Cash-system TDS compliance and section 40(a)(ia) disallowance: timely deposit before return due date avoids addition

Disallowance under section 40(a)(ia) was held unwarranted where an assessee on the cash system actually paid the amount in March, deducted tax at source at that time, and deposited it in April within the time permitted by section 139(1). Mere memorandum entries kept for convenience did not amount to an accrual-based booking of liability or payment. The proviso to section 40(a)(ia) was read as a remedial provision intended to make the disallowance rule workable and to avoid hardship where tax had in fact been deducted and paid within the statutory period, and the reference point was treated as the return-filing due date, not the earlier Chapter XVII-B deposit date.

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Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 was justified where the assessee, following the cash system of accounting, deducted tax at source in the last month of the previous year and deposited it before the due date for filing the return.

Analysis: The assessee was on cash system and the amount in question was actually paid in March 2007. Tax was deducted at source at that time and deposited in April 2007 within the time permitted by section 139(1). The memorandum entries maintained for convenience did not amount to booking a liability or payment on accrual basis. The proviso to section 40(a)(ia), read in the light of the legislative history and the remedial nature of the later amendments, was treated as intended to make the provision workable and to avoid hardship where tax had in fact been deducted and paid within the statutory time. The Court also held that the expression used in the proviso refers to the due date for filing the return under section 139(1), not the earlier date for deposit of tax under Chapter XVII-B.

Conclusion: Disallowance under section 40(a)(ia) was not warranted, and the deletion of the addition was upheld in favour of the assessee.

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