Once tax has not been deducted and even if such tax has been paid by the deductee, disallowance u/s.40[a][ia] can still be made.

ACIT vs. DICGC Ltd (ITAT Mumbai) – ITAT held that even if payee pays tax on payments which are liable for Deduction of Tax at Source (TDS), the payment would still be disallowed under Section 40(a)(ia) of the Income-tax Act,1961 (the Act) in the hands of payer.  It distinguished decisions in the case of Hindustan Coca Cola Beverage (P) Ltd v. CIT [2007] 293 ITR 226 (SC) and Mahindra & Mahindra Ltd v. DCIT [2009] 30 SOT 374 (Mum) (SB) and observed that these two decisions were rendered in the context of Section 201(1) of the Act and principles laid down therein could not be adopted f...