Supplier drawing hundi on buyer and routing it through his banker with instructions to charge interest on amount of hundi from date of acceptance to date of actual payment - Whether tax is deductible at source by party retiring hundi from interest at the time of making payment to bank

Clarification on Tax Deductions for Hundis: Bank's Role Determines Tax Duty u/s 194A(3)(iii)(a).

The circular addresses the tax deduction at source on interest related to hundis drawn by suppliers on buyers and routed through banks. If a bank immediately discounts the hundi, the payment to the supplier is considered a price for the bill, exempting it from tax deduction under section 194A(3)(iii)(a). However, if the bank acts only as an agent, receiving payment on behalf of the supplier, the buyer must deduct tax on the interest paid. This distinction clarifies when tax deductions apply based on the bank's role in the transaction.