Actual payment required for tax withholding; mere book entries in mercantile accounts do not trigger deduction

Under the Hyderabad Income-tax Act, interest credited to non-resident lenders in an assessee's mercantile accounts was not treated as "payment" for withholding-tax purposes. The statutory expression "paid" in the computation or allowance provision could not be extended to the separate deduction-at-source provision, which required deduction at the time of actual payment. Mere capitalization, credit entry, or book adjustment did not discharge the debt or amount to payment. The question was answered in the negative, and the assessee succeeded on the point.

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Issues: Whether, under the Hyderabad Income-tax Act, interest credited to non-resident lenders in the assessee's mercantile accounts amounted to "payment" so as to attract the obligation to deduct income-tax at the maximum rate.

Analysis: The statutory scheme distinguished between the computation of income and the deduction obligation imposed on a person responsible for paying interest to a non-resident. The definition of "paid" in the computation provision was intended to operate for allowance of deductions under that section and could not be extended to the withholding provision. The withholding section required deduction at the time of payment, and the natural meaning of that expression was actual payment. Authorities construing analogous provisions held that mere capitalization, credit entry, or book adjustment does not discharge the debt or amount to payment.

Conclusion: Credit entries made in a mercantile system did not constitute payment within the meaning of the withholding provision. The question was answered in the negative, in favour of the assessee.

Ratio Decidendi: For purposes of a tax-deduction-at-source provision requiring deduction at the time of payment, "payment" means actual payment and not a notional or book-entry payment arising from mercantile accounting.

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