COMMISSIONER OF INCOME-TAX VS BAKHEAR AHMED & CO., 1998 PTD-MADRAS-HIGH-COURT-INDIA 987 (1996)

(a) Income-tax---

----Income from undisclosed sources---Amount borrowed or repaid on Hundi---Scope of S. 69-D---Amount repaid by account payee demand draft is covered by exception mentioned in S.69-D---Such an amount cannot be assessed as income from undisclosed sources---Indian Income Tax Act, 1961, S.69-D.

Even though a 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.

A demand draft is 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 in 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. The different phraseology used in section 40-A(3), section 269-T and section 269-SS of the Indian Income Tax Act, 1961, by itself will not lead to the conclusion that the Legislature, when it enacted section 69-D deliberately intended to exclude account payee crossed bank drafts in enacting the deeming provision.

Hence, when repayment, during the previous year in question, of a loan borrowed on Hundi by an account payee crossed cheque, is made by an account payee demand draft, section 69-D cannot be invoked and-the amount repaid cannot be deemed to be the income of the assessee who made the repayment.

CIT v. Intraven Pharamaceuticals (P.) Ltd. (1996) 219 ITR 225 (AP) fol,

CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC); CIT v. National Taj Traders (1980) 121 ITR 535 (SC); CIT v. Vaidyanathan (K.S.) (1985) 153 ITR 11 (Mad.); Fernandez (A.V.) v. State of Kerala (1957) 8 STC 561; AIR 1957 SC 657; Hansraj Gupta v. Dehra Dun Mussourie Electric Tramway Co. Ltd (1933) 3 Comp. Cas. 207; AIR 1933 PC 63; Narayanaswami (S.) v. Panneerselvam (G.) AIR 1972 SC 2284; Pt. Sidh Nath Shukla v. Punjab National Bank of India Ltd. AIR 1960 All. 238; Seaford Court Estates Ltd. v. Asher (1949) 2 All ER 155 (CA); Suganchand & Co. v. Brahmayya & Co. (1951) 21 Comp. Cas. 224; AIR 1951 Mad. 910; (1951) 2 MU 9 and V. Guruviah Naidu & Sons v. CIT (1995) 216 ITR 156 (Mad.) ref.

(b) Interpretation of statutes---

----Reasonable interpretation ---Casus omissus.

Tax laws have to be interpreted reasonably and in consonance with justice.

S.V. Subramaniam for C.V. Rajan for the Commissioner.

R. Janakiraman for the Assessee.

JUDGMENT

ABDUL HADI, J. ---In this tax case preferred by the Revenue under section 256 of the Income-tax 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 Income-tax Officer was not right in adding a sum of Rs. 42,490 under section 69-D of the Income-tax Act, 1961?

(2)Whether, having regard to the provisions of section 69-D of the Indian Income Tax Act, 1961, the Appellate Tribunal's view that the account payee demand drafts' can be equated to I account payee cheques' is sustainable in law?"

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.

Section 69-D 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 in 1978-79 with the previous year ending with March 31, 1978. The assessee borrowed the following amounts of hundi from Messrs 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 abovesaid principle sum of Rs. 40,000, a sum of Rs.2,490 was also paid by way of interest. In the above circumstances, the Income-tax Officer treated, under section 69-D of the Act, the abovesaid sum of Rs. 40,000 + Rs.2,490, thus, in all Rs. 42,490 as income. However, on appeal by the assessee, the Commissioner of Income-tax (Appeals), on the footing that a drafts 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 abovesaid 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 v. Punjab National Bank of India Ltd., AIR 1960 All 238 Suganchand & Co. v. Brahmayya & Co. (1951) 21 Comp Cas 224; AIR 1951 Mad 910; (1951) 2 MU 9 and holding that the account payee demand drafts can be equated to account payee cheques within the meaning of section 69-D 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 section 69-D could be invoked and the repayment amount could be deemed to be income of the assessee who made the repayment. Before proceeding to analysis the rival arguments on this aspect, we must state that the first of the abovesaid 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 Commissioner of Income-tax (Appeals) and the Tribunal below were right in deleting a sum of Rs. 41,175 as not coming under section 69-D of the Income Tax Act, 1961?"

