IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "H", MUMBAI
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
AND SHRI AMIT SHUKLA, JUDICIAL MEMBER
ITA No. 5170/Mum/2012
Assessment Year: 2009-10
DCIT-22(2) Shri Harnamsingh
Vashi Railway Station Bldg. Kulbirsingh Maker, 7,
Complex, Vashi Navi Vs. Green Apartment, Acharya
Mumbai Nagar, W.T. Patil Marg,
Govandi, Mumbai- 400 088
PAN:AACPM 6759 Q
(Appellant) (Respondent)
C.O. No. 206/Mum/2014
(Arising from ITA No. 5170/Mum/2012) AY: 2009-10
Shri Harnamsingh DCIT-22(2)
Kulbirsingh Maker, 7, Green Vashi Railway Station Bldg.
Apartment, Acharya Nagar, Vs. Complex, Vashi Navi
W.T. Patil Marg, Govandi, Mumbai
Mumbai- 400 088
PAN:AACPM 6759 Q
(Appellant) (Respondent)
Assessee by : Shri Jayant R. Bhatt
Revenue by : Shri Vivek A Perampurna
Date of hearing : 01.10.2014
Date of Pronouncement : 10.10.2014
ORDER
PER N.K. BILLAIYA, AM:
This Appeal filed by the Revenue and Cross Objection by the Assessee are
preferred against the order of the Ld.CIT(A) -33, Mumbai dated 18.05.2012. The
sum and substance of the grievances of the Revenue is that the Ld.CIT(A) erred in
holding that discount on Hundi is not covered by the definition of interest and
therefore, not liable for deduction of tax at source u/s 194 of the Act, and
accordingly cannot be disallowed u/s 40(a)(ia).
2. Assessee is a proprietor of M/s. Shri Sawant Enterprise, a builder and
developer. The assessee has also shown income from salaries from M/s. Shree
ITA No. 5170/Mum/2012
2 Shri Harnamsingh Kulbirsingh Maker
Assessment Year: 2009-10
Sawant Builder and Developer P. Ltd. and income from other sources. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
ITA No. 5170/Mum/2012
3 Shri Harnamsingh Kulbirsingh Maker
Assessment Year: 2009-10
"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:-
(a) Money borrowed or
(b) Debt incurred
In the impugned transaction both these elements are missing as there is no
borrower- lender relationship which is an essential characteristic/feature of all
borrowings/lending as the Hundi cannot be treated either as the loan or borrowing,
the discounting charges paid thereon is not subject to TDS under the provisions of
the Act. The Hon'ble Delhi High Court in the case of Cargil Global Trading India Pvt.
Ltd. in ITA No. 331 of 2011 with ITA No. 204 of 2011 considered the following
observations of the Tribunal:-
"9.The word "interest" is differently defined under Interest-tax Act. As per
Section 2(7) of Interest-tax Act, "interest" means interest on loans and
advances made in India and includes-(a) commitment charges on unutilized
portion of any credit sanctioned for being availed of in India and (b) discount
on promissory notes and bill of exchange drawn or made in India. Thus
where the legislature was conscious of the fact that even the discount of bill
of exchange is to be included within the definition of interest, the same was
basically so provided for. However, under the scheme of IT Act, the word
"interest" defined under Section 2(28A) does not include the discounting
charges on discounting of bill of exchange. Though the Circular No. 65 was
rendered in relation to deduction of tax under Section 194A, in respect of
payment to a resident, the same will be relevant even for the purpose of
considering whether the discount should be treated as interest or not. The
CBOT has opined that 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 realization 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 payment cannot technically be held as including any
interest and therefore, no tax need be deducted at source from such payment
by the bank. The decision relied by the AO in the case of Vijay Ship Breaking
Corpn. (supra) has been reversed by the Hon'ble Supreme Court as reported
in the case of Vijay Ship Breaking Corpn. v. CIT (2008) 219 CTR 639 (SC):
ITA No. 5170/Mum/2012
4 Shri Harnamsingh Kulbirsingh Maker
Assessment Year: 2009-10
(2008) 14 OTR (SC) 74. The Hon'ble Supreme Court held that usance interest
payable outside India by an undertaking engaged in the business of ship
breaking is
exempt from payment of income-tax by virtue of Expln. 2 added to Section
10(15)(iv)(c) with retrospective effect from 1st April, 1962 and hence the
assessee was not liable to deduct tax at source under Section 195 of the Act,
The discounting charges are not in the nature of interest paid by the
assessee. Rather after deducting discount the assessee received net amount
of the bill of exchange accepted by the purchaser. CFSA, not having any PE in
India, is not liable to tax in respect of such discount earned and hence the
assessee is not under obligation to
deduct tax at source under Section 195 of the Act. Accordingly, the same
amount cannot be disallowed by invoking Section 40(a)(i) of the Act."
And held as under:-
"We are in agreement with the aforesaid discussion on the legal aspect. It
may be pointed out that the CBDT has issued one Circular No.65 way back on
02.09.1971 clarifying the position in respect of income by way of interest
under Section 194 read with section 197(1) and (2) of the Act as under:
"1..... Where the supplier of goods makes over the usance bill/undi to his
bank which discounts the same and credits et amount to the supplier's
account straightaway without waiting for realization of the bill on due date,
the property in the usance bill/hundi passes on to the bank and - eventual
collection on due date is a receipt by the bank - 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 are to or a banking Co-operative Society, conforming to the
exemption granted by section 194A(3)(iii)(a) of the Income-tax Act, 1961.
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 Board's above mentioned Circular 7th November,
1970, would apply and buyer will have to deduct the tax from the interest."
12. There is another Circular No. 647 dated 22.03.1993 the point as it relates
to TDS on interest other than securities". In this Circular, the Board has
clarified the issue in the following manner:
"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 & at source.
ITA No. 5170/Mum/2012
5 Shri Harnamsingh Kulbirsingh Maker
Assessment Year: 2009-10
4. It is clarified for the information of all concerned 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 of tax at source are not applicable in the case of transactions in
these two instruments."
13. Having regard to the aforesaid, we are of the opinion that no substantial
question of law arises, as the matter stands settled by the dicta of the
Supreme Court as well as clarification by CBDT itself."
Considering the facts in the light of the above judicial decisions, we do not find any
error or infirmity in the findings of the Ld.CIT(A).
8. In the result, the appeal filed by the Revenue is dismissed.
C.O. No. 206/Mum/2014
(Arising from ITA No. 5170/Mum/2012) AY: 2009-10
9. Cross Objection by the assessee is filed late by 372 days. There is no request
for the condonation of the delay nor any affidavit is filed by the assessee explaining
the facts causing the delay in filing of the cross objection. Cross Objection filed by
the assessee are therefore not admitted being barred by the period of limitation.
CO. No. 206/Mum/2014 is dismissed.
Order pronounced in the open court on this 10th day of October, 2014.
Sd/- Sd/-
(AMIT SHUKLA) (N.K. BILLAIYA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 10.10.2014
*Srivastava
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR "H" Bench
//True Copy//
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.
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