TMI Blog1985 (7) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... unts 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 per piece Pavit India 93,262 7.70 Sunil International 18,597 1.36 Sanjana Enterprises 37,575 2.55 7.80 ---------- 11.61 ---------- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ITO did not propose this addition in the draft order submitted to the IAC and that the IAC suo motu made this addition, still the ITO's assessment order showed that the payments made to Pavit India also was in the contemplation of the ITO for disallowance and consequently could not be considered to be an item not considered by the ITO even though no addition was proposed on that account. However, he held alternatively that if the IAC's instructions in this regard were considered 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 piec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the services determined by the ITO is really fair and represented the fair market value. What we found on examination of the data collected by the ITO which was only appraised and reappraised by the IAC and the Commissioner (Appeals) is the comparison of the rates paid to Pavit India with the rates paid to the other fabricators by the assessee and that too by averaging. The difficulty in this kind of comparison is to ensure that like was compared with the like. The average 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 cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished except raising strong suspicions. There is another style No. 7904 for which fabrication charges of Rs. 10.25 per piece were paid and it was shown in the remarks column that Rs. 7.02 per piece was paid for PC without buttoning and Rs. 7.43 paid for button stitched. There are also some other processes to be gone through before a garment is ready for delivery which covers the fabrication charges, i.e., buttoning, cleaning, thread-cutting, pressing and finishing. The charges 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to be inadequate by the ITO was found satisfactory by the IAC and the addition proposed by the ITO on that score was disapproved of, i.e., the gross profit disclosed was found to be proper. It is to be remembered that the fabrication charges formed part of the trading account. When the fabrication charges are inflated, as pointed out by the department, the gross profit rate would be lower, but which was not found to be lower. It was found to be reasonable and adequate. Thus, to say 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries 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 to go into the legal question raised as to whether it is open to the IAC to give directions under section 144B when the ITO did not propose any particular addition. We find force in the view taken by the Commissioner (Appeals) that as an appellate authority it is open to him to go into all those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 made that more embroidery work was involved in the garments handled by Sonu International. He also did not see any extra commercial considerations in making these payments. With no relationship and without any extra commercial consideration, he observed that it is not open to the ITO to disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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