Judgment :- (This ITA is filed under Section 260-A of the income Tax Act, 1961 arising out of order dated 21.4.2004 passed in ITA No.709/Bang/1998 for the assessment year 1992-93 praying to set aside the orders of the Tribunal dated 21.4.2004, in ITA.No.709/Bang/1998, in the interest of justice.) This appeal is filed by the assessee calling in question the order of the Tribunal dated 21.4.2004 in ITA.No.709/Bang/1998. 2. The appellant/assessee is a partnership firm carrying on the business of manufacture and sale of Agarbati under various brands. For the assessment year 1992-93 a return of income was filed declaring a loss of Rs.25,70,965/- which was accepted under Section 143(1))(a) of the income Tax Act on 29.1.1993. Subsequently, a regular assessment under Section 143(3) of the Act was made on 27-3-1995 determining the total loss at Rs.1,29,495/- as against Rs.25,70,965/-. In computing the regular assessment, certain additions were made. During the relevant assessment year the assessee firm claimed deduction of Rs.21,91,867/- as commission to its agents. Out of which Rs.7,34,713/- was paid to M/s. Rangashree Marketing Private Limited (M/s.R.M.C) and Rs.6,03,546/- was paid to M/s.Onam Marketing Company (M/s.O.M.C). According to the assessee the said commission was paid to the agents on the basis of the turn over attributable to the agents and the percentage of commission varying from 3 to 16% depending on the area and party. Besides this commission, the assessee firm also allowed trade discount, cash discount and sales promotion incentives and the assessee had claimed Rs.16,31,000/- as marketing and sales promotion expenses to M/sR.M.C. M/s.R.M.C and M/s O.M.C are sister concerns of assessee firm. The assessee firm comprises of eight partners who are all close relatives and some of the partners of assessee firm are partners of M/s.R.M.C and M/s.O.M.C. These partners also draw salary from the company and some of the Directors of M/s.R.M.C. besides drawing salary form this company also enjoy the benefits from the assessee firm. Both R.M.C and O.M.C are carrying on activities as that of the assessee. 3. Both R.M.C and O.M.C are carrying on activities as that of the assessee. 3. According to the assessee it had engaged the services of M/s.R.M.C. to conduct market survey of the products and improve the sales and when details of the same were called for by the Assessing Officer, it was noticed that there was no market survey at all conducted by M/s.R.M.C. in a routine manner, as the persons employed by M/s.R.M.C has only visited the areas and booked the orders, which is a normal activity of any commission agent. Under the circumstances the Assessing Officer held that it was an instance of a colourable device adopted by assessee by creating M/s R.M.C. and M/s O.M.C. As these two concerns were brought into existence with the sole objects of diverting the profits of the assessee thereby the tax incidence of the assessee firm was reduced or had become nil. Under the circumstances the Assessing Officer dis-allowed the entire expenditure or Rs.16,31,028/-claimed on account of marketing and sales promotion expenses paid to M/s.R.M.C as there was no marketing survey activity in that year and therefore, the entire amount was added back as excessive and unreasonable to the benefits accrued to the business of the assessee, as the said payment was a device to avoid tax. 4. Similarly commission payment of Rs.6,03,546/- made to his sister concern M/s.O.M.C also dis-allowed under section 40(b) of the income Tax Act on the ground that M/s.O.M.C was started to take away the profits of the assessee and that it had no other activity except to deal with the assessee. Accordingly, the assessment order was made by the Assessing Officer on 27-03-1995. 5. Being aggrieved by the said order an appeal was filed before the Commissioner of Income Tax (Appeals) who held that the dis-allowance made by the Assessing Officer under the above heads were not to be interfered with. The order of the Appellate Authority was challenged before the Tribunal which also dismissed the appeal of the assesee. 6. 5. Being aggrieved by the said order an appeal was filed before the Commissioner of Income Tax (Appeals) who held that the dis-allowance made by the Assessing Officer under the above heads were not to be interfered with. The order of the Appellate Authority was challenged before the Tribunal which also dismissed the appeal of the assesee. 