of the case and in law the assessee denies its liability to pay interest under s. 234A of Rs. 8,622, under s. 234B of Rs. 50,055. The levy of interest be deleted."
ITA No. 1148/Pn/2008 (for asst. yr. 2001-02):
"1. On the facts and in the circumstances of the case and in law the learned CIT(A) was not justified in sustaining the addition of Rs. 1,00,000 made by AO treating it as income by invoking s. 69D of the Act. Since it is an undisputed position that the borrowing, though not admitted by the assessee, as per records was said to have been done on the basis of promissory notes, therefore, the provisions of s. 69D are not attracted to the borrowings raised by executing such promissory notes. The addition be quashed.
2. On the facts and in the circumstances of the case and in law and in view of ground No. 1 above addition sustained by learned CIT(A) of Rs. 48,000 treating it as interest and brokerage under s. 69C is not justified. The same be deleted.
3. On the facts and in the circumstances of the case and in law the provisions of s. 153C are not attracted to the facts of this case. The assessment being bad in law be quashed.
4. On the facts and in the circumstances of the case and in law the assessee denies its liability to pay interest under s. 234A of Rs. 5,220, under s. 234B of Rs. 8.150. The levy of interest be deleted."
ITA No. 1149/Pn/200B (for asst. yr. 2000-01):
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) was not justified in sustaining the addition of Rs. 2,00,000 made by AO treating it as income by invoking s. 69D of the Act. Since it is an undisputed position that the borrowing, though not admitted by the assessee, as per records was said to have been done on the basis of promissory notes, therefore, the provisions of s. 69D are not attracted to the borrowings raised by executing such promissory notes. The addition be quashed.
2. On the facts and in the circumstances of the case and in law and in view of ground No. 1 above addition sustained by learned CIT(A) of Rs. 10,500 treating it as interest and brokerage under s, 69C is not justified. The same be deleted.
3. On the facts and in the circumstances of the case and in law the provisions of s. 153C are not attracted to the facts of this case. The assessment being bad in law be quashed.
4. On the facts and in the circumstances of the case and in law the assessee denies its liability to pay interest under s. 234A of Rs. 7,290, under s. 234B of Rs. 57,510. The levy of interest be deleted."
2. As these appeals arise on common set of facts and involve somewhat interconnected issues, all the four appeals are being disposed of by way of this consolidated order.
3. The relevant material facts are like this. A search and seizure operation under s. 132 was carried out in the case of one S.H. Soni on 29th July 2003. During the course of this search, some books of accounts and documents are said to have been seized which related to money-lending operations of the said S.H. Soni. According to the AO, "some of such (seized) documents were blank promissory notes signed by the borrowers, blank undated cheques duly signed by the borrowers with amounts borrowed mentioned". The AO was of the view that modus operandi of S.H. Soni was that "the loans were advanced in cash normally for 90 days after deducting the interest amount (varying from 1.5 per cent to 2 per cent per month) and brokerage amount" and "at the time of borrowing, the borrowers hand over blank cheque of the full amount borrowed and promissory note and another promissory note is also obtained to ensure interest payment on due dates by the borrowers which is recorded on the back of it". It was in this backdrop and on the basis of documents seized from S.H. Soni, the AO noted that the assessee had borrowed the monies as under:
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Sr. Name of the Date of Amount in Rate of interest Brokerage
No. advancer advance Rs. for three
Months
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1. Ashok Oswal 21-1-2001 20,000 1.5% per month 0.75%
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2. Parbin Datt 06-3-2001 1,00,000 1.75% per month 0.75%
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3. Shree SK 27-3-2002 2,00,000 1.5% per month 0.75%
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4. The AO thus required the assessee to show whether or not the aforesaid borrowings are accounted for in the books of accounts. The AO also required the assessee to show cause as to why "as the amounts were borrowed on Hundi otherwise than account payee cheques, the same should not be treated as income under s. 69D of the Act". The AO also required the assessee to show cause as to why the interest paid on these borrowings should not be treated as unexplained expenditure of the assessee and accordingly, be brought to tax under s. 69C of the Act.
