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Issues: (i) Whether disallowance under section 40(a)(ia) could be sustained in respect of salary-related TDS payments not covered by that provision; (ii) Whether, in view of the Finance (No. 2) Act, 2014, the disallowance under section 40(a)(ia) was to be restricted to 30% instead of 100%; (iii) Whether relief was available where deductees had offered the receipts to tax and where TDS was subsequently deposited, including consequential allowance in the year of payment and verification of related claims.
Issue (i): Whether disallowance under section 40(a)(ia) could be sustained in respect of salary-related TDS payments not covered by that provision.
Analysis: The payment in question related to salary on which tax had been deducted under section 192B. The provision as it then stood covered specified payments such as interest, commission, brokerage, rent, royalty, fees for professional services, fees for technical services, and contractor payments, but did not extend to salary. Since salary was outside the scope of the disallowance provision, the embargo under section 40(a)(ia) was not attracted to that part of the expenditure.
Conclusion: The disallowance relating to salary-related payment was deleted, in favour of the assessee.
Issue (ii): Whether, in view of the Finance (No. 2) Act, 2014, the disallowance under section 40(a)(ia) was to be restricted to 30% instead of 100%.
Analysis: The amendment reducing the disallowance to 30% was treated as curative and intended to remove undue hardship. Relying on the amended text and supporting tribunal precedent, the Court held that the harsher full disallowance should not survive where the legislative change was designed to mitigate the rigour of the provision.
Conclusion: The disallowance under section 40(a)(ia) was restricted to 30% where the provision applied, in favour of the assessee.
Issue (iii): Whether relief was available where deductees had offered the receipts to tax and where TDS was subsequently deposited, including consequential allowance in the year of payment and verification of related claims.
Analysis: The assessee produced material indicating that certain deductees had filed returns and offered the receipts to tax, and also asserted that TDS had been deposited subsequently. The Court held that these factual claims required verification by the Assessing Officer to avoid possible double taxation and to determine the correct year of allowance for the expenditure. The matter was therefore restored for limited verification and consequential relief.
Conclusion: The issue was remanded for verification, with consequential relief to follow upon proof, in favour of the assessee for statistical purposes.
Final Conclusion: The appeal succeeded on the salary issue, the statutory disallowance was moderated where applicable, and the remaining claims were sent back for verification and consequential allowance; the assessee obtained only partial substantive relief.
Ratio Decidendi: Section 40(a)(ia) applies only to the categories of payments covered by it, and the 2014 amendment reducing the disallowance to 30% was applied as a curative measure to mitigate undue hardship, while factual claims of tax payment by deductees required verification before consequential relief could be granted.
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