Non-resident interest on foreign borrowings was not disallowable where no Indian tax charge or withholding obligation arose.

Interest on foreign borrowings used in India for share and securities purchases was held not disallowable where the sum was not shown to be chargeable to tax in India. The analysis notes that section 58(1)(a)(ii) applies only to interest chargeable under the Act and not paid or deducted, while section 195 withholding arises only if the payment is chargeable in the recipient's hands. Because the borrowings and interest payment were both outside India, and the assessee was treated as an investor rather than as carrying on a share-dealing business in India, section 9(1)(v) did not apply and no withholding obligation arose.

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Issues: Whether interest paid by a non-resident assessee on foreign borrowings, utilised in India for purchase of shares and securities, was disallowable under section 58(1)(a)(ii) of the Income-tax Act, 1961 for non-deduction of tax at source under section 195 of that Act, and whether such interest was chargeable to tax in India under sections 5(2) and 9(1)(v) of that Act.

Analysis: Section 58(1)(a)(ii) disallows interest only where the interest is chargeable under the Act and tax has not been paid or deducted. The liability to deduct tax under section 195 depends upon the sum being chargeable under the Act in the hands of the recipient. The borrowings were taken outside India by a non-resident and the interest was payable to another non-resident outside India. The assessment record did not show that the assessee was carrying on a business in India of dealing in shares or securities; the transactions were treated as investment and the gains were assessed as capital gains. In that setting, section 9(1)(v) did not apply, because the interest was not shown to be in respect of moneys borrowed and used for the purposes of a business carried on in India. The contention that the interest accrued in India merely because the borrowed funds were utilised in India was rejected, since accrual follows the loan transaction and not the place of utilisation. Section 195 was also held inapplicable where the payment itself was made outside India.

Conclusion: The interest was not liable to disallowance under section 58(1)(a)(ii), no obligation to deduct tax arose under section 195, and the assessee succeeded on the issue.

Ratio Decidendi: For disallowance of interest under section 58(1)(a)(ii), the interest must be chargeable under the Act in the hands of the recipient, and section 195 applies only where the payment to a non-resident is itself chargeable and made in circumstances attracting the statutory withholding obligation.

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