TDS disallowance extends to amounts paid or payable, as section 40(a)(ia) is read to enforce mandatory compliance.

Section 40(a)(ia) was construed with sections 194C and 200 and Rule 30(2) to confirm that TDS compliance is required both on credit and on actual payment. The Court held that the expression "payable" in the disallowance provision does not exclude sums already paid, because a narrow reading would undermine the statutory scheme and the consequences for default. It approved the view that expenditure may be disallowed for failure to deduct or deposit tax at source whether the relevant amount remains outstanding or has been paid, and rejected the contrary Allahabad High Court view.

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Issues: Whether section 40(a)(ia) of the Income-tax Act, 1961 applies only to amounts that remain payable to a contractor or sub-contractor, or also to amounts that have already been paid.

Analysis: The Court read section 40(a)(ia) with sections 194C and 200 of the Income-tax Act, 1961 and Rule 30(2) of the Income Tax Rules. It held that the obligation to deduct tax at source arises both on credit and on actual payment, and that the provision was enacted to enforce compliance with TDS obligations. The Court approved the view that the word "payable" in section 40(a)(ia) does not exclude sums already paid, because such a narrow construction would defeat the statutory scheme and the consequences attached to default. The Court further held that the contrary view of the Allahabad High Court was incorrect.

Conclusion: Section 40(a)(ia) covers both amounts payable and amounts already paid. The issue was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: A provision disallowing expenditure for failure to deduct or deposit tax at source must be construed in harmony with the TDS charging and payment provisions, and the expression used in that disallowance provision will not be limited so as to defeat enforcement of mandatory TDS compliance.

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