1. This is a matter referred to us, to hear, which, a Special Bench was constituted by the President mainly to decide the question, whether the provisions of Section 69D were attracted to the repayments of two hundi loans, made in cash ; one was of Pokardas Jawaharlal-Rs. 50,000 and the other was of Girdharidas Ghansharndas & Co.--Rs. 30,000. There was a decision of the Madras Bench of the Income-tax Appellate Tribunal, which held that all hundis are not Bills of exchange ; that 'hundi', if it was in the nature of a promissory note, though described as a 'hundi underwritten on a hundi paper, would not be covered by the provisions of Section 69D. For the assessee, when reliance was placed upon this decision, the then Bench felt; that the matter required re-consideration and, therefore, a Special Bench was constituted and the appeal was heard by the Special Bench at some length. In this appeal, besides this point of applicability of Section 69D, there are some other points, which we would like to dispose of at the outset.
2. The first point was against the disallowance of a sum of Rs. 22,320 on account of hotel expenses. This amount was disallowed by the Income-tax Officer on the ground that they were in the nature of entertainment expenses, whereas it is the claim of the assessee that these expenses were incurred in the normal course of business and pursuant to the long standing trade practice. Reliance, in support of the admissibility of this claim, was placed upon a decision of the Gujarat High. Court in the case of CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424. The Finance Act, 1983 by inserting Explanation 2 in Section 37(2A) with retrospective effect from 1-4-1976 expanded the meaning of the expression 'entertainment expenditure' to include the expenditure on the provision of hospitality of every kind, by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever, whether or not such provision was made by reason of any express or implied contract or custom or usage of trade and excluded from its purview, the expenditure incurred on food and beverages by the assessee to Ms employees in office, factory or other place of their work. Having regard to this explanation, the claim of the assessee had clearly become disallowable.
Keeping this position of law in view, the learned counsel for the assessee did not press this point. We, therefore, confirm the disallowance.
3. The next ground was against the disallowance of Rs. 25,000 on account of the cost of high power bulbs. This ground also was not seriously contested except to state that the matter was allowed by the Income-tax Appellate Tribunal, in the assessee's own case in the earlier assessment year. We have gone through the orders of the Tribunal for the earlier year and we find that the reasons for the deletion of the additions were totally different. The assessee had claimed there a total sum of Rs. 1,69,576 as cost of higher power bulbs. Out of this the Income-tax Officer allocated Rs. 1,60,000 to cost of production of the assessee's feature film 'Satyam Shivam Sundaram'. Thus only a sum of Rs. 9,576 was allowed as cost of bulbs used in the Studio. The disallowance of Rs. 1,60,000 was, however, confirmed by the Tribunal. There, the Income-tax Officer in addition to disallowance of Rs. 1,60,000, made by transfer to "cost of production" account, which was confirmed by the Tribunal, had further disallowed a sum of Rs. 25,000 on the sole presumption that the assessee must have some unutilised bulbs. This addition, the Tribunal said, was unwarranted and deleted it, the reason being that when out of Rs. 1,69,576, a sum of Rs. 1,60,000 was allocated to cost of production account, which was already disallowed, there was no reason to disallow a further sum of Rs. 25,000 as that would be over and above the claim made by the assessee. This was not the reason given by the Income-tax Officer this year in support of the disallowance. The Income-tax Officer observed : This year the cost of H. P. Bulbs, debited to P & L account is Rs. 1,75,326. As in the assessment year 1978-79 this year also cost of unutilised bulbs is estimated at Rs. 85,000 and the opening cost will be estimated at Rs. 60,000. The difference of Rs. 25,000 will be added.
Even though, the reason, given by the Income-tax Officer, may not, on the face of it, look very convincing and satisfactory to warrant a disallowance, the fact remains that the assessee had no account, as to how many bulbs were purchased, how many were utilised and how many were held in stock. The Tribunal had disallowed Rs. 1,60,000 in the previous year, out of Rs. 1,69,000 claimed. The excess disallowance of Rs. 25,000 only was deleted. This year there was no such disallowance made by the department. Akin to the disallowance of Rs. 1,60,000 made in the previous year, the total disallowance was only Rs. 25,000. Since the Tribunal had already confirmed a disallowance of Rs. 1,60,000 in the previous year, which leads us to believe that some disallowance was called for, since the disallowance made this year was only Rs. 25,000 and since the assessee had not maintained any stock account and since the existence of unutilised bulbs was not denied, we think that the disallowance of Rs. 25,000 was not unwarranted, nor can it be said to be excessive. We, therefore, confirm the disallowance.
