Year-end disallowance under tax deduction rules does not apply where the liability was already paid during the year.

Section 40(a)(ia) was treated as a year-end disallowance provision applying to amounts remaining payable, not to sums already paid during the previous year. On that reasoning, where payment to the hospital had been made during the year and nothing was outstanding at 31 March, disallowance for non-deduction of tax at source was not sustainable. The note reflects the Special Bench view that the relevant condition for invoking the provision is the existence of an unpaid liability at year-end, and that an actually paid amount falls outside its scope.

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Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be made in respect of an amount which had been actually paid during the year and was not outstanding at the year-end despite non-deduction of tax at source.

Analysis: The assessee's payment to the hospital had been made during the relevant previous year and nothing remained payable as on 31 March 2007. The dispute turned on the construction of section 40(a)(ia), which, on the reasoning adopted, was attracted to amounts remaining payable and not to sums already paid. Following the Special Bench view relied upon, the year-end outstanding liability was treated as the relevant condition for invoking the disallowance provision.

Conclusion: Disallowance under section 40(a)(ia) was not sustainable for an amount actually paid during the year and not outstanding at year-end. The issue was decided in favour of the assessee.

Final Conclusion: The addition was deleted and the assessee obtained relief on the only substantive ground decided.

Ratio Decidendi: Section 40(a)(ia) was applied as a year-end disallowance provision governing amounts payable, not sums already paid during the previous year.

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