Sales incentives paid to retailers by an agent on behalf of principals are not "commission" under Section 194H

Sales incentives paid to retailers by an agent on behalf of principals are not “commission” under Section 194H, and genuine business expenditure cannot be disallowed merely due to unserved notices.

Issue 1: Applicability of TDS under Section 194H on sales promotion and cash incentives paid to retailers by an agent on behalf of principals.

Whether sales promotion commission and cash incentives paid by an assessee (acting as an agent) to retailers on behalf of its principals fall under the definition of “commission” requiring TDS deduction under Section 194H of the Income-tax Act, 1961.

Facts 1:

The assessee-company promotes brands of Indian Made Liquor (IML) and beer manufactured by RDPL and SDBL.
The assessee entered into del-credere agreements with RDPL and SDBL, under which its responsibility was to promote IML brands among retailers.
The assessee appointed retail dealers for supply and transit of products and paid “sales promotion commission” and “cash incentives” to these retailers.
The Assessing Officer (AO) observed that no TDS was deducted on these payments and consequently disallowed the commission and sales incentives under Section 40(a)(ia) of the Income-tax Act, 1961.
It was an admitted fact that the assessee paid these sales incentives to retailers on behalf of its principals (RDPL and SDBL), and these amounts were reimbursed by the principals to the assessee.

Decision 1:

The court held in favor of the assessee. It ruled that since it was an admitted fact that the assessee was an agent between the principal and retailers, and paid sales incentive and sales promotion expenditure on behalf of the principal to retailers, the amount so paid did not fall into the category of “commission” requiring deduction of tax at source under Section 194H. Furthermore, there was no principal-agent relationship between the assessee and the retailer traders, thus Section 194H provisions could not be applied.

Key Takeaways 1:

Scope of Section 194H: Section 194H applies to “commission” or “brokerage” paid by a person to another person for services rendered. The crucial aspect is the existence of a principal-agent relationship between the payer and the payee for the specific “commission” payment.
No Direct Principal-Agent Relationship with Retailers: In this scenario, the assessee was an agent of RDPL/SDBL. The payments to retailers were on behalf of the principals for promoting their brands. The retailers were acting as purchasers/distributors, not as agents of the assessee for a commission payment.
Reimbursement Aspect: The fact that the assessee was reimbursed by the principals for these payments further supports the view that the assessee was merely facilitating the transaction on behalf of the principals, and the ultimate benefit/payment was from the principals to the retailers, not a commission from the assessee to the retailers.
Trade Discounts vs. Commission: Often, such incentives are considered akin to trade discounts or price reductions offered by the manufacturer/principal to boost sales, rather than commission for services rendered to the assessee.

Issue 2: Allowability of Business Expenditure under Section 37(1) for sales promotion and cash incentives to retailers when genuineness is questioned due to unserved notices.

Whether sales promotion and cash incentives paid to retailers can be disallowed as business expenditure under Section 37(1) of the Income-tax Act, 1961, merely because notices issued under Section 133(6) to some retailers were returned unserved by postal authorities.

Facts 2:

The Assessing Officer (AO) disallowed commission and cash incentives paid to retailers, observing that out of 28 letters issued to retailers under Section 133(6), 24 were returned by postal authorities with remarks like “no such person at given address” or “no such address.”
The AO concluded that the assessee failed to prove the genuineness of payments and attempted to circumvent the law to avoid tax.
The assessee provided relevant evidence and argued that the license period for retailers to carry on business was typically short (1-2 years), and retailers would discontinue business and become unavailable at the given address once their license expired.
The assessee also submitted various other evidences, including confirmations from parties, to prove the genuineness of the expenditure.

Decision 2:

The court held in favor of the assessee. It ruled that merely for the reason of non-service of notice, an adverse inference could not be drawn against genuine expenditure incurred by the assessee. It found that going by the nature of the assessee’s business and trade practice, the AO could not disbelieve the assessee’s arguments solely on the ground that notices were unserved. Therefore, the Commissioner (Appeals) was right in deleting the addition made by the Assessing Officer towards the disallowance of commission on sales promotion and cash incentives paid to retailers.

