Sections 36(1)(iii), 40(a)(ia) and 194A of the Income Tax Act 1961 – Assessee having neither credited the interest in the books of account under any account nor paid such interest in the year, but claimed deduction on the basis of mercantile system of accounting straightaway in the computation of income without routing it through books of account, mandate of section 194A is not attracted and, consequently, the provisions of section 40(a)(ia) are not attracted.
Facts
For the relevant assessment year, the Assessing Officer disallowed u/s 40(a)(ia) Rs. 336.49 lacs towards accrued interest payable by the assessee-company to Sahara India Financial Corporation Ltd. (SIFC) for which no entry was passed in the books of account.Deduction was claimed directly in the Computation of Total Income. The CIT (A) confirmed the disallowance.
For earlier A.Y.2003-04, the assessee claimed deduction for similar interest payable on term loan to SIFC to the tune of Rs. 2.51 crore which was allowed by the Assessing Officer in the assessment framed u/s 143(3). Subsequently, the learned CIT, taking recourse of the provisions of section 263, held that the amount of interest was not deductible. ”
Held:
The Tribunal held that the provisions of section 40(a) (ia) are not attracted in the assessee’s case. The Tribunal noted as under:
In the mercantile system of accounting, deduction is allowed on accrual of liability. It is not material whether the amount is paid or not, or whether or not it is recorded in the books of account. Therefore, the deduction of interest payable to SIFC cannot be denied.
On a conjoint reading of sub section (1) with Explanation to section 194A, it is amply borne out that the event for deduction of tax at source arises when the amount of interest is credited to the account of the payee or when it is paid, whichever is earlier.
Even if the amount is not credited to the account of payee but shown under the head `Interest payable 20 account’ or `suspense account’, etc. it shall still be deemed as credit to the account of payee.
Thus, the essential requirement is that the amount must be credited in the books of account either in the account of payee or interest payable account or any other account by whatever name called such as suspense account. Once an amount is credited in the books of account, the liability to deduct tax at source arises if the payment of such interest is made after the date of crediting.
Since the assessee has not credited the amount of such interest in its books of account and, further, such interest has not been paid in this year, the mandate of section 194A cannot be attracted. This provision comes into play only when either the amount is credited in the books of account or interest is paid, whichever is earlier.
Once there is no liability to deduct tax at source u/s 194A, the provisions of section 40(a)(ia) cannot be attracted.
Probably, this lacuna was not noticed by the legislature while enacting the relevant provisions, which has been exploited by the assessee as a measure of tax planning. In this year the deduction has to be allowed. It will be open to the Assessing Officer to consider the later development of actual payment or non-payment of interest to SIFC and deal with it as per law in such later years.
