COMMISSIONER OF INCOME TAX Vs. MODERN INSULATORS LTD.

JUDGEMENT

(1.) This appeal under Section 260A of the Income Tax Act (for short, 'IT Act') is directed against the order of the Income Tax Appellate Tribunal (for short, 'ITAT') and is relevant for the assessment year 2007-08.

(2.) Brief facts necessary for disposal of this appeal are that the respondent is engaged in the business of manufacturing of insulators and bushings and is a limited company incorporated under the Companies Act. The short controversy relates to payment of commission made by the respondent-Company to (1) M/s Alavabond Ltd, London amounting to Rs.3,17,93,218/-; (2) M/s Jacob & Jacob S.A. De C.V., amounting to Rs.32,75,683/-; (3) M/s Trafalghar Trading FZC, Sharjah (UAE) amounting to Rs.2,53,89,798/- and liability to deduct TDS thereon. While the claim of the respondent-assessee is that it relates to payments of commission to non-resident agents and in view of the circular of the Central Board of Direct Taxes, bearing No.786 dated. 07/02/2000, it was not required to deduct tax at source on the said commission payments, however, the Assessing Officer (for short, 'AO') was of the view that in view of the latest Circular No.7 dated. 22/10/2009, which came to be issued by the Central Board of Direct Taxes before completion of the assessment, therefore, the said circular is applicable and in the light of the said circular, the assessee was liable to deduct tax at source on payments made to the non-residents referred to above and since the assessee failed to deduct tax at source and to pay in the Govt. treasury account under Section 195 of the IT Act, therefore, the AO was of the view that the entire amount is disallowable under the provisions of Section 40(a)(ia) of the IT Act and accordingly a show cause notice was issued to this effect and dissatisfied with the reply of the assessee, the AO disallowed the entire amount by invoking provisions of Section 40(a)(ia). The AO also disallowed the payments to M/s Alavabond Ltd, London and M/s. Trafalghar Trading FZC. As per AO the assessee was unable to justify the business expediency in payment of the said amount to the aforesaid companies and therefore, the AO disallowed the amount paid to the said companies but since the disallowance was being made under Section 40(a)(ia), no separate addition was made. In so far as payment made of commission to M/s Jacob & Jacob S.A. De C.V. is concerned, the AO was satisfied and allowed the commission payment but since TDS was not deducted, disallowed the entire claim u/s 40(a)(ia) of the Act.

(3.) Dissatisfied with the disallowance us/ 40(a)(ia) and on account of business expediency, the matter was carried in appeal before the Commissioner of Income Tax (Appeals) (for short, "CIT(A)"), who was satisfied with the explanation offered by the assessee and the CIT(A) not only deleted disallowance of commission by holding that the assessee has been able to justify the payments on account of business expediency to the agents aforesaid but also held that in view of the circular No.786 dated 07/02/2000, which was in force during the previous year relevant to the year under appeal, there was no liability of the assessee to deduct tax at source u/s 195 of the Act and accordingly he was of the view that provisions of Section 40(a) (ia) cannot be invoked and are inapplicable and thus deleted the entire disallowance. The CIT(A) also discussed the grounds relating to business expediency and rejected the finding of the AO.