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Issues: (i) Whether interest accrued on debentures was deductible as an ascertained liability under the mercantile system of accounting; (ii) Whether such interest was hit by section 40(a)(ia) of the Income-tax Act, 1961 for failure to deduct and pay tax at source.
Issue (i): Whether interest accrued on debentures was deductible as an ascertained liability under the mercantile system of accounting.
Analysis: The interest on debentures was quantified under the terms of the debenture certificates and had accrued year to year. In principle, an accrued and ascertained business liability is allowable on mercantile basis, and mere non-entry in the books does not by itself determine allowability.
Conclusion: The interest liability was treated as an accrued and ascertained liability for accounting purposes.
Issue (ii): Whether such interest was hit by section 40(a)(ia) of the Income-tax Act, 1961 for failure to deduct and pay tax at source.
Analysis: Section 40(a)(ia), inserted to enforce compliance with TDS provisions, disallows specified resident payments, including interest, where tax deductible at source under Chapter XVII-B has not been deducted or, after deduction, has not been paid within the prescribed time. The statutory bar operates notwithstanding the general rule of allowability on accrual basis, and it applies even if the expenditure was claimed through the computation of income rather than through the profit and loss account.
Conclusion: The disallowance under section 40(a)(ia) applied, and the interest expenditure was not allowable for the year in question.
Final Conclusion: The assessee's claim for deduction of accrued debenture interest was rejected for the relevant year because the TDS condition under the special disallowance provision was not satisfied.
Ratio Decidendi: Where a payment falls within section 40(a)(ia) of the Income-tax Act, 1961, its allowability depends on deduction and payment of tax at source, and the special disallowance provision prevails over the general mercantile principle of accrual-based deduction.
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