TDS Not Deducted

First of  all, how the contractor can demand the TDS certificates when there was no deduction of tax at source?? Secondly, the item of expenditure should have been disallowed as an expenditure in the AY 2006-07 in view of non deduction of tax at source. If so, now you can make an adjustment in current years financial statement as a "PRIOR PERIOD ADJUSTMENT". For such you need to either receive an amount equal to TDS from the contractor (as he has received the same because of non deduction earlier) and pay it to the credit of Government. Alternatively, you can pay the TDS from your pocket & debit it to prior period adjustment account. In any case you cannot get deduction of the same.

yes i agree with sathish... it cant miss the view of statutory auditor either.... its lapse from the side of company..