Business expenditure: TDS: Disallowance u/s. 40(a)(ia): A. Y. 2009-10: Tax deducted at source on salaries of employees paid by another party on behalf of assessee: Assessee not required to deduct tax on reimbursement to that party: Disallowance u/s. 40(a) (ia) cannot be made:

In the A. Y. 2009-10, M paid salary to the employees of the assessee on behalf of the assessee and also deducted tax at source as per law. The assessee reimbursed the amount to M. The Assessing Officer disallowed the payment made to M relying on the provisions of section 40(a)(ia), on the ground that no tax was deducted at source on such payment to M. The CIT(A) allowed the assessee’s appeal and held that since M had deducted tax at source on salaries paid by it on behalf of the assessee, the assessee was not required to deduct tax at source on reimbursement made by it to M, and when the expenses incurred by the assessee were totally paid and did not remain payable as at the end of the accounting period, the provisions of section 40(a) (ia) of the Act were not applicable. The Tribunal affirmed the decision of the CIT(A).

On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) Tax was deducted at source from the salaries of the employees paid by M, and the circumstances in which such salaries were paid by M for the assessee were sufficiently explained. For disallowing expenses from business and profession on the ground that tax has not been deducted at source, the amount should be payable and not which has been paid by the end of the year.

ii) The Tribunal had not committed any error in recording on facts, and no question of law arose for consideration in appeal.”