Section 40(a)(ia) relief depends on proof that the commission recipient already paid tax on the income.

Section 40(a)(ia) can be neutralised where the resident deductee has already paid tax on the commission income, because the payer is then deemed to have deducted and paid tax on the date the deductee filed the return. The proviso is treated as beneficial and clarificatory, with retrospective operation. However, the relief cannot be applied without verifying documentary proof that the deductees actually discharged tax on the relevant receipts, so the factual position must be established before any disallowance is lifted.

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Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 was sustainable in respect of commission payments on which tax was not deducted at source, and whether the matter required verification of whether the deductees had paid tax so as to attract the beneficial proviso.

Analysis: The non-deduction of tax at source on commission was not in dispute. The dispute centered on the effect of the proviso to section 40(a)(ia), as explained by the Tribunal's earlier view that the provision can operate even where payment is made before the end of the financial year. The Court accepted the principle that if the resident payee has paid tax on the amount received, the payer is to be deemed to have deducted and paid tax on the date the payee furnished the return. The proviso, being beneficial and clarificatory, was treated as having retrospective effect. However, the record did not contain clear documentary proof that the deductees had actually paid tax on the commission receipts.

Conclusion: The matter was required to be restored to the Assessing Officer for verification of whether the deductees had paid tax. If that fact was established, no disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be made.

Final Conclusion: The appeal succeeded to the extent of setting aside the existing relief and sending the matter back for factual verification, with the ultimate disallowance depending on proof of tax payment by the deductees.

Ratio Decidendi: Where the deductee has paid tax on the income, the payer is deemed to have deducted and paid tax for purposes of section 40(a)(ia), but the benefit can be applied only after verification of that fact.

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