4. The next ground taken up was disallowance of expenses out of shooting-Rs. 1,00,000 set erections and costume expenses- Rs. 50,000 shooting set erections~Rs. 35,068 and the entertainment expenses Rs. 8,474. At the time of hearing, the learned counsel for the assessee did not press these disallowances. Those disallowances are, therefore, confirmed.
5. Ground No. 6 is a ground objecting to the disallowance of claim said to have been made under Section 35B for exports market development. The Division Bench, which heard this appeal, had remarked that this ground did not arise out of the order of the Commissioner of Income-tax (Appeals). We have gone through the order of the Commissioner of Income-tax (Appeals) from this angle and find that this ground does not really arise out of the order of the Commissioner of Income-tax (Appeals). Since this ground was not raised before the Commissioner of Income-tax (Appeals) there was no occasion for him to deal with this ground. For that reason, we also cannot deal with this ground, unless the assessee is permitted to raise this ground. Considerable amount of time was spent in arguing whether we, as the final fact-finding body, can permit the parties before us to raise the ground for the first time, when it was not taken up earlier before any authority. In support of the view that we have got the power to permit the learned counsel for the assessee relied upon a decision of the Bombay High Court in CIT v. Western Rolling Mills (P.) Ltd. [1985] 156 ITR 54 and another decision of the Rajasthan High Court in CIT v. Pratapsingh [1987] 164 ITR 431. Reference was also made to another decision of the Bombay High Court in Ugar Sugar Works Ltd. v. CIT [1983] 141 ITR 326 with a view to distinguish it. The learned counsel for the assessee further pointed out that for the assessment year 1975-76 in the assessee's own case the Tribunal had pointed out that the assessee would be entitled to the relief under Section 35B in respect of the publicity charges incurred abroad, disagreeing with the department's contention that the assessee having only assigned his right of exploitation outside India he could not be said to be rendering any service or providing any facility outside India in order to attract the eligibility for claiming relief under Section 35B. For the revenue strongest reliance was placed upon Ugar Sugar Works Ltd.'s case (supra) to show that we do not have the power to entertain this ground at all because the assessee had not raised this ground before the AAC, by which it meant that the assessee was not aggrieved by the decision of the Income-tax Officer. In our considered view, the decision of the Bombay High Court in Ugar Sugar Works Ltd.'s case (supra), which is binding on us, governs the issue and no alteration in that view was made by the Bombay High Court in the subsequent decision in Western Rolling Mills (P.) Ltd.'s case (supra).
In Ugar Sugar Works Ltd.'s case (supra) the Bombay High Court had to deal with the question, whether, when an assessee had not appealed to the A AC against the finding of the Income-tax Officer, rejecting the assessee's claim for development rebate, although at the same time it had appealed to the AAC against other disallowance made by the Income-tax Officer, he could be permitted to raise the point of development rebate, before the Tribunal. The Bombay High Court, after a review of the entire case law on the subject, took the view that the finding of the Income-tax Officer not having been appealed against to the AAC, it must be assumed that the assessee was not aggrieved by the finding of the Income-tax Officer and that it had accepted the same.
Further, the finding of the Income-tax "officer not being the subject-matter of appeal before the AAC and he not having been called upon to adjudicate the same and not having adjudicated upon the same, there could not be any decision of the AAC on the finding of the Income- tax Officer and, therefore, it could not be said that the assessee was aggrieved by the decision of the AAC in respect of the said matter so as to entitle him to file an appeal to the Tribunal under Section 253 against the order of the AAC on the said finding.
