DULICHAND GULSARI LAL JAIN VS UNION OF INDIA
1999 P T D 1997
[226 I T R 753]
[Madhya Pradesh High Court (India)]
Before A. K. Mathur, C. J. and S. K. Kulshrestha, J
DULICHAND GULSARI LAL JAIN and another
Versus
UNION OF INDIA and others
Miscellaneous Petition No.619 of 1987, decided on 11/09/1996.
Income-tax---
----Income from undisclosed sources---Constitutional validity of provisions-- Amount borrowed or repaid on hundi otherwise than through account payee cheque drawn on a Bank---Section 69-D treating such amounts as income of assessee from undisclosed sources---Provisions of S.69-D are valid---Indian Income Tax Act, 1961, S.69-D---Constitution of India, Arts. 14 & 19.
A bare perusal of section 69-D of the Income Tax Act, 1961.1 clearly shows that it lays down that where any amount is borrowed on hundi from any person 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 for the previous year in which the amount was borrowed or repaid, as the case may be. The whole idea behind checking this payment by way of hundi is that it does not lend transparency to the transaction whereas in the transaction through the bank loan, there is transparency as the transactions can be verified. Section 69-D does not offend Articles 14 and 19 of the Constitution. It is valid.
Attar Singh Gurmukh Singh v. ITO (1982) 136 ITR 589 (P&H); Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC); K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India (1992) 196 ITR 431 (Mad.); Sajowanlal Jaiswal v. CIT (1976) 103 ITR 706 (Orissa) and U.P. Hardware Store v. CIT (1976) 104 ITR 664 (All.) ref.
H.S. Shrivastava for Petitioner.
V.K. Tankha for Respondents.
JUDGMENT
A. K. MATHUR, C.J.---The petitioners by this writ petition have challenged the validity of section 69-D of the Income Tax Act, 1961, as being unconstitutional. The petitioners have also prayed that the excluding of the loans taken on hundi and interest paid thereon from the total income of the assessee may be ordered. ,
Petitioner No. 1 is a registered firm and petitioner No.2 is one of the partners. The petitioners are carrying on business in cloth. Regular books of account have been maintained. For the purpose of accounting, the Diwali year is followed. During the accounting year, Diwali 1977-78, relevant to the assessment year 1979-80, the Income-tax Officer, A-Ward, Jabalpur, found that the assessee had taken hundi loans in cash from various parties after April 1, 1977, in the following manner:
| Sl. No. | Name of party | Date of hundi loan | Amounts (Rs.) |
| 1. | Dr. Sureshchand Jain, Jawaharganj, Jabalpur | 10-7-1978 | 2,000 |
| 2. | Mohanlal Gangaram, Gotegaon | 15-10-1978 | 3,000 |
| 3. | Smt. Jhunnibai w/o Mulayamchand | 21-7-1978 | 2,000 |
| 4. | Smt. Rajkumari Jain | 25-7-1978 | 1,000 |
| 5. | Smt. Champalal Jain | 23-8-1978 | 3,500 |
| 6. | Shri Kallulal Mohanlal | 9-9-1978 | 3,500 |
| 7. | Shri Danpatlal Nathulal | 13-9-1978 | 3,000 |
| 8. | Shri Santosh Kumar Deochand | 18-9-1978 | 10,000 |
| 9. | Mahendra General Stores | 11-10-1978 | 2,000 |
| 10. | Shri Shambuprasad Kewalprasad | 25-9-1978 | 10,000 |
| 11. | Shri Shambuprasad Kewalprasad | 9-10-1978 | 4,000 |
| 12. | Smt. Kasturibai Shikerchand (she has also given Rs.5,000 by cheque on11-7-1978) | 9-10-1978 | 1,000 |
| 13. | Shri Sushikumar Vinodkumar | 2-10-1978 | 2,000 |
| 14. | Shri Kukumchand Barelal | 30-9-1979 | 4,000 |
| | | | 51,000 |
The hundi Khokas, i.e., discharged hundis, were taken on record by the Income-tax Officer. In reply to the query by the Income-tax Officer as to why the hundi loans be not added in the total income as they are not through account payee cheques, it was stated that the credits were all supported by genuine confirmatory letters from the creditors. It was also stated that the money had to be taken in cash because of the exigencies of business and in some cases, the creditors had no bank account. The Income-tax Officer did not accept the explanation. He added the entire amount to the total income of the assessee. In terms of section 69-D of the Act, which came into force from April 1, 1977, the Assessing Officer, while disposing of the explanation submitted by the assessee, held that the question whether the loans are genuine or not does not arise, as the provision of the Act has to be complied with strictly, and it admits of no exception. The Income-tax Officer accordingly added these loans amounting to Rs.51,000 and interest of Rs.3,318, total Rs.54,318, to the total income of the assessee and assessed them to tax. The income determined in the case of the firm was allocated to the partners and the partners were also assessed on the share income which included the loans treated as income under section 69-D.
