TDS disallowance on interest payment was reduced where the recipient had already paid tax on the same income.

Interest expenditure disallowed for non-deduction of tax at source was held unsustainable to the extent the recipient had already included the payment in its return and paid tax. The tax deduction mechanism is aimed at protecting revenue, and where the deductee has discharged the tax liability, no revenue loss remains. The second proviso to section 40(a)(ia), read with the first proviso to section 201(1), supports treating the tax as deemed deducted and paid in such circumstances. The addition was therefore deleted in favour of the assessee to the extent of the tax-paid amount.

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Issues: Whether the disallowance of interest expenditure under section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax at source under section 194A was sustainable when the payee had already offered the amount to tax.

Analysis: The amount disallowed represented interest paid without deduction of tax at source. The recipient of a substantial part of the payment had already included the amount in its return and paid tax thereon. The purpose of tax deduction at source is to protect revenue, and once the recipient has paid tax on the same income, no revenue loss survives. The second proviso to section 40(a)(ia), read with the first proviso to section 201(1), supports this tax-neutral approach by deeming tax as deducted and paid where the deductee has discharged the tax liability.

Conclusion: The disallowance was not justified to the extent the recipient had already paid tax, and the deletion of the addition was upheld in favour of the assessee.

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