Sitting in Bombay, dealing with a case falling within the Bombay High Court's jurisdiction, we are bound by the decision of the Bombay High Court and respectfully following the Bombay High Court, we must hold that the assessee not having filed an appeal to the AAC against the finding of the Income-tax Officer, rejecting the assessee's claim for the disallowance of weighted deduction under Section 35B, is not entitled to raise this plea before the Tribunal, as he could not be said to be aggrieved by the decision of the Income-tax Officer, even though in the earlier order on this point there was a decision of the Tribunal in his favour. In the later case decided by the Bombay High Court in Western Rolling Mills (P.) Ltd.'s case (supra), the question was whether where there was full material on record to enable the consideration of a claim, an assessee can raise a point before the AAC for the first time to consider the question of grant of relief. Before the Income-tax Officer, the assessee in this case had not claimed relief under Section 80-I of the Income-tax Act, 1961. The assessee preferred an appeal before the AAC. An additional ground was taken before the AAC for relief under Section 80-I. The AAC, following the decision of the Gujarat High Court in the case of CIT v. Gurjargravures (P.) Ltd. [1972] 84 ITR 723, admitted the additional ground and directed the Income-tax Officer to go into the merits of the case.
Aggrieved by the direction of the AAC, the department came up in appeal before the Tribunal contending that the AAC was not justified in entertaining the additional ground but the Tribunal upheld the action of the AAC. The question, which then arose before the High Court, at the instance of the revenue was whether the order of the Tribunal upholding the action of the AAC was legal and valid. The Bombay High Court after referring to the Supreme Court decision in the case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 by which the decision of the Gujarat High Court was reversed and also referring to the decision of the Andhra Pradesh High Court in CIT v. Gangappa Cables Ltd. [1979] 116 ITR 778, where the Andhra Pradesh High Court considered and applied the decision of the Supreme Court, held that the AAC had the power to entertain the ground of appeal provided that there was ample material on the record. The Bombay High Court held that the decision of the Supreme Court in Gurjargravures (P.) Ltd.'s case (supra) was no bar to the entertaining of the claim by the AAC or the Tribunal when there was material before the Income-tax Officer. On coming to this conclusion the Bombay High Court held categorically at page 57 of the report that they were not considering the question as to whether there was any difference between the powers of the AAC and the powers of the Tribunal in this petition and confined themselves only to the powers of the AAC to entertain a new ground. This is what the Bombay High Court observed : In the instant case we are not required to consider whether there is any difference between the powers of the AAC and the Tribunal in this petition. We are considering the powers of the AAC (for Commissioner of Appeals) to entertain a new ground. Before either of the decisions is applied, let us consider, whether there was any material on record in the present case, which would have enabled the AAC to uphold the assessee's claim for relief made for the first time before the AAC.This would show that the Bombay High Court had not dealt with the powers of the Tribunal in this regard and had left it open. By this decision, therefore, it cannot be argued, nor can this decision be construed as laying down the ruling that the Tribunal can entertain a ground against the order of the AAC even though such a ground was not taken up before him. In other words, the decision rendered by the Bombay High Court in Ugar Sugar Works Ltd.'s case (supra) remains unaltered. We are, therefore, duty bound to follow the Bombay High Court's decision, which holds that in a situation of this nature the assessee cannot be said to have been aggrieved by the order of the AAC, which means that we cannot permit a ground which does not arise out of his order. It was perhaps for this reason that the earlier Division Bench consisting of the then President had remarked in the file that this ground did not arise out of the order of the CIT implying that the Tribunal would not consider this ground. For these reasons we will not deal with this ground.
6. Now, we will deal with the main question for which the larger Bench was specially constituted namely, whether the amounts repaid by cash could be said to be hundi loans' that is borrowed on 'hundis'. Dealing with this question, the Income-tax Officer observed : As per provisions of Section 69D of the Income-tax Act, 1961 which came into force w.e.f. 01-04-1976, the repayment should have been made by account payee cheque. Since the amounts were paid in cash, the same are disallowed in view of the provisions of Section 69D of the Income-tax Act. Against this addition the assessee appealed to the Commissioner of Income-tax (Appeal) who confirmed the addition with the following observation : Section 69D provides that 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 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.
Admittedly in the present case, the amounts of Rs. 50,000 and Rs. 30,000 were borrowed by the appellant against 'hundis' and the repayments of the loans were made in cash. Therefore, provisions of Section 69D are clearly attracted. The ITO is, therefore, justified in adding the amount of Rs. 80,000 as income under the provisions of this section. Accordingly, I reject this ground.
Against this order of the Commissioner of Income-tax (Appeals) the present appeal is filed and the question is, whether what was repaid on 'hundi loan' could be treated as the income of the assessee or not.
