ITO, Ward - 4(2), Kolkata, Kolkata V. M/s. M.K.J. Enterprises Ltd., Kolkata

ITA 729/KOL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75018 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2014
• Appeal Filed By: Department
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 12-05-2011
• Court: TRIBUNAL
• Department Lawyers: S P LAHIRI
• Assessee Lawyers: S K TULSIYAN
• Keywords: Business expenditure; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, C , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA () BEFORE , /AND . . . . ' '' ''# '#'# '#, $% ) [BEFORE SHRI MAHAVIR SINGH, JM & SHRI ABRAHAM P. GEORGE, AM] & & & & / I.T.A NO. 729/KOL/2011 '( )* '( )* '( )* '( )*/ // / ASSESSMENT YEAR: 2007-08 INCOME-TAX OFFICER, WD-4(2), KOLKATA. VS. M/S. M K J ENTERPRISES LTD. (PAN:AABCM7727L) (,- /APPELLANT ) (./,-/ RESPONDENT ) DATE OF HEARING: 10.01.2014 DATE OF PRONOUNCEMENT: 27.01.2014 FOR THE APPELLANT: SHRI S. P. LAHIRI, JCIT, SR. DR FOR THE RESPONDENT: SHRI S. K. TULSIYAN $0 / ORDER PER SHRI MAHAVIR SINGH, JM: THIS APPEAL BY REVENUE IS ARISING OUT OF ORDER OF C IT(A)-VI, KOLKATA IN APPEAL NO.881/ CIT(A)-VI/09-10/CIR-6/KOL DATED 31.01.2011. ASSESS MENT WAS FRAMED BY DCIT, CIRCLE-6, KOLKATA U/S. 143(3) R.W.S. 115WE(3) OF THE INCOME-T AX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR ASSESSMENT YEAR 2007-08 VIDE HIS ORD ER DATED 29.12.2009. 2. AT THE OUTSET, IT IS NOTICED THAT THIS APPEAL BY REVENUE IS DELAYED BY 24 DAYS AND REVENUE HAS FILED CONDONATION PETITION. ON QUERY FROM THE BENCH, LD. AR FAIRLY CONCEDED THAT THE APPEAL CAN BE ADMITTED. AS THE LD. COUNSEL HAS NOT RAISED ANY OBJECTION, WE, GOING THROUGH THE SMALL DELAY, CONDONE THE DELAY AND ADMIT THE APPEAL . 3. THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AS REGARDS TO THE ORDER OF CIT(A) RESTRICTING THE DISALLOWANCE AT 1% OF EXEMPTED INCOME U/S. 14A OF THE ACT. FOR THIS, REVENUE HAS RAISED FOLLOWING GROUND NO.1: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A)-VI, KOLKATA HAS ERRED IN LAW IN DIRECTING THE A.O. TO RESTRICT THE DISALLOWA NCE U/S. 14A OF THE I. T. ACT TO 10% OF TOTAL EXEMPTED INCOME AT RS.7,85,717/- WHICH COMES TO RS.7,857/-. 4. