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. 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.
