Section 40(a)(ia) disallowance limited to year-end payables, with retrospective relief where the payee has paid tax.

Section 40(a)(ia) disallowance was treated as confined to amounts remaining payable at the end of the financial year, not to expenditure already paid during the year, subject to factual verification of whether the sums were actually outstanding on 31 March. The second proviso to section 40(a)(ia) was treated as curative and retrospective, so no disallowance could survive where a resident payee had included the payment in its return and discharged the tax liability, again subject to verification of the underlying records. The matter was therefore remanded for factual examination on both issues.

---

---

Issues: (i) Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be made in respect of expenditure actually paid during the financial year despite non-deduction of tax at source; (ii) Whether disallowance under section 40(a)(ia) could be sustained in respect of interest paid to a resident payee where the payee had accounted for the income and discharged tax liability, with the second proviso to section 40(a)(ia) being applicable retrospectively.

Issue (i): Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be made in respect of expenditure actually paid during the financial year despite non-deduction of tax at source.

Analysis: The coordinate bench view in Merlyn Shipping was followed to hold that section 40(a)(ia) was attracted only to amounts remaining payable as on the last day of the financial year and not to amounts already paid during the year. The matter, however, required factual verification as to whether the disputed amounts were in fact paid before 31 March.

Conclusion: The issue was restored to the Assessing Officer for verification, and disallowance could be made only to the extent the amounts remained payable at year end.

Issue (ii): Whether disallowance under section 40(a)(ia) could be sustained in respect of interest paid to a resident payee where the payee had accounted for the income and discharged tax liability, with the second proviso to section 40(a)(ia) being applicable retrospectively.

Analysis: The second proviso was treated as a curative and declaratory amendment inserted to rationalize the provision, and therefore as retrospective in operation. Where the resident payee had included the amount in its return and tax liability had been discharged, the assessee could not be fastened with a disallowance, subject to verification of the factual material.

Conclusion: The issue was remanded to the Assessing Officer for verification, and if the payee had returned the income and discharged tax, the disallowance was to be deleted.

Final Conclusion: The common order granted relief on the core TDS disallowance questions by applying a year-end payable test and the retrospective curative effect of the second proviso, but both matters were sent back for factual verification.

Ratio Decidendi: Section 40(a)(ia) disallowance, on the view applied here, is confined to amounts remaining payable at the end of the financial year, and the second proviso operates retrospectively to prevent disallowance where the resident payee has already included the sum in its return and discharged the tax liability.

---