Tax deduction on non-resident interest and exchange-loss proof requirements shape allowance under sections 40(a)(i) and 43A.

Interest paid to non-resident banks was treated as allowable where the tax on the interest had been recovered by the Department, because section 40(a)(i) was read as permitting allowance where tax was either paid or deducted, not only where deduction was made under Chapter XVII-B. Extra depreciation under section 43A required proof that an asset was acquired from outside India, that part of the cost remained outstanding when exchange rates changed, and that the liability increased in Indian currency; absent those factual particulars, the matter had to be verified and recomputed on evidence.

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Issues: (i) Whether interest paid to non-resident banks was disallowable under section 40(a)(i) of the Income-tax Act, 1961 when tax had not been deducted at source under Chapter XVII-B but had subsequently been recovered by the Department under section 226. (ii) Whether extra depreciation under section 43A of the Income-tax Act, 1961 could be allowed without proof of the outstanding foreign currency liability and the consequent increase due to exchange rate variation.

Issue (i): Whether interest paid to non-resident banks was disallowable under section 40(a)(i) of the Income-tax Act, 1961 when tax had not been deducted at source under Chapter XVII-B but had subsequently been recovered by the Department under section 226.

Analysis: The disallowance provision was read as creating two alternative conditions, namely, that tax on the interest had been paid or deducted. The words relied upon by the Department were held not to make payment contingent only on deduction under Chapter XVII-B. Since the tax on the interest had in fact been recovered, the statutory condition for allowance was satisfied.

Conclusion: The interest expenditure was not hit by section 40(a)(i) and was allowable.

Issue (ii): Whether extra depreciation under section 43A of the Income-tax Act, 1961 could be allowed without proof of the outstanding foreign currency liability and the consequent increase due to exchange rate variation.

Analysis: Extra depreciation under section 43A depends on proof that the assessee acquired an asset from outside India, that a portion of the cost remained outstanding when the exchange rate changed, and that the liability increased in Indian currency because of that change. As the relevant factual details were not on record, the matter required verification and recomputation on the basis of evidence to be furnished by the assessee.

Conclusion: The matter was remitted for fresh determination of the admissible extra depreciation under section 43A.

Final Conclusion: The interest claim was upheld, while the depreciation issue was sent back for factual verification and recomputation, leaving the assessee with only partial substantive relief.

Ratio Decidendi: For the purpose of section 40(a)(i), payment of tax on interest payable outside India is an independent alternative to deduction at source, and relief under section 43A requires proof of the outstanding foreign currency liability and the increase caused by exchange fluctuation.

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