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

Income-tax Act, 2025

At a Glance

The document for detailed commentary is Clause 106 of the Income Tax Bill, 2025 (Old Version), titled "Amount borrowed or repaid through negotiable instrument, hundi, etc." It proposes that amounts borrowed or repaid by means other than an account payee cheque shall be treated as the borrower's or repayer's income for the tax year in which the transaction occurs. The provision matters to taxpayers using negotiable instruments or hundis for lending/repayment, to tax authorities assessing income, and to regulated intermediaries. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 106 (Income Tax Bill, 2025 - Old Version) is located in the aggregation of income provisions (Bills classified under "AGGREGATION OF INCOME"). The clause addresses the treatment of amounts borrowed or repaid via particular instruments-negotiable instruments and hundis-when those transactions are effected otherwise than by an account payee cheque, or through modes that the Board may later specify. The text expressly includes interest ("including interest thereof") as part of the amount covered. Definitions or further explanations: Not stated in the document beyond the textual references to "negotiable instrument", "hundi", and "account payee cheque." The Bill contains an explanatory sentence describing the policy that amounts borrowed on a hundi or similar instruments when not passed through an account payee cheque will be deemed income of the borrower/repayer.

Statutory Provision Mode

Text & Scope

The clause comprises two sub-sections. Sub-section (1) provides: where any amount (including interest thereof) is borrowed or repaid through a negotiable instrument or a hundi, other than an account payee cheque, or through any mode as specified by the Board, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying, as the case may be, for the tax year in which the amount was borrowed or repaid. Sub-section (2) provides that where such amount has been deemed to be the income of any person under sub-section (1), that person shall not be liable to be assessed again in respect of such amount under that sub-section on repayment of such amount.

Interpretation

The provision operates as a deeming rule: it converts a financing transaction (borrowing or repayment) effected by certain instruments or modes into taxable income in the year of borrowing/repayment. The inclusion of interest within the deeming indicates the legislature's intent to treat not only principal but also interest components as taxable when transacted by the specified modes. The clause uses mandatory language ("shall be deemed to be the income"), leaving limited discretion at assessment stage to disregard the deeming when the statutory conditions are satisfied. The provision also empowers the Board to specify alternative modes that will attract the deeming rule, implying subordinate legislation or administrative specification may expand the list of covered modes. Legislative intent (as articulated in the explanatory line in the Bill): to capture off-account or informal credit/repayment channels (notably hundis) wherein funds pass outside bank account cheques, thereby preventing tax avoidance or concealment through non-account-payee channels.

Exceptions/Provisos

The clause carves out transactions conducted through an "account payee cheque" from the deeming rule. No other statutory exceptions, thresholds, or provisos are provided in the text. The Board's power to specify modes creates a prospective exception/extension mechanism but no criteria for specification are provided in the clause. Any further conditionality, exemptions, or procedural safeguards: Not stated in the document.

Illustrations

• Example 1: A lends Rs. X to B and receives repayment by a hundi in the same tax year; under Clause 106(1) the amount repaid (including interest) is deemed B's income in that tax year. The Bill's text captures this scenario. (Concrete numeric examples are not provided in the Bill.)

• Example 2: C borrows money via a negotiable instrument other than an account payee cheque; the borrowed amount is deemed C's income in the year of borrowing. (No further factual details or exceptions are set out in the Bill.)

Interplay

The clause references the Board's power to specify additional modes that will trigger the deeming, implying interaction with delegated instruments (notifications/gazette orders) to expand or clarify covered modes. References to other statutory provisions, rules, circulars, or case law are Not stated in the document. Any cross-references to sections dealing with income characterization, disclosure, or penalties are Not stated in the document.

Differences between the Section 106 of the Income-tax Act, 2025 and Clause 106 of the Income Tax Bill, 2025 (Old Version)

• Wording and scope: The statutory Section 106 (Income-tax Act, 2025) and Clause 106 (Income Tax Bill, 2025 - Old Version) are substantially similar in substance. Both deem amounts borrowed or repaid through a negotiable instrument or a hundi, other than an account payee cheque (or through any mode specified by the Board), to be the income of the person borrowing or repaying in the year of borrowing/repayment. The Act text explicitly adds the phrase "(including interest thereof)" and in subsection (1) the Act repeats "(including interest paid on the borrowed amount)" when describing the income element; the Bill's text includes "(including interest thereof)" only once and does not reiterate the interest phrase in the second clause.
  • Practical impact: The Act's duplication clarifies that interest component is included both when borrowed and when repaid; the Bill's single insertion conveys the same substantive inclusion but with slightly less repetition. There is no meaningful change in tax effect.
• Terminology: The Bill uses "a hundi" and speaks of "account payee cheque drawn on a bank" in the explanatory sentence appended to Clause 106. The Act uses "on a hundi" and "an account payee cheque" and adds the alternative phrase "or through any mode as specified by the Board in this behalf."
  • Practical impact: The Act's phrasing and the Board-specifiable mode language are identical in both versions; differences are minor drafting variations and do not alter coverage.
• Explanatory note: The Bill (old version) contains an appended explanatory sentence describing the clause's intent (that amounts borrowed on a hundi or other instruments not through an account payee cheque shall be deemed income). The Act version does not include that appended sentence in the excerpt provided.
  • Practical impact: The explanatory sentence in the Bill aids legislative intent and clarifies policy aim; its absence in the Act text excerpt may reflect removal of the marginal note or relegation to legislative history, but not a substantive change in liability.

Practical Implications

• Compliance and risk areas: Taxpayers who borrow or repay funds through hundis or non-account-payee negotiable instruments face a risk of those amounts being treated as income in the tax year of transaction. This creates potential timing differences and immediate taxable consequences where such instruments are used. Brokers, moneylenders, and persons dealing in hundis must assess reporting and tax consequences when handling such instruments. The Board's power to specify additional modes may broaden the reach administratively, increasing compliance risk.
• Record-keeping/evidence: While the clause does not prescribe records, the deeming effect highlights the practical need for documentary evidence to show lawful financing arrangements and to establish whether the transaction was in fact effected by an account payee cheque or by a covered instrument/mode. Taxpayers would logically need to retain originals of negotiable instruments, hundis, bank records, and contemporaneous loan documentation to substantiate the nature of transactions-however prescription of specific records or timelines: Not stated in the document.

Key Takeaways

• Clause 106 is a deeming provision that treats amounts borrowed or repaid through specified non-account-payee modes (negotiable instruments, hundis, and Board-specified modes) as income in the year of borrowing or repayment.
• The provision expressly includes interest within the amount to be deemed income.
• Transactions effected by an account payee cheque are explicitly excluded from the deeming rule.
• Sub-section (2) prevents double taxation: once deemed income on borrowing/repayment, the same amount shall not be assessed again on repayment under the same provision.
• The provision empowers the Board to identify additional modes that will attract the deeming treatment, signalling scope for administrative expansion.
• The Bill contains an explanatory sentence clarifying the policy objective to capture off-bank-account instruments; the clause itself does not set out procedural protections or thresholds.
• Practical effect centers on timing and characterization of amounts where informal or non-account-payee payment channels are used; taxpayers should maintain transaction documentation (the clause itself does not specify records required).

Full Text:

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