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
Circular No. 65 was issued by the Central Board of Direct Taxes on 2 September 1971. Its subject is 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.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Modifies Circular No. 48 dated 7th November 1970 on deduction from interest where a supplier draws a usance bill or hundi on the buyer and routes it through his bank. The Board now distinguishes two situations. Where the supplier makes the bill over to his bank, which discounts it and credits the net amount to him at once without waiting for realisation, the property in the bill passes to the bank and the collection on the due date is the bank's own receipt; the net payment by the bank to the supplier is the price of the bill and cannot technically be said to include interest, so the bank need not deduct from it, and the buyer need not deduct on paying the bank on the due date, such payments to a bank or a banking co-operative society being exempt under section 194A(3)(iii)(a). Where there is no immediate discounting and the bank merely acts as agent, collecting on the due date from the buyer for the supplier and crediting him, the bank receives the interest on the supplier's behalf and the earlier circular continues to apply, so the buyer must deduct tax from the interest.
The Board was asked to reconsider the view taken in Circular No. 48 dated 7th November 1970 and, on examining the legal position, found it needed modification to that extent.
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
1. I am directed to invite a reference to the Board’s 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 supplier’s 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 Board’s 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.
In a section 201 proceeding against a buyer who paid a bank on a usance bill without deducting, and in a bank's own examination of its discounting portfolio for deduction defaults.
Source: the Income Tax Department’s own published text — its page for this instrument.