TMI Blog2009 (1) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... for the respondent. JUDGMENT The judgment of the court was delivered by MRS. B. V. NAGARATHNA J.- This appeal is filed by the assessee calling in question the order of the Tribunal dated April 21, 2004, in I. T. A. No. 709/Bang/1998. 2. The appellant/assessee is a partnership firm carrying on the business of manufacture and sale of agarbattis 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, 1961, on January 29, 1993. Subsequently, a regular assessment under section 143(3) of the Act was made on March 27, 1995, determining the total loss at Rs. 1,29,495 as against Rs. 25,70,965. In computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer, 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. had 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 the 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 object of diverting the profits of the assessee thereby the tax incidence of the firm was reduced or had become nil. Under the circumstances, the Assessing Officer disallowed the entire expenditure of Rs. 16,31,028 claimed on account of marketing and sales promotion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 appellant can be understood as commission paid to partners as envisaged in section 40(b) of the Act ?" 7. We have heard Sri Ramamurthy, learned counsel for M/s. Vasan Associates and Sri K. V. Arvind for Sri M. V. Seshachala, learned counsel for the respondent/Department. 8. Learned counsel for the appellant submits that M/s. R. M. C. was started with the idea of promoting the appellant's 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motion 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 disallowing the claim of Rs. 16,31,028 and Rs. 6,03,546? 11. It is not in 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. 21,91,867.63 as commission paid to its agents and out of this commission 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. closed down its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 off 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 allowing the said expenses. 13. During the course of arguments, learned counsel for the appellant submitted a copy of the agreement dated February 6, 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 publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest to a firm cannot be treated as payment of interest to its partners. We do not differ from 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., agarbattis 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 per cent. of the commission charges. 16. Sri K. C. Manjunath and K. L. Raju who are the relatives and partners along with other relatives ..... X X X X Extracts X X X X X X X X Extracts X X X X
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