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE RELEVANT ASSESSMENT YEAR INVOLVED IS 2007-08 AND HONBLE BOMBAY HIGH 2 ITA NO. 729/K/2011 M/S. MKJ ENTERPRISES LTD. , AY:2007-08 COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V S. DCIT [2010] 328 ITR 81 (BOM.), WHEREIN IT IS HELD THAT RULE 8D OF THE RULES AS INS ERTED BY THE I. T (FIFTH AMENDMENT) RULES, 2008 W.E.F. 24.3.2008 IS PROSPECTIVE AND NOT RETROS PECTIVE. THE CIT(A) RESTRICTED THE DISALLOWANCE AT 1% OF THE EXEMPTED INCOME U/S. 14A OF THE ACT BY OBSERVING AS UNDER: I FIND THAT THE DECISION OF DAGA CAPITAL HAS BEEN REVERSED BY HONBLE BOMBAY HIGH COURT IN THEIR ABOVE MENTIONED ORDER DTD. 12.08.201 0. IN THIS ORDER HONBLE COURT HAS HELD THAT RULE 8D SHALL BE APPLICABLE FROM ASSESSME NT YEAR 2008-09 ONWARDS. HERE, SINCE THE ASSESSMENT YEAR INVOLVED IS 2007-08 THERE FORE I HOLD THAT RULE 8D WILL NOT APPLY. HOWEVER, IN CERTAIN RECENT DECISIONS HONBLE ITAT KOLKATA HAS HELD THAT OUT OF THE ADMINISTRATIVE EXPENSES, EXPENSES TO THE TUNE O F 1% OF THE EXEMPT INCOME CAN BE DISALLOWED U/S. 14A. FOLLOWING THESE DECISIONS I H OLD THAT AN AMOUNT OF RS.7,857/- SHALL BE DISALLOWABLE U/S. 14A. THE EXEMPTED INCOME IS TO THE EXTENT OF RS.7,85,717 /- AND CIT(A) HAS DIRECTED THE AO TO RESTRICT HE DISALLOWANCE AT 1% OF THE EXEMPTED INCO ME. WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMIS SED. 5. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) DELETING THE DISALLOWANCE MADE BY AO ON ACCOUNT OF DISCOUNTING/F ACTORING CHARGES AS INTEREST EXPENSES FOR NON-DEDUCTION OF TDS U/S. 194A OF THE ACT, THEREBY DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. FOR THIS REVENUE HAS RAISED FOLLOWING GROUND NO.2: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON THE FACTS BY DELETING THE DISALLOWANCE U/S. 4 0(A)(IA) THOUGH THE ASSESSEE HAS TREATED THE PAYMENT AS INTEREST IN ITS BOOKS OF ACCOUNT. 6. BRIEFLY STATED FACTS ARE THAT DURING THE RELEVAN T FY THE ASSESSEE PAID A SUM OF RS.56,33,112/- TO M/S. LALJI FINANCIAL ON ACCOUNT O F DISCOUNTING/FACTORING CHARGES WITHOUT DEDUCTING TDS. ACCORDING TO AO, THESE FACTORING /D ISCOUNTING CHARGES ARE INTEREST EXPENSES AS PER THE PROVISIONS OF SECTION 2(28A) OF THE ACT AND ASSESSEE IS LIABLE TO DEDUCT TDS U/S. 194A OF THE ACT. ACCORDING TO AO, AS THE ASSESSEE FAILE D TO DEDUCT TDS, THESE EXPENSES CANNOT BE ALLOWED IN TERM OF SECTION 40(A)(IA) OF THE ACT. A CCORDINGLY, HE MADE DISALLOWANCE. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING IN PARA 6.3 AS UNDER: 6.3. I HAVE CAREFULLY CONSIDERED ALL THE FACTS AN D CIRCUMSTANCES OF THIS ISSUE. IT IS SEEN THAT THE ASSESSEE IS A AGENT OF M/S. MUKAND LTD. A ND THE STEEL PRODUCTS OF THIS COMPANY ARE SOLD THROUGH THE ASSESSEE. THE SALE BILLS ARE I SSUED BY MUKAND LTD. IN THE NAME OF THE CUSTOMERS BUT ON THEM IT IS MENTIONED THAT THE PAYM ENT FOR THE BILLS IS