Tax deduction at source on interest to a foreign bank leads to disallowance where no withholding was made.

Interest paid to a foreign bank was treated as taxable in India under the India-Switzerland tax treaty, so tax was deductible at source under section 195 of the Income-tax Act, 1961. As the assessee did not deduct tax and also did not furnish the required undertaking, the payment attracted disallowance under section 40(a)(i). The analysis followed the earlier view in the assessee's own case for a prior year, and in the absence of contrary material, that position was applied again against the assessee.

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Issues: Whether interest paid to a foreign bank without deduction of tax at source was liable to disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The assessee paid interest to a foreign bank and did not deduct tax at source or furnish the required undertaking. The earlier decision in the assessee's own case for an earlier assessment year had already held, after considering Article 11(1) and Article 11(2) of the India-Switzerland tax treaty, that the interest was taxable in India and that tax was deductible under section 195 of the Income-tax Act, 1961. In the absence of any contrary material, the earlier view was followed. Since tax was not deducted at source on the interest payment, the expenditure attracted disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Conclusion: The assessee was liable to deduct tax at source on the interest payment and the disallowance under section 40(a)(i) was in law; the issue was decided against the assessee.

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