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

Clarifying Tax Deduction on Interest for Hundis: When Banks Act as Owners vs. Agents u/s 194A(3)(iii)(a).

The circular addresses tax deduction at source concerning interest on hundis routed through banks. When a supplier discounts a hundi with a bank, the bank owns the bill, and payments to the bank are not subject to tax deduction under section 194A(3)(iii)(a). However, if the bank acts merely as an agent and collects payment on behalf of the supplier, the buyer must deduct tax from the interest paid to the supplier. In cases where interest is routed through the bank to the supplier, the buyer is responsible for deducting tax at source, as the exemption does not apply.