Unless something's changed in Equip Upgrades, it won't override the no hydro on surface mod (at least it doesn't for me).
I rather suspect you're starting out in Coastal Waters campaign in the Type 7a. It has side-mounted hydrophones with with 45 degree baffles front & rear, and
should work on the surface - the sensors are mounted along the hull.
After two or three patrols you will be offered the upgrade to the deck mounted sensor, 360 degree hydrophone (I forget the name) while in bunker - that hydrophone, and none of the ones that follow it will work on the surface, thanks to the IRAI no hydro mod.
