Tax deduction at source on non-resident interest governs deductibility where section 40(a)(i) bars the business claim.

Interest paid to a non-resident vendor on unpaid ship purchase money was treated as income chargeable under the Act, so tax deduction at source under section 195 applied. Because no tax was deducted or paid under Chapter XVII-B, section 40(a)(i) barred the amount from deduction in computing business income, and section 37(1) could not be used to override that bar. The alternative claims under section 10(15)(iv)(c) and section 36(1)(iii) also failed, since the assessee had not itself incurred the relevant borrowing or foreign debt and the statutory disallowance still applied.

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Issues: Whether interest paid by the assessee to a non-resident vendor on unpaid purchase money of a ship was deductible under section 37(1) of the Income-tax Act, 1961, in the absence of deduction of tax at source, and whether the assessee could invoke section 10(15)(iv)(c) or section 36(1)(iii) to claim the deduction.

Analysis: The interest paid to the non-resident was held to be income chargeable under the Act in the hands of the recipient, attracting the machinery of deduction of tax under section 195. Since no tax was deducted or paid as required by Chapter XVII-B, section 40(a)(i) barred the allowance of the amount in computing business income, and section 37(1) could not be invoked. The claim under section 10(15)(iv)(c) failed because the assessee had not itself borrowed money or incurred the foreign debt; the debt had been incurred by the original purchaser. The alternative reliance on section 36(1)(iii) also failed because the statutory bar under section 40(a)(i) applied, even assuming the interest otherwise fell within that provision.

Conclusion: The deduction was not allowable to the assessee; the answer to the referred question was in the negative and the Revenue succeeded.

Final Conclusion: The interest paid to the non-resident vendor remained subject to the tax-deduction regime, and non-compliance with that regime disentitled the assessee from claiming the deduction in business computation.

Ratio Decidendi: Where interest payable to a non-resident is chargeable under the Act and tax is not deducted as required, section 40(a)(i) prevents deduction of that amount in computing business income, and a successor purchaser cannot claim exclusion under provisions meant for borrowing or debt incurred by the industrial undertaking itself.

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