ORDER
J. Kathuria, Accountant Member
1. This appeal by the assessee for assessment year 1990-91 raises an important issue. The facts of the case lie in a narrow compass which are these. For assessment year 1990-91, the assessee which is a cooperative society under the Haryana Cooperative Societies Act, filed a return declaring income of Rs. 2,11,77,724. The scrutiny of the case revealed to the Assessing Officer that the assessee had claimed payment of additional cane price of Rs. 5,19,07,100. This additional price was debited over and above the minimum price of sugarcane, fixed by the Sugarcane Control Board which was a State Body. It appears that the assessee which is carrying on the business of manufacture and sale of sugar has 23,526 members out of whom 21,463 members are canegrowers and the remaining members are cooperative societies, Gram Panchayats, etc. The minimum price of COJ-64 variety of sugarcane was fixed at Rs. 40 per qtl. by the Government and the minimum price for the general variety of sugarcane was fixed at Rs. 36 per qtl. At the time of supply of the sugarcane, the individual members had to enter into an agreement with the assessee for the supply of sugarcane at the minimum price fixed by the Government and if they failed to supply their requisite quantity of sugarcane, then they could be penalised for the same. In the instant case, however, the Board of Directors in their meeting held on 2-3-1990 decided to pay Rs. 60 per qtl. for COJ-64 variety and Rs. 56 per qtl. for the other varieties. At page 87 of the assessee’s compilation is a copy of the minutes recorded at the Board’s meeting aforesaid. While considering item at serial No. 6 (to consider and approve the cane price for the crushing season 1989-90), the following minutes were recorded :
The Board considered the matter of fixation of cane price for the crushing season 1989-90. The Board was informed that cane producer members of this Mills had demanded a higher cane price in view of better quality of cane supplied by them and to increase the area under cane crop. The matter was discussed and it was unanimously resolved to pay the under noted cane price to cane suppliers for the season 1989-90 :
1. For COJ-64 variety Rs. 60 per quintal 2. For other varieties Rs. 56 per quintal. At the same page, an item regarding the raising of share capital in view of the funds requirement for expansion of the Mills to 2500 TCD was also considered and the minutes recorded were the following : The Board considered the matter of funds requirement for expansion of the Mills from 1250TCD to 2500 TCD and unanimously resolved to collect share capital from cane producer members by deducting Rs. 18 per quintal from the cane price for the crushing season 1989-90. The Board further resolved that in addition of Rs. 18 no share capital be deducted from the cane price for the season 1989-90. 2. The Assessing Officer came to the conclusion that the payment of purchase price of Rs. 60 per qtl. and Rs. 56 per qtl. for different varieties of sugarcane was not at all warranted by the genuine needs of the Mill and that the assessee had adopted a device only to camouflage the real profit of the Mill without paying the proper taxes. He accordingly disallowed a sum of Rs. 5,19,07,100, by disallowing the additional cane price of Rs. 25 per qtl. Later on, the Assessing Officer passed an order under Section 154 on 28-5-1993 in which the actual additional price of Rs. 20 per qtl. was considered and hence the addition of Rs. 5,19,07,100 was reduced to Rs. 4,15,25,680. 3. The learned CIT(A) considered the issue at length and upheld the action of the Assessing Officer. 4. Though the assessee has raised as many as three grounds, the issue is one regarding the addition of Rs. 5,19,07,100 which after the Assessing Officer's order under Section 154 dated 28-5-1993 should read as Rs. 4,15,25,680.
5. Shri D.K. Gupta, the learned Counsel for the assessee submitted that the members of the cooperative society were clamouring for the increase in the price of sugarcane over and above the minimum price fixed by the Government. In this connection, Shri Gupta drew our attention to a sort of representation made by certain members, a copy of which is available at page 61 of the assessee’s compilation. It was pointed out that the members had brought to the notice of the Mills that the results shown by the assessee were excellent and prices of fertilizers had gone up and that the members of the cooperative society should be adequately compensated for the increase in the cost of inputs and that minimum price should be paid @ Rs. 64 to Rs. 70 per qtl. The learned Counsel for the assessee also drew our attention to a sort of handbill issued by the assessee, a copy of which is available at page 62 of the assessee’s compilation. In the said handbill which is for the necessary information of the farmers, an appeal has been made by the management that they should start giving sugarcane to the assessee-mill without waiting for the fixation of the price for the sugarcane as a promise has been held out that the Board shall sympathetically consider their demands. Shri Gupta submitted that there was lot of unrest in the ranks of the canegrowers to the effect that they were not being suitably rewarded or adequately compensated for the sugarcane supplied by them to the assessee whereas the employees had been given two months’ wages as bonus. According to the learned Counsel for the assessee, there was an imminent threat of strike and if the assessee had not raised the price of sugarcane to Rs. 56 and Rs. 60 per qtl., the assessee’s calculations for doubling the production would have gone away and the assessee would have suffered incalculable loss. It was submitted that the Board of Directors considered the demands of the canegrowers and decided to pay the increased price for the sugarcane supplied to the mill in its meeting held on 2-3-1990. It was emphasised that the question of fixing up the suitable price for the sugarcane was under active consideration of the Board of Directors and that the decision was finally taken on 2-3-1990. It was also pointed out that quite a few representatives of the canegrowers were present at the time of the Board’s meeting and it was mentioned that persons appearing at serial Nos. 1, 4, 5, 6, 7, 8, 9 and 11 as at page 86 of the assessee’s compilation were representatives of the canegrowers.
6. The learned Counsel for the assessee submitted that the whole idea for paying an increased price to the canegrowers was two-fold : (1) to motivate the canegrowers to continue to keep land under cultivation and (2) to increase the acreage for cultivation of sugarcane so that the farmers could be dissuaded from growing other cash crops and thereby starving the assessee from the raw material namely, the sugarcane.
7. The learned Counsel for the assessee specifically invited our attention to the assessee’s letter dated 11-7-1992 addressed to the Deputy Commissioner of Income-tax, Special Range, Karnal, a copy of which is available at pages 33 to 35 of the assessee’s compilation. It was pointed out that a survey report was obtained to see the pattern of sugarcane cultivation for the crushing season 1987-88 to 1991-92 in which it was found that for the crushing season 1987-88, area under sugarcane cultivation was 22,833 acres and cane available was 43.73 lac qtls. For the crushing season 1988-89, the area under cultivation was 24,073 acres and the cane available was 45.55 lac qtls. Similarly for crushing season 1989-90, the area under cultivation was 24521.6 acres and the cane available was 44.10 lac qtls. It was, however, pointed out that for the crushing season 1990-91, the area under cane cultivation went up to 28959.1 acres and the cane available was 53.84 lac qtls. Similarly for the crushing season 1991-92, the area under cane cultivation went up to 32245.2 acres and the cane available was 68.94 lac qtls. It was, therefore, submitted that it was because of the incentives given by the assessee that the area for cultivation of sugarcane increased and the total quantum of sugarcane available also registered an increase.
8. The learned Counsel for the assessee submitted that the expenditure in question was laid out wholly and exclusively for business purposes by the assessee and the department could not sit in judgment as to whether this expenditure was necessary or not. Relying on the Tribunal’s decision in the case of Haryana Cooperative Sugar Mills Ltd. v. ITO [IT Appeal No. 2551 (Delhi) of 1981 dated 11-12-1981] for assessment year 1976-77, it was submitted that a similar issue had arisen in that case also whereas against the minimum price of Rs. 13.75 per qtl. fixed by the Government of India, the assessee paid the price of Rs. 15.25 per qtl. which was held to be reasonable and laid out wholly and exclusively for the purposes of business of the assessee. Reliance was also placed on the Supreme Court judgment in PravaraSahakariSakhar KarkhanaLtd. v. CIT [1974] 94ITR 321 in which the assessee-cooperative society manufacturing sugar had paid to its members at a rate higher than the minimum price fixed by the Government for sugarcane produced and supplied by them and the Supreme Court held that the High Court was not justified in accepting the Commissioner’s applications under Section 66(2) of the Indian Income-tax Act, 1922.
9. The learned Counsel for the assessee also relied on the Gujarat High Court decision in Marghabhai Kishabhai Patel & Co. v. CIT [1977] 108 ITR 54 for the proposition that unless it was shown that the transactions in question were sham ones or unless the value shown was not the value in the books of account or unless these were not bona fide transactions, it was not open to the taxing authorities to disregard the figures of transactions shown in the books of account of the firm. For this very proposition, reliance was placed on the Bombay High Court decision in Godavari Sugar Mills Ltd. v. CIT [1985] 155 ITR 306 in which the aforesaid decision of the Gujarat High Court in the case of Marghabhai Kishabhai Patel & Co. [supra) was followed.
10. The learned Counsel for the assessee also relied on the Madhya Pradesh High Court judgment in CIT v. Gwalior Sugar Co. Ltd. [1984] 150 ITR 320 for the proposition that in order to qualify for deduction, expenses incurred should have a direct bearing and nexus with the business of the assessee or should have incurred to facilitate the carrying