Reimbursement of expenses and Form 26A defeat disallowance under section 40(a)(ia) where tax has already been paid by the payee.

Disallowance under section 40(a)(ia) was not sustainable on reimbursement of expenses where the underlying payments, if incurred directly, would not attract TDS. The service tax component was also treated as outside TDS liability on the basis of the CBDT circular relied on in the text. For the remaining reimbursement, Form 26A showed that the payee had included the receipts in total income and paid tax, bringing the matter within the proviso to section 201. On that footing, the foundation for disallowance failed and the addition was deleted in full.

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Issues: Whether disallowance under section 40(a)(ia) was sustainable on reimbursement of expenses, including the service tax component, when the payee had included the receipts in its total income and Form 26A was furnished.

Analysis: The reimbursement related to expenses which, if directly incurred by the assessee, would not attract TDS, and therefore no disallowance could be made on that part. The service tax component was also not liable for TDS in view of the CBDT circular relied upon by the Authority. For the balance reimbursement, the furnished Form 26A certified that the payee had accounted for the receipts in its total income and paid tax thereon, bringing the case within the proviso to section 201. In that situation, the foundation for disallowance under section 40(a)(ia) did not survive.

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

Final Conclusion: The addition made on account of alleged non-deduction of tax at source on reimbursed expenditure could not be sustained, and the assessee succeeded on the disputed disallowance.

Ratio Decidendi: Where reimbursement is not itself a TDS-bearing payment, and the payee has offered the receipt to tax with Form 26A establishing compliance, disallowance under section 40(a)(ia) cannot be made.

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