Madras H.C : Whether, on the facts and in the circumstances of the case, the ITO was not right in adding a sum of Rs. 42,490 under s. 69D of the IT Act, 1961 ?

Counsel Appeared

S.V. Subramaniam for C.V. Rajan, for the Revenue : R. Janakiraman, for the Assessee

ABDUL HADI, J. :

In this tax case preferred by the Revenue under s. 256 of the IT Act, 1961 (hereinafter referred to as “the Act”), the questions of law referred to us are as follows :

“1. Whether, on the facts and in the circumstances of the case, the ITO was not right in adding a sum of Rs. 42,490 under s. 69D of the IT Act, 1961 ?

2. Whether, having regard to the provisions of s. 69D of the IT Act, 1961, the Tribunal’s view that the `account payee demand drafts’ can be equated to `account payee cheques’ is sustainable in law ?

2. The issue shortly is, when the assessee repays money borrowed on a hundi by an account payee crossed draft whether the amount so paid could be deemed to be the income of the assessee for the previous year in which the amount was repaid. Sec. 69D of the Act runs as follows : 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.” The short facts are as follows : The respondent-assessee is a registered firm carrying on business in grains and cereals. The relevant assessment year is 1978-79 with the previous year ending with 31st March, 1978. The assessee borrowed the following amounts of hundi from M/s P.P.M. Sankaralinga Nadar Sons, Virudhunagar : The amounts were borrowed by account payee crossed cheques. But repayments were made only by account payee crossed demand drafts. While repaying, apart from the above said principal sum of Rs. 40,000, a sum of Rs. 2,490 was also paid by way of interest. In the above circumstances, the ITO treated, under s. 69D of the Act, the above said sum of Rs. 40,000 + 2,490, thus, in all Rs. 42,490 as income. However, on appeal by the assessee, the CIT (A) on the footing that a draft is only a cheque issued by a bank, allowed the appeal in part, deleting from assessment, a sum of Rs. 41,175 out of the above said sum of Rs. 42,490. The assessee did not prefer any appeal to the Tribunal. But, the appeal preferred by the Revenue before the Tribunal was dismissed relying on Pt. Sidh Nath Shukla vs. Punjab National Bank of India Ltd. AIR 1960 All 238 and Suganchand & Co. vs. Brahmayya & Co. AIR 1951 Mad 910 ; (1951) 2 MLJ 9 and holding that the account payee demand drafts can be equated to account payee cheques within the meaning of s. 69D of the Act. Therefore, the short question to be considered by us is, when repayment, during the previous year in question, of the loan borrowed on hundi by account payee crossed cheque, is made by an account payee demand draft, whether s. 69D could be invoked and the repayment amount could be deemed to be income of the assessee who made the repayment. Before proceeding to analyse the rival arguments on this aspect, we must state that the first of the above said two questions, in the light of the facts stated, should be redrafted as follows :

Whether, on the facts and in the circumstances of the case, the CIT (A) and the Tribunal below were right in deleting a sum of Rs. 41,175 as not coming under s. 69D of the IT Act, 1961?”

