CH.G. KRISHNAMURTHY, SENIOR VICE PRESIDENT: These are appeals filed by assessee and Department aggrieved by order of CIT (A) by which he directed certain reliefs and confirmed certain additions made by ITO. In assessee s appeal basic objection taken to was to addition of Rs. 90,000 maintained by CIT (A) and also to rejection of allowance of weighted deduction under s. 35B of IT Act, 1961( Act ) in respect of certain items. In Departmental appeal objection is taken to certain reliefs granted by CIT (A) which we will come to little later. 2. We shall first take up assessee s appeal. relevant facts relating to addition of Rs. 90,000 are : assessee as is seen from records is manufacturer of various garments for export. total turnover as seen from assessment order is of order of Rs. 99.42 lakhs. accounts maintained by assessee show, inter alia, that it paid total sum of about Rs. 18.83 lakhs towards fabrication charges of these garments. Of these Rs. 11.61 lakhs were paid to following three parties : Average Amount Pieces price per in lakhs piece Pavit India 93,262 7.70 Sunil 18,597 1.36 International Sanjana 37,575 2.55 7.80 Enterprises 11.61 Fabrication done through 1,50,959 7.22 6.80 other parties partners of assessee-firm are found to be interested very substantially either by themselves or through their relatives in first three concerns. We will not at this moment go into question as to how they are related. ITO came to conclusion that payments to these parties were excessive and unreasonable having regard to legitimate business needs of assessee-firm. He proposed total disallowance of 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 being relative but no disallowance as such was proposed. However, when matter went before IAC under s. 144B of Act, he was not convinced with reasons given by ITO for disallowance of total sum paid to above two parties but out of payment made to Pavit India, he suggested disallowance of Rs. 1.50 lakhs mainly on ground that average price per piece paid to Pavit India was more than average price per piece paid to other fabricators and that disallowance of Rs. 1 per piece would meet ends of justice. Aggrieved by this addition, appeal was filed before CIT (A). major contentions raised were : (a) that when ITO did not propose any addition in draft order out of payments made to Pavit India, it was not open to IAC to direct addition suo motu and as such that addition directed by IAC was illegal, and (b) on comparative basis payment made to Pavit India could not be said to be excessive or unreasonable having regard to legitimate needs of business particularly in case of manufacture of garments where different styles of stitching of garments would determine amount of fabrication charges to be paid as well as inputs like buttons, laces, covering cloth and their quality. There were more than 200 styles of fashions exported by assessee and price of garments ranged between Rs. 20 to Rs. 80 per piece and this showed variation in fabrication charges and unless total garments along with style and input material was compared with like styled garments fabricated by other fabricators, it would not be possible to determine whether charges paid to Pavit India was excessive or unreasonable. CIT (A) did not feel convinced of these arguments. Insofar as first point was concerned, while he agreed with contention that ITO did not propose this addition in draft order submitted to IAC and that IAC suo motu made this addition, still ITO s assessment order showed that payments made to Pavit India also was in contemplation of ITO for disallowance and consequently could not be considered to be item not considered by ITO even though no addition was proposed on that account. However, he held alternatively that if IAC s instructions in this regard were considered as without jurisdiction, he had power coterminous with that of AO and in exercise of that power, he could go into every question that was processed by ITO and decide whether there was any justification for addition made. Then he went into question of reasonableness and after picking out certain items of garments manufactured by Pavit India as listed by him in his order in para 2.11 he held that there was probability of payments made to Pavit India being not reasonable and excessive having regard to fair market value of services rendered. Then again like IAC, he also compared average rates and considered that excess rate paid was Rs. 1 per piece and on that basis, sustained addition of Rs. 90,000 by deleting balance of Rs. 60,000 which is now contested before us. 3 . We have carefully considered various objections raised by learned chartered accountant for assessee and arguments by learned Departmental Representative. What is most striking in this case is, as against effort to prove that there was excessive payment made to fabricators having regard to fair market value or services to assessee, there was any amount of suspicion running through entire conclusions and discussions of ITO, IAC and CIT (A) in proposing addition and in confirming same to some extent. basis for addition is application of s. 40A (2) (a) of Act which provides for expenses or payments, which are not to be deducted in certain circumstances. This section says that notwithstanding anything to contrary contained in any other provision of this Act relating to computation of income under head Profits and gains of business or profession where assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b), i.e., relatives, ITO is of opinion that such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facilities for which payment is made or legitimate needs of business or profession of assessee or benefit derived by or accruing to him therefrom, so much of expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction. most important ingredient for application of this section is expenditure must be considered by ITO to be excessive or unreasonable having regard to fair market value of goods or services or legitimate needs of business or benefit derived or accruing to assessee. In other words, what is first to be determined by ITO, which is imperative, is fair market value of goods or services for which payment is made. Unless fair market value of goods or services is established, no comparison can be possible and be made of payment made by assessee with fair market value of goods or services. Thus, we have tried to find out whether fair market value of service determined by ITO is really fair and represented fair market value. What we found on examination of data collected by ITO which was only appraised and repressed by IAC and CIT (A) is comparison of rates paid to Pavit India with rates paid to other fabricators by assessee and that too by averaging. difficulty in this kind of comparison is to ensure that like was compared with like. average fabrication price paid to other fabricators as noted by authorities below was Rs. 6.80 per piece whereas average price paid to Pavit India, according to CIT (A), is Rs. 8.20 per piece. This was considered as fair comparison so as to arrive at conclusion that payment made to Pavit India was excessive. But what was missed is as we have observed short-while ago was comparison of like with like. It is not shown that fabrication charges paid to other parties in respect of same style of cloth with same quantity of inputs was compared. data collected by CIT (A) to come to that conclusion as mentioned in para No. 2.11 of his order clearly demonstrate that such comparison was not made and perhaps could not have been made, e.g., first item taken for comparison was of stitching charges paid for garments style No. 5471. rate paid was Rs. 8.35 per piece. In 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 conclusion that fabrication charge paid for this garment was excessive or unreasonable having regard to fair market value of services. It can only be said that this expenditure was excessive or unreasonable. Only when it was compared with fair market value of services, which means that there is another market value or in absence of market value, fairness of market value must have to be assessed and adjudged with reference to relevant material. What is material that is available to show that payment made in respect of this garment was excessive or unreasonable, except suspicion perhaps very strong. Similarly, in another item of style No. 7906 payment was made at Rs. 8 per piece and it was also pointed out in remarks column that this particular style was made by another fabricator Simisan, to whom Rs. 8.10 per piece was paid, excess being 10 paise. Can we say that 10 paise excess paid was unreasonable or unfair or excessive ? Then there is another style No. ITC-02 for which fabrication charge of Rs. 6.25 per piece was paid. Here it is shown same style was made by Pavit India to whom Rs. 8.50 per piece was paid. When to Pavit India Rs. 6.25 per piece was paid at one time and Rs. 8.50 per piece was paid at another, will it not become necessary to show whether inputs are one and same. shirt is shirt. Different tailors will charge differently depending upon their style, workmanship, material used and even overheads depending upon again location. Unless these comparisons are made and fair assessment is made how can one arrive at fair market value. Merely on ipse dixit of ITO it will be very unsafe to use this provision to make disallowances out of payments made to relatives and persons referred to in s. 40A (2) (b) without first establishing fair market value. To repeat our finding here is that fair market value was not established 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 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 garment is ready for delivery which covers fabrication charges, i.e., buttoning, cleaning, thread-cutting, pressing and finishing. charges of fabrication will depend upon performance of these processes. If some of these processes are not included in agreement of fabrication, 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 these garments which were exclusively made by Pavit India our comments in regard to very first item apply with equal force to these items also, i.e., to say that items picked up by CIT (A) as examples, as Representative