During the course of the scrutiny the assessment proceedings the AO noticed that under the Head ‘Finance Expenses’ the assessee has debited an amount of Rs.91,30,250/- on account of discount on Hundi. The assessee was asked whether tax has been deducted at source u/s 194A of the Act. The assessee replied that provision of section 194A are not attracted as the said expenses are only discount and not interest and are covered by Circular No. 647 dated 22.03.1993 of the CBDT, and therefore, provisions of section 40(a)(ia) are also not applicable.
This explanation did not find favour with the AO. Drawing support from the decision of the Tribunal Delhi Bench in the case of Kanha Vanaspati Ltd. 17 SOT 160 the AO was of the firm belief that discounting charges claimed by the assessee amount to interest as defined in section 2(28)A of the Act. The AO proceeded by disallowing Rs.91,30,250/- u/s 40(a)(ia) of the Act.
The assessee carried the matter before the Ld.CIT(A) and reiterated his claim that Hundi discount charges are not interest and therefore not subject to TDS and consequently disallowance u/s 40(a)(ia) of the Act is not correct. In support the assessee relied upon the CBDT Circular No. 647 and on the decision of Cargil Global Trading India Pvt. Ltd. 126 TTJ 516.
After considering the facts and the submissions and CBDT circular and the decision relied upon by the assessee the Ld.CIT(A) was convinced that the decision relied upon by the AO in the case of Kanha Vanaspati Ltd. do not apply on the facts of the case. The Ld.CIT(A) concluded by deleting the addition of Rs.91,30,250/-. Aggrieved by this the revenue is before us.
The Ld. DR strongly supported the findings of the AO, it is the say of the DR that Hundi discounting charges are covered by the definition of interest given u/s 2(28)A of the Act. Per contra counsel for the assessee reiterated what has been submitted before the lower authorities.
Having heard rival submissions, we have carefully perused the orders of the authorities below. Let us first understand the definition of interest given u/s 2(28A) of the Act.
‘interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and included any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized;”
It is clear from the definition that the expenditure would be held as in the nature of interest if it is payable in respect of:-
