Assessee has not credited interest in its books of account and such interest has not been paid in relevant year, and assessee claiming deduction in computation if income on merchantile basis, mandate of section 194A cannot be attracted to further invoke disallowance under section 40(a)(ia

Held by ITAT MUMBAI BENCH inPranik Shipping & Services Ltd. on 25-01-2012, [2012] 19 taxmann.com 107 (Mumbai - Trib.

"........................... the assessee did not credit such interest in the books of account under any account. Rather the deduction has been claimed on the basis of mercantile system of accounting straightway in the computation of income, without routing it through books of account, which has been held by us to be allowable in an earlier para. In view of the fact that 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. Rather 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.

14. Probably this loophole was not contemplated by the Legislature while enacting the relevant provisions, which has been exploited by the assessee as a measure of tax planning. We cannot remedy the situation. 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 M/s Sahara India Financial Corporation Limited and deal with it as per law in such later years. This ground is allowed.

15. In the result, the appeal is allowed.