Section 40(a)(ia) disallowance does not apply to interest already paid when the payer is not an assessee in default.

Section 40(a)(ia) was treated as inapplicable to interest already paid where the assessee was not liable to be treated as an assessee in default under section 201(1). The proviso was applied so that, for disallowance purposes, tax is deemed deducted and paid when the recipient is not chargeable to tax or the payer is otherwise not in default. On the facts noted, the recipients were largely exempt entities or persons not liable to tax, and the deletion of the disallowance was upheld.

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Issues: Whether disallowance under section 40(a)(ia) was sustainable in respect of interest payments already made, where the payees were stated to be exempt or otherwise not liable to tax and the assessee was not required to be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961.

Analysis: The amounts of interest had already been paid and the disallowance provision was treated as applicable only to sums remaining payable. The proviso to section 40(a)(ia) was applied to hold that where the assessee is not deemed to be in default under section 201(1), the tax is to be deemed deducted and paid for the purpose of that disallowance. The payees were also shown, on the record, to be mostly exempt entities or recipients in whose hands tax was not attracted, and the appellate authorities relied on the binding effect of the jurisdictional precedent on the issue.

Conclusion: The disallowance under section 40(a)(ia) was not justified and the deletion of the addition was upheld in favour of the assessee.

Ratio Decidendi: Section 40(a)(ia) cannot be invoked to disallow interest already paid where the assessee is not liable to be treated as an assessee in default under section 201(1), particularly when the recipients are not chargeable to tax.

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