Section 40(a)(i), read with section 2(28A) — Discounting charges paid, cannot be treated as interest in terms of section 2(28A) and, therefore, such amount is not liable for TDS u/s.195.– Also, the same cannot be disallowed u/s 40(a)(i).

1. As per section 2(28A), interest means sum payable in respect of any money borrowed or debt incurred. In the instant case, there was no debt incurred or money borrowed. In fact, it was a case where the assessee had merely discounted sale consideration receivable on sale of goods.

2. The word `interest’ defined u/s 2(28A) does not include the discounting charges on discounting of bill of exchange.

3. Though Circular No.65 was issued in relation to deduction of tax u/s 194A, yet in respect of payment to a resident, the same would be relevant even for the purpose of considering whether the discount should be treated as interest or not. The CBDT had opined that where the supplier of goods makes over the usance bill / hundi to his bank which discounts the same and credits the net amount to the supplier’s account straightaway, without waiting for realisation of the bill on due date, the net payment made by the bank to the supplier is in the nature of price paid for the bill. Such payment cannot technically be held as including any interest and, therefore, no tax need be deducted at source from such payment by the bank.

4. Hence, the assessee was not under obligation to deduct tax at source u/s 195. Accordingly, the same amount could not be disallowed by invoking section 40(a)(i).