5. The stand of the assessee was that the assessee did not have any such borrowings. The AO noted the stand and proceeded to decide the matter purportedly on merits, by observing as follows:
"12. As the assessee has denied having accepted any of such loans mentioned above, the case is decided on merits.
13. During the course of hearing, the assessee was requested to give reasons why the blank but signed cheque was given by the firm to Shri Soni. Similarly, it was requested to explain why the promissory note was signed by the firm's partner Shri Vilas Attal.
14. In this regard, the contentions of the partner of the firm are as under:
(a) In case of any borrowings, promissory/demand note and post-dated cheques are taken even by banks. Most of the times, these documents are signed in anticipation of loan to be disbursed. It also happens that the loan is not taken afterwards. The firm had borrowed funds from market. some times through the broker, Shri Soni by account payee cheques. When such borrowings were made, these documents used to be given in advance. These documents did not bear the name of the advancer as such arrangement used to be done by the broker. Therefore, these documents though signed, were blank. You will appreciate that the documents seized and related to firm are also unnamed. Once again, I confirm that the documents signed were in respect of the amount to be borrowed by account payee cheques only. No cash loan has been taken or demanded.
(b) As regards the list of the borrowers and lenders concerned, though the name of the firm is appearing in the list, these documents do not pertain to the firm. As such, I am unable to comment on it. I, as a partner of the firm or other partner, do not know the persons whose names are appearing after the names of the firm in the said list.
(cl Under the circumstances and considering the facts, the amounts in question should not be considered as income.
15. The contentions of the assessee have been considered. However, the same are not acceptable for the reasons as under:
(a) It goes beyond doubt that the assessee had accepted money from the above-mentioned persons through broker, Shri Soni. The cash book seized during the course of search operation in the case of Shri Soni clearly reveals name of the assessee enlisted among the names of borrowers. The fact that blank cheques were handed over by the assessee justifies and proves that transaction has taken place. No man of ordinary prudence would handover blank cheques without any purpose. The evidence found during the course of search operation in the case of Shri Soni proves that the assessee has borrowed loan in cash from Shri Soni and has handed over the blank cheques as security for repayment of the said loan.
(b) The amounts were borrowed on Hundi in cash, i.e., otherwise than by account payee cheques. This is also evident from the promissory notes the assessee signed.
(c) The assessee also had paid interest on these borrowings which is evident from the details recorded on these documents.
(d) As per the provisions of s. 69D of the Act, where any amount is borrowed on a Hundi form or any amount due thereon is repaid to any person otherwise than by 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.
(e) From the above, it is clear that the amounts borrowed by the assessee mentioned above would be the deemed income of the assessee under s. 69D of the Act.
16. During the previous year relevant to assessment year under consideration, the assessee has not borrowed any fresh amount. However, the amounts borrowed in earlier years remained outstanding.
17. As per the documents, the said amounts were borrowed with interest and brokerage. The interest and brokerage for various assessment years are depicted hereunder in a tabular form :
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Asst. Total amount of Period of Interest Brokerage Total
yr. borrowing in Rs. borrowing in Rs. in Rs. in Rs.
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2000-01 2,00,000 3 months 9,000 1,500 10,500
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2001-02 2,00,000 12 months 3,600 6,000 42,000
1,00,000 3 months 5,250 750 6,000
-------
48,000
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2002-03 2,00,000 12 months 36,000 6,000 42,000
1,00,000 12 months 21,000 3,000 24,000
2,00,000 1 month 3,000 500 3,500
-------
69,500
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2003-04 2,00,000 12 months 36,000 6,000 42,000
1,00,000 12 months 21,000 3,000 24,000
2,00,000 12 months 36,000 6,000 42,000
-------
1,08,000
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2004-05 2,00,000 3 months 9,000 1,500 10,500
1,00,000 3 months 5,250 750 6,000
2,00,000 3 months 9,000 1,500 10,500
-------
27,000"
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6. Aggrieved by the additions so made on account of borrowings on Hundis and unexplained expenditure of interest. the assessee carried the matter in appeal before the CIT(A) but without any success.