Key Takeaways 2:

Genuineness of Expenditure (Section 37(1)): For an expense to be allowed under Section 37(1), it must be incurred wholly and exclusively for the purpose of business. The burden to prove genuineness lies with the assessee.
Evidentiary Value of Unserved Notices: While unserved notices can raise initial suspicion, they are not conclusive proof of non-genuineness of expenditure. The court recognized the practical difficulties in the retail sector where businesses might be temporary or frequently change addresses.
Holistic View of Evidence: The AO must consider all available evidence provided by the assessee, including the nature of the business, trade practices, and direct confirmations from parties, rather than relying solely on the technicality of unserved notices.
No Adverse Inference from Unserved Notices Alone: It is a well-established principle that a genuine business expenditure cannot be disallowed merely because a third party fails to respond to a notice or is not traceable by the department, especially when the assessee has provided other corroborating evidence.
Role of Commissioner (Appeals): The CIT(A) correctly evaluated the facts and accepted the assessee’s explanation regarding the nature of the retail business and the challenges in tracing old addresses, leading to the deletion of the arbitrary addition.

IN THE ITAT HYDERABAD BENCH ‘B’

Income Tax Officer

Welsh and Breton Blenders (P.) Ltd.

MANJUNATHA G, Accountant member
and VIJAY PAL RAO, Vice president

ITA.No.603 (Hyd.) of 2024
[Assessment Year 2008-2009]

APRIL 24, 2025

Sashank Dundu, Adv. for the Assessee. Dr. Sachin Kumar, Sr. AR for the Revenue.

ORDER

Manjunatha G., Accountant Member. – This appeal has been filed by the Assessee against the order dated 24.04.2024 of the learned CIT(A)-National Faceless Appeal Centre [in short the “NFAC”] Delhi, relating to the assessment year 2008-2009.

2. Brief facts of the case are that, the assessee company is in the business of promoting the brands of IML products manufactured by M/s. Rhizome Distilleries Pvt. Ltd., Hyderabad and M/s. Som Distilleries & Breweries Ltd. The appellant-company had filed it’s return of income for the assessment year 2008-09 on 10.11.2008 declaring a total income of Rs.2,56,144/-. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noted that the assessee has debited huge expenditure under the Head “Sales Commission and Cash Incentives” and, therefore, called-upon the assessee to file relevant evidences including nature of expenditure, to whom said expenditure has been aid and the parties of the payment. In response, the assessee vide letter dated 20.10.2010 submitted complete details of expenditure and also explained the nature and parties of sales promotion and cash incentives paid to various retailers along with Delcredere Agent Agreement dated 20.03.2007 between the appellant-company and M/s. Rhizone Distilleries Private Limited for marketing the IML products manufactured by the principal i.e., M/s. Rhizone Distilleries Private Limited. The assessee had also filed the basis for payment of commission and cash incentives and further filed relevant TDS details in respect of commission amount of Rs.14,89,892/- paid to various marketing agents employed by the appellant-company for promoting brand of M/s. Rhizone Distilleries Private Limited. The Assessing Officer after considering relevant details submitted by the appellant-company observed that, although, the assessee has furnished relevant Delcredere Agreement along with payment details of commission and cash incentives to various retailers and also basis for such payment, but, on perusal of relevant details filed by the appellant-company, it was observed by the Assessing Officer that, the appellant company has received commission of Rs.3,91,82,326/- from M/s. Rhizone Distilleries Private Limited and M/s. Som Distilleries & Breweries Ltd., on which, tax was deducted at source as per provisions of sec.194H of the Income Tax Act, 1961 [in short “the Act”]. Further, the assessee company has paid commission to it’s Agents amounting to Rs.14,84,892/- and further, an amount of Rs.3,71,85,810/-has been paid to the retailers in the form of sales promotion and cash incentives. Since the appellant company has received commission from principals, the very nature of the payment made by the assessee company to the Agents or retailers did not change from the moment it is received by the assessee company to the point of time when it is distributed amongst the retailers and, therefore, observed that, the payment made by the assessee company to the retailers falls under the definition of “Commission” as defined u/sec.194H of the Act and consequently, for failure to deduct TDS on such commission and cash incentives the amount paid by the assessee and debited under the Head “Commission and Cash Incentives”, cannot be allowed as deduction u/sec.40(a)(ia) of the Act.

