Substance over form in related-party payments: commission and promotion s were disallowed as profit diversion.

Commission paid to sister concerns and marketing and sales promotion s were treated as non-genuine where the recipient entities had substantially common partners and close relatives, and the arrangement appeared to replace one concern with another for the same activities. In the absence of satisfactory material showing independent services beyond the assessee's business, the payments were viewed as a mechanism to divert business profits to concerns controlled by the same persons. The court applied the substance-over-form principle and treated the arrangement as a colourable device lacking commercial substance, so the disallowance was upheld and section 40(b) was rightly invoked.

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Issues: Whether the commission paid to the sister concerns and the marketing and sales promotion expenses claimed by the assessee were disallowable as payments in substance to partners and as a device to divert profits, attracting section 40(b) of the Income-tax Act, 1961.

Analysis: The assessee firm and the recipient concerns had substantially common partners and close relatives. The arrangement showed that one concern had replaced the other while carrying on the same activities for the assessee, with no satisfactory material establishing independent services beyond the assessee's business. The payments were therefore viewed as a mechanism to transfer business profits to concerns controlled by the same persons. On this footing, the substance of the transactions, and not their form, governed the tax treatment, and the arrangement was treated as a colourable device lacking genuine commercial substance.

Conclusion: The disallowance of the commission and marketing and sales promotion expenses was upheld, and section 40(b) was rightly invoked.

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