TDS applies only to sums chargeable under the Act; rent paid to a non-taxable recipient was outside section 194-I.

Tax deduction at source under section 194-I applies only where the payment is a sum chargeable under the Income-tax Act; read with section 204(iii), no TDS liability arises if the recipient's income is not chargeable to tax. On that basis, rent paid to Kolkata Port Trust, treated as a charitable institution with income not assessable for the relevant year, was outside the TDS net. As no tax was deductible, the payer could not be treated as an assessee in default under section 201(1), and the corresponding disallowance under section 40(a)(ia) could not be sustained.

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Issues: Whether rent paid to Kolkata Port Trust was liable to tax deduction at source under section 194-I of the Income-tax Act, 1961 and, if not, whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be sustained.

Analysis: The payee was treated as a charitable institution and its income for the relevant assessment year was found not chargeable to tax under the Act. The obligation to deduct tax at source under section 194-I was read with section 204(iii), so that TDS liability arose only in respect of a sum chargeable under the Act. Since the rent paid was not includible in the payee's total income, no tax was deductible at source. The further consequence was that the payer could not be treated as an assessee in default under section 201(1), and the disallowance made under section 40(a)(ia) could not stand.

Conclusion: No tax was deductible at source on the rent paid to Kolkata Port Trust, and the disallowance under section 40(a)(ia) was unsustainable; the issue was decided in favour of the assessee.

Final Conclusion: The assessee's appeal succeeded because the payment in question was held outside the TDS net and the corresponding expenditure disallowance was deleted.

Ratio Decidendi: The obligation to deduct tax at source arises only when the payment is a sum chargeable under the Income-tax Act, 1961; if the recipient's income is not chargeable to tax, no TDS liability follows and disallowance for non-deduction cannot be made.

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