1973 (9) TMI 34 - HC - Income Tax

Summary

Issues:
Interpretation of section 10(15)(iv)(c) of the Income-tax Act, 1961 regarding the deduction of interest paid by an assessee to a non-resident vendor for unpaid purchase money of a ship. Determination of whether the interest paid is chargeable under the Act and if the assessee is entitled to deduct it under section 37(1) of the Income-tax Act, 1961.

Detailed Analysis:

The case involved a question referred by the Income-tax Appellate Tribunal, Cochin Bench, regarding the deductibility of interest paid by an assessee to a non-resident vendor for unpaid purchase money of a ship under section 37(1) of the Income-tax Act, 1961. The assessee, a company incorporated under the Indian Companies Act, purchased the ship from an individual who had agreed to pay the purchase price to the non-resident vendor in instalments with interest. The Income-tax Officer disallowed the interest amount as a deduction for failure to deduct tax under section 195 of the Act. The Appellate Assistant Commissioner and the Tribunal held in favor of the assessee, allowing the deduction under section 37(1) based on previous decisions. The Tribunal's finding was that the interest paid was not chargeable under the Act, thus not attracting the bar under section 40(a)(i) and making it an allowable deduction under section 37(1).

The Tribunal's decision was based on the interpretation of various sections of the Income-tax Act, particularly focusing on section 37(1) which allows deductions for expenditures incurred wholly and exclusively for business purposes. Section 40(a)(i) restricts deductions for interest payable outside India if tax has not been paid or deducted as required. The Tribunal analyzed whether the interest paid to the non-resident vendor could be considered "interest chargeable under the Act" and whether the assessee's failure to deduct tax affected its entitlement to the deduction under section 37(1).

The Tribunal also examined the applicability of section 9(1)(i) which deems certain incomes to accrue or arise in India, including income from money lent at interest brought into India. The Tribunal found that the interest paid to the non-resident vendor fell within this category, supporting its decision to allow the deduction under section 37(1).

Additionally, the Tribunal considered the argument raised by the assessee regarding section 10(15)(iv)(c) which exempts interest payable by an industrial undertaking in India on foreign borrowings for specific purposes from income computation. However, it was determined that the assessee did not meet the criteria under this provision as the debt was not incurred by the company itself, but by the individual from whom the ship was purchased.

Ultimately, the Tribunal concluded that the interest paid to the non-resident vendor was not deductible under section 37(1) due to the failure to deduct tax as required under the Act. The judgment was delivered in favor of the department, and the assessee was directed to bear the costs of the reference.

This detailed analysis of the judgment highlights the key legal interpretations and considerations made by the Tribunal in determining the deductibility of interest paid by the assessee to a non-resident vendor under the Income-tax Act, 1961.