Circular No. 647 — 1056. Clarification regarding applicability of provisions of section 194A to commercial pa

What this is

Circular No. 647 was issued by the Central Board of Direct Taxes on 22 March 1993. Its subject is 1056. Clarification regarding applicability of provisions of section 194A to commercial papers and certificates of deposits.

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.

What it does

Holds that the difference between the issue price and the face value of Commercial Papers and Certificates of Deposit is discount allowed, not interest paid, so the tax deduction provisions - the question raised was on section 194A - do not apply to transactions in these two instruments. It records that both are money market instruments in the nature of usance promissory notes, issued and regulated under Reserve Bank of India instructions, traded in the secondary market, issued at a discount to face value and freely transferable by endorsement and delivery, however much their conditions on minimum face value, maturity and ceiling on issue may differ.

Why it was issued

A question had recently been raised whether the difference between issue price and face value is interest, attracting deduction under section 194A, or discount, which is not liable to deduction.

Who it reaches

Issuers of Commercial Paper and Certificates of Deposit
Banks and companies subscribing to or trading in these instruments
Deductors uncertain whether to withhold on the discount element

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.194A	s.2, s.393, s.400, s.402

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1056. Clarification regarding applicability of provisions of section 194A to commercial papers and certificates of deposits
1. The Certificates of Deposits (CDs) and the Commercial Papers (CPs) are money-market related instruments which are traded in the secondary market. These are negotiable instruments in the nature of usance promissory notes which are issued and regulated in accordance with the instructions/guidelines issued by the Reserve Bank of India from time to time.
2. While, in terms of the Reserve Bank’s instructions pertaining to Certificates of Deposits and Commercial Papers, the conditions regarding their minimum face value, period of transferability/maturity, ceiling on the amount of issue, etc., differ, one aspect is common to both these instruments, namely, that they are issued at a discount to their face value and are freely transferable by endorsement and delivery. Thus, the issue price of these instruments is less than their face value.
3. A question has been recently raised as to whether the difference between the issue price and face value of these instruments should be treated as ‘interest’ in which case it would be liable to deduction of tax at source under section 194A of the Income-tax Act, 1961, or, it should be treated as ‘discount’ which is not liable to deduction of tax at source.
4. It is clarified for the information of all concerned that the difference between the issue price and the face value of the Commercial Papers and the Certificates of Deposits is to be treated as ‘discount allowed’ and not as ‘interest paid’. Hence, the provisions of the Income-tax Act relating to deduction to tax at source are not applicable in the case of transactions in these two instruments.
Circular : No. 647, dated 22-3-1993.

What to watch

The ruling is on deduction at source only - it says nothing about how the discount is to be taxed in the holder's hands.
It is confined to Commercial Papers and Certificates of Deposit as described, being instruments issued at a discount under Reserve Bank of India regulation.
Other discounted instruments are not covered by the reasoning merely because they are also issued below face value.
The TDS regime and section 194A have been amended since 1993.

Where you meet it

In a TDS survey or section 201 proceeding where the Department treats the discount on money market instruments as interest.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 27/2023 [F. No. 370142/11/2023-TPL] / SO 2189(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 16 May 2023
Notification No. 110/2021 [F. No. 275/27/2021-IT(B)] / SO 3815(E) — Ministry of Finance 17 September 2021
Notification No. 26/2019 [F. No. 275/15/2018-IT(B)]/SO 1399(E) — -, -. ~ "Bo ito ~o 33004 99 REGD. NO. D. L.-33004/99 ([he <5o':t.ette of 3ndio . 1251] No. 1251] 3ffiTmruT EXTRAORDINARY 20 March 2019
Notification No. 6/2018 — TDS deduction under section 194A of the income tax act 1961 in case of senior citizens 6 December 2018
Notification No. 65/2016 [F. No. 275/28/2015-IT (B)] / SO 2616(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 5 August 2016
Notification: 4 Date of Issue: 24/1/2013 — [To BE Published in Gazette of INDIA, Extraordinary, Part II 24 January 2013

← Circular No. 648 · Circular No. 645 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.