GUARANTEED AND UNDERWRITTEN BY THE ASSESSEE M/S. MKJ ENTERPRISES L TD. UNDER A ARRANGEMENT. AS PER THIS ARRANGEMENT THE PAYMENT TO MUKUND LTD. IS TO B E MADE BY THE ASSESSEE AND THE ASSESSEE COLLECTS THE PAYMENT FROM THE CLIENTS WHO HAVE PURCHASED THE GOODS FROM 3 ITA NO. 729/K/2011 M/S. MKJ ENTERPRISES LTD. , AY:2007-08 MUKAND LTD. THROUGH THE ASSESSEE. THE BILLS OF PURC HASE FOR WHICH PAYMENT IS TO BE RECEIVED BY THE ASSESSEE ARE DISCOUNTED WITH A FINA NCING FIRM NAMED M/S. LALJI FINANCIALS. WHEN THE BILLS ARE DISCOUNTED, M/S. LAL JI FINANCIALS PAYS TO THE ASSESSEE THE BILL AMOUNT AFTER DEDUCTING ITS DISCOUNTING OR FACT ORING CHARGES. THESE DISCOUNTING / FACTORING CHARGES ARE CLAIMED BY THE ASSESSEE AS EX PENDITURE. IN THS PROCESS OF BILL DISCOUNTING THE RESPONSIBILITY TO COLLECT THE BILL AMOUNT FROM THE CUSTOMERS PASSES ON TO M/S. LALJ FINANCIALS. WHETHER THE PAYMENT OF THE B ILL AMOUNT IS RECEIVED OR NOT RECEIVED OR RECEIVED LATE OR A LESS AMOUNT IS RECEIVED BY LA LJI FINANCIALS IT IS NOT A CONCERN OF THE ASSESSEE. THIS SHOWS THAT IN THIS TRANSACTION ACTU ALLY THE ASSESSEE HAS SOLD ITS ASSETS TO M/S. LALJI FINANCIALS AND THE OWNERSHIP OF THE ASSE TS, IN THE FORM OF DEBTORS, HAS NOW PASSED ON TO M/S. LALJ FINANCIALS. IN THIS KIND OF TRANSACTIONS IT CANNOT BE SAID THAT M/S. LALJI FINANCIALS HAS ADVANCED ANY LOAN TO THE ASSES SEE OR THE ASSESSEE HAS INCURRED ANY DEBT. THE AMOUNT PAID BY M/S. LALJI FINANCIALS TO THE ASSESSEE IN VIEW OF THE BILL DISCOUNTED BY IT IS IN THE NATURE OF SALE PROCEEDS OF THE DEBT PURCHASED BY LALJI FINANCIALS FROM THE ASSESSEE. THEREFORE, IT CANNOT BE SAID THAT THE DISCOUNTING/FACTORING CHARGES PAID TO LALJI FINANCIALS ARE IN THE NATURE OF INTEREST AS DEFINED IN SECTION 2(28A) OF THE I. T. ACT. FROM SECTION 2(28A) IT CAN BE SE EN THAT ONE IMPORTANT REQUIREMENT OF THIS SECTION IS THAT THERE SHOULD BE ANY MONEY BORR OWED OR DEBT INCURRED OR ANY CREDIT FACILITY UTILIZED BY THE ASSESSEE. HERE, THE ASSESS EE HAS NOT DONE ANY OF THESE THREE THINGS BECAUSE THE MONEY PAID BY M/S. LALJI FINANCIALS N VIEW OF THE BILL DISCOUNTED BY IT, IS NOT TO BE REPAID BY THE ASSESSEE. THEREFORE, ANY CHARGE S PAD BY THE ASSESSEE IN RESPECT OF SUCH MONEY RECEIVED AFTER BILL DISCOUNTING CANNOT B E TERMED AS INTEREST U/S. 2(28A). IN ITS SUBMISSION THE ASSESSEE HAS REFERRED TO CBDT CIRCULAR NO. 65 DATED 2.9.71 AND HAS CLAIMED THAT THIS SUPPORTS THEIR STAND. THE A.O . HAS REJECTED THIS CONTENTION OF THE ASSESSEE ON THE GROUND THAT THIS WAS RELATED TO DIS COUNTING CHARGES