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 v. Intraven Pharmaceuticals (P.) Ltd. (1996) 219 ITR 225 (AP). The relevant observations therein are as follows (at page 227):

"We have perused the provisions of section 69-D as well as the objects and reasons for the introduction of this section. The reference there is only to the Wanchoo Committee Report which has 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 section 69-D does not refer to 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 section 40-A(3), which was introduced from April 1, 1968, as well as section 269-T, which was introduced with effect from July 11, 1981, and section 269-SS which came into effect from April 1, 1984. The provisions of section 69-D came into effect in between, on April 1, 1977. A perusal of the analogous sections shows that they were also concerned with the transparency of transactions because section 40-A(3) refers to expenditure incurred in the course of business above Rs. 10,000; section 269T with reference to repayment of deposits; and section 269-SS with reference to deposit of receipts exceeding Rs. 10,000, Section 69-D 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 section 69-D 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 section 69-D. In our opinion, the object of making disallowance under section 69-D 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 ribunal 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 section 69-D. 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 section 40-A(3) of the Act, which was introduced in 1968, that is prior to introduction of section 69-D which came in by virtue of 1975 amendment and with effect from April 1, 1977, there is reference to both crossed cheque and crossed bank draft, and (ii) while in section 269-T, which was introduced by an Amendment Act of 1981, with effect from July 11, 1981, and section 269-SS which came into force from April 1, 1984 (thus, both these latter provisions being after the introduction of section 69-D), 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 section 69-D 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 section 69-D, by inadvertence, as held in the abovesaid decision of the Andhra Pradesh High Court. He further relies on the following passage in Sampath Iyengar's Law of Income Tax, Ninth edition (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 moreso 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 v. Dehra Dun Mussourie Electric Tramway Co. Ltd. (1933) 3 Comp Cas 207; AIR 1933 PC 63, Narayanaswami (S.) v. Panneerselvam (G.), AIR 1972 SC 2284, CIT v. National Taj Traders (1980) 121 ITR 535 (SC), Maxwell's Interpretation of Statutes, 12th edition, pages 33, 47, Seaford Court Estates Ltd. v. Asher (1949) 2 All ER 155 (CA). He also relies on similar observations in Halsbury's laws of England, Third Edition, Volume 36, paragraph 584, at page 390, and in Bindra's Interpretation of Statutes, Fifth edition, 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 section 6 of the Negotiable Instruments Act and the meaning given to draft in section 85 of the said Act and also the exposition of the difference between cheque and draft in Suganchand & Co. v. Brahmayya & Co. (1951) 21 Comp Cas 224; (1951) 2 MU 9. 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 section 69-D was introduced, the Select Committee Report presented on March 20, 1975. stated thus:

"While discussing the desirability of introducing the proposed new section 69-D 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. "

On the other hand, learned counsel for the assessee submits that the emphasis in section 69-D is only on account payee crossing and, therefore, whether the negotiable instrument concerned is a cheque or a draft, section 69 D 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 above referred to 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 section 69-D 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 section 69-D. According to him, as laid down in CIT v. Gawalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC), tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. He also relies on V.Guruviah Naidu & Sons v. CIT (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 abovesaid 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.

We have considered the rival submissions. In suganchand & Co. v. Brahmayya & Co. (1951) 21 Comp Cas 224; (1951) 2 MU 9 (DB), (Rajamannar C.J. and Panchapakesa Aiyar, J.). This Court held, thus, (at page 229):

"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 in 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 supplied. Here in italic).

But, it must be noted that the abovesaid two differences between the cheque and draft are not really germane to the object with which section 69-D was enacted, viz., the unearthing of black money and preventing its proliferation, that is, in the context of section 69-D, 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 v. National Taj Traders (1980) 121 ITR 535 (SC) also. It has been further laid down therein as follows (at page 542):

"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".

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 section 69-D.

The Supreme Court has also in CIT v. Gwalior Rayon Silk Mf,, Co. Ltd. (1992) 196 ITR 149 (SC) at page 156 as follows:

"Nevertheless, tax laws have to be interpreted reasonably an n consonance with justice adopting a purposive approach."

In V. Guruviah Naidu & Sons v. CIT (1995) 216 ITR 156 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 v. K. S. Vaidyanathan, (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 section 2(m) of the Wealth Tax 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, section 69-D 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 to section 69-D 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., section 40-A(3), section 269-T and section 269-SS by itself will not lead to the conclusion that the Legislature, when it enacted section 69-D, deliberately intended to exclude account payee crossed bank drafts in enacting the abovesaid deeming provision.

No doubt in A.V. Fernandez v. State: of Kerala (1957) 8 STC 561; 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 edition, volume 1 (prior to the portion in that book dealing with section wise commentary of the Income Tax 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 interpretation lead to absurd results a casus omissus could be inferred.

The net result is, we answer the first question as redrafted by us in paragraph 2 (at page 577) above in the affirmative and against the Revenue. We also answer the second question in the affirmative and against the Revenue. No costs.

M.B.A./1289/PTDReference answered.