7. One of the legal pleas raised by the assessee was that since the documents found in possession of S.H. Soni were not in the nature of 'Hundi' at all and therefore deeming provisions under s. 69D cannot come into play at all. References were made to several judicial precedents including CIT vs. Ram Niwas (200B) 2 DTR (Del) 1, CIT vs. K.P. Abdullah (2000) 158 CTR (Mad) 342 : (1999) 240 ITR 947 (Mad), ITO vs. K.A. Khadar Sons (1983) 17 TTJ (Mad) 75, Ranbir Raj Kapoor vs. ITO (1988) 30 TTJ (Bom)(SB) 656 and Asstt. CIT vs. Bissheshwarlal Mannalal & Sons (2002) 74 TTJ (Cal) 994 : (2002) 80 ITD 69 (Cal) in support of the proposition and the features on instruments must possess so as to be entitled to be termed as 'Hundi'. Learned CIT(A) did not specifically deal with any of these contentions but summarily rejected the same by observing as follows:
"5. I have carefully considered the submissions of the appellant and perused material on record. As regards the case law relied upon by the appellant, it may be mentioned that these case law relied upon by the appellant are distinguishable on facts and do not apply to the appellant's case squarely. These cases and other similar cases lay down certain well established principles of law regarding burden of proof and appreciation of evidence. There is no dispute about such principles. The question is one of applicability of the principles to the facts in a given case. It has been a well-settled view that the ratio of any decision must be understood in the background of that case. What is of essence in a decision is its ratio and not every observation found therein nor what legally follows from the various observations made in it. It is not a profitable task to extract a suitable sentence here and there from a judgement and to build upon it (vide Ambica Quarry Works vs. State of Gujarat AIR 1987 SC 1073). In my considered view, the principles enunciated in the cited cases do not render any help to the appellant in the facts and circumstances of the present case because the appellant's case is held to be distinguishable on facts."
8. The CIT(A) then proceeded to confirm the actions of the AO by observing as follows:
"5.2 The following are the essential features in the present case:
(i) The subject document is written on a Hundi paper in vernacular language;
(ii) The subject document contains the name of the bank and amount of money and corresponding cheque for the same amount has been found, which is duly signed by the assessee.
(iii) The subject document which is the basis for making addition under s. 69D was found and seized during the course of search under s. 132(1) in the premises of Shri Shriram Soni Group. As per the newly inserted provisions of law as contained in s. 292C, the presumption regarding the correctness of content of such seized material is available in any proceeding under the Act. On facts of case, it is absolutely clear that the appellant has failed to rebut the presumption regarding the correctness of the seized material which shows taking of loan by the appellant. From the conspectus of the material on record, taking into account the settled legal position in this regard and further taking into account the relevant provisions of law as contained in s. 292C, it is clear that the factum of receipt of cash loan is established.
Thus, if the content of the subject paper, sample of which is reproduced in para 5.1 hereinbefore, is seen along with the cheque which is an unconditional order signed by the assessee directing the bank to pay a certain sum of money only to or to the order of a certain person, where name is left blank or bearer, it is clear that the said document fulfils the essential qualities of a Hundi. This is a case where the entire transaction is unaccounted in the books of accounts of the appellant. It is trite law that substance is more important than form. It is again trite law that whatever cannot be done directly can never be allowed to be done indirectly so as to defeat a provision of law on the statute book. If these principles of law are applied for ascertaining the correctness of the document, we have to examine the substance and effect of the document. If the substance and effect of the document which is written on a 'Hundi' paper are considered along with the cheque, it is clear that the subject document is a 'Hundi'. In fact, the cheque is a bill of exchange drawn on a bank. Though the cheque is blank, obviously, the person to whom it was given could have put the name or make it payable at his order. Then, the cheque is a bearer cheque. Taking into account all these aspects of the matter, it is held that the subject document is a 'Hundi' and cannot be said to be a promissory note.
5.3 In view of the foregoing discussion, it is held that the learned AO is fully justified on facts and in law in making the addition under s. 69D treating the subject document as 'Hundi', sample of which is reproduced in para 5.1 hereinbefore. Accordingly, the additions made by the learned AO under s. 69D are upheld in all the assessment years in which such addition is subject-matter of appeal in the present case.
