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TMI Blog1988 (1) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... ely. The above interest amounts were debited to profit and loss account and credited to the interest payable account. No tax was deducted at the time of crediting the above interest amounts to the "interest payable account". The above amounts were claimed as a deduction in the returns by the assessee company but were disallowed by the ITO as according to him the deduction of interest claimed without deduction of tax at source could not be allowed in view of provisions of s. 40(a)(i) of the IT Act. 3. On appeal it was claimed that provisions of s. 40(a)(i) were not attracted in this case as interest accrued was not payable outside India. It was further submitted that no tax was deductible at source as the interests claimed as deduction was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in India, under s. 163 of IT Act. To disallow the deduction, all the above narrated circumstances should be present. This sub-section is not applicable in this case as it has not been shown that interest claimed as deduction by the assessee "was payable outside India". No doubt, Karnail Singh is a non-resident but from this no inference can be drawn that interest on loan advanced by him was payable outside India. To determine whether interest was payable in or outside India, it was necessary to look to agreement between the parties. The assessee from very start had been claiming that interest in this case was payable in India. This has not been controverted. The interest was also actually paid in India on 1st Dec., 1982. The factual pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f above finding that interest claimed as deduction was not payable outside India, these appeals can be disposed of without deciding this question. However, as both the parties have submitted on this point, we record our finding on this issue also. The assessee company admittedly follows mercantile system of accounting and, therefore, for computing its income all liabilities accrued are to be allowed as deduction. On this position there is no dispute between the parties. 6. The two provisions under Chapter XVII-B of the IT Act dealing with deduction of tax from interest relevant for deciding the issue before us are ss. 194A(1) and 195(1) of the IT Act. These are as under: "194A(1)--Any person, not being an individual or an HUF who is respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident may be payable in India requiring deduction of tax at source under s. 195(1) of the IT Act. It will all depend upon the terms of the agreement under which interest is payable. No general proposition that in every case of non-resident interest must be taken to be payable outside India can be accepted nor any authority was shown to us in support of the above proposition. The argument of the assessee that tax at source was not deductible under s. 195(1) of the IT Act as the interest was not actually paid when entry in interest payable account was made is required to be accepted. In terms of s. 195(1) tax is to be deducted "at the time of payment" of interest. The credit of interest payable account will not tantamount to "payment" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that "Payment" in s. 24(4) of the Hyderabad IT Act (corresponding to s. 18 (3A) of the Indian IT Act, 1922 should be interpreted as meaning actual payment and therefore crediting of interest amounts to the accounts of the lenders could not be deemed to be payment within the meaning of that sub-section so as to attract the provisions of s. 24(12) of the Hyderabad IT Act (corresponding to s. 18(7) of the Indian IT Act). The order of the ITO demanding tax from the assessee was, therefore, not in accordance with law." 7. Their Lordships of the Supreme Court in CIT vs. Toshoku Ltd. (1980) 19 CTR (SC) 192 : (1980) 125 ITR 525 (SC) considered the question whether making of entries in the account of non-residents would tantamount to actual or cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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