Commissioner of Income Tax vs Prithivi Fire Works Industries

N.V. Balasubramanian, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal, Madras, has stated the case and referred

the following question of law for the assessment year 1981-82 u/s 256(1) of the Income Tax Act, 1961, for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the transactions, of borrowing

and repayment with interest thereon amounting to Rs. 1,84,945 were in the nature of promissory notes and not hundi and that therefore the sum of

Rs. 1,84,945 should not be taxed as income u/s 69D of the Income Tax Act, 1961, for the assessment year 1981-82 ?

The assessee is, a partnership firm carrying on business in the manufacture and sale of fire works. For the assessment year 1981-82 the Income

Tax Officer made an addition of Rs. 1,84,945 under the head ""Other sources"" on account of hundi borrowings from five parties by invoking the

provisions of section 69D of the Income Tax Act, 1961. The Income Tax Officer made an addition of the said sum that borrowings were on

hundis amounting to Rs. 1,50,000 from five parties and Rs. 34,945 represented interest thereon. The Commissioner of Income Tax (Appeals) on

appeal held that the instruments were only promissory notes and not hundis and therefore deleted the additions. The Appellate Tribunal on further

appeal by the Revenue seems to have proceeded on the basis that the instruments drawn were only promissory, therefore, the provisions of section

69D of the Act, are not applicable and directed the Income Tax Officer to verify the genuineness of the loans. However, for the disposal of the

assessment tax case it is not necessary to consider the correctness of the order of the Tribunal the aspect of the question of genuineness of the

loan. The fact remains that the Appellate Tribunal upheld the order of the Commissioner of Income Tax (Appeals) holding that the borrowings

were made on promissory notes; and they were not hundi loans. It is in this context the questions whether the provisions of section 69D of the Act

are applicable or not has to be considered. A similar question whether the provisions of section 69D of the Act would be invoked when the

contents of the document though executed on hundi papers but when the essential characteristic of hundi was absent was considered by the

decision of this court in Commissioner of Income Tax Vs. Paranjothi Salt Co., . This court has held that where the document contained a clear and

categorical promise and undertaking to pay those who had made available the amounts, together with interest on and from the date on which the

amounts were repayable (it does not) satisfy the requirements of hundis, the provision of section 69D of the Act are not applicable. It is already

seen that on the facts of the case, both the Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) have held that the instruments

were only promissory notes and not hundis and, therefore, we are of the view that the Tribunal was right in deleting the addition made u/s 69D of

the Act. In this view of the matter, we answer the question referred to us in the affirmative and against the Revenue. However, there will be no

order as to costs.