5.4 As regards addition made on account of unexplained expenditure being in the nature of interest and brokerage, from the seized material, it is absolutely clear that the appellant has borrowed loans from Shri Ashok Oswal, Pravin Datta and Shri S.K. through Shri Shriram Soni, as is clearly brought out in the assessment order. The mode of receipt of money is in cash. Therefore, it is clear that the entry is unaccounted in case of books of accounts of the appellant. If the twin test of looking into the surrounding circumstances and applying the test of human probabilities as enunciated by the Hon'ble Supreme Court in the case of Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC) are applied to the facts of the present case, it is absolutely clear that appellant was engaged in borrowing unaccounted money in cash to be utilized outside the books of accounts. The expenditure in respect of such loan by way of interest and brokerage also remains unaccounted as the source of the same has not been explained by the appellant. Taking into account these aspects of the matter and also considering the totality of facts and circumstances of the case, it is held that the action of learned AO in making addition under s. 69C of the IT Act, 1961 on account of unexplained expenditure in the form of interest and brokerage on borrowings is fully justified on facts and in accordance with law. Accordingly, the additions made by the AO on account of interest and brokerage are upheld in all assessment years under appeal."
9. Aggrieved by the stand of the CIT(A) as well, the assessee is in further appeal before us.
10. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
11. We have noted that there is no dispute about the basic position that the impugned addition is made under s. 69D for borrowing on Hundis, and under s. 69C in respect of interest said to have been paid on such borrowings. The references to these sections are unambiguous and categorical. As far as additions under s. 69D are concerned, the legal position is settled that in order to be called a Hundi, the instrument has to be first in the nature of bill of exchange, and not in the nature of a promissory note. As we have noted in para 7 above, learned counsel for the assessee has cited numerous authorities for this proposition which are simply brushed aside by the CIT(A) by making some vague observations to the effect that, "it may be mentioned that these case law relied upon by the appellant are distinguishable on facts and do not apply to the appellant's case squarely" and that "these cases and other similar cases lay down certain well established principles of law regarding burden of proof and appreciation of evidence". What has been relied upon, so far as these cases are concerned, is a legal proposition as to what constitutes a Hundi and that proposition has been laid down therein in no uncertain terms. The questions of burden of proof and appreciation of evidence are not at all relevant in this context. Every decision is on the facts of a case but what is relevant is whether the decision, when viewed as a judicial precedent, lays down a legal proposition of general application or something confined to the facts of that particular case. To arrive at decision in a particular case, more often that not, the general legal position is appreciated and clarified, or else a judicial precedent can never have a normative effect in other cases. We are unable to share learned CIT(A)'s perception that "the principles enunciated in the cited cases do not render any help to the appellant in the facts and circumstances of the present case because the appellant's case is held to be distinguishable on facts". The CIT(A) states that facts are distinguishable but he does not explain which facts of the assessee's case are different vis-a-vis cases before those judicial authorities, and how such a differentiation affects the legal principles laid down in those judicial precedents. Take for example, the decision of this Tribunal in the case of Asstt. CIT vs. Bissheshwarlal Mannalal & Sons which was co-authored by one of us. In the said case, the Tribunal had, inter alia, concluded as follows:
"It is not in dispute at all that the borrowing from the local moneylender was inherently a bilateral transaction; whatever money was borrowed by the assessee at the tea estate office was repaid to the moneylender, at another location by the assessee firm itself, by way of a crossed account payee cheque. As held by Hon'ble Andhra Pradesh High Court in Dexan Pharmaceuticals (P) Ltd.'s case, there are always three parties to a Hundi transaction and, therefore, it is clear that a bilateral transaction is to be treated as outside the ambit of Hundi transaction. A Hundi, as held by the Hon'ble Madras High Court in a large number of cases, must possess essential characteristics of the bills of exchange and not promissory notes; even the CBDT Circular No. 221 [1977 CTR (Jour) 260], referred to earlier, clarifies that a Hundi is an indigenous form of bill of exchange which is usually drawn up in vernacular language. This CBDT circular, following the principle laid down in the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC), is in the nature of contemporanea expositio furnishing legitimate aid in construction of s. 69D. Therefore, it is necessary to examine necessary characteristics of a bill of exchange and whether the document in question was drawn up in a vernacular language. A bill of exchange requires three parties, i.e., drawer, drawee and payee, whereas in the case before us, as elaborated above, there are only two parties, i.e., the assessee and the moneylender. In Dexan Pharmaceuticals (P) Ltd.'s case, it is held that 'the drawer cannot himself be the drawee'. It is also settled in law that when drawer and drawee are the same person, that person is not entitled to treat the instrument as a 'bill of exchange'. If, therefore, an instrument, like one before us, cannot even be treated as 'bill of exchange' in the hands of the assessee; there is certainly no question the instrument in question can be treated as a Hundi in the hands of the assessee."
