Section 40(a)(ia) disallowance fails when TDS deducted in March is paid before the return filing deadline

Disallowance under section 40(a)(ia) is not attracted where tax deducted in the last month of the previous year is deposited before the due date for filing the return under section 139(1). The provision governing disallowance turns on the conditions in section 40(a)(ia) itself, namely whether tax was not deducted or, after deduction, not paid within the prescribed time. The deduction-and-deposit requirements under Chapter XVII-B, including section 194C, govern the TDS obligation but do not control allowability of the expenditure under section 40(a)(ia). On these facts, the expenditure remained deductible.

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Issues: Whether the disallowance under section 40(a)(ia) was justified where tax was deducted in March and deposited before the due date under section 139(1), and whether the time-limit for deduction and deposit under section 194C controlled the allowability of the expenditure.

Analysis: The relevant inquiry under section 40(a)(ia) is whether tax, having been deductible on the payment, was either not deducted or, after deduction, not paid within the period specified in that provision. The conditions for disallowance are contained in section 40(a)(ia) itself. The provisions governing deduction and deposit under Chapter XVII-B, including section 194C, operate for determining the obligation to deduct tax at source, but they do not govern the actual disallowance of expenditure under section 40(a)(ia). Where tax was deducted in the last month of the previous year and deposited before the due date of filing the return under section 139(1), the case falls within clause (A) of section 40(a)(ia). In such circumstances, the proviso and the main provision support allowance of the expenditure.

Conclusion: The disallowance was not justified. The assessee was entitled to deduction of the expenditure.

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