Tax deduction at source applies only to sums chargeable under the Act; final non-taxability finding barred disallowance.

Tax at source under section 195(1) is deductible only from sums chargeable under the Act, and a final determination that remittances to a Singapore shipping company were not chargeable to tax in India barred disallowance under section 40(a)(i). Earlier revisional and appellate orders had held that the foreign company had no permanent establishment in India, the income was taxable in Singapore, and sections 44B, 195 and 40(a)(i) did not apply; those orders had attained finality. The retrospective amendment to section 195 did not change that position, and the alternate-remedy objection was rejected because the assessment order was patently unsustainable.

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Issues: Whether the assessee was liable to deduct tax at source under section 195(1) of the Income-tax Act, 1961 on remittances made to the Singapore shipping company, and whether the disallowance under section 40(a)(i) of the Income-tax Act, 1961 could be sustained despite the earlier revisional and appellate orders holding the remittances not chargeable to tax in India.

Analysis: The remittances had earlier been examined in revision and in appeal, and those authorities had held that the foreign company had no permanent establishment in India, that the income arising from the transaction was taxable in Singapore, and that the provisions of sections 44B, 195 and 40(a)(i) of the Income-tax Act, 1961 did not apply. Those orders were not challenged and had attained finality. The Court applied the principle that tax must be deducted at source only from sums chargeable under the Act, and held that the retrospective amendment to section 195 could not alter the position where the underlying remittance was not chargeable to tax in India. The plea of alternate remedy was also rejected in view of the patent unsustainability of the assessment order and the binding nature of the earlier orders in the assessee's own case.

Conclusion: The disallowance under section 40(a)(i) for alleged non-deduction of tax at source under section 195(1) was held unsustainable and was quashed in favour of the assessee.

Final Conclusion: The assessment action could not stand because the underlying payment was held not chargeable to tax in India, and the earlier final orders in the assessee's case governed the issue.

Ratio Decidendi: Tax at source under section 195(1) is deductible only from sums chargeable under the Act, and a final binding determination that the remittance is not taxable in India precludes disallowance under section 40(a)(i).

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