items, do not go to prove Department s case any amount of vagueness in conclusion and unsatisfactoriness of basis in arriving at conclusion is very much manifest in observations that he made in succeeding para. CIT (A) points out in para No. 2.12 that most of items could not find any comparison as such style was not got fabricated by assessee-firm from other fabricators. Then assessee s explanation was that Pavit India possessed necessary strength and capability of fabrication in much better way than others and that was why they were preferred. CIT (A) held that this explanation was not satisfactory. observations made by CIT (A), to quote, are very interesting, from para No. 2.13 : "I have carefully considered submissions of learned authorized Representative. Apart from general observations made by him in order to justify high rates of more than Rs. 10 per piece to Pavit India, and in absence of any comparable instances of payment to other fabricators, there is n o evidence to prove that such high rates paid to Pavit India were commensurate with fair market value of services." This observation will show that there were no comparable instances and t h t fair market value of services was taken for granted without establishing it. concluding part of order of CIT (A) says that payments made to Pavit India in some measure were not commensurate with fair market value of services. He therefore, made comparison with average rate paid to Pavit India with average rate paid to others and disallowed Rs. 90,000 at rate of Rs. 1 per piece. We are unable to subscribe to this view that payments made to Pavit India were excessive when as pointed out earlier comparative instances were lacking and garments were exclusively fabricated by Pavit. India more so when Pavit India received payments and fully accounted for them in their books of account and payments were supported by vouchers and other materials. This circumstance may not be so relevant, if s. 40A (2) (b) is attracted. It is further pointed out that in none of earlier years payment made towards fabrication charges were disallowed. Another aspect to be considered is rate of gross profit. rate disallowed. Another aspect to be considered is rate of gross profit. rate of gross profit shown by assessee though was found to be inadequate by ITO was found satisfactory by IAC and addition proposed by ITO on that score was disapproved of, i.e., gross profit disclosed was found to be proper. It is to be remembered that fabrication charges formed part of trading account. When fabrication charges are inflated, as pointed out by Department, 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 fabrication charges and at same time to say that rate of gross profit was reasonable, is mutually contradictory. This contention of inflation does not fit in other. Even though s. 40A can be made use of to disallow ultimate effect of excessiveness or unreasonableness of expenditure incurred would reflect in lowering of gross profit by inflation of fabrication charges. This test also does not lend support to view taken by Department. Thus, looked at from any angle it is difficult to agree with conclusion of Department that assessee paid higher charges to Pavit India, which could be considered as excessive or unreasonable having regard to fair market value of services or can it be said that legitimate needs of business don t require such payments. Here, legitimate needs and benefit accruing to business referred to in s. 40A (2) will take in exclusive nature of work to be performed by Pavit India. This disallowance, is therefore, uncalled for and we delete it. Here, we may say that in Departmental appeal objection was taken to deletion of disallowance of Rs. 60,000. Since we are of view that there is no justification for view that payment of fabrication charges were excessive or unreasonable, deletion of Rs. 60,000 by CIT (A) cannot be said to be incorrect. ground in Departmental appeal, thus, stands covered by this conclusion. 4. next objection in assessee s appeal is against non-allowance of weighted deduction under s. 35B in respect of following items : Rs. Bank commission 26,685 Bank Interest 92,645 Salary to export division 1,50,000 In respect of bank interest, learned counsel for assessee invited our attention to order passed by Delhi Bench C in case of IAC vs. Smt. Sudesh Madhok (IT Appeal No. 1110 (Delhi) of 1983) by which Tribunal allowed weighted deduction on interest paid to bank. Following with respect that order, we hold that assessee is entitled to weighted deduction in respect of bank interest. bank interest and bank commission are, in our view stand on same footing and if bank interest is qualified for weighted deduction under s. 35B, fortiorari bank commission also should be entitled to weighted deduction. However, we may point out that Department relied upon decisions of Special Benches of Tribunal in case of J. H. & Co. vs. ITO (1982) 1 Sot 15and in case of ITO vs. Happy Sound Industries (1982) 1 Soft 172. These Special Bench decisions were considered by Delhi Bench C when above decision was arrived at. We would, therefore, like