Retrospective relief under section 40(a)(ia) applies when the payee has already offered the receipt to tax.

The second proviso to section 40(a)(ia) is declaratory and curative, and applies retrospectively from 1 April 2005. Where tax was deducted under section 194C instead of the alleged correct provision, the disallowance cannot survive if the payee has included the receipt in its profit and loss account and computed business income accordingly. The matter was therefore restored for limited factual verification of the payee's tax treatment of the receipt, and the disallowance would be deleted if that verification is satisfied.

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Issues: Whether disallowance under section 40(a)(ia) could be sustained where tax was deducted under section 194C instead of the alleged correct provision, and whether the second proviso to section 40(a)(ia) required deletion of the disallowance on verification of tax compliance by the payee.

Analysis: The Tribunal noted the settled position that the second proviso to section 40(a)(ia) is declaratory and curative in nature and operates retrospectively from 1 April 2005. On the facts, the dispute required limited verification as to whether the recipient had included the receipt in its profit and loss account and computed business income accordingly. If that factual condition was satisfied, the disallowance would not survive.

Conclusion: The issue was restored to the Assessing Officer for limited verification, with a direction to delete the disallowance if the requisite factual verification was satisfied.

Final Conclusion: The matter was sent back for factual verification of the payee's tax treatment of the receipt, and the disallowance was not finally adjudicated on merits at this stage.

Ratio Decidendi: The second proviso to section 40(a)(ia) is curative and retrospective, and where the payee has duly offered the amount to tax, disallowance for short deduction of TDS cannot be sustained.

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