PAID TO BANKS AND NOT TO PRIVATE PARTIES. IN THIS RESPECT THE RELEVANT CO NTENT OF THE ABOVE CBDT CIRCULAR IS REPRODUCED BELOW: I AM DIRECTED TO INVITE A REFERENCE TO THE BOARDS CIRCULAR NO. 48, DATED 7TH NOVEMBER, 1970 [F. 275/195/70-ITJ]. THE BOARD HAS B EEN 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, TH E FOLLOWING EXTENT THE EARLIER VIEWS NEED A MODIFICATION. WHERE THE SUPPLIER OF GO ODS MAKES OVER THE USANCE BILL/HUNDI TO HIS BANK WHICH DISCOUNTS THE SAME AND CREDITS THE NET AMOUNT TO THE SUPPLIERS 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 OF THE SUPPLIER. FOR SUCH CASES OF IMMEDIATE DISCOUNTING THE NET PAY MENT MADE BY THE BANK TO THE SUPPLIERS IN THE NATURE OF A PRICE PAID FOR THE BIL L. SUCH A PAYMENT CANNOT TECHNCALLY BE HELD AS INCLUDING INTEREST AND THERE FORE 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 DSCOUNTED BILL INASMUCH AS THESE PAYMENTS ARE TO A BANK OR A BANKING CO- OPERATIVE SOCIETY, CONFIRMING TO THE EXEMPTION GRAN TED BY SECTION 194A(3)(III)(A) OF THE INCOME-TAX ACT, 1961. FROM THE ABOVE IT CAN BE SEEN THAT THIS CIRCULAR DO ES NOT DEAL WITH THE BILL DISCOUNTING CHARGES DIRECTLY. IT IS ACTUALLY RELATED TO THE AMO UNT WHICH IS PAID BY THE BANKS TO THEIR CUSTOMERS AFTER DEDUCTING THE BILL DISCOUNTING CHAR GES FROM THE BILL AMOUNT. THE CIRCULAR SAYS THAT NO INTEREST COMPONENT IS INVOLVED IN THIS AMOUNT PAID BY BANKS TO THE SELLERS WHO DISCOUNT THEIR BILLS WITH THE BANKS. HOWEVER IN THS CRCULAR IT HAS BEEN CLARIFIED THAT WHEN IN A TRANSACTION OF BILL DISCOUNTING THE NET A MOUNT OF THE BILL, AFTER DEDUCTING THE DISCOUNTING CHARGES, IS PAID TO THE DISCOUNTEE, THE PROPERTY IN THE BILL PASSES TO THE 4 ITA NO. 729/K/2011 M/S. MKJ ENTERPRISES LTD. , AY:2007-08 DISCOUNTER AND THE COLLECTION ON THE DUE DATE IS A RECEIPT BY THE DISCOUNTER ON ITS OWN BEHALF AND NOT ON BEHALF OF THE DISCOUNTEE. THUS TH E AMOUNT WHICH IS PAID BY THE BILL DISCOUNTER TO THE DISCOUNTEE IS NOT A LOAN BUT A PU RCHASE PRICE. SINCE IN THIS TRANSACTION NO LOAN IS BORROWED BY THE ASSESSEE THEREFORE ANY C HARGES PAID IN RESPECT OF THE SAME CANNOT BE TREATED AS INTEREST U/S. 2(28A). IN HS ORDER THE A.O. HAS REFERRED TO A DECISION OF MADRAS HIGH COURT IN THE CASE OF VISWAPRIYA FINANCIAL & SECURITIES LTD. VS. CIT(200) 258 ITR 496 (MAD.). FIRST OF ALL IT IS SEEN THAT THIS CASE S NOT RELATED TO BILL DISCOUNT ING CHARGES BUT RELATED TO AMOUNT PAID BY THE ASSESSEE TO ITS CUSTOMERS AT A FIXED RATE ON TH E AMOUNT DEPOSITED BY THEM WITH THE ASSESSEE. SECONDLY, THE