Arguments were addressed to us quite elaborately by Shri S.A. Joshi, for the assessee, Shri Y.P. Trivedi as an Intervener and Shri S.C.Tewari for the revenue. After considering the arguments, addressed to us and also considering the case law relied upon by them and also going through the decision of the Tribunal given on the subject, we are of the opinion that the decision given in the case of Second ITO v.Grahalakshmi & Co. [1982] 2 ITD 420 by the Madras Bench does not require any reconsideration by us. When we say this, we do not mean to say that under the Law, we are empowered to re-consider a decision given by a Division Bench with a view or so as to overrule it, but we do feel that in a larger Bench, we are entitled to consider the question again in the light of the new developments either in the sphere of Law, or in the realm of facts and then come to a fresh conclusion which may be in accordance with the earlier views or opposite to it. Having considered the legal position and the facts in this light, we say that the opinion expressed by the learned Bench in the case of Grahalakshmi & Co. (supra) and followed by another Bench of the Madras in the case of Fifth ITO v. K.A. Khader Sons [1983] 6 ITD 65, do appear to us to be stating the correct position in law in regard to 'hundis'. A leading decision was given by the Madras Bench in the case of Grahalakshmi & Co. (supra) to which one of us was a party.
There, the legal prepositions considered and laid down were as under : The general acceptation of the word 'hundi' is derived from the exception provided in Section 1 of the Negotiable Instruments Act which provides that nothing contained therein affects any local usage relating to any instrument in an oriental language, but not the instruments themselves. Even if a hundi is written in the form of a promissory note, if it is established to be a hundi, these local usages may apply and it would be possible for the payee to negotiate that document without endorsement, but a document written in English cannot be negotiated without endorsement.
The Bench considered in depth the situation prevailing before the introduction of Section 6913, what was the mischief sought to be suppressed and what was the remedy proposed to curb the mischief. It also referred to direct taxes enquiry final report, which was the source for the recommendation, that in order to stop the investment and utilisation of black money by way of a 'hundi loans' a provision should be made that all loans received on hundis and repayments made including interest should be made only through account payee cheques. It was pursuant to this recommendation that Section 69D was enacted. The Bench then traced the history, as to what a 'hundi' meant and referred to the Commentary on Negotiable Instruments Act (Act XXVI of 1881), Sixteenth Edition by M.S. Parthasarathy and also referred to the circulars issued by the Central Board of Direct Taxes No. 208 dated 15-11-1976. On a, consideration of these authorities and the source of information the Bench came to the view that the following are the characteristics of a 'hundi' : (a) A hundi is payable to a specified person or order or negotiable without endorsement by the payee ; (b) A holder is entitled to sue on a 'hundi' without an endorsement in his favour ; (c) A hundi accepted by the drawee could be negotiated without endorsement; (d) If a 'hundi' is lost, the owner could claim a duplicate or triplicate from the drawer and present it to the drawee for payment ; The Bench then contrasted these characteristics with the requirements of a Bill of Exchange as denned in Section 5 of the Negotiable Instruments Act. It found that a hundi is different from a promissory note, as a promissory note contains a promise to pay, whereas a Bill of Exchange contains an order to pay. A Bill of Exchange is also negotiable as well as a promissory note. It distinguished a Bill of Exchange from a hundi only from the point of view of negotiability by endorsement. If a Bill of Exchange is negotiable only by endorsement, it does not partake the character of a 'hundi' but if it is negotiable without endorsement, it partakes the character of a 'hundi'. By laying these guidelines, the Tribunal examined the instrument in that case and found that it bore a close resemblance to a promissory note as it satisfied all the requirements of a promissory note and is a bill of exchange and not a hundi at all. Ultimately the decision of the Tribunal in that case turned on the document executed in that case. The conclusion of the Tribunal was that if the document was in the nature of a promissory note, it could not be termed as a 'hundi" and, therefore, the provisions of Section 69D would not be applicable. This was also the view taken by another Bench of the Madras in the case of K.A. Khader Sons (supra). There also the Bench held that the document executed in that case was a promissory note and not a bill of exchange much less a hundi. This Bench also relied upon the Calcutta High Court decision to come to the view that even if an instrument was engraved on a hundi paper and even though it was called a hundi, yet it could not be a hundi, if it contained the characteristics of a promissory note.
