2009 (12) TMI 674 - AT - Income Tax

Interest expenditure disallowed without TDS payment under section 40(a)(ia)

The Tribunal allowed the department's appeal, stating that the interest expenditure claimed by the assessee could not be allowed without TDS payment as ... Business disallowance Issues Involved:1. Deletion of disallowance of interest by CIT(A).2. Applicability of section 40(a)(ia) regarding non-deduction of tax on interest provisions.Summary:Issue 1: Deletion of disallowance of interest by CIT(A)The revenue appealed against the CIT(A)'s order deleting the disallowance of interest amounting to Rs. 1,24,76,750. The Assessing Officer (AO) had disallowed this interest on the grounds that it was a contingent liability and not an ascertained liability, as the interest was not accounted for in the assessee's books. The AO relied on various judicial decisions to support this view. However, the CIT(A) observed that the interest liability was certain and real as per the terms of the debentures issued by the assessee, and thus, it was an ascertained liability. The CIT(A) held that the interest was allowable on an accrual basis under the mercantile system of accounting, referencing Accounting Standard 29 and several judicial precedents.Issue 2: Applicability of section 40(a)(ia) regarding non-deduction of tax on interest provisionsThe AO also disallowed the interest based on section 40(a)(ia), as the assessee had not deducted tax at source on the interest. The CIT(A) disagreed, stating that since the interest entries were not passed in the books, the provisions of section 193 and section 40(a)(ia) were not applicable. The CIT(A) relied on the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. and other cases to support this view. However, the Tribunal held that the provisions of section 40(a)(ia) apply irrespective of whether the interest entries were made in the books. The Tribunal emphasized that the statute requires TDS to be deducted and paid for the interest to be allowable as an expense. The Tribunal concluded that the CIT(A) erred in allowing the interest deduction without TDS payment and restored the AO's disallowance.Conclusion:The Tribunal allowed the department's appeal, holding that the interest expenditure claimed by the assessee could not be allowed without TDS payment as per section 40(a)(ia). The assessee can claim the interest expenditure in the year in which the TDS payment is made.