Circular No. 208

What this is

Circular No. 208 was issued by the Central Board of Direct Taxes on 15 November 1976. Its subject is 475. Whether payment on or after April 1, 1977 of amount borrowed on hundi is to comply with the section regardless of whether hundi was executed prior to the said date or on or after that date.

What it does

States that section 69D applies to repayments made on or after 1 April 1977 whenever the hundi was executed. Section 69D, added by the Taxation Laws (Amendment) Act, 1975 with effect from 1 April 1977, provides that where any amount is borrowed on a hundi, or any amount due on a hundi is repaid, otherwise than through an account payee cheque drawn on a bank, the amount borrowed or repaid is assessed as the income of the borrower or repayer for the previous year of the borrowing or repayment; it also covers interest paid on an amount borrowed on a hundi. It applies only to hundis and not to other loans, such as repayment by employees to employers or repayment to banks or co-operative societies. The circular notes that 'hundi' is not defined in the Act, describes it as an indigenous instrument in vernacular language, a form of bill of exchange long used by the mercantile community to collect dues, lists varieties such as darshani, muddati, shahjog, jokhmi, namjog, dhanijog and jwabi hundis and zickri chit, and gives common characteristics: payable to a specified person or order or negotiable without the payee's endorsement, the holder being able to sue without an endorsement in his favour, negotiability after acceptance without endorsement, and the owner's right to a duplicate or triplicate if lost, with interest chargeable where usage is established. It then holds that any payment on or after 1 April 1977 in respect of an amount borrowed on a hundi must comply with the section regardless of when the hundi was executed.

Why it was issued

The question was whether repayments after the commencement date on hundis executed earlier were caught, and the Board states that they are.

Who it reaches

• Businesses that borrow on hundis in the indigenous credit market
• Persons repaying hundi borrowings, including interest, after 1 April 1977
• Borrowers who took hundi loans before the commencement date
• Assessing Officers making additions under section 69D

The provisions it speaks to

The instrument, as the Board published it

475. Whether payment on or after April 1, 1977 of amount borrowed on hundi is to comply with the section regardless of whether hundi was executed prior to the said date or on or after that date
1. The Taxation Laws (Amendment) Act, 1975 has added a new section 69D with effect from April 1, 1977, which provides that if any amount is borrowed from any person on a hundi or any amount due on it is repaid to any person, otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be assessed as the income of the taxpayer borrowing or repaying the said amount, for the previous year in which the amount is borrowed or repaid. This will also apply to the amount of interest paid on the amount borrowed on hundis. This provision is applicable only in respect of hundis and does not cover other types of loans, such as repayment of loan by employees to employers, repayment of loan to banks, co-operative societies, etc.
2. The term "hundi" has not been defined in the 1961 Act. In common commercial parlance, it denotes an indigenous instrument in vernacular language which can be used by the holder thereof to collect money due thereon without using the medium of currency. It may also be regarded as an indigenous form of bill of exchange expressed in vernacular language which has been in use in the mercantile community in India for the purpose of collecting dues. There are numerous varieties of hundis, for example, darshani hundi, muddati hundi, shahjog hundi, jokhmi hundi, namjog hundi, dhanijog hundi, jwabi hundi and zickri chit. The characteristics of hundis differ according to the varieties of the same. The following characteristics are found in most of the hundis :
1. A hundi is payable to a specified person or order or negotiable without endorsement by the payee.
2. A holder is entitled to sue on a hundi without an endorsement in his favour.
3. A hundi accepted by the drawee could be negotiated without endorsement.
4. If a hundi is lost, the owner could claim a duplicate or a triplicate from the drawer and present it to the drawee for payment. Interest can be charged where usage is established.
3. This provision will come into force with effect from April 1, 1977. Accordingly, any payment on or after April 1, 1977 in respect of an amount borrowed on a hundi will have to comply with the requirements of this provision regardless of whether the hundi was executed prior to the said date or on or after that date.

Circular : No. 208 [F. No. 208/7/76-IT(A-II)], dated 15-11-1976.

What to watch

• The date of the hundi does not save a repayment: it is the date and mode of repayment that decide.
• The only safe mode is an account payee cheque drawn on a bank — cash repayment brings the whole amount to tax as income.
• The amount is taxed on borrowing and again on repayment if both fall foul of the section, and interest paid on the borrowing is caught too.
• The section is confined to hundis; ordinary loans, employee loans and bank or co-operative society loans are outside it.
• Whether an instrument is a hundi is a question of fact, the Act carrying no definition, and the characteristics listed are common features rather than a test.

Where you meet it

In a scrutiny assessment where a cash repayment of an indigenous borrowing is added under section 69D.

On the same provision

• Circular No. 221 — Section 69D l Amount Borrowed/repaid on Hundi 6 June 1977

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