Clause 106 Amount borrowed or repaid through negotiable instrument, hundi, etc.

Income Tax Bill, 2025

Introduction

Clause 106 of the Income Tax Bill, 2025, and Section 69D of the Income Tax Act, 1961, both address the treatment of amounts borrowed or repaid through instruments like hundis and negotiable instruments, specifically when such transactions do not occur through an account payee cheque. These provisions aim to curb tax evasion by ensuring that transactions through informal credit instruments are captured within the tax net. Section 69D was introduced by the Taxation Laws (Amendment) Act, 1975, effective from April 1, 1977, to tackle the issue of unaccounted money being circulated through hundis. Clause 106 seeks to broaden this scope by including other negotiable instruments and any modes specified by the Board, thereby reflecting a legislative intent to adapt to evolving financial practices.

Objective and Purpose

The primary objective of both Clause 106 and Section 69D is to prevent tax evasion by deeming amounts borrowed or repaid through informal credit instruments as income. The legislative intent is to ensure transparency and accountability in financial transactions, thereby reducing the circulation of unaccounted money. By mandating that such transactions occur through an account payee cheque, the provisions aim to create a traceable record, facilitating better oversight by tax authorities. Clause 106 expands this framework by including negotiable instruments and allowing the Board to specify additional modes of transaction, reflecting a proactive approach to encompass emerging financial practices.

Detailed Analysis

Clause 106 of the Income Tax Bill, 2025

1. Scope and Inclusion: Clause 106 extends the scope to include any negotiable instrument or modes specified by the Board, alongside hundis. This broadens the range of financial instruments covered, acknowledging the diverse methods of informal borrowing and lending prevalent in the economy.

2. Deemed Income: Any amount borrowed or repaid through these instruments, if not done through an account payee cheque, is deemed the income of the person borrowing or repaying. This provision is crucial in capturing income that might otherwise escape taxation due to the informal nature of such transactions.

3. Avoidance of Double Taxation: Subsection (2) ensures that once an amount has been deemed income upon borrowing, it is not assessed again upon repayment. This prevents double taxation on the same transaction, maintaining fairness in the tax system.

Section 69D of the Income Tax Act, 1961

1. Specific to Hundis: Section 69D specifically targets transactions involving hundis, a traditional form of credit instrument in India. It reflects the historical context where hundis were commonly used for informal credit, often escaping the formal financial system's scrutiny.

2. Deemed Income: Similar to Clause 106, amounts borrowed or repaid through hundis, if not via an account payee cheque, are deemed income. This provision was a significant step in bringing informal financial transactions within the tax ambit.

3. Provision for Interest: The explanation to Section 69D explicitly includes interest paid on the borrowed amount as part of the repaid amount. This ensures that the total financial obligation, including interest, is accounted for in the deemed income.

4. Avoidance of Double Taxation: The section includes a proviso preventing double assessment of the same amount upon repayment, aligning with the principle of fair taxation.

Practical Implications

For businesses and individuals, these provisions necessitate a shift towards more formalized financial transactions. The requirement to use account payee cheques or specified modes ensures that there is a clear record of transactions, reducing the opportunity for tax evasion. Businesses may need to adjust their financial practices to ensure compliance, particularly if they have traditionally relied on informal credit instruments like hundis. For regulators, these provisions enhance the ability to track financial flows and identify unaccounted income, thereby improving tax compliance.

Comparative Analysis

Clause 106 of the Income Tax Bill, 2025, represents an evolution of Section 69D by acknowledging the changing landscape of financial transactions. While Section 69D focuses solely on hundis, Clause 106 includes negotiable instruments and allows for additional modes to be specified by the Board. This flexibility ensures that the provision remains relevant in the face of new financial instruments and practices. The inclusion of interest in Section 69D ensures comprehensive coverage of financial obligations, a feature that is implicitly covered under Clause 106 through its broad wording.

Conclusion

Both Clause 106 and Section 69D serve as critical tools in combating tax evasion through informal credit instruments. By mandating the use of account payee cheques or specified modes, they ensure greater transparency and accountability in financial transactions. Clause 106, with its broader scope, reflects a forward-looking approach, adapting to the evolving financial landscape. These provisions underscore the importance of formalizing financial transactions to enhance tax compliance and reduce the circulation of unaccounted money.

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Full Text:

Clause 106 Amount borrowed or repaid through negotiable instrument, hundi, etc.

Deemed income from informal credit instruments: non account payee transactions treated as taxable, prompting formalisation of payments. Clause 106 and Section 69D deem amounts borrowed or repaid through hundis, negotiable instruments, or Board specified modes to be the income of the borrower or repayer when not transacted by account payee cheque, with provisions capturing interest where applicable and safeguards to prevent double taxation once an amount has been treated as income.