1988 (1) TMI 93 - AT - Income Tax

Summary

Issues:
Disallowance of interest deduction under section 40(a)(i) of the IT Act for non-deduction of tax at source and determination of whether the interest was payable outside India.

Analysis:
The appeals by the assessee, a limited company, were against orders upholding disallowance of interest of Rs. 7500 and Rs. 9000 in the assessment years 1981-82 and 1982-83, respectively. The company had taken a loan for business purposes and claimed interest accrued on the loan as a deduction. The tax authority disallowed the deduction citing non-deduction of tax at source under section 40(a)(i) of the IT Act. The CIT(A) upheld the disallowance, leading the assessee to appeal before the Tribunal.

Section 40(a)(i) prohibits deduction of interest payable outside India without tax deduction at source. The Tribunal found that interest in this case was not payable outside India as per the agreement between the parties. The interest was actually paid in India, supporting the claim that it was payable in India. The Tribunal distinguished previous court decisions cited by the revenue, emphasizing the need to determine whether interest was payable in or outside India based on the agreement. Therefore, the disallowance under section 40(a)(i) was deemed unjustified.

Regarding the deduction of tax at source under Chapter XVII-B of the IT Act, the Tribunal noted that the provisions of sections 194A(1) and 195(1) apply based on the status of the payee (resident or non-resident), not on the location of payment. The Tribunal held that tax under section 195(1) is to be deducted only at the time of actual payment to the payee, not when the amount is credited to an account. Citing relevant case law, the Tribunal emphasized that mere book entries do not constitute actual payment. Therefore, the disallowance of the deduction under section 40(a)(i) was considered unwarranted, and the interest claimed was allowed as a deduction in both assessment years.

In conclusion, the appeals were allowed, and the disallowance of interest deduction was overturned, directing that the interest claimed by the assessee be allowed in both assessment years.