Section 40(a)(ia) was inserted by the Finance Act, 2004 w.e.f April 1,2005 with an intent to expand the compliance of TDS provisions. It seeks to disallow 30% of the sum payable to resident on which TDS was deductible, but not deducted or deducted but not paid to credit of Govt. within due date.
The much disputed issue was whether provisions of Section 40(a)(ia) would be limited to expenditure subject to TDS which remains payable as on 31st March of the previous year or it would include expenditure which was payable at any point of time during previous year.
Now finally the Apex Court settled this controversy. It was held by the court that it is a statutory obligation of a person making payment to the resident payee to deduct tax as per TDS Chapter. Further provisions of TDS suggests that TDS needs to be deducted at the time of credit of such sum to the account of the payee or at the time of payment whichever is earlier. Therefore, it is clear that the tax had to be deducted in both possibilities, such as, when the amount is credited to the payee account or when the payment is actually made.