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Issues involved: Interpretation of u/s 40A(2)(b) of the Income-tax Act, 1961 regarding disallowance of excess job charges paid to sister concern.
Summary: The appeal was filed by the assessee against the order of CIT(Appeals)-I, Surat confirming the addition of Rs.3,84,464/- for excess job charges paid to a sister concern u/s 40A(2)(b) of the Act. The Assessing Officer found the amount paid to be excessive and unreasonable without proper justification. The AO invoked Section 40A(2)(b) due to a close relationship between directors of the assessee-company and the sister concern. The AO disallowed 10% of the total expenditure claimed. The appellant appealed against this disallowance. Before the first appellate authority, the appellant explained the reasons for the payments made to the sister concern, emphasizing the unique aspects of the weaving industry. The CIT(A) granted partial relief by restricting the disallowance to 5% of the expenses, noting the lack of comparative charges provided by the AO. Upon further appeal, the Tribunal analyzed the applicability of Section 40A(2)(b) and emphasized the requirement for the Assessing Officer to form an opinion based on fair market value. It was observed that the AO did not collect sufficient information to determine the prevailing market rate and made the disallowance on an estimate basis. The Tribunal referred to relevant case laws to support the argument that a comparative analysis is essential for invoking Section 40A(2)(b). As the Revenue did not provide comparable instances, the Tribunal allowed the assessee's appeal, overturning the previous disallowance. In conclusion, the Tribunal allowed the assessee's appeal, highlighting the necessity for a proper assessment based on fair market value before invoking Section 40A(2)(b) for disallowances.
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