The later Bench further held that in each case, the facts had to be examined to decide, whether the document executed was a promissory note or a hundi. Eventually it depends upon the facts obtaining in each case. Neither of the Benches laid down the rule that if a document was executed in English, it could not be a hundi except that both the Benches stated that if a document was executed in English language, it became negotiable only by endorsement and the requirement of endorsement for negotiability will not be there, if the documents are executed in oriental language. In the case of Grahalakshmi & Co.
(supra) the Bench considered two circulars issued by the Central Board of Direct Taxes. One circular was dated 15-11-1976 and no. 208, explaining the provisionsof the Taxation Laws (Amendment) Act, 1975, which introduced Section 69D of the Income-tax Act. It also explained the provisions of Section 69D and referred to the history relating to the hundis and how they came into vogue and how the business community was utilising them as a credit facility and what would be their characteristics. It also referred to the various kinds of hundis, which were in use and briefly referred to them. The other circular was no.
221 dated 6-6-1977. Both the circulars were considered by the Tribunal in its order in extenso and after quoting from them culled out the characteristics of a hundi and more or less applied those characteristics to find out whether the instrument executed in that case was a hundi or a promissory note.
7. It does not, therefore, appear proper for the Revenue to contend before us now that Circulars of the Board were not considered by the Madras Bench in Grahalakshmi & Co.'s case (supra). Without going into the finer nuances of law relating to the Negotiable Instruments, all that we would like to hold is that the test laid down by the Madras Benches in the case referred to above are of universal application and that is the only way to find out whether a document executed is a hundi or not. Since we have found, that the test laid down by the Madras Benches, is very appropriate and correct, we are of the opinion that that test needs no change even after due re-consideration.
8. Now in Appendix I, to the Negotiable Instruments Act by M.S.Parthasarathy, 16th Edition, the term 'hundi' has been explained. It says, a bill of exchange in the vernacular language is generally called a 'hundi'. The term 'hundi' was formerly applicable to native bills of exchange. A promissory note is called a 'teep' and in certain areas as a 'rukka'. Hundis are negotiable instruments written in an oriental language. They are sometimes bills of exchange and at other times promissory notes and are subject to local usages and are un-affected by the provisions of the Negotiable Instruments Act. A bill of exchange may include a hundi but a hundi does not include a bill of exchange.
The term 'hundi' is generally understood includes all indigenous negotiable instruments whether they be in the form of notices or bills.
The word 'hundi' is a term wider than the bill of exchange. The instrument in order to be a hundi must be capable of beingsued upon by the holder in his own name and must by the custom of trade be transferable like cash by delivery. Now this appears to us to be the correct proposition of law, which was also endorsed by the Madras Bench in Grahalakshmi & Co.'s case (supra) as well as in the subsequent case.
A hundi, by the custom of trade, must be transferable like cash by delivery. That means that if the negotiation of a hundi can only be by an endorsement, then it cannot be a hundi. Now this test is to be applied to test any instrument for the purposes of Section 69D. In the present case before us, the bill of exchange was in the following terms : At (163) one hundred sixty three days after date without days of grace pay at Bombay to Girdharidas Ghanshamdas or order the sum of Rupees Five Thousand (Rs. 5,000) for value received this day.To, for R.K. FilmsK.V. Sunder Raman, Sd/-Trombay Road, ProprietorChembur, Bombay.
Notice of Dishonour Waived.Accepted.
for R.K. FilmsSd/- sd/-Rs. 10,000 Due date 9-6-1978 Bombay dated 28-12-1977 At (163) one hundred sixty three days after date without days of grace pay at Bombay to Pokardas Jawaharlal or Order the sum of Rupees Ten Thousand (Rs. 10,000) for value received this day.To, for R.K. FilmsK.V. Sunder Raman, Sd/-Chembur, Bombay.
Notice of Dishonour Waived.Accepted.
for R.K. FilmsSd/- Sd/- It is made payable to order and it does not contain any promise like in the promissory note. Section 4 of the Negotiable Instruments Act defines a promissory note as an instrument in writing not being a bank note or currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. The definition of a promissory note is exhaustive. So, analysing this section we would get: (b) that the promissory note must contain undertaking to pay which is an essential element as distinguished from a mere acknowledgement of indebtedness without an express promise to pay the debt ; (g) the instrument must contain a promise to pay money and money only ; and 9. Applying these requirements to the document before us, executed in this case, it does not appear to be a promissory note at all, because there is no promise to pay, which is an essential element of a promissory note, even though it can be said that other requirements are present. Section 5 of the Negotiable Instruments Act defines a bill of exchange as "a bill of exchange is an instrument in writing containing an un-conditional order signed by the maker directing certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument." We will not go into the question at this stage as to what distinguishes a bill of exchange from a promissory note, but we would like to mention that the document executed in this case can be said to be a bill of exchange because it contains an unconditional order directing a certain person to pay the stated sum of money to the order of certain person namely, Pokardas Jawaharlal. The document executed in this case cannot, therefore, be said to be a promissory note but only a bill of exchange.
