TDS on interest under mutual accounts applies only to the net amount after set-off of reciprocal debit and credit entries.

Under section 194A, tax deduction at source on interest is confined to the income by way of interest actually payable. Where mutual accounts involve reciprocal debit and credit entries, the interest amount must be computed after set-off of those entries, because the net balance alone represents the real interest income. A mere gross entry in the head office books does not fix the deduction base if the parties' accounts show a lower amount payable after adjustment. On that basis, TDS was correctly deducted only on the net interest remaining after set-off.

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Issues: Whether tax was deductible at source under section 194A of the Income-tax Act, 1961 on the gross amount of interest credited, or only on the net interest payable after setting off mutual debit and credit entries between the parties.

Analysis: The liability to deduct tax at source under section 194A turns on the income by way of interest actually payable. Where the parties maintain mutual accounts and reciprocal interest liabilities are adjusted against each other, the computation of the interest income necessarily requires set-off of the respective credits and debits. In such a situation, the mere entry in the head office books cannot be treated as the full amount on which deduction must be made, because the final amount payable after taking all relevant accounts into consideration alone represents the real interest income. The Tribunal held that the assessee had correctly deducted tax on the net amount remaining after adjustment.

Conclusion: Tax deduction at source was required only on the net interest of Rs. 6,880 payable after set-off, and the assessee succeeded on this issue.

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