Expenses disallowed due to contravention of section 40(a)(ia) r/w section 195 of the Income Tax Act

This case involves an appeal by M/s Prime Oceanic Pvt. Ltd. concerning disallowed expenses. The Assessing Officer (AO) disallowed Rs. 28,40,000 in sales promotion expenses paid to Trans Coral Shipping, FZE, UAE, citing a failure to deduct tax at source under Section 195 of the Income Tax Act. The AO viewed this payment not as an expense but as a distribution of income. Additionally, a lump sum of Rs. 1,60,000 was disallowed from various other expenses like vehicle, fuel, and telephone costs.

IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A” JAIPUR

BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM

ITA No. 652/JP/2019
Assessment Year :2013-14

M/s Prime Oceanic Pvt. Ltd.,
Gandhi Nagar, Upla Sonava,
Scheme No. 8, Alwar (Raj.)
PAN/GIR No.: AAFCP0730Q
Appellant

Vs.

The Income Tax Officer,
Ward-2(3),
Alwar (Raj)
Respondent

Assessee by : Shri Manish Agarwal (CA)
Revenue by : Smt Monisha Choudhary (JCIT)

Date of Hearing : 06/04/2021
Date of Pronouncement: 14/06/2021

ORDER

PER: VIKRAM SINGH YADAV, A.M.

This is an appeal filed by the assessee against the order of ld. CIT(A)-22, Alwar dated 26.02.2019 wherein the assessee has taken the following grounds of appeal:-

 “1. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the disallowance of Rs.28,40,000/- made by Ld. AO u/s 40(a)(i) of the Act in respect to payment made to Trans Coral Shipping, FZE ,Sharjah (UAE) arbitrarily.

1.1 That, ld. AO has further erred in holding that the payment made by assessee to Trans Coral Shipping, FZE ,Sharjah (UAE) was liable for deduction of tax at source u/s 195 of the Income Tax Act by completely brushing aside the submission made and evidences adduced. Appellant prays disallowance so made is not in accordance with law and deserves to be deleted.

 2. On the facts and in the circumstances of the case and in law, ld. CIT(A) has grossly erred in confirming the action of ld. AO in making lump sum disallowance of Rs.1,60,000/-out of various expenses debited to profit & loss account, i.e. Vehicle, Diesel & Petrol expenses, entertainment expenses, telephone and mobile expenses and travelling expenses, arbitrarily.

2.1. That, ld. CIT(A) has further erred in confirming the disallowance of Rs.1,60,000/- merely on the basis of assumptions and presumptions, without in any manner pointing out any specific defect instance of expenses being excessively incurred/incurred for non business purposes. Appellant prays that all the expenses were incurred wholly and exclusively for the purposes of business and therefore disallowance so made deserves to be deleted.”

2. Briefly, the facts of the case are that during the course of assessment proceedings, the Assessing officer observed that the assessee has claimed sales promotion expenses of Rs. 28,40,000/- in its profit & loss account towards amount credited to M/s Trans Coral Shipping, FZE, Sharjah (UAE) without deduction of tax at source and the assessee was asked to explain as to why the expenses should not be disallowed due to contravention of section 40(a)(ia) of the Act r/w section 195 of the Act. On perusal of the reply filed by the assessee, the agency agreement dated 11.02.2012 entered into between the assessee and M/s Trans Coral Shipping and copy of bills issued by M/s Trans Coral Shipping FZE, the AO observed that the sales promotion expenses of Rs.28,40,000/- is not an expenditure but distribution of income of the company for the reasons as under:-

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