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.

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October 2020