TaxTMI 
TaxTMI 
2014 (1) TMI 1484
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....ted 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 disallowance 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 Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.), wherein it is held that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. 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 Hon'ble Bombay High Court in their above mentioned order dtd. 12.08.2010. In this order Hon'ble Court has held that Rule 8D shall be applicable from assessment year 2008-09 onwards. Here, since the assessment year involved is 2007-08 therefore I hold that Rule 8D will not apply....
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....ssessee. The bills of purchase for which payment is to be received by the assessee are discounted with a financing firm named M/s. Lalji Financials. When the bills are discounted, M/s. Lalji Financials pays to the assessee the bill amount after deducting its discounting or factoring charges. These discounting / factoring charges are claimed by the assessee as expenditure. In thìs process of bill discounting the responsibility to collect the bill amount from the customers passes on to M/s. Laljì Financials. Whether the payment of the bill amount is received or not received or received late or a less amount is received by Lalji Financials it is not a concern of the assessee. This shows that in this transaction actually the assessee has sold its assets to M/s. Lalji Financials and the ownership of the assets, in the form of debtors, has now passed on to M/s. Laljì Financials. In this kind of transactions it cannot be said that M/s. Lalji Financials has advanced any loan to the assessee 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 pu....
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....he income-tax Act, 1961." From the above it can be seen that this circular does not deal with the bill discounting charges directly. It is actually related to the amount which is paid by the banks to their customers after deducting the bill discounting charges 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 thís círcular it has been clarified that when in a transaction of bill discounting the net amount of the bill, after deducting the discounting charges, is paid to the discountee, the property in the bill passes to the 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 the amount which is paid by the bill discounter to the discountee is not a loan but a purchase price. Since in this transaction no loan is borrowed by the assessee therefore any charges paid in respect of the same cannot be treated as interest u/s. 2(28A). In his order the A.O. has referred to a decision of Madras High Court in the case of Viswapriya Financial & Securities Ltd. vs. CIT(200)....
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....o the assessee after deducting its discounting/factoring charges. These discounting/factoring charges are claimed by the assessee as expenditure. Whether this expenditure of discounting/factoring charges is in the nature of interest or not? The provision of section 2(28A) of the Act defines the definition of interest, which reads as under: "28A. interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other 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 in 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 credit facility which has not been utilized. It is, thus, seen that interest either means sum payable in 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 ....
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.... of failure of the customer to pay, the factor will bear the bad debt risk. Such arrangements are made for the purpose of maintaining 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 Limited 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 invoice "Payment of the Invoice is guaranteed and underwritten by MKJ Enterprises Ltd. as per arrangement/agreement. Under such process, Lalji Financials , a Proprietorship Firm discounts the Purchase Bills, after drawing and acceptance of Bills of "Exchange/Hundi by and between Purchaser and Seller, and make us the net payment of Bill after deducting Discount Charges (pre-payment basis or call it upfront charges). As soon as the said Lalji Financials, discounts the Bills, property in the bills passes to Lalji Financials. On due date or an earlier date, payment made to Lalji Financials, cannot technically be held as including interest and therefore as per the aforesaid rationale provided....