OBSERVATIONS OF HONBLE COU RT WILL NOT APPLY TO THE CASE OF BILL DISCOUNTING BECAUSE AS DESCRIBED ABOVE IN SUCH TRAN SACTIONS UNDERTAKEN BY THE ASSESSEE NO MONEY HAS BEEN BORROWED BY IT FROM THE BILL DISC OUNTER. THEREFORE, THE ABOVE DECISION OF MADRAS HIGH COURT WILL NOT APPLY TO THE CASE OF THE ASSESSEE. THE A.O. HAS ALSO REFERRED TO TWO MORE CIRCULARS OF THE CBDT. I FIND THAT THE ISSUE DISCUSSED IN CIRCULAR DATED 23 .09. 1968 IS NOT RELEVANT TO THE ISSUE UND ER CONSIDERATION HERE. SIMILARLY IT IS SEEN THAT THE ISSUE DISCUSSED IN CIRCULAR 48 HAS BE EN MODIFIED BY THE CBDT, SUBSEQUENTLY IN THE CIRCULAR NO.65 DISCUSSED ABOVE. IN THE ABOVE DISCUSSION IT HAS BEEN POINTED OUT THAT EVEN AS PER THIS CIRCULAR 65 THE DISCOUNTING C HARGES CANNOT BE TERMED AS INTEREST AS PER SECTION 2(28A) OF THE I.T. ACT. IN VIEW OF THE ABOVE DISCUSSION I HOLD THAT THE DIS COUNTING CHARGES OF RS.56,33,112/- PAID BY THE ASSESSEE CANNOT BE TERMED AS INTEREST U/S. 2 (28A) AND THEREFORE THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS ON THEM U/S. 194A OF THE I. T. ACT. HENCE THE DISALLOWANCE OF THESE DISCOUNTING CHARGES MADE BY THE AO U/S. 40(A) (IA) IS DELETED. AGGRIEVED, REVENUE CAME IN APPEAL BEFORE US. 7. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSEE IS A DEL CREDERE AGENT OF MUKUND LTD. MUKUND LTD. IS A COMPANY PRODUCING STEEL AND ASSESSEE IS SELLING STEEL PRODU CTS PRODUCED BY MUKUND LTD. AS A DEL CREDERE AGENT. FROM THE FACTS OF THE CASE, IT IS C LEAR THAT THE SALE BILLS ARE ISSUED BY MUKUND LTD. IN THE NAME OF THE CUSTOMERS BUT ON THEM IT IS MENTIONED THAT THE PAYMENT FOR BILL IS GUARANTEED AND UNDER-WRITTEN BY THE ASSESSEE MKJ EN TERPRISES LTD., AS PER DEL CREDERE ARRANGEMENT/AGREEMENT. AS PER THIS ARRANGEMENT, TH E PAYMENT TO MUKUND LTD. IS TO BE MADE BY THE ASSESSEE AFTER COLLECTING FROM THE CLIENTS, WHO HAVE PURCHASED STEEL OF MUKUND LTD. THROUGH ASSESSEE. IN SUCH CIRCUMSTANCES, THE BILL OF PURCHASE FOR WHICH PAYMENT IS TO BE RECEIVED BY THE ASSESSEE ARE TO BE DISCOUNTED WITH A FINANCE FROM LALJI FINANCIAL. WHEN THE BILLS ARE DISCOUNTED, M/S. LALJI FINANCIAL PASSED T HE SAME TO THE ASSESSEE AFTER DEDUCTING ITS DISCOUNTING/FACTORING CHARGES. THESE DISCOUNTING/F ACTORING CHARGES ARE CLAIMED BY THE ASSESSEE AS EXPENDITURE. WHETHER THIS EXPENDITURE OF DISCOU NTING/FACTORING CHARGES IS IN THE NATURE OF INTEREST OR NOT? THE PROVISION OF SECTION 2(28A) O F THE ACT DEFINES THE DEFINITION OF INTEREST, WHICH READS AS UNDER: 5 ITA NO. 729/K/2011 M/S. MKJ ENTERPRISES LTD. , AY:2007-08 