This conclusion of ours that the instrument executed in this case is a bill of exchange and not a promissory note takes this case out of the purview of Grahalakshmi & Co.'s case (supra) as well as K.A. Khader Sons' case (supra) decided by the Madras Bench of the Income-tax Appellate Tribunal.
10. Now, if the bill of exchange in this case is negotiable only by endorsement, then it ceases to be a hundi, as explained by the Board in the circular referred to in Grahalakshmi & Co.'s case (supra) and also by the statement of law given by M.S. Parfchasarathy in the Negotiable Instruments Act, Sixteenth Edition in Appendix I cited above. To repeat, a hundi must, by custom, be transferable like cash by delivery.
If it is not transferable like cash by delivery, it does not become a hundi as explained in the case of Grahalakshmi & Co. (supra). The object of Section 69D was to trace the source of money brought into the books by an assessee through the medium of a hundi. Since a hundi is transferable like cash by delivery, it becomes difficult to spot the person giving it and, therefore, the source becomes difficult to trace.
In order to trace the source, Section 69D provided that these transactions either for borrowal or repayment must be by account payee cheques, which would identify the person while in the process, acting as a curb in bringing unaccounted money into the books in the guise of hundi loans. Since money covered by a hundi is transferable like cash by delivery, it is to prevent this transferability that the safeguard was provided in Section 69D. If, therefore, moneys are borrowed on the strength of instruments which are transferable like cash by delivery, they become hundis. At this point of time, it becomes wholly immaterial, whether the borrowal is genuine or not. Section 69D does not refer to genuineness at all. It applies only one test, whether the money was borrowed on hundi and if so, whether it was by an account payee cheque or not and similarly for repayments. If this test is satisfied, the sum in question will fall outside the purview of Section 69D. Reverting back to the instrument executed in this case, it contains a direction to pay to the order of Pokardas Jawaharlal.
Therefore, it is negotiable. Now Section s 47 and 48 of the Negotiable Instruments Act deal with a negotiation by delivery and by endorsement.
Section 47 lays down : Subject to the provisions of Section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.
An instrument paya,ble to the bearer means an instrument, which is expressed to be so payable or on which the only or the last endorsement is an endorsement in blank. Where an instrument payable to bearer is only to be transferred to any person so as to constitute that person the holder thereof, the only thing, the Section requires to be done, is to deliver it to such person. Section 48, deals with Negotiation by endorsement and it provides : Subject to the provisions of Section 58, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by endorsement and delivery thereof.
Thus this Section deals with the negotiation of an instrument payable to order and stipulates that those instruments are negotiable only by an endorsement of the holder followed by delivery. In order that a transferee of an instrument payable to order acquires the rights of a holder in due course, the instrument must be negotiated in the manner prescribed by this section. If, however, the holder transfers by simple delivery, an instrument payable to order, without endorsement, the transferee merely acquires the rights of an assignee without the advantage of negotiability. The effect of endorsement is provided for in Section 50 of the Negotiable Instruments Act, which says that: The endorsement of a negotiable instrument followed by delivery transfers to the endorse the property therein with the right of further negotiation ; but the endorsement may, by express words, restrict or exclude such right, or may merely constitute the endorse an agent to endorse the instrument, or to receive its contents for the endorser or for some other specified person.
Thus, the effect of endorsement is to transfer to the endorse the property in the document with right of further negotiation. This transfers the property in the document with the right of further negotiation, if to be achieved by endorsement, then it becomes a bill of exchange and not a hundi. In this case the document is made payable to order. Therefore, it is negotiable only by endorsement and delivery thereof. If a document is negotiable by endorsement and delivery thereof, it becomes a bill of exchange and not a hundi. It would also not become a promissory note in certain cases. Therefore, keeping in view the terms of the instrument executed in this case, we are of the opinion that this bill of exchange is negotiable only by endorsement and such a document does not fall within the category of a hundi.
