Amount borrowed or repaid through negotiable instrument, hundi, etc.
106(1)
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 in this behalf, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying, as the case maybe, for the tax year in which the amount was borrowed or repaid.
106(2)
Where the amount borrowed under sub-section (1) has been deemed to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under that sub-section on repayment of such amount.
Section Summary:
This section addresses the tax treatment of amounts borrowed or repaid through negotiable instruments (like promissory notes) or hundis (a traditional financial instrument), excluding account payee cheques. If such transactions occur, the borrowed or repaid amount is treated as income for the borrower or repayer in the tax year when the transaction takes place. The section ensures that once the amount is deemed as income, it cannot be taxed again upon repayment.
Key Changes:
- Inclusion of Non-Account Payee Transactions: The section specifically targets transactions made through negotiable instruments or hundis, excluding account payee cheques. This is a clarification to prevent misuse of non-account payee instruments for tax evasion.
- Deemed Income Provision: Borrowed or repaid amounts through these instruments are treated as income in the year of the transaction, which is a stricter provision compared to earlier laws.
- No Double Taxation: Once the amount is deemed as income under this section, it cannot be taxed again upon repayment.
Practical Implications:
- For Borrowers: If you borrow money through a negotiable instrument or hundi (other than an account payee cheque), the borrowed amount will be treated as your income in the year of borrowing. This could increase your taxable income for that year.
- For Repayers: If you repay such a loan, the repayment itself will not trigger another tax liability, as the amount has already been deemed as income earlier.
- For Businesses: Businesses using hundis or negotiable instruments for transactions need to ensure compliance with this provision to avoid unintended tax consequences.
Critical Concepts:
- Negotiable Instrument: A document guaranteeing payment of a specific amount, such as a promissory note or bill of exchange.
- Hundi: A traditional financial instrument used in India for borrowing or lending money, often without formal documentation.
- Deemed Income: The amount is treated as income for tax purposes, even if it is not actual income in the traditional sense.
- Account Payee Cheque: A cheque that can only be deposited into the payee's bank account, ensuring traceability and reducing misuse.
Compliance Steps:
- Document Transactions: Ensure proper documentation for any borrowing or repayment through negotiable instruments or hundis.
- Avoid Non-Account Payee Instruments: Use account payee cheques or other traceable modes for transactions to avoid triggering this provision.
- Report Deemed Income: Include the deemed income in your tax return for the year in which the borrowing or repayment occurs.
Examples:
- Borrowing Scenario: Mr. A borrows ₹5 lakh through a promissory note (a negotiable instrument) from Mr. B. Under this section, ₹5 lakh will be treated as Mr. A's income in the year of borrowing, increasing his taxable income for that year.
- Repayment Scenario: Mr. A repays the ₹5 lakh to Mr. B in the next year. Since the amount was already deemed as income in the borrowing year, it will not be taxed again upon repayment.
This section aims to curb tax evasion by ensuring transparency in financial transactions involving negotiable instruments and hundis.