INCOME TAX

Circular 48

Dated 7/11/1970

Supplier drawing hundi on buyer and routing it through his banker with instructions to charge interest on amount of hundi from date of acceptance to date of actual payment - Whether tax is deductible at source by party retiring hundi from interest at the time of making payment to bank

CLARIFICATION 1

1. I am directed to invite a reference to the Boards Circular No. 48 [F. No. 275/195/70-ITJ], dated 7-11-1970 [Clarification 2]. The Board has been requested to reconsider the views given in that circular. After a careful examination of the legal position the Board is of the view that to the following extent the earlier views need a modification. Where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the suppliers account straightaway without waiting for realisation of the bill on due date, the property in the usance bill/hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such a payment cannot technically be held as including interest and therefore no tax need be deducted at source from such payments by the bank. Further, the buyer need not deduct any tax from the payment made by him on due date to the bank in respect of such discounted bill inasmuch as these payments to a bank or a banking cooperative society, conforming to the exemption granted by section 194A(3)(iii)(a).

2. On the other hand, where there is no immediate discounting and the bank merely acting as agent receives on the expiry of the period the payment for the bill from the buyer on behalf of the supplier and credits it to him accordingly, the bank receives interest on behalf of the supplier and the instructions contained in the Boards above-mentioned circular dated November 7, 1970 would apply and the buyer will have to deduct the tax from the interest.

Circular: No. 65 [F. No. 275/97-ITJ], dated 2-9-1971.

CLARIFICATION 2

1. I am directed to invite a reference to the Boards Circular No. 22/68-IT(B) [F. No. 12/23/68-IT(B)], dated 28-3/13-5-1968, regarding the provisions of section 194A. Instances have been brought to the notice of the Board where in the case of outstation sale of goods the supplier draws a hundi on the buyer and routes it through his banker along with transport documents with instructions to deliver the documents on retirement of the hundi and to charge interest on the amount of hundi from the date of acceptance thereof to the date of actual payment. A question has been raised whether, in such circumstances, tax is deductible at source by the party retiring the hundi on the amount of interest at the time of making payment to the bank, or whether the exemption provisions of section 194A(3)(iii)(a) would be attracted in this behalf.

2. In the above case the interest paid by the buyer to the supplier is not to the bank as such but only routed through the bank. In accordance with section 194A(3)(iii)(a), no tax is to be deducted at source in respect of interest paid to a bank but where the interest from the buyer is not for the bank as such, but only routed through bank to the supplier who is the recipient, the buyer has to deduct tax at source under section 194A from the interest paid and routing of the interest through bank will not make any difference.

Circular: No. 48 [F. No. 275/195/70-ITJ], dated 7-11-1970.