Yes, the issue raised is very much relevant and logical. Once, it is proved that tax has been paid by the deductee, then there is no loss to revenue. Therefore, the enforcement of TDS in the hands of deductor appears to be non logical. But there is no answer for the question that TDS provisions will become redundant once this argument is accepted. But other side of the logic is more reasonable and nobody could find any fault with it. Till a circular is issued by the board in 1997, nobody from revenue side accepted the argument that once the deductee paid the taxes, decuctor should not be treated as assessee in default in respect of that TDS. Since many courts have accepted the argument and relieved the deductors from the demand u/s 201(1), finally CBDT had issued a circular in 1997 and ultimately made an amendment( not directly but indirectly) in Sec. 191 as per which the above mentioned proposition has been accepted.
Further, after this amendment also, many argue that once the deductee pays the tax, demand u/s 201(1) can be waived but not the demand u/s 201(1A). They quote the case law reported in 293 ITR 226 to support their argument. In my opinion, this is also not correct. once it is proved that the deductee paid the taxes alongwith interest u/s 234B and 234C then the department didnot lose anything. Because, the interest received from deductee u/s 234B and 234C is more or less equal to the interest chargeable u/s 201(1A) in the hands of the deductor. Though this is not directly enunciated, but indirectly supported the judgements reported in 271 ITR 395, 287 ITR 354, 288 ITR 379, 304 ITR 338(AT), 253 ITR 310 and 91 ITD 450. I dont say that penalty u/s 271C should also waived once the deductee pays the taxes.
Futher, there is no answer to this question that there is no provision existed as on today to prevent the revenue from enforcing the provisions of sec 40a(ia) when it is brought to the notice that deductee had already paid the taxes. Since TDS is not the liability of the assessee and the liability of some body else discharged by the assessee, it cannot be written off in his books and should be reduced from the payment to be made to the deductee or else he should request the deductee to return that amount by issuing a TDS certificate to that effect in case the payment is already made by him. In fact, nothing prevented him from issuing the TDS certificate. Even in the case of deductee also, if no claim is made in the return and two years are already over, he cannot made a frest claim which is against the provisions of Sec. 155(14). But natural justice says the same amount cannot be collected twice. Once from the deductee as a tax liability and secondly from the deductor in the form of enfocing the provisions of Sec. 40a(ia).
Even the amendment brought in the F.Y. 2008 wherein it has been allowed to pay the TDS deducted before filing of the return of income is applicable only to the deductions made during the month of March of the preceeding F.Y.. For other payments, the amended provision is not applicable and the same should be remitted before the expiry of the F.Y. otherwise, there is every possibility that the relevant expenditure will be disallowed by the A.Os invoking the provisions of Sec. 40a(ia). In view of the above, this issue needs further elobaration and requires further amendment commensurating the argument that provisions of sec 40a(ia) are not applicable when it is proved that deductee had already paid the relevant taxes. But as of now, this argument will not be accepted by the revenue authorities.
I hope I have shared my views on this complicated subject.