Section 40(a)(ia) disallowance targets claimed deductions, not capitalised work-in-progress where no profit-and-loss deduction is claimed.

Section 40(a)(ia) of the Income-tax Act, 1961 restricts deduction of expenditure otherwise allowable under Sections 30 to 38 where tax required under Chapter XVII-B has not been deducted or paid. The provision applies only where the expenditure is claimed as a deduction in computing business income. Amounts capitalised as capital work-in-progress, not debited to the profit and loss account and not claimed as revenue expenditure, therefore fall outside its operative scope. Separate proceedings for failure to deduct tax at source do not determine the allowability of capitalised amounts in assessment proceedings under Section 143(3).

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Issues: Whether disallowance under Section 40(a)(ia) of the Income-tax Act, 1961 could be made in respect of amounts capitalised as capital work-in-progress and not claimed as expenditure.

Analysis: Section 40(a)(ia) operates by restricting deduction of expenditure otherwise allowable under Sections 30 to 38 where tax deductible under Chapter XVII-B has not been deducted or paid. The amounts in question were capitalised as work-in-progress, were not debited to the profit and loss account, and were not claimed as revenue expenditure. Since no deduction was claimed while computing business income, the statutory condition for invoking Section 40(a)(ia) was absent. Any separate proceedings for failure to deduct tax at source would not determine the allowability of the capitalised amount in assessment proceedings under Section 143(3) of the Income-tax Act, 1961.

Conclusion: Disallowance under Section 40(a)(ia) was not applicable to the capitalised amounts and the deletion of the disallowance was upheld.

Ratio Decidendi: Section 40(a)(ia) applies only where an otherwise allowable expenditure is claimed as a deduction; it does not apply to amounts capitalised as work-in-progress and not debited to the profit and loss account.

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