2.1. The Assessing Officer further observed that, during the course of assessment proceedings, the assessee company was asked to furnish name and address and PAN of the persons to whom sales promotion and cash incentives were paid. In response, the assessee company has filed complete list of persons along with their name and address, PAN and also amount of cash incentives paid to various parties. In order to verify the genuineness of the claim made by the assessee company, notices were issued u/sec.133(6) of the Act by the Assessing Officer to all the 28 persons and out of 28 letters, 24 of them have been returned un-served by the postal authorities with the remark “no such address at the given address or no such person at the given address”. Further, the findings of these letters were put-forth to the Authorised Representative of the Assessee and was asked to furnish any other documentary evidences in support of it’s claim. The assessee vide letter dated 27.01.2021 has filed confirmation letter from various parties along with their PAN and address proof. The Assessing Officer after considering the relevant evidences filed by the assessee including the confirmation from the parties observed that, in few confirmation letters there are discrepancies and, therefore, observed that, the assessee is unable to prove the genuineness of the payment made to various retailers and, therefore, observed that this is a clear case where the assessee company has tried to circumvent the law to avoid to pay tax and, therefore, by following the Judgment of Hon’ble Supreme Court in the case of McDowells and Co. Ltd., vs., Commercial Tax Office 11/154 ITR 148 (SC) held that, the assessee has designed a tax avoidance plan and, therefore, rejected the explanation of the assessee and made addition of Rs.3,71,85,810/-towards commission and cash incentives paid to retailers.

3. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee reiterated it’s submissions made before the Assessing Officer and also filed relevant evidences including Delcredere Agreement between the appellant-company and the principal viz., M/s. Rhizone Distilleries Private Limited. The appellant company has also filed various other evidences including the basis for payment of sales incentives and also filed Form-16 issued by M/s. Rhizone Distilleries Private Limited to prove that, the Assessing Officer has grossly misunderstood the amount received by the appellant-company from the principals towards reimbursement of cash incentives paid to various retailers as commission and went on a wrong premise and observed that, the assessee company has distributed commission received from the principals to the retailers which attracts the provisions of sec.194H of the Act. The assessee further contended that, it has furnished all evidences including the name and address of the persons to whom cash incentives has been paid. However, when the Assessing Officer issued notice u/sec.133(6) of the Act, few of them have not responded for various reasons including discontinuance of the business after specific period of 1 or 2 years license period fixed by the State Government. Therefore, merely for the reason of not responding to sec.133(6) notice, any adverse inference cannot be drawn against the assessee, when available evidences filed goes to prove that expenditure incurred is genuine and supported by necessary evidences.

4. The learned CIT(A) after considering the relevant submissions of the assessee and by following the decision of Hon’ble High Court of Andhra Pradesh and Telangana in the cases of CIT (TDS) vs., United Breweries Ltd., [2017] /[2016] 387 ITR 150 (Andhra Pradesh and Telangana) and decision of Coordinate Bench of ITAT, Visakhapatnam Tribunal in the case of United Breweries Ltd., vs., ITO41/155 ITD 482 (Visakhapatnam – Trib.) held that, payment made by the appellant-company to retailers for promotional expenses under a scheme of principal-company does not fall under the category of “commission”. Further, the Assessing Officer’s contention that, appellant made payment to the retailers or representative of the retailers did not establish is also incorrect going by the facts of the present case where the assessee has clearly explained the reasons for not responding to the notices issued by the Assessing Officer u/sec.133(6) of the Act by the retailers and as per the explanation of the assessee, the retailers operates the license for a short period of 1-2 years in a given place and after discontinuance of license by the State Government or allotment of said license to different vendors, the persons discontinued the business and goes to a different place and, therefore, non-response by the persons to the notices, cannot be considered as a ‘reason’ for disallowance of huge expenditure when all other evidences filed by the assessee goes to prove that the expenditure incurred under the Head “Sales Promotion and Cash Incentives” is paid to the retailers on behalf of the Principal and the assessee has got reimbursement of the said expenditure from the Principal. This fact is further strengthened by the fact that, Principal has issued Form-16 where they have deducted TDS @ 2% which is applicable to contractual payments and going by the above facts, it is undisputedly clear that, Assessing Officer went on wrong premise that the appellant-company has received commission from the Principals and the same has been distributed to various retailers, which attracts provisions of sec.194H of the Act. Therefore, the learned CIT(A) observed that, the Assessing Officer has erred in disallowing expenditure incurred under the Head “Sales Promotion and Cash Incentives”.

