Section 40(a)(ia) applies to TDS-deductible payments during the year, with later deduction allowed on actual tax payment.

Section 40(a)(ia) is not confined to sums outstanding as payable on the last day of the financial year; it applies to any TDS-deductible amount paid or payable during the year where tax has not been deducted or, after deduction, not paid within the prescribed time. The Tribunal rejected the narrower year-end payable interpretation. It also accepted the alternative position that, where tax is actually paid, the corresponding expenditure is allowable in the year of such payment under the provisos to sections 40(a)(ia) and 40(a)(i), subject to verification by the Assessing Officer.

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Issues: (i) whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is confined only to amounts outstanding as payable on the last day of the financial year, and (ii) whether the assessee is entitled to deduction in the year in which tax is actually paid under the provisos to section 40(a)(ia) and section 40(a)(i) of the Income-tax Act, 1961.

Issue (i): Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is confined only to amounts outstanding as payable on the last day of the financial year.

Analysis: The statutory language was read to cover any amount on which tax is deductible at source and in respect of which tax has not been deducted or, after deduction, not paid within the prescribed time. The reasoning rejected the view that the provision applies only to sums remaining payable at year end. The Tribunal relied on the view that the section cannot be restricted by importing words not used by the Legislature, and that the earlier Special Bench view treating only year-end payables as disallowable was not correct in law.

Conclusion: The disallowance provision is not confined to year-end outstanding payables and applies to amounts payable during the year as well.

Issue (ii): Whether the assessee is entitled to deduction in the year in which tax is actually paid under the provisos to section 40(a)(ia) and section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The alternative plea was accepted because the provisos permit the expenditure to be allowed in the year in which the tax is actually paid. The revenue did not object to such allowance if actual payment was verified. The matter was therefore left to verification by the Assessing Officer on the fact of actual payment of tax.

Conclusion: The assessee is entitled to deduction in the year in which tax is actually paid, subject to verification of such payment.

Final Conclusion: The appeal succeeded only to the limited extent that the claimed expenditure was directed to be allowed in the year of actual tax payment, while the primary objection to the year-end restricted interpretation of section 40(a)(ia) was rejected.

Ratio Decidendi: Section 40(a)(ia) applies to all relevant TDS-deductible payments made or payable during the year, and where tax is later paid, the corresponding deduction is allowable in the year of such actual payment under the proviso mechanism.

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