Section 40(a)(ia) disallowance applies to payments made during the year when tax was deductible at source.

Section 40(a)(ia) was held to apply not only to amounts outstanding at year-end but also to sums paid during the year where tax was deductible at source. The Tribunal reasoned that the obligation to deduct tax arises at the time of payment or credit, and the provision could not be narrowed by reading in a limitation not found in the text. Following the Calcutta and Gujarat High Courts, it rejected the contrary view in Merilyn Shipping and the passing reference in Vector Shipping. The disallowance was therefore upheld.

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Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is confined only to amounts remaining payable on the last day of the financial year, or whether it also applies to amounts paid during the year on which tax was deductible at source.

Analysis: The Tribunal held that the statutory obligation to deduct tax at source arises at the time of payment or credit, and the language of section 40(a)(ia) does not warrant restricting the disallowance only to balances outstanding on the closing date of the year. It preferred the reasoning of the Calcutta High Court and the Gujarat High Court over the contrary view taken in Merilyn Shipping and the passing reference in Vector Shipping, and accepted the view that the provision cannot be narrowed by supplying a casus omissus.

Conclusion: The disallowance was held to be justified and the assessee's contention was rejected.

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