1988 (1) TMI 89 - AT - Income Tax

Summary

Issues:
Disallowance of interest deduction under section 40(a)(i) of the Income-tax Act for A.Ys. 1981-82 and 1982-83.

Analysis:
The case involved appeals by an assessee, a limited company, against the disallowance of interest deductions in the assessment years 1981-82 and 1982-83. The company had taken a loan for business purposes from a non-resident and claimed interest as a deduction, which was disallowed by the ITO citing section 40(a)(i) of the Income-tax Act. The CIT (A) upheld the disallowance, leading the assessee to appeal before the Tribunal.

Upon examination, the Tribunal considered the provisions of section 40(a)(i) which disallow deductions for interest payable outside India without tax deduction at source. The Tribunal noted that the interest in question was paid in India, as per the agreement between the parties, and thus not payable outside India. The Tribunal emphasized that the actual payment of interest in India supported the claim that it was payable in India, rendering section 40(a)(i) inapplicable in this case. The Tribunal distinguished previous court decisions cited by the Department, highlighting the factual nature of determining whether interest was payable outside India.

Another argument raised was the applicability of tax deduction under Chapter XVII-B of the Income-tax Act. The Tribunal clarified that the provisions under sections 194A(1) and 195(1) apply based on the status of the payee (resident or non-resident), not on the location of payment. It was established that tax deduction under section 195(1) is required only at the time of actual payment of interest, not when credited to an account. Referring to judicial precedents, the Tribunal concluded that mere book entries do not constitute actual payment, and in this case, the credit was made to the "interest payable account," not the non-resident's account. Therefore, the disallowance of interest deduction under section 40(a)(i) was deemed unjustified, and the Tribunal directed the allowance of the interest deduction for both assessment years.

In conclusion, the Tribunal allowed the appeals, holding that the interest claimed by the assessee as a deduction should be allowed in the assessment years in question.