to follow order of Tribunal referred to above. In respect of export division, Department allowed weighted deduction at 50 per cent of salaries paid to staff engaged in export division. CIT (A) pointed out that details filed before him showed that weighted deduction was claimed even in respect of wages paid to employees workers like button operator, over-locker, cutter, etc., which go to add to lost of manufacture, but not for development of export markets. In view of this position, he found it difficult to quantify amount entitled to deduction under s. 35B. On estimate, he arrived at 50 Per cent. claim of 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. order of CIT (A) on this point is, in our opinion reasonable and we confirm same. 5 . In respect of ground No. 1 in assessee s appeal, since we have discussed merits, we thought it unnecessary to go into legal question raised as to whether it is open to IAC to give directions under s. 144B when ITO did not propose any particular addition. We find force in view taken by CIT (A) that as appellate authority it is open to him to go into all those questions, which were gone into by ITO and adjudicate upon them even if not appealed against and that power was properly exercised in this case. assessee s Representative did not address us any argument on this question. This will dispose of assessee s appeal. 6 . Coming now to Departmental appeal, here as in case of fabrication charges, ITO has proposed disallowance of Rs. 2 lakhs on instructions of IAC under s. 144B. same ground that IAC had given this direction suo motu without being raised by ITO was taken up before CIT (A) but CIT (A) overruled this objection and decided matter on merits in favour of assessee. Since we are of view that that power has been properly exercised, we do not like to go into that question. In any case we find that CIT (A) was justified on merits. There is one concern called Sonu International to which average price of Rs. 7.45 per piece for embroidery work was paid. That was considered to be excessive when compared with rates to other parties, i.e., Kalakriti Sohan Ganj, New Delhi and Manmohan Embroidery Works, Delhi. average price paid to these parties was, respectively, Rs. 3.85 per piece and Rs. 2.42 per piece. It is excessiveness of payment made to Sonu International that gave rise to suspicion in mind of ITO who disallowed sum of Rs. 2,18,000. It was contended before CIT (A) that matter could not be decided merely on basis of comparison of rates without anything more. CIT (A) in his order summed up contentions raised before him, thus : "The learned authorised Representative pointed out that Shri Satish Chand partner of Sonu International, had appeared and his statement had been recorded by ITO. account books called for could not be produced by him because of loss due to theft and for that necessary evidence in form of FIR had been filed before ITO. Then, he pointed out that on basis of description of type of embroidery carried out by Sonu International given in their bills, it would be clear that work so carried was embroidery and crochet work. rates for embroidery varied from 1.50 to 8.50 depending upon 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 bills of embroidery of Kalakriti whose payments have not been doubted that with regard embroidery of Kalakriti whose payments have not been doubted that with regard to embroidery and crochet work they were also paid at same rate. He also produced bills of Sachitra Hast Kala Kendra, Modi Nagar for subsequent year to show that rates paid to outside parties were cheaper." Then he observed that no disallowed could be made merely on comparison of rates more particularly in case where s. 40A does not apply. Incidentally this finding which is correct, is at variance with conclusion reached in fabrication charges. He found that ITO except comparing average rates did not bring any material to show that payments made to this party was excessive or unreasonable. He found force with submission made that more embroidery work was involved in 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 ITO to disallow any portion of payment. He should have regard to nature of work to be done. Again as we observed earlier, while dealing with assessee s appeal, CIT (A) has taken line of comparing like with like to arrive at conclusion of reasonableness or excessiveness in payments. For reasons which we have discussed earlier and also with regard to point that gross profit disclosed was found to be reasonable, just like fabrication charges, embroidery charges also formed part of trading account, to say that there was inflation in embroidery work would be inconsistent with finding that rate of gross profit is reasonable. We, therefore, agree with CIT (A) s view that there was absolutely no justification for addition of sum of Rs. 2 lakhs. deletion is justified and we confirm it. 7 and8.(These paras are not reproduced here as they involve minor issues) 9. In result, appeal filed by assessee is allowed in part while appeal filed by Department stands dismissed. *** UPVAN INTERNATIONAL v. INCOME TAX OFFICER