6. Being aggrieved by the said order of dismissal, this appeal has been filed, inter alia, raising the following substantial question of law: “On the facts and in the circumstances of the appellants case, whether, the Tribunal is right in holding the commission paid to M/s. Onam Marketing Company and sales promotion expenses to M/s. Rangashree Marketing Pvt. Ltd., are hit by provisions of section 40-B of he Act, since some of the partners of the appellant are partners and directors of the recipients? On the facts and in the circumstances of the appellant’s case, whether, the commission and sales promotion expenses incurred by the appellants canbe understood as commission paid to partners as envisaged in section 40-B of the Act? 7. We have heard Sri. Rama Murthy, learned counsel for M/s. Vasan Associates and Sri.K.V. Arvind for Sri.M.V. Seshachala, learned counsel for respondent/ Department. 8. Learned counsel for the appellant submits that M/s R.M.C was stated with the idea of promoting the appellants products and also to accept deal with many more items. M/s.O.M.C had to procure sales for which commission was paid. But the Tribunal without appreciating that the Commission was paid for procuring sales proceeded to hold that the procurement of sales had no relevance for payment of commission. Tribunal Further erred in equating the sales promotion paid to M/s.R.M.C. as in the nature of commission by applying Section 40(b) of the Act. The Assessing Officer was not right in holding that the payment of commission to these two entities was a device to avoid tax. He therefore submits that the orders impugned have to set aside and the Assessing Officer be directed to consider the claim of Rs.6,03,546/- as commission to its agent M/s.O.M.C as well as Rs.16,31,028/-. 9. The Assessing Officer was not right in holding that the payment of commission to these two entities was a device to avoid tax. He therefore submits that the orders impugned have to set aside and the Assessing Officer be directed to consider the claim of Rs.6,03,546/- as commission to its agent M/s.O.M.C as well as Rs.16,31,028/-. 9. Per contra, it is submitted by the counsel for the Department that the assessee firm comprises of eight partners who are all close relatives and some of the partners of the assessee firm are directors of M/s.R.M.C and partners of M/s/O.M.C are partners of the assessee as well representing M/s.R.M.C as directors. The turn-over figures for the past three years suggest that no survey of any professional nature have been made by these two entities and that of M/s.O.M.C was started to take away the profits of the assessee firm and that no services were rendered by M/S. R.M.C to the appellant. Therefore, the Commission paid is nothing but payment to the partners. Hence the so-called commission payment is not allowable expenditure and therefore, the Assessing Officer correctly dis-allowed the claim of expenditure as well as the dis-allowance of marketing and sales promotion expenses is just and proper which does not call for any interference in this appeal. 10. Having regard to the rival contentions noted above, the only question that arises for our consideration is whether the Assessing Officer and the appellate authorities were justified in dis-allowing the claim of Rs.16,31,028/- and Rs.6,03,546/-? 11. It is not dispute that the assessee is a partnership firm comprising of eight partners which is in the business of manufacture, sale and export of Agarbattis. The assessee claimed a sum of Rs.21,91,867.63ps as commission paid to its agents and out of this commissions a sum of Rs.7,34,713/- was paid to M/s.R.M.C and a sum of Rs.6,03,546/- was paid to M/s. O.M.C. M/s. R.M.C close down its activities in October 1991 and M/s. O.M.C was started during the period. The amount of Rs.7,34,713/- paid to M/s.R.M.C has been allowed by way of a deduction. The Tribunal has also noticed that the partners are close relatives having an interest in both these concerns. In fact the closing down on M/s.R.M.C and the commencement of M/s. O.M.C was nothing but a substitution of the latter concern for the former for carrying out the same activities. The Tribunal has also noticed that the partners are close relatives having an interest in both these concerns. In fact the closing down on M/s.R.M.C and the commencement of M/s. O.M.C was nothing but a substitution of the latter concern for the former for carrying out the same activities. More over three of the partners of the appellant/firm are the partners of M/s. R.M.C and two of the partners of the appellants are partners M/s.O.M.C. therefore, the payment made to M/s.O.M.C is nothing but payment made to partners. When the partners in both the firms are the same and there is nothing on record to indicate regarding any other services rendered by M/s.O.M.C except to the appellant, in our view, section 40(b) of the Act is rightly invoked. Therefore, the commission payment of Rs.6,03,546/- made to M/s. O.M.C. is not an allowable expenditure. 