28A. INTEREST MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A DEPOSIT, CLAIM OR OTH ER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES 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 UTILISED. AS PER SECTION 2(28A) OF THE ACT INTEREST PAYABLE I N ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED INCLUDES ANY SERVICE, FEE OR OTHER CHARGES IN RESPECT OF MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CRED IT FACILITY WHICH HAS NOT BEEN UTILIZED. IT IS, THUS, SEEN THAT INTEREST EITHER MEANS SUM PAYABLE I N RESPECT OF ANY MONEY BORROWED OR DEBT INCURRED. IN THE INSTANT CASE, IT WAS NOT A CASE OF DEBT INCURRED OR MONEYS BORROWED. IN FACT, IT WAS A CASE WHERE THE ASSESSEE HAD MERELY DISCOUNTED SALE CONSIDERATION RECEIVABLE ON SALE OF GOODS. IT WAS NOT A CASE WHERE ANY MONEY HAD BEEN B ORROWED OR DEBT HAD BEEN INCURRED. IT WAS ALSO NOT A CASE WHERE ANY SERVICE, FEE OR EITHER CH ARGE HAD BEEN PAID IN RESPECT OF MONEY BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CRED IT FACILITY WHICH HAD NOT BEEN UTILIZED. IT WAS NOT A CASE WHERE SECTION 2(28A) OF THE ACT COULD BE INVOKED. FURTHER, WE CAN DEAL WITH THIS ISSUE FROM ANOTHER ANGLE I.E. THE INTEREST TAX ACT, 1974. AS PER SECTION 2(7) OF THE INTEREST TAX ACT, INTEREST MEANS INTEREST ON LOANS AND ADVANCES MADE IN INDIA AND INCLUDES - (A) COMMITMENT CHARGES ON UNUTILIZED PORTION OF ANY CREDIT SANCTIO NED FOR BEING AVAILED OF IN INDIA; AND (B) DISCOUNT ON PROMISSORY NOTES AND BE DRAWN OR MADE I N INDIA. THUS, WHERE THE LEGISLATURE WAS CONSCIOUS OF THE FACT THAT EVEN THE DISCOUNT OF BIL LS OF EXCHANGE WAS TO BE INCLUDED WITHIN THE DEFINITION OF INTEREST, THE SAME WAS BASICALLY SO P ROVIDED FOR. HOWEVER, UNDER THE SCHEME OF THE ACT, THE WORD INTEREST DEFINED UNDER SECTION 2(28A) DOES NOT INCLUDE THE DISCOUNTING CHARGES ON DISCOUNTING OF BE. THOUGH THE CIRCULAR NO. 65 WA S RENDERED IN RELATION TO DEDUCTION OF TAX UNDER SECTION 194A OF THE ACT, YET IN RESPECT OF PA YMENT TO A RESIDENT, THE SAME WOULD BE RELEVANT EVEN FOR THE PURPOSE OF CONSIDERING WHETHE R THE DISCOUNT SHOULD BE TREATED AS INTEREST OR NOT. THE CBDT HAD OPINED THAT WHERE THE SUPPLIER OF GOODS MAKES OVER THE USANCE OF BILL/HUNDI TO HIS BANK WHICH DISCOUNTS THE SAME AND CREDITS THE NET AMOUNT TO THE SUPPLIER S ACCOUNT STRAIGHTAWAY WITHOUT WAITING FOR REALIZATIO N OF THE BILL ON DUE DATE, THE PROPERTY IN THE USANCE OF 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 TH E SUPPLIER IS IN THE NATURE OF A PRICE PAID FOR THE