2013 (9) TMI 742 - HC - Income Tax

Binding of circular upon the Revenue officers effective date of Circular No.7 of 2009 dated 22.10.2009 withdrawing earlier circulars - disallowance was made by A.O. under Section 40 (a) (i) for non-deduction of tax at source under Section 195. - Held that - Where a circular issued earlier created a vested right in the tax-payer and such right is sought to be curtailed or withdrawn by a subsequent circular, then such subsequent circular will not have a retrospective effect - Circular No.7 of 2009 dated 22.10.2009 withdrawing earlier circulars became operative from 22.10.2009 - Circulars in the relevant year was binding upon the department and assessee can challenge the affect of the Circular but that the A.O. did not have any right to ignore the circulars and to disallow non-deduction of tax at source under Section 195 and under Section 40 (a) (i) of the Act Decided against the Revenue.

Summary

Issues:
- Delay in presenting the appeal
- Interpretation of circulars and judgments regarding tax deduction at source under Section 195 of the Income Tax Act, 1961
- Disallowance of expenses under Section 40 (a) (ia) of the Act
- Applicability of circulars and retrospective effect of circular withdrawal

Delay in presenting the appeal:
The High Court condoned a delay of 13 days in filing the appeal by the income tax department under Section 260A of the Income Tax Act, 1961. The court found the explanation for the delay to be good and sufficient, with no serious opposition.

Interpretation of circulars and judgments regarding tax deduction at source under Section 195:
The primary issue revolved around the department's appeal challenging the ITAT's reliance on Circular No.786 dated 07.02.2000 and the failure to consider Circular No.30/2009 dated 25.03.2009. The department questioned the ITAT's interpretation of the law and the retrospective applicability of the circulars. The court analyzed whether the ITAT was justified in its decisions based on the circulars and the Supreme Court judgment in CIT vs. Moser Baer India (P) Ltd. The court emphasized the importance of the circulars in determining the liability to deduct tax at source under Section 195.

Disallowance of expenses under Section 40 (a) (ia) of the Act:
The case involved disallowance of expenses amounting to Rs.57,49,489 for non-deduction of income tax at source under Section 195. The AO disallowed the sum based on the mandatory liability under Section 195, which the assessee contested, citing business expediencies and non-resident recipients. The CIT (A) and ITAT both ruled in favor of the assessee, emphasizing the importance of circulars and the lack of evidence supporting the AO's position.

Applicability of circulars and retrospective effect of circular withdrawal:
The court considered the withdrawal of Circular No.786 of 2000 and the subsequent Circular No.7 of 2009, emphasizing that the withdrawal did not create retrospective obligations for the assessee. The court highlighted that the circulars in force at the time of assessment were binding and could not be ignored by the AO. The judgment favored the assessee, dismissing the income tax appeal and upholding the importance of circulars in determining tax liability.