5. Aggrieved by the order of the learned CIT(A), the Revenue is now in appeal before the Tribunal.

6. Dr. Sachin Kumar, Sr. AR for the Revenue submitted that the learned CIT(A) has erred in deleting the addition made by the Assessing Officer towards disallowance of sales promotion and cash incentives paid to various retailers as commission without appreciating the fact that the assessee could not prove the said expenditure with relevant evidences which is evident from the enquiries conducted by the Assessing Officer during the course of assessment proceedings where notices issued u/sec.133(6) of the Act to 28 persons have been returned un-served with postal remark “no such person was available in the given address or incorrect postal address”. Learned Sr. AR for the Revenue further submitted that, principals have deducted TDS u/sec.194H of the Act on the total amount paid to the appellant company. The appellant company has also distributed the said commission to various retailers and failed to deduct TDS as per the provisions of 194H of the Act. Since the assessee company has failed to deduct TDS u/sec.194H of the Act, the Assessing Officer has rightly invoked provisions of sec.40(a)(ia) of the Act. Further, the assessee also failed to prove genuineness of the payment made to various retailers with relevant evidences which is evident from the enquiries conducted during the course of assessment proceedings. Further, although, the assessee has filed confirmation from few parties, but, said confirmation letters are general in nature and there are various discrepancies and, therefore, the Assessing Officer on the basis of relevant evidences has rightly reached to the conclusion that the assessee has designed a tax avoidance plan which fall under the ratio laid down by the Hon’ble Supreme Court in the case of McDowells and Co. Ltd., vs., Commercial Tax Officer (supra). The learned CIT(A) without considering the relevant facts has simply deleted the additions made by the Assessing Officer. Therefore, he submitted that the order of the learned CIT(A) should be setaside and the additions made by the Assessing Officer should be sustained.

7. Shri Shashank Dundu, Advocate-Learned Counsel for the Assessee, on the other hand, supporting the order of the learned CIT(A) submitted that, the appellantcompany is engaged in the business of promoting IML brands for various manufacturers of IML products and had entered into Delcredere Agreement with M/s. Rhizone Distilleries Private Limited and M/s. Som Distilleries & Breweries Ltd. As per the agreement between the appellantcompany and the principals, the appellant-company is engaged in the activity of promoting IML brands manufactured by the Principals right from the stage of assessing the marketing conditions, ascertaining the stock position from Andhra Pradesh State Breweries Corporation and also promoting the brand of the assessee on retailer sales, for which, the appellant-company was paid commission and also reimbursement of cash incentives paid to various retailers on behalf of the Principals to the retailers and that the same cannot be considered as “commission” within the meaning of sec.194H of the Act. In this regard, he relied upon decision of ITAT, Visakhapatnam Tribunal in the case of United Breweries Ltd., vs., ITOITD 482 (Visakhapatnam – Trib.). Learned Counsel for the Assessee, referring to the observation of the Assessing Officer with regard to enquiries conducted u/sec.133(6) of the Act by issuing letters to various persons submitted that, although, the letters were issued by the Assessing Officer in few cases which are returned un-served by the postal department, but, the fact remains that license holders operates the retail shop for a short period of 1-2 years and after discontinuance of license by the State Government, they proceed to a new address. Therefore, when the Assessing Officer issued notices during the course of assessment proceedings after a period of more than 04 years, it is obvious that the parties may not be available in the given address and for this reason, notice issued by the Assessing Officer might have been returned un-served by the postal authorities. However, the fact remains that the assessee has filed all evidences including confirmation from various parties and proved that the appellant-company has distributed cash incentives on behalf of the Principal to various retailers for promoting IML brand, for which, the appellant-company has been paid commission, on which, the TDS has been deducted by the Principals. Further, the appellant had also employed marketing agents for the purpose of promoting brands and paid commission to various persons, on which, TDS has been deducted. Since the cash incentives paid to retailers is on behalf of the Principals and further, the same does not fall u/sec.194H of the Act, the question of deduction of TDS does not arise and, therefore, the said expenditure cannot be disallowed u/sec.40(a)(ia) of the Act. Therefore, the learned CIT(A) has rightly deleted the addition made by the Assessing Officer and thus, he pleaded that the order of the learned CIT(A) should be upheld.

