Section 40(a)(ia) disallowance fails where the payee has already returned the income and paid tax.

Disallowance under section 40(a)(ia) was held unsustainable where the payee had already included the corresponding interest or finance charges in its return and paid tax on that income. The Chartered Accountant's certificate was accepted as evidence that the tax due on the payment had been discharged by the recipient, so the second proviso to section 40(a)(ia) applied and the amount could not be brought to tax by way of disallowance. The payer was therefore not to be treated as an assessee-in-default for recovery purposes, and the addition was deleted in favour of the assessee.

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Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be sustained when the payee had already included the corresponding income in its return and paid tax thereon.

Analysis: The assessee had failed to deduct tax at source on interest or finance charges paid to the payee, but additional evidence in the form of a Chartered Accountant's certificate showed that the payee had duly accounted for the amount in its return and paid the corresponding taxes. In such a situation, the second proviso to section 40(a)(ia) prevents the amount from being brought to tax by way of disallowance, and the payer cannot be treated as an assessee-in-default for recovery purposes when the tax due on the payment has already been discharged by the payee.

Conclusion: The disallowance under section 40(a)(ia) was not sustainable and was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive disallowance issue, and the assessment was relieved to that extent.

Ratio Decidendi: Where the payee has offered the payment to tax and paid the due tax, the corresponding amount cannot be disallowed under section 40(a)(ia) on the ground of non-deduction of tax at source.

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