3. Both the rival counsel relied on several decisions and we shall presently refer to them. One direct decision in favour of the assessee, which is relied on by learned counsel for the assessee is CIT vs. Intraven Pharmaceuticals (P) Ltd. (1995) 125 CTR (AP) 269 : (1996) 219 ITR 225 (AP) : TC 42R. 1875. The relevant observations therein are as follows : We have perused the provisions of s. 69D as well as the objects and reasons for the introduction of this section. The reference there is only to the Wanchoo Committee report which had made reference to unearthing black money and preventing its proliferation. In other words, the object was only to see that the transactions of borrowal by hundi will be made visible by making the transaction go through a bank. From this purposive approach it would be apparent that the object of identifying the payee is achieved whether it is sent by a crossed account payee cheque or a crossed demand draft. Learned counsel for the petitioner laid stress on the fact that s. 69D does not refer to a bank draft while other sections refer to that alternative mode of payment. We notice that payment by either an account payee cheque or account payee bank draft, was considered to be necessary under s. 40A(3), which was introduced from 1st April, 1968, as well as s. 269T, which was introduced w.e.f. 11th July, 1981, and s. 269SS which came into effect from 1st April, 1984. The provisions of s. 69D came into effect in between, on 1st April, 1977. A perusal of the analogous sections shows that they were also concerned with the transparency of transactions because s. 40A(3) refers to expenditure incurred in the course of business above Rs. 10,000; s. 269T with reference to repayment of deposits; and s. 269SS with reference to deposit of receipts exceeding Rs. 10,000. S. 69D refers to both the receipt and payment of amounts borrowed on hundis. The nature of these transactions is the same and we are unable to see any particular reason why an account payee cheque of a bank account would serve the purpose of transparency of transactions more than an account payee demand draft. It appears to us that the omission to refer to an account payee demand draft in s. 69D is probably inadvertent. The various decisions referred to in the order of the Tribunal about the nature of the cheque and a demand draft were rendered in the background of the provisions of the Negotiable Instruments Act and those considerations are not germane to the purpose behind s. 69D. In our opinion, the object of making disallowance under s. 69D is only in the event of the transaction being unverifiable. When it is seen that the repayment by an account payee demand draft is equally efficacious in verifying the identity of the payee, we share the view of the Tribunal that an account payee demand draft also should be treated as an account payee cheque drawn on a bank for the purpose of the provisions of s. 69D. We, therefore, answer the questions in the affirmative and against the Revenue.” But, what learned counsel for the Revenue submits is that the said decision is not correct. He points out that : (i) while in s. 40A(3) of the Act, which was introduced in 1968, that is prior to introduction of s. 69D which came in by virtue of 1975 amendment and w.e.f. 1st April, 1977, there is reference to both crossed cheque and crossed bank draft, and (ii) while in s. 269T, which was introduced by an Amendment Act of 1981, w.e.f. 11th July, 1981, and s. 269SS which came into force from 1st April, 1984 (thus, both these latter provisions being after the introduction of s. 69D), there is reference to both account payee crossed cheque and account payee crossed bank draft, there is reference only to account payee crossed cheque and not account payee crossed bank draft, in s. 69D of the Act and that in such a situation, particularly the Court cannot infer omission by the Central Legislature of the expression “account payee crossed bank draft” in s. 69D, by inadvertence, as held in the above said decision of the Andhra Pradesh High Court. He further relies on the following passage in Sampath Iyengar’s Law of Income Tax, Ninth Edn. (1994) at page 47 : “A casus omissus cannot be supplied by the Court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the legislature.

In some situations, however, the Courts supplement the words of the statute to give `force and life’ to the intention of the legislature and are compelled to perform some judicial services to cope with the difficulties raised.” The said passage relies on Hansraj Gupta vs. Dehra Dun Mussourie Electric Tramway Co. Ltd. AIR 1933 PC 63, S. Narayanaswami vs. G. Panneerselvam AIR 1972 SC 2284, CIT vs. National Taj Traders (1980) 14 CTR (SC) 348 : (1980) 121 ITR 535 (SC), Maxwell’s Interpretation of Statutes, 12th Edn., pages 33, 47, Seaford Court Estates Ltd. vs. Asher (1949)2 All ER 155 (CA). He also relies on similar observations in Halsbury’s Laws of England Third Edn., Vol. 36, paragraph 584, at page 390, and in Bindra’s Interpretation of Statutes, Fifth Edn. pages 260 and 261. He also points out that even the above referred Andhra Pradesh decision recognises the difference between a cheque and a banker’s draft. In this connection he also drew our attention to the definition of cheque under s. 6 of the Negotiable Instruments Act and the meaning given to draft in s. 85 of the said Act and also the exposition of the difference between cheque and draft in Suganchand & Co. vs. Brahmayya & Co. (supra). He also submits that in a cheque, the tracing of both the payer and payee is possible, but in a draft tracing of payer is not possible. He also points out that while s. 69D was introduced, the Select Committee Report presented on 20th March, 1975, stated thus : “While discussing the desirability of introducing the proposed new s. 69D relating to amount borrowed or repaid on hundis, the Committee were assured that its working would be watched for sometime and, if necessary, suitable amendments would be proposed in due course.”