8. We have heard both the parties, perused the material on record and the orders of the authorities below. The facts borne-out from the record indicates that, the appellant-company is engaged in the business of promoting IML and Beer manufactured by M/s. Rhizone Distilleries Private Limited and M/s. Som Distilleries & Breweries Ltd. The appellant-company had entered into Delcredere Agreement with M/s. Rhizone Distilleries Private Limited and as per the said agreement, the responsibility of the appellant-company is to ascertain stock position of various brands at the Depots of Andhra Pradesh State Breweries Corporation Ltd., ensuring appropriate transport arrangements and loading and unloading activities at the Depot level, liaison and inter-action with Excise Department Officials periodically, ascertaining of brand stock position and promotion of IML brands among the retailers and their representatives, for which, the appellant-company has been paid commission and also reimbursement of any expenditure incurred for payment of cash incentives and sales promotion expenditure to retailers. During the financial year relevant assessment year under consideration, the appellant-company has received Rs.3,91,82,326/- from M/s. Rhizone Distilleries Private Limited and M/s. Som Distilleries & Breweries Ltd., which includes commission payment, on which, TDS @ 10% has been deducted as per sec.194H and reimbursement of sales promotion and cash incentives paid to distilleries retailers, on which, TDS @ 2% has been deducted as per sec.194C of the Act. The appellant-company has paid sales promotion and cash incentives of Rs.3,71,85,000/- to retailers and also paid Rs.14,84,892/- to the Agents as commission. The appellant-company has deducted TDS as per sec.194H of the Act on commission payment to Agent, however, not deducted any TDS on sales promotion and cash incentives paid to the retailers. The Assessing Officer disallowed commission and sales incentives paid to the retailers u/sec.40(a)(ia) of the Act on the ground that the appellantcompany has failed to deduct TDS as per sec.194H of the Act and further observed that, the said expenditure is not deductible even on merit, because the appellant-company failed to prove the genuineness of the expenditure. The Assessing Officer has discussed the issue at length in light of various evidences filed by the assessee including the relevant Delcredere Agreement, details of commission and sales incentives paid to retailers and the basis for payment and held that, although, the assessee has proved the basis for payment of sales incentives to the retailers which is based on quantity of goods sold to the retailers, but, the genuineness of the said payment has not been proved by filing relevant evidences. The Assessing Officer took support from the enquiries conducted during the course of assessment proceedings including notices issued u/sec.133(6) of the Act to various retailers where few of them have not been responded and on the basis of such enquiry, he came to the conclusion that, assessee is not able to prove the genuineness of the said payment.

9. We have given our thoughtful consideration to the reasons given by the Assessing Officer to make the addition towards the disallowance of commission and cash incentives paid to the retailers in light of various arguments of the Learned Counsel for the Assessee and we ourselves do not subscribe to the reasons given by the Assessing Officer for the simple reason that, going by the nature of business carried-out by the appellant-company, it was an admitted fact that the appellant-company is in the business of promoting IML brands manufactured by two distilleries on the basis of Delcredere Agreement. The liquor trading is highly regulated by the State Government’s and it is sold through the State Breweries Corporation Limited to the retailers who are having valid license issued by the State Excise Department. The manufacturers of IML and Beer cannot directly sale their product to the retailers and also there is no occasion for them to promote their brands except through the State Beverages Corporation Limited. Therefore, obviously they have to promote their brands by appointing agents for this purpose. Therefore, going by the nature of trade and the role of the appellant-company in the given case, in our considered view, the reasons given by the Assessing Officer to disallow the expenditure incurred under the Head “Commission and Sales Incentives” paid to various retailers is devoid of merit and cannot be accepted.