BILL. SUCH PAYMENT CANNOT TECHNICALLY BE HE LD AS INCLUDING ANY INTEREST AND, THEREFORE, NO TAX NEED TO BE DEDUCTED AT SOURCE FROM SUCH PAYM ENT BY THE BANK. 6 ITA NO. 729/K/2011 M/S. MKJ ENTERPRISES LTD. , AY:2007-08 8. THE PROCESS ADOPTED IN THE PRESENT CASE WAS EXPL AINED BY THE ASSESSEE BEFORE THE AO, BEFORE CIT(A) AND EVEN NOW BEFORE US, WHICH IS AS U NDER: NOW, OUR CASE, WHICH SHOULD BE PROPERLY TERMED AS REVERSED FACTORING OR NON-RECOURSE OR WITHOUT RECOURSE, WHEREIN CREDIT COVER IS PROVID ED TO THE PURCHASER AND IN THE EVENT OF FAILURE OF THE CUSTOMER TO PAY, THE FACTOR WILL BEAR THE BAD DEBT RISK. SUCH ARRANGEMENTS ARE MADE FOR THE PURPOSE OF MAINT AINING THE PRODUCTION SALES REALIZATION CYCLE IN A SMOOTH MANNER. PLEASE UNDERSTAND OUR PROCESS OF PURCHASE, SALE AND BILL DISCOUNTING FROM LALJI FINANCIALS. WE ARE THE SELLING AGENT AND AGENT OF MUKUND LIMIT ED IN RESPECT OF STAINLESS STEEL INDUSTRIAL GRADE PRODUCED BY THEM. IN RESPECT OF SELL. MUKUND LIMITED RAISES DIRECTLY BILL ON OUR CUSTOMERS AND ENDORSEMENT ON THE INVOIC E PAYMENT OF THE INVOICE IS GUARANTEED AND UNDERWRITTEN BY MKJ ENTERPRISES LTD. AS PER ARRANGEMENT/AGREEMENT. UNDER SUCH PROCESS, LALJI FINANCIALS , A PROPRIETOR SHIP FIRM DISCOUNTS THE PURCHASE BILLS, AFTER DRAWING AND ACCEPTANCE OF BILLS OF EX CHANGE/HUNDI BY AND BETWEEN PURCHASER AND SELLER, AND MAKE US THE NET PAYMENT O F BILL AFTER DEDUCTING DISCOUNT CHARGES (PRE-PAYMENT BASIS OR CALL IT UPFRONT CHARG ES). AS SOON AS THE SAID LALJI FINANCIALS, DISCOUNTS THE BILLS, PROPERTY IN THE BI LLS PASSES TO LALJI FINANCIALS. ON DUE DATE OR AN EARLIER DATE, PAYMENT MADE TO LALJI FINA NCIALS, CANNOT TECHNICALLY BE HELD AS INCLUDING INTEREST AND THEREFORE AS PER THE AFORESA ID RATIONALE PROVIDED BY THE SAID CIRCULAR, THE PAYMENT OF DISCOUNTING CHARGES BY THE MKJ ENTERPRISES LIMITED, OF BILLS, WOULD NOT BE LIABLE FOR TDS UNDER SECTION 194A OF T HE INCOME TAX ACT, 1961. FROM THE ABOVE EXPLANATION OF THE ASSESSEE IT IS CL EAR THAT INTEREST IS A TERM RELATING TO A PRE- EXISTING DEBT, WHICH IMPLIES A DEBTOR CREDITOR RELA TIONSHIP. ACCORDING TO US, UNPAID CONSIDERATION GIVES RISE TO A LIEN OVER GOODS SOLD AND NOT FOR MONEY LENT. THIS INTERPRETATION OF OURS IS SUPPORTED BY THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF BOMBAY STEAM NAVIGATION CO. PVT. LTD. VS. CIT (1963) 56 ITR 52 ( SC), WHEREIN IT IS HELD THAT, WHERE INTEREST ON UNPAID PURCHASE PRICE WAS NOT TREATED AS INTERES T ON LOAN. IT IS CLEAR FROM THE DEFINITION THAT BEFORE ANY AMOUNT PAID IS CONSTRUED AS INTEREST, IT HAS TO BE ESTABLISHED THAT THE SAME IS PAYABLE IN RESPECT OF ANY MONEY BORROWED OR DEBT INCURRED. ACCORDING TO US, DISCOUNTING CHARGES OF BILL OF EXCHANGE OR FACTORING CHARGES OF SALE CANNO T BE TERMED AS INTEREST. THE ASSESSEE IN THE PRESENT CASE IS ACTING AS AN AGENT. NOW WHAT IS TH IS IS TO BE SEEN. ACCORDING TO US, A DEL CREDERE IS AN AGENT, WHO, SELLING GOODS FOR HIS PRI NCIPAL ON CREDIT , UNDERTAKES FOR AN ADDITIONAL COMMISSION TO SELL ONLY TO PERSONS FOR WHOM HE CAN STAND GUAR ANTEE. HIS POSITION IS THUS THAT OF A SURETY WHO IS LIABLE TO HIS PRINCIPAL SHOULD THE VENDEE MAKE DEFAULT. THE AGREEMENT BETWEEN HIM AND HIS PRINCIPAL NEED NOT BE REDUCED TO OR EVIDENCED BY WRITING, FOR HIS UNDERTAKING IS A GUARANTEE. A DEL CREDERE AGENT IS AN AGENT WHO NOT ONLY ESTABLISHES A 7 ITA NO. 729/K/2011 M/S. MKJ ENTERPRISES LTD. , AY:2007-08 PRIVITY OF CONTRACT BETWEEN HIS PRINCIPAL AND THE T HIRD PARTY, BUT WHO ALSO GUARANTEES TO HIS PRINCIPAL THE DUE PERFORMANCE OF THE CONTRACT BY TH E THIRD PARTY. HE IS LIABLE, HOWEVER, ONLY WHEN THE THIRD PARTY FAILS TO CARRY OUT HIS CONTRAC T, E.G., BY INSOLVENCY. HE IS NOT LIABLE TO HIS PRINCIPAL IF THE THIRD PARTY REFUSES TO CARRY OUT H IS CONTRACT, FOR EXAMPLE, IF THE BUYER REFUSES TO TAKE DELIVERY. IN THE PRESENT CASE BEFORE US THE A SSESSEE HAS ASSESSED THE INCOME AS DEL CREDERE BEING TRADING IN GOODS AND MERCHANDISE AND ALSO DEALING IN SECURITIES AND WHICH IS ASSESSED AS INCOME FROM BUSINESS AND NOT INCOME FRO M OTHER SOURCES. THE EXPENDITURE INCURRED IS ALSO ON ACCOUNT OF BUSINESS EXPENDITURE AND NOT INTEREST EXPENDITURE IN THE NATURE OF INTEREST FALLING U/S. 194A OF THE ACT. ACCORDINGLY , THESE DISCOUNT/FACTORING CHARGES DO NOT COME WITHIN THE PURVIEW OF SECTION 194A AND ASSESSE E IS NOT LIABLE TO TDS ON THESE CHARGES. HENCE, CIT(A) HAS RIGHTLY DELETED THIS DISALLOWANCE AND WE CONFIRM THE SAME. THIS GROUND OF APPEAL OF REVENUE IS DISMISSED. 9. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. 10. ORDER IS PRONOUNCED IN THE OPEN COURT ON 27.01. 2014 SD/- SD/- . . . . ' '' ''# '#'# '# , $% , (ABRAHAM P. GEORGE) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 27TH JANUARY, 2013 12 '3' 4 JD.(SR.P.S.) $0 5 . 6$ )7- COPY OF THE ORDER FORWARDED TO: 1 . ,- / APPELLANT ITO, WARD-4(2), KOLKATA 2 ./,- / RESPONDENT M/S. MKJ ENTERPRISES LTD., 2, CLIVE GHAT STREET, KOL-1. 3 . 0' ( )/ THE CIT(A), KOLKATA 4. 5. 0' / CIT KOLKATA <= .' / DR, KOLKATA BENCHES, KOLKATA / ./ TRUE COPY, $0'>/ BY ORDER, ' /ASSTT. REGISTRAR .