4. On the other hand, learned counsel for the assessee submits that the emphasis in s. 69D is only on account payee crossing and, therefore, whether the negotiable instrument concerned is a cheque or a draft, s. 69D cannot be invoked once it is an account payee crossed one. He also points out that the Court, even according to several decisions, could infer casus omissus if a literal construction of a particular clause in the statute leads to manifestly absurd or anomalous results, which could not have been intended by the legislature. Admittedly, in the present case, the assessee borrowed the abovereferred amount of Rs. 40,000 from the abovesaid P.P.M. Sankaralinga Nadar Sons and, counsel submits, when the repayment in question is only repayment of that borrowed amount, it would be absurd to hold that s. 69D is attracted and that the amount repaid should be fictionally deemed to be income under the said section. Such a thing, according to learned counsel, could not have been at all the intention of the legislature when it introduced s. 69D. According to him, as laid down in CIT vs. Gwalior Rayon Silk Mfg. co. Ltd. (1992) 104 CTR (SC) 243 (1992) 196 ITR 149 (SC) : TC 27 R.187, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. He also relies on V. Guruviah Naidu & Sons vs. CIT (1996) 130 CTR (Mad) 189 : (1995) 216 ITR 156 (Mad). He also submits that even in a draft, relevant parties could be identified or traced. Even where the draft is obtained by paying cash to the bank, the name and address of the party paying the cash and applying for the draft have to be entered in the challan, which has to be submitted to the bank. That apart, he also points out that in the case of the above said repayment by draft, the payee’s name alone has to be identified, the payer being the assessee himself and the draft itself would show the payee’s name.

5. We have considered the rival submissions. In Suganchand & Co. vs. Brahmayya & Co. (supra) (Rajamannar C.J. and Panchapakesa Aiyar J.), this Court held thus : “A demand draft is, of course, a bill of exchange drawn by a bank on another bank, or by itself on its own branch, and is a negotiable instrument not offending the Paper Currency Act or the Reserve Bank Act. It is very nearly allied to a cheque, the difference between it and a cheque consisting largely on two facts. Firstly, it can be drawn only by a bank on another bank, and not by a private individual as in the case of cheques. Secondly, it cannot so easily be countermanded as a cheque, either by the person purchasing it, as by the drawer of a cheque, or by the bank to which it is presented.” (Emphasis, italicised in print supplied) But, it must be noted that the abovesaid two differences between the cheque and draft are not really germane to the object with which s. 69D was enacted, viz., the unearthing of black money and preventing its proliferation, that is, in the context of s. 69D, to see that the transactions of borrowal by hundi will be made visible by making the transaction go through a bank. Further, even though the casus omissus cannot be readily inferred, it has to be inferred when a literal construction of a particular section leads to manifestly absurd results which could not have been intended by the legislature. This has been laid down in CIT vs. National Taj Traders (Supra) also. It has been further laid down therein as follows : “Where to apply words literally would `defeat the obvious intention of the legislation and produce a wholly unreasonable result’ we must `do some violence to the words’ and so achieve that obvious intention and produce a rational construction.”

6. In the present case, admittedly the amount repaid represented the amount earlier borrowed and, therefore, it could never be treated as income. Such an absurd conclusion cannot be the intention of the legislature when it introduced s. 69D. The Supreme Court has also in CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (supra) held as follows : “Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach.” In V. Guruviah Naidu & Sons vs. CIT (supra) also, this Court indicated that a consideration of the object of the enactment would often provide the solution to the problem of interpretation. Further, in CIT vs. K.S. Vaidyanathan (1985) 47 CTR (Mad)(FB) 110 : (1985) 153 ITR 11 (Mad)(FB), the majority view is, the rule of strict construction applies only to charging sections and not to machinery sections, like s. 2(m) of the WT Act, 1957, which defined the term “net wealth” for the purpose of levy of wealth-tax. There also, it was observed that the principle of purposive construction has to be applied, which would promote the general legislative purpose underlying the provision. Here also, s. 69D could be considered only as machinery section. Further, in view of the fact that the interpretation which learned counsel for the Revenue wants to put on s. 69D would lead to absurd result, particularly in the present case, which is a case of repayment of admittedly borrowed amount, the different phraseology used in the other abovereferred to sections viz., s. 40A(3), s. 269T and s. 269SS by itself will not lead to the conclusion that the legislature, when it enacted s. 69D, deliberately intended to exclude account payee crossed bank drafts in enacting the said deeming provision. No doubt in A.V. Fernandez vs. State of Kerala AIR 1957 SC 657, an observation from which has been referred to at page 50 of Kanga and Palkhivala’s Law and Practice of Income-tax, Eighth Edn., Vol. 1 (prior to the portion in that book dealing with section-wise commentary of the IT Act), it is observed that in construing fiscal statutes, one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. But, we must point out that the Supreme Court itself has pointed out in the other decisions, as indicated above, that where such literal interpretations lead to absurd results, a casus omissus could be inferred.

7. The net result is, we answer the first question as redrafted by us in paragraph 2 above in the affirmative and against the Revenue. We also answer the second question in the affirmative and against the Revenue.

No Costs.

[Citation : 221 ITR 574]