Therefore, to the moneys borrowed by these documents or to the repayments made by these documents, the provisions of Section 69D would become inapplicable. As rightly urged on behalf of the assessee, the source or the originator of the money is traceable and easily locatable. These moneys, we are told, were originally borrowed by bank cheques. Only the repayments were made by cash on account of certain exigencies or business. We are, therefore, of the opinion that the addition of these sums of Rs. 80,000 as covered by Section 69D is inappropriate, nor can we say that the decision given by the Madras Benches were not correct because they also turned upon the interpretation to be placed upon the instrument executed in those cases. Since the tests laid down therein, to ascertain the nature of the document, were quite proper, we cannot say that they were wrongly decided. We are, however, of the opinion that the order of the Bombay Bench 'A' in the case of Samir Glass Traders v. First ITO [IT Appeal No. 7254 (Bom.) of 1983] relating to assessment year 1978-79, a copy of which was made available to us on the paper book, does not appear to us to have correctly laid down the state of law. This ground is, therefore, decided in favour of the assessee.
11. Then we come to the last ground argued in this case, namely, whether the disallowance of publicity expenses of Rs. 1,10,482 was not legal. In para 18 of the Commissioner of Income-tax's order, this point was dealt with, as under : 18. The last ground in this appeal is against the disallowance of a sum of Rs. 1,10,482 out of the publicity expenses. The ITO has disallowed this amount under the provisions of Section 37(3A). It is submitted that by producing the film 'Satyam Shivam Sundaram' the appellant had set up an industrial undertaking for the manufacture of production of an article and, therefore, in view of the provisions of Section 37(3D) no disallowance should have been made out of the expenditure incurred by the appellant on advertisement and publicity.
19. The appellant had taken up this plea before the IAC also but he did not accept it on the ground that the appellant had produced several films in the past and, therefore, the "film 'Satyam Shivam Sundaram' cannot be said to be a new product. I have considered the matter carefully and in my opinion there is no force in the argument of the learned counsel for the appellant. The provisions of Section 37(3C) are applicable only in a case where the assessee has not set up industrial undertaking for the manufacture of production of any articles. As the appellant has been in the film line for the last several years and had produced several films in the past, he cannot be said to have established a new industrial undertaking by producing the film 'Satyam Shivam Sundaram'. As such the provisions of Section 37(3D) are not applicable in this case. The disallowance of Rs. 1,10,482 made by the ITO is according to the provisions of Section 37(3A) and, therefore, is according to law. I, therefore, reject this claim.
In this contract our attention was invited to a decision of the Income-tax Appellate Tribunal, Bombay Benches in the case of First ITO v. Y.R. Chopra (sic). In this case also the question arose whether each picture produced by a producer would amount to the setting up of a new industrial undertaking for the purpose of taking advantage of the provisions of Section s 37 (3A) and 37(3C). There also during the accounting year relating to the assessment year 1980-81, the assessee, a film producer, claimed the advertisement expenditure as fully deductible on the ground that his case was covered by the provisions of Section 37(3D) and that Section 37(3A) had no application to such expenditure. On the rejection by the ITO of the claim of the assessee, when the matter came before the Tribunal, the Tribunal held that the assessee was a, new industrial undertaking. The Tribunal there held that in the common parlance a new industrial undertaking would mean a newly set up paraphernalia or aggregation for a particular purpose. It found that a producer requires so many things for taking up ventures like producing a movie. The Tribunal also held that it was not the requirement of Section 37(3D) that such an industrial undertaking should be new. The requirement is that it should be an industrial undertaking, set up for manufacturing or producing any articles. In the case of a film producer, the movie is a new product, which requires a separate establishment and a new advertising machinery. Hence, each movie in the case of a producer is a separate and an "independent industrial undertaking and, therefore, the provisions of Section 37(3D) are applicable and not of Section 37(3A). We have gone through the judgment made available to us on the paper book and we are in complete agreement with the view expressed therein and following with respect that view, we hold that the view taken by the revenue in this case is unjustified. We, therefore, direct the Income-tax Officer to apply the provisions of Section 37(3D) and allow the expenditure of Us. 1,10,482 also.