Running account debit is not TDS deduction: later book entry cannot cure non-deduction under section 40(a)(ia).

Section 40(a)(ia) requires tax to be deducted from the relevant payment or amount payable itself, and then remitted within the prescribed time. A later debit to the payee's running account does not amount to deduction at source where no tax was actually deducted from the earlier payments made during the year. The relaxation under the Finance Act, 2010 and the principle in Virgin Creations apply only where tax was in fact deducted and paid within the extended time, not where deduction was absent altogether. The disallowance under section 40(a)(ia) was therefore correctly attracted.

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Issues: Whether tax could be treated as deducted at source for the purpose of section 40(a)(ia) when the assessee debited the payee's running account on the last date of the previous year instead of deducting tax from the actual payments made during the year.

Analysis: The payments to the sub-contractor were liable to tax deduction at source under section 194C. The statutory scheme of section 40(a)(ia), read with section 194C and Chapter XVII-B, requires tax to be deducted from the payment or amount payable itself, and then remitted within the prescribed time. Debiting a running account at a later stage is not the same as deducting tax at source from the payments made earlier. The relaxation introduced by the Finance Act, 2010 and the decision in Virgin Creations did not assist the assessee because that principle applies only where tax was in fact deducted at source and paid within the extended time, not where deduction at source itself was absent.

Conclusion: The later debit of the running account did not amount to deduction of tax at source, and the disallowance under section 40(a)(ia) was rightly attracted.

Ratio Decidendi: For section 40(a)(ia), tax must be deducted from the very payment or amount payable on which deduction is required; a subsequent debit to the payee's running account does not satisfy the requirement of deduction at source.

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