10. Further, the Assessing Officer himself has admitted in his assessment order and more particularly, in para 3.5 that, the appellant-company has substantiated the basis of payment of sales incentives to various retailers. Further, the Assessing Officer himself admitted the fact that, the appellant-company has deducted TDS on commission paid to the Agents who are engaged in the activity of promoting the brands of the Principal’s. However, the Assessing Officer has committed a fundamental error in coming to the conclusion that, the expenditure incurred by the appellant-company under the Head “Commission and Sales Incentives” is disbursement of commission received by the appellant-company from the Principals which is evident from the fact that, the Assessing Officer rests his discussion only on the ground that the appellant-company has received commission from M/s. Rhizone Distilleries Private Limited and the same has been distributed to various retailers. However, the fact remains that the appellant-company has received commission income of Rs.5,76,022/-, on which, TDS has been deducted u/sec.194H of the Act. Further, the appellant-company has received reimbursement of sales incentives and sales promotion expenditure from M/s. Rhizone Distilleries Private Limited amounting to Rs.3,75,85,007/-, on which, TDS @ 2% has been deducted u/sec.194C of the Act. This fact has been strengthened by Form-16A issued by M/s. Rhizone Distilleries Private Limited-Principal. Although, the evidences filed by the appellant-company including Form-16A issued by the Principal’s clearly shows that, the assessee has received reimbursement of expenditure from M/s. Rhizone Distilleries Private Limited, but, the Assessing Officer went on the wrong presumption that the appellant-company has received commission from the M/s. Rhizone Distilleries Private Limited and the same has been distributed to various retailers. Since the Assessing Officer has committed a fundamental error in understanding the issue, in our considered view, the reasons given by the Assessing Officer to disallow the expenditure by invoking the provisions of sec.40(a)(ia) of the Act is totally contrary to facts available on record and law.

11. Having said so, let us come back, what is the legal position in respect of applicability of TDS provisions on sales promotion expenditure, trade discounts and cash incentives given to the retailers by the Principal’s. Admittedly, the assessee has paid sales incentives to the retailers on behalf of the Principal’s. The Principal’s have promoted sales promotion scheme for promoting their brands and said scheme has been promoted on the basis of quantity of product purchased by the retailers and this fact has been admitted by the Assessing Officer. The assessee has also filed relevant computation explaining the basis for payment of sales incentives. Therefore, once it is an admitted fact that, the assessee is an Agent between the Principal and the Retailers and paid sales incentive and sales promotion expenditure on behalf of the Principal to the Retailers, in our considered view, the amount so paid did not fall in the category of “commission” requiring deduction of tax at source u/sec.194H of the Act. This legal position is supported by the decision of ITAT, Visakhapatnam Bench in the case of United Breweries Ltd., vs., ITO (supra) where the Tribunal under identical set of facts has held that where an assessee, manufacturer of Beer, paid trade discount to retail dealers through it’s Delcredere Agreement depending upon the quantity of Beer lifted by each retailer, amount so paid, did not fall in category of “commission” requiring deduction of TDS u/sec.194H of the Act. This legal proposition is further supported by the decision of Hon’ble High Court of Andhra Pradesh and Telangana in the cases of CIT (TDS) vs., United Breweries Ltd., (supra) where it has been clearly held that there being no relationship of Principal and Agent between the Assessee and the Retailers from incentives paid by the assessee to retailers through Delcredere Agreement in order to boost it’s sales could not be treated as commission for the purpose of sec.194H of the Act. In the present case, there is no dispute with regard to the fact that, the appellant-company has paid sales incentives to the retailers on behalf of the Principal’s and the same has been reimbursed by the Principal to the appellant-company. Since there is no Principal and Agent relationship between the appellant-company and the retailer traders, the provisions of sec.194H cannot be applied. Therefore, in our considered view, the Assessing Officer is erred in invoking the provisions of sec.194H of the Act and consequently, disallowed the expenditure u/sec.40(a)(ia) of the Act for non-deduction of tax on such payments.

