ITAT: Interest paid on Bank Loan not liable to TDS

The Income Tax Appellate Tribunal (ITAT), Bangalore bench has held that the interest paid on bank loan cannot be liable to Tax Deduction at Source (TDS) and therefore, the disallowance under section 40(a)(ia) of the Income Tax Act, 1961.

Facts of the case:-

The Assessing Officer, while considering the income tax return filed by TUV Rheinland NIFE Academy Private Limited, noticed that the assessee has not deducted tax at source from various payments, which included payment of interest on borrowings amounting to Rs.65,66,637/-. The AO disallowed 30% of the above-said amount u/s 40(a)(ia) of the Act.

Section 194A deals with the provisions relating to TDS on interest other than on securities. Tax is to be deducted under section 194A if interest (other than interest on securities) is paid to a resident. Thus, the provisions of section 194A are not applicable in the case of payment of interest to a non-resident. Payments made to non-residents are also covered under the TDS mechanism, however, tax in such a case is to be deducted as per Section 195.


While allowing the plea of the assessee, Accountant Member B R Bhaskaran and Judicial Member Beena Pillai held that the interest paid on bank loans is not liable to TDS deduction and hence disallowance u/s 40(a)(ia) is not called for.

“However, we notice that the Ld CIT(A) has confirmed the disallowance only for want of evidence. Accordingly, in the interest of natural justice, we are of the view that the assessee should be provided with an opportunity to produce evidences in support of its claim. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it with the evidences that may be furnished by the assessee. After hearing the assessee, the AO may take appropriate decision in accordance with law,” the Tribunal said.

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