The petitioners preferred an appeal against the assessment order. The appellate authority rejected the appeal. The second appeal to the Income tax Appellate Ttibunal has also been rejected on March 25, 1985. Then the assessee moved an application before the Tribunal for making a reference to the High Court, but the same was rejected. Therefore, the petitioners have filed this present petition challenging the validity of section 69-D of the Act.
It may be relevant to mention that section 69-D of the Income-tax Act was added in the Income-tax Act by the Taxation Laws (Amendment) Act, 1975 (Act No.41 of 1975), with effect from April 1, 1977.
Learned counsel for the petitioners submitted that the said provision is ultra vires Article 14 of the Constitution as arbitrary and also violative of Article 19(1)(g), as it interferes with the right of the petitioners' freedom of trade.
Shri V.K. Tankha, learned counsel for the Revenue, has submitted that the provision nowhere violates the right of the petitioners under Article 14 or 19(1)(g) of the Constitution and section 69-D is a regulatory measure and the purpose of incorporating this provision is to check evasion of tax and circulation of black money by hundis as it is difficult to regulate such money transactions, therefore, such a stringent provision was introduced.
In order to appreciate the contentions of learned counsel, it will be necessary to refer to the provision of section 69-D of the Income-tax Act, which reads as under:
"69-D. Amount borrowed or repaid on hundi.---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. "
A bare perusal of section 69-D clearly shows that it lays down that where any amount is borrowed on hundi from any person 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 for the previous year in which the amount was borrowed or repaid, as the case may be. The proviso lays down that the income which has been deemed to have been income in that section, will not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount. The Explanation further provides that the amount repaid shall include the amount of interest paid on the amount borrowed.
Shri V.K. Tankha, learned counsel for the Revenue, has submitted that similar provisions exist in section 40-A(3) which also provides that any expenditure over a sum of Rs.2,500 (Rs.10,000 now by virtue of 1987 amendment), shall not be allowed to be deducted if not made by a crossed cheque drawn on a bank or by a crossed bank draft. Learned counsel has submitted that the attempt on the part of the Legislature has been increasingly to check the evasion of tax and assessing the black money. Therefore, in order to see that all the transactions are transparent, the Legislature is insisting that the transaction should be through the medium of the bank so that such transaction can be examined properly. In this connection, learned counsel has invited our attention to the case of Attar Singh Gurmukh Singh v. ITO (1991) 191 ITR 667 (SC), wherein section 40-A(3) of the Income Tax Act, 1961, came up for challenge as being ultra vires Articles 14 and 19(1)(c) of the Constitution of India and while upholding the validity of this Act, their Lordships observed (page 672):
"In our opinion, there is little merit in this connection. Section 40-A(3) must not be read in isolation or to the exclusion o; Rule 6-DD. The section must be read along with the rule If readtogether, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40-A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing' authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40-A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40-A(3) was not practicable or would have caused genuine difficulty to the payee...
If the payment is made by a crossed cheque drawn on a bank or a crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from undisclosed sources. In interpreting a taxing statute, the Court cannot be oblivious to the proliferation of black money which is under circulation in our country. Any restraint-intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business."
Shri V.K. Tankha has also invited our attention to various other judgments with reference to section 40-A(3), in Sajawanlal Jaiswal v. CIT (1976) 103 ITR 706 (Orissa), U.P. Hardware Store v. CIT (1976) 104 ITR 664 (All) and Attar Singh Gurmukh Singh v. ITO (1982) 136 ITR 589 (P&H). The aforesaid reasoning is applicable in the present case also. The whole idea behind checking this payment by way of hundi is that it does not lend transparency to the transaction whereas in the transaction through the bank loan, there is transparency as the transactions can be verified.
In this connection, our attention was also invited to section 269-SS of the Act regarding taking or accepting certain loans and deposits. Section 269-SS reads as under:
"269-SS.---No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if,---
(a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or
(b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b),
is ten thousand rupees or more:
Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by,---
(a) Government;
(b) any banking company, post office savings bank or co-operativebank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(e) such other institution, association or body or class of institutions, associations or bodies Which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette:"
The following second proviso shall be inserted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989:
"Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.
Explanation. ---For the purposes of this section, ---
(i) 'banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act;
(ii) 'co-operative bank' shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(iii) 'loan or deposit' means loan or deposit of money. "
The validity of section 269-SS has already been upheld by the Madras High Court in the case of K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India (1992) 196 ITR 431.
Here also, loan transactions have to be through bank cheques so that they can be verified. Thus, there is anxiety on the part of the Legislature to see that all transactions should be open through the banking system so that authenticity of the same can be verified. Therefore, in view of the above discussions, we are of the opinion that section 69-D of the Act does not suffer from any vice offending Article 14 or 19(1)(g) of the Constitution of India. Hence, there is no merit in this petition and the same is dismissed. The amount of security, if any, shall be refunded to the petitioners. No order as to costs.
M.B.A./1940/FC Order accordingly.