12. Coming back to another aspect of the issue. The Assessing Officer had also disallowed the expenditure on the ground that the appellant-company failed to prove genuineness of the expenditure by filing relevant evidences. The Assessing Officer came to the above conclusion solely on the basis of enquiries conducted during the course of assessment proceedings by issuing notices u/sec.133(6) of the Act on 28 persons on the basis of details submitted by the appellant-company. Out of 28 letters issued by the Assessing Officer, 24 letters have been returned by the postal authorities with the remark “no such person at the given address or no such address at the given address”. The assessee has explained the reasons for non-service of notices issued by the Assessing Officer to the list of persons given by the appellant-company and according to the appellant-company, the excise license is issued by the State Government normally for a period of 1-2 years. The retailers will carry-out the business in the given address as and when the license is valid and once the period of license is over, they discontinue the business and disappear from the place. The Assessing Officer accepted the fact that licenses are issued for 1 or 2 years by the State Government, however, disbelieved the explanation of the appellantcompany only on the ground that the appellant-company could not furnish relevant licenses issued to the retailers to prove it’s claim. In our considered view, the Assessing Officer has completely erred in coming to the conclusion that, the expenditure incurred by the appellant-company is non-genuine only on the basis of enquiry conducted during the course of assessment proceedings, because, the Assessing Officer conducted enquiries in the year 2010, whereas, the appellant-company carried-out business in the year 2007-2008 and there is almost more than 03 years gap between the business conducted by the appellant-company and the enquires conducted by the Assessing Officer. Since the assessee has filed relevant evidences and argued that the license period is only for a period of 1-2 years and as and when the license period is over, the retailers will discontinue business and not available in the given address, in our considered view, going by the nature of business of the assessee and the trade practice, the Assessing Officer cannot disbelieve the arguments of the assessee only on the ground that notices issued u/sec.133(6) of the Act are returned un-served by the postal authorities. We are of the considered view that, when the assessee has filed various evidences including confirmation from the parties to prove the genuineness of expenditure, in our considered view, merely for the reason of non-service of notice, adverse inference cannot be drawn against the genuine expenditure incurred by the appellant-company.

13. Further, the Assessing Officer has took support from the decision of Hon’ble Supreme Court in the case of McDowells and Co. Ltd., vs., Commercial Tax Officer (supra), but, in our considered view the decision of Hon’ble Supreme Court in the case of McDowells and Co. Ltd., (supra) cannot be applied to each and every case, because nowhere in the said Judgment it was held that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may subjected to is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of the legitimacy or genuineness of the act. The principles enunciated in the above case has not been effected the freedom of the citizens to act in a manner according to it’s requirements, his wishes in the manner of doing any trade or activity or planning his affairs with subscription within the frame-work of law unless the same falls in the category of colourable device. This principle has been supported by the decision of Hon’ble Gujarat High Court in the case of Banyan And Berry vs., CIT (Gujarat) which has been approved by the Hon’ble Supreme Court in the case of Union of India vs., Azadi Bachao Andolan ITR 706 (SC). Therefore, we are of the considered view that the Assessing Officer is erred in coming to the conclusion that the assessee has designed tax avoidance method for payment of tax which is nothing but a colourable device.

14. In this view of the matter and considering the totality of the facts and circumstances of the case, we are of the considered view that, the learned CIT(A) after considering all the relevant facts and also explanation of the appellant-company has rightly deleted the addition made by the Assessing Officer towards disallowance of commission, on sales promotion and cash incentives paid to the retailers. Thus, we are inclined to uphold the findings of the learned CIT(A) and dismiss the appeal filed by the Revenue.

15. In the result, appeal of the Revenue is dismissed.