12. As far as the marketing and sales promotion expenses are concerned, the assessee has claimed a sum of Rs.16,31,028 as deduction as the said amount was paid to M/s.R.M.C and which has been dis-allowed by the Assessing Officer. Some of the partners of the appellant firm are also partners in M/s R.M.C. Hence the benefit which the partners had derived from the appellant was transferred to another entity M/s. R.M.C. which had the very same persons as partners. Therefore, in our view the creation of M/s. R.M.C as well as M/s. O.M.C was nothing but a device adopted by the appellant for siphoning of the profits of the appellant’s company in the form of commission as well as marketing and sales promotion expenses. The Assessing Officer was therefore, right in not working the said expenses. 13. During the course of arguments learned counsel for the appellant submitted a copy of the agreement dated 6.2.1989 between M/S. O.M.C and M/s. R.M.C. and under clause 15 of the said agreement it is stated that the first party i.e., the appellant herein would bear all expenditure incurred by the second party (M/s. R.M.C) with regard to advertisement and publicity for the marketing and selling of the products in addition to distribution commission as per clause (iii). As per clause (iii) M/s. R.M.C. was entitled was to a commission on the sale effected of the products manufactured by the appellant at the rate 15% of the price charged to stockist. As per clause (iii) M/s. R.M.C. was entitled was to a commission on the sale effected of the products manufactured by the appellant at the rate 15% of the price charged to stockist. We find that these two clause were the modus-operandi by which the profits of the appellant was transferred to M/s. R.M.C and also to M/s. O.M.C. 14. Though a tax payer may resort to a device to divert the income before it accures or arises to him, the effectiveness of the device depends upon its genuintiy. The substance of the transaction has to be assessed by applying the taxing statute so as to ascertain whether it is a sham or make believe transaction or one which is genuine and therefore is eligible for deduction under the Act. Hence courts have to look into the form of the transaction to find out its substance so as to ensure that there is no avoidance of tax by a method impermissible in law. 15. Learned counsel for the appellant has relied upon a judgment of the Delhi High Court in the case of Commissioner of Income Tax vs. Nagpur Golden Transport Company reported in (1998) 233 ITR 389 to contend that payment of interest by one firm to another firm cannot be treated as payment to partners of that firm though the partners in both firms are common so as to attract section 40 clause (b) of the Act as the firm and its partners are to be treated as two separate legal entities and payment of interest to a firm cannot be treated as payment of interest to its partners. We do not differ form the said proposition. We are however, unable to apply the same to the facts and circumstances of the present case as the payment in the instant case is not interest. Considering the nature of product manufactured by the assessee i.e, Agarbatti and out of a sum of Rs.21,91,867/- paid as commission to its agents by the appellant and a sum of Rs.7,34,730/- was paid to M/s. R.M.C till October, 1991 and from October 1991 onwards a sum of Rs.6,03,546/- was paid to M/s.O.M.C i.e., more than fifty percent of the commission charges. 16. Sri K.C. Manjunath and K.L. Raju who are the relatives and partner along with other relatives of the assessee firm formed the company M/s. R.M.C and Sri. 16. Sri K.C. Manjunath and K.L. Raju who are the relatives and partner along with other relatives of the assessee firm formed the company M/s. R.M.C and Sri. K.S. Chandrashekar Gupta and R.V. Srinivas and Sri. K.K. Rangaiah formed a partnership of M/s. O.M.C out of which the first two persons are the partners of the appellant/firm and the third is the executive of the appellant/firm. M/s.O.M.C has no other activity except to deal with the appellant. Hence the formation of M/s. O.M.C. is for a sham and nominal purpose of receiving the profits of the appellant which is a device to avoid tax. Under the circumstances we cannot apply the ratio of the judgment of the Delhi High Court to the facts and circumstance of the present case. 17. In view of the above reasons, the appeal filed by the appellant/assessee is dismissed.