12. The Tribunal thus held that unless an instrument can be said to be in the nature of the bill of exchange, it cannot be treated as a Hundi at all. It also said that unless there are three parties to a transaction. it cannot be said to be a bill of exchange. A note is taken of the esteemed views of Hon'ble Madras High Court which holds that a promissory note cannot be treated as a Hundi. In the present case. the AO has categorically observed, as we have noted in earlier part of this order, that the promissory notes were found, and it was on the strength of these promissory notes that borrowings were resorted to. Under these circumstances, in our understanding, it is difficult to hold that following the ratio of the Tribunal's decision in Bissheshwarlal Mannalal & Sons case, it cannot be concluded that the borrowings in question were not covered by the scope of s. 69D. The distinction made out by the learned CIT(A) is a distinction without any material difference.
13. We see no reasons to take any other view of the matter than the view so taken by the Co-ordinate Bench. No contrary judicial precedents by equivalent or higher authorities have been brought to our notice. Learned counsel has also cited a number of judicial precedents which support the legal proposition set out in the preceding para, and which was stated in Bissheshwarlal Mannalal & Sons. As for the findings that the borrowing should be treated as a borrowing on Hundi because it is made out in Hindi and is on a Hundi paper. we are of the view that merely because a promissory note is made out in a vernacular language and is on a general format, it would not attain characteristics of a bill of exchange which is sine qua non for being treated as a Hundi.
14. We, therefore, hold that the borrowings in question, even if that be so, are not covered by the inherently limited scope of s. 69D which covers only borrowings on Hundis and, for that reason, the CIT(A) indeed erred in upholding the impugned additions under s. 69D.
15. The next issue then is the payment of interest, which is added as an unexplained expenditure under s. 69C of the Act.
16. The basis of this addition is inferences drawn by the authorities below, and the expenditure is not evidenced by any cogent proof. We have noted that learned CIT(A) has relied upon landmark judgment of Hon'ble Supreme Court in Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 : (1995) 214 ITR 801 (SC) and proceeded to tax the same on the basis of preponderance of probabilities about the expenditure having been incurred.
17. In order to invoke s. 69C, in our considered view, there has to be reasonable evidence to come to the conclusion that the expenditure has been incurred and the same is not accounted for in assessee's books of accounts. The onus is on the AO to demonstrate that such an expenditure is incurred. However, from the material before us, it is not clear whether there were specific details of interest payments by the assessee or whether the alleged interest payments are computed on the basis of what must have been, according to the AO, assessee's interest liability on the borrowings which are said to have taken place.
18. We, therefore, deem it fit and proper to remit the issue of interest payment back to the file of the AO. It is only in case he can demonstrate specific details of payment of interest, the addition in question could be considered. However, as we have stated earlier, the addition cannot be justified merely on the basis of hypothetical calculations about the interest liability on the amounts alleged to have been borrowed.
19. We thus restore the matter, on this issue, for fresh adjudication by the AO. He will decide the matter afresh in accordance with the law, in the light of our above observations. by way of a speaking order, and after giving a fair and reasonable opportunity of hearing to the assessee. The matter thus stands remitted to the file of the AO.
20. While the assessee's grievance against additions under s. 69D is thus upheld, the assessee's grievance against additions under s. 69C is upheld only to the extent that the matter stands for re-examination by the AO as per our above observations.
21. In the result, all the four appeals are partly allowed in the terms indicated above.
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