Business expenditure: TDS: Disallowance u/s. 40(a)(ia) r/w. s/s. 9(1)(vii) and 195: A. Y. 2007- 08: Circular in force during relevant year not obliging to deduct tax at source: Disallowance u/s. 40(a)(ia) not proper: Subsequent withdrawal of Circular not relevant:

In the A. Y. 2007-08, the Assessing Officer disallowed an amount of Rs. 57,49,489 paid to overseas entities as commission relying on section 40(a)(ia) on the ground that tax is not deducted at source u/s. 195 of the Act. The Assessing Officer rejected the contention of the assessee that the assessee was not obliged to deduct tax at source on the said payments in view of the Circular Nos. 23 of 1969, 163 of 1975 and 786 of 2000 and accordingly the said payments were not taxable in the hands of the recipients. The CIT(A) deleted the disallowance and held that the Circular No. 7 of 2009 withdrawing the above said circulars was operative only from 22nd October, 2009, and not prior to that date and had no bearing in the instant assessment year. The Tribunal confirmed the order of the CIT(A) and dismissed the appeal filed by the Revenue. On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) The Circulars did not oblige the assessee to deduct tax at source. The assessment in question for the A. Y. 2007-08 would be governed by the Circular, which was operative at the relevant time. The assessee was not entitled to deduct tax at source.

ii) Circular No. 7 of 2009, dated 22-10-2009, withdrawing the earlier Circulars became operative only from that date. The Circulars in the relevant year were binding on the Department and the Assessing Officer did not have any right to ignore the Circulars and to disallow u/s. 40(a) (ia) of the Act, for non-deduction of tax at source u/s. 195.”