12 March 2008
THERE IS AN INTERESTING CASE ON FINANCING CHARGES AND TDS GIVEN BELOW.IF WE TREAT FINANCING/DISCOUNTING CHARGES AS PER THIS CASE, SEC 194A APPLIES .OR ELSE IT IS A CASE OF TDS UNDER SEC 194J

In the case of Kanha Vanaspati Ltd..v.Additional Commissioner of Income-tax, Range-50, New Delhi, the assessee-company had borrowed money from financiers for making payment to its suppliers. He had paid financial charges to the financiers and debited same under the head ‘Discounting charges’. The Assessing Officer held that said payments were in nature of interest, which attracted the provisions of section 194A and, accordingly, levied interest under section 201(1)/201(1A) and also imposed penalty under section 271C. They further that contended, that it bona fide believed that it was paying discounting charges for discounting of the bills of suppliers and since section 194A requires deduction of tax at source only on the payment of interest, it did not deduct tax at source on payment of discounting charges.

The court however held that the story of bill discounting charges had been advocated to confuse the whole issue. A simple short-term loan arrangement with financiers had been presented as bill discounting arrangement. Even the bill discounting charges are also in nature of interest falling in the definition of interest under section 2(28A). Therefore, the transactions with the financiers were of simple loan arrangement and remained uncontroverted by the assessee. The director of the assessee-company during the course of survey, had also admitted that so called bill discounting charges were in nature of interest.

Moreover, the ignorance of the law is of no excuse. Also the words ‘reasonable cause’ would not take in its sweep an error or misconception of law. Therefore, the contention of the assessee, that there was a confusion about the nature of so-called bill discounting charges, could not be treated as reasonable cause that the assessee was under a bona fide belief that tax at source was not deductible. This could not be a reasonable cause also for non-deduction of tax at source. The provisions of section 271C do not have any requirement of mens rea to be proved before levy of penalty under this section.

MR.DHAVAL OUR CA CLUB MEMBER CONTRIBUTED THE FOLLOWING INFO. UNDER TDS ON BILL DISCOUNTING

Discounting of usance bills and hundis - 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. 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 buyer will have to deduct the tax from the interest.—Circular: No. 65 [F. No. 275/79/ITJ], dated 2-9-1971

R.V.RAO