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TMI Blog1985 (7) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... .42 lakhs. The accounts maintained by the assessee show, inter alia, that it paid a total sum of about Rs. 18.83 lakhs towards fabrication charges of these garments. Of these Rs. 11.61 lakhs were paid to the following three parties: Pieces Amount Average price in lakhs&nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; ---------- Fabrication done through other parties 1,50,959 7.22 6.80 The partners of the assessee-firm are found to be interested very substantially either by themselves or through their relatives in the first three concerns. We will not at this moment go into the question as to how they are related. The ITO came to the conclusion that the payments to these parties were excessive and unreasonable having regard to the legitimate business needs of the assessee-firm. He proposed a total disallowance of the payments made to Sunil International and Sanjana Enterprises of Rs. 1,36 lakhs and Rs. 2.55 lakhs, respectively. He even referred to Pavit India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as without jurisdiction, he had the power coterminous with that of the assessing officer and in exercise of that power, he could go into every question that was processed by the ITO and decide whether there was any justification for the addition made. Then he went into the question of reasonableness and after picking out certain items of garments manufactured by Pavit India as listed by him in his order in paragraph 2.11, he held that there was probability of the payments made to Pavit India being not reasonable and excessive having regard to the fair market value of the services rendered. Then again like the IAC, he also compared the average rates and considered that excess rate, paid was Re. 1 per piece and on that basis, sustained an addition of Rs. 90,000 by deleting the balance of Rs. 60,000 which is now contested before us. 3. We have carefully considered the various objections raised by the learned chartered accountant for the assessee and the arguments by the learned departmental representative. What is most striking in this case is, as against an effort to prove that there was excessive payment made to the fabricators having regard to the fair market value or the servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fabrication price paid to other fabricators as noted by the authorities below was Rs. 6.80 per piece whereas the average price paid to Pavit India, according to the Commissioner (Appeals), is Rs. 8.20 per piece. This was considered as a fair comparison so as to arrive at the conclusion that the payment made to Pavit India was excessive. But what was missed is as we have observed a short-while ago was comparison of like with the like. It is not shown that the fabrication charges paid to other parties in respect of the same style of cloth with same quantity of inputs was compared. The data collected by the Commissioner (Appeals) to come to that conclusion as mentioned in paragraph No. 2.11 of his order clearly demonstrate that such a comparison was not made and perhaps could not have been made, e.g., the first item taken for comparison was of stitching charges paid for garments style No. 5471. The rate paid was Rs. 8.35 per piece. In the remarks column it was said that this garment was exclusively made by Pavit India. Now when this garment was exclusively made by Pavit India, which means not by others, how it is possible to come to the conclusion that the fabrication charge paid fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fabrication will depend upon the performance of these processes. If some of these processes are not included in the agreement of fabrication, the charges might be lower. Otherwise, they might be higher. This important consideration also does not seem to have been taken into account. Then there are three other items, which show that those garments were exclusively made by Pavit India. In respect of those garments, which were exclusively made by Pavit India, our comments in regard to the very first item apply with equal force to these items also, i.e., to say that the items picked up by the Commissioner (Appeals) as examples, as representative items, do not go to prove the department's case any amount of vagueness in the conclusion and unsatisfactoriness of the basis in arriving at the conclusion is very much manifest in the observations that he made in the succeeding paragraph. The Commissioner (Appeals) points out in paragraph No. 2.12 that most of the items could not find any comparison as such style was not got fabricated by the assessee-firm from other fabricators. Then the assessee's explanation was that Pavit India possessed the necessary strength and capability of fabrica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay that there was inflation in the fabrication charges and at the same time to say that the rate of gross profit was reasonable, is mutually contradictory. This contention of inflation does not fit in the other. Even though section 40A can be made use of to disallow the ultimate effect of the excessiveness or unreasonableness of the expenditure incurred would reflect in the lowering of the gross profit by the inflation of fabrication charges. This test also does not lend support to the view taken by the department. Thus, looked at from any angle it is difficult to agree with the conclusion of the department that the assessee paid higher charges to Pavit India, which could be considered as excessive or unreasonable having regard to the fair market value of the services or can it be said that the legitimate needs of the business do not require such payments. Here, the legitimate needs and benefit accruing to the business referred to in section 40A(2) will take in the exclusive nature of the work to be performed by Pavit India. This disallowance, is therefore, uncalled for and we delete it. Here, we may say that in the departmental appeal objection was taken to the deletion of the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OT 172. These Special Bench decisions were considered by the Delhi Bench 'C' when the above decision was arrived at. We would, therefore, like to follow the order of the Tribunal referred to above. In respect of export division, the department allowed weighted deduction at 50 per cent of the salaries paid to the staff engaged in the export division. The Commissioner (Appeals) pointed out that the details filed before him showed that weighted deduction was claimed even in respect of wages paid to employees and workers like button operator, over-locker, cutter, etc., which go to add to the lost of manufacture, but not for development of export markets. In view of this position, he found it difficult to quantify the amount entitled to the deduction under section 35B. On an estimate, he arrived at 50 per cent. The claim of the assessee was that at least 75 per cent should be allowed but we are unable to agree with this submission for lack of necessary details. The order of the Commissioner (Appeals) on this point is, in our opinion, reasonable and we confirm the same. 5. In respect of ground No. 1 in the assessee's appeal, since we have discussed the merits, we thought it unnecessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of embroidery carried out by Sonu International given in their bills, it would be clear that the work so carried was embroidery and crochet work. The rates for embroidery varied from 1.50 to 8.50 depending upon the design, quality and quantity of work, and crochet work was costlier as compared to ordinary embroidery. Moreover, crochet work was done at cheaper rates at Ghaziabad where Sonu International existed. He showed from the bills of the embroidery of Kalakriti whose payments have not been doubted that with regard to embroidery and crochet work they were also paid at the same rate. He also produced the bills of Sachitra Hast Kala Kendra, Modi Nagar for the subsequent year to show that the rates paid to outside parties were cheaper." Then he observed that no disallowance could be made merely on comparison of rates more particularly in a case where section 40A does not apply. Incidentally this finding which is correct, is at variance with the conclusion reached in fabrication charges. He found that the ITO except comparing the average rates did not bring any material to show that the payments made to this party was excessive or unreasonable. He found force with the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X
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