2011 (6) TMI 150 - AT - Income Tax

Disallowance - Discounting charges - Provisions of section 40(a)(ai) - that Hindustan Motors Limited was raising bill of exchange which was discounted by HHFL after charging discounting charges thereon. Such bills were raised in respect of vehicles supplied to the assessee. Therefore the assessee was reimbursing discounting charges to HHML - Held that - as per the issue with regard to nature of discounting charges has been elaborately discussed by the ITAT Delhi Bench in the case of Asstt. CIT v. Cargill Global Trading (I)(P.) Ltd. (2009 -TMI - 63859 - ITAT DELHI-B) wherein after relying on the decision of Hon ble Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corporation (2003 -TMI - 11906 - GUJARAT High Court) it was held that discounting charges on the bill of exchange is not in the nature of interest - thus the Assessing Officer was not justified in treating such discounting charges as interest for disallowing the same by invoking the provisions of section 40(a)(ai) of the Income-tax Act 196 - Decided in favour of assessee.

Summary

Issues:
Disallowance of discounting charges under section 40(a)(ai) of the Income-tax Act, 1961.

Analysis:
The appeal was filed against the CIT(A)'s order concerning the disallowance of discounting charges paid to a company by the assessee. The assessee, a dealer in two-wheelers and spare parts, was reimbursing discounting charges to its supplier, which were debited in the books of account and claimed as expenses. The Assessing Officer disallowed the charges, considering them as interest subject to tax deduction at source under section 40(a)(ai).

Upon review, it was found that the discounting charges were not in the nature of interest, as argued by the Assessing Officer. Reference was made to a similar case by the ITAT, Delhi Bench, and a circular by the CBDT clarifying that discounting charges on bill of exchange do not fall under the definition of interest as per the Income-tax Act, 1961. The Supreme Court also held that discounting charges were not interest. Therefore, the Tribunal concluded that the charges reimbursed by the assessee were not covered by the provisions of the Income-tax Act, 1961.

The Tribunal considered the legal precedents and circulars, along with the assessee's own case where similar charges were allowed as business expenditure. It was established that the discounting charges were part of the price paid for the purchased vehicles and not to be treated as interest. Consequently, the Tribunal allowed the appeal of the assessee, overturning the disallowance of the discounting charges.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing that the discounting charges were not akin to interest and should not have been disallowed under section 40(a)(ai) of the Income-tax Act, 1961.