Assertion (A): If the interest is payable outside India, tax must be deducted at source. Reason (R): If tax has not been deducted…

Question

Assertion (A): If the interest is payable outside India, tax must be deducted at source.

Reason (R): If tax has not been deducted at source, the amount paid as interest will not be allowed as a deduction in computing business income.

1. A. Both (A) and (R) are correct and (R) is the correct explanation of (A). (Correct answer)
2. B. (A) and (R) both are correct but (R) is not the correct explanation of (A).
3. C. (A) is correct but (R) is wrong.
4. D. (A) is wrong but (R) is correct.

Correct Answer

Option A — Both (A) and (R) are correct and (R) is the correct explanation of (A).

Detailed Solution & Explanation

The correct answer is Both (A) and (R) are correct and (R) is the correct explanation of (A)..

Key Points

• Both the Assertion (TDS on interest payable outside India is mandatory) and the Reason (non-deduction disallows the interest as a business deduction) are correct, and the Reason correctly explains the Assertion.

Additional Information

• In Assertion-Reason items, settle each statement independently first, then ask whether the Reason causes the Assertion.
• Section 195 requires TDS on interest and other sums payable to a non-resident; section 40(a)(i) disallows the expenditure if that tax is not deducted or paid.
• So the disallowance is precisely the mechanism that enforces the deduction — which is why the Reason explains the Assertion rather than merely accompanying it.
• The domestic counterpart is section 40(a)(ia), which disallows 30% of the expense where resident TDS is not deducted.