Tax disallowance under section 40(a)(ia) fails when payees have reported income and paid tax despite missing Form 26A.

Disallowance under section 40(a)(ia) cannot be sustained merely because Form 26A under Rule 31ACB was not furnished, where the resident payees had included the payments in their returns and discharged tax liability. The Tribunal treated the absence of Form 26A as a technical lapse, since the record showed that the recipients had accounted for the receipts and there was no basis to continue the tax disallowance once tax had already been paid by the payees. The payer was therefore not to be subjected to further tax recovery solely on account of the procedural defect, and the disallowance was directed to be deleted.

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Issues: Whether disallowance under section 40(a)(ia) could be sustained merely for non-furnishing of Form 26A under Rule 31ACB when the recipients had included the payments in their returns and paid tax thereon.

Analysis: The assessee produced certificates from the recipient lenders and the record did not show that the recipients had failed to offer the amounts to tax. The Tribunal noted that the earlier remand direction was aimed at verifying whether the deductees had accounted for the receipts and discharged tax liability. It also noted the settled principle that once the payee has paid tax on the income, the payer should not be visited with a further tax recovery only because of a procedural defect in furnishing Form 26A. On that basis, the absence of Form 26A was treated as a technical lapse and not a ground to continue the disallowance.

Conclusion: The disallowance under section 40(a)(ia) was not sustainable and was directed to be deleted.

Ratio Decidendi: Where the resident payee has included the payment in its return and paid tax thereon, disallowance under section 40(a)(ia) cannot be maintained solely for want of Form 26A under Rule 31ACB.

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