2013 (11) TMI 738 - HC - Income Tax

Circular binding upon AO Applicability of Circular No.7 of 2009 dated 22.10.2009 Disallowance u/s 40(a)(ia) of the Income tax act Held that - The assessment in question for the assessment year 2007-08 would be governed by Circular, which was operative at the relevant time. The assessee was not entitled to deduct TDS. The department could not have taken different stand in subsequent years or assessment year 2007-08, when the circulars were operative and were not withdrawn - Circulars in the relevant year was binding upon the department and assessee can challenge the affect of the Circular but that the A.O. did not have any right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 Reliance has been placed on the judgment in Commissioner of Income Tax, Allahabad and another vs. M/s Model Exims Kanpur 2013 (9) TMI 742 - ALLAHABAD HIGH COURT - Decided against the Revenue.

Issues:
- Interpretation of provisions of explanation under Section 9
- Reliance on CBDT Circulars for clarificatory nature of amendments
- Misinterpretation of Section 195 r/w Section 9 and Section 40(a)(ia)
- Ignoring the retrospective nature of clarificatory amendments
- Obligation to deduct tax at source under Section 195

Interpretation of provisions of explanation under Section 9:
The High Court considered the appeal by the Income Tax department against the ITAT order for the assessment year 2009-10. The department raised questions regarding the interpretation of the explanation inserted by the Finance Act, 2010 in Section 9(2). The Court referred to a previous judgment where it was held that subsequent circulars cannot curtail vested rights created by earlier circulars. The liability to deduct tax under Section 195 was emphasized, and it was argued that even if earlier circulars did not mandate TDS deduction, withdrawal of such circulars would be retrospective. The Court held that the assessment must be made in accordance with the law after the withdrawal of circulars, as they did not create vested rights and were clarificatory in nature.

Reliance on CBDT Circulars for clarificatory nature of amendments:
The Court examined whether the ITAT erred by relying on a specific CBDT Circular while ignoring another circular. It was argued that the withdrawal of earlier circulars was retrospective and the liability to deduct tax should be determined based on the law, not circulars. The Court emphasized that the withdrawal of circulars did not create vested rights and the assessment should align with the law after withdrawal, as clarified in previous judgments.

Misinterpretation of Section 195 r/w Section 9 and Section 40(a)(ia):
The issue of misinterpretation of Section 195 in connection with Sections 9 and 40(a)(ia) was raised. The Court discussed the obligation to deduct tax at source under Section 195, particularly concerning payments to non-resident recipients not liable to pay tax in India. It was concluded that in such cases, the payer was not obligated to deduct tax at source under Section 195(1).

Ignoring the retrospective nature of clarificatory amendments:
The Court addressed whether the ITAT erred in ignoring the retrospective effect of the explanation inserted by the Finance Act, 2010 in Section 9(2). It was argued that the ITAT should have considered the retrospective application of the amendment. However, the Court held that the circulars in force at the relevant time governed the assessment, and the department could not take a different stand in subsequent years when the circulars were operative and had not been withdrawn.

Obligation to deduct tax at source under Section 195:
The Court analyzed the obligation to deduct tax at source under Section 195, particularly in cases involving payments to non-resident recipients not liable to pay tax in India. It was emphasized that the circulars applicable at the time of assessment were binding on both the department and the assessee, and the AO could not disregard the circulars to disallow non-deduction of tax at source under Section 195 and Section 40(a)(ia) of the Income Tax Act. The Court upheld the decision in favor of the assessee based on the previous judgment in a similar case.

In conclusion, the High Court dismissed the Income Tax Appeal, upholding the judgment in favor of the assessee based on the interpretation of relevant provisions, the retrospective nature of amendments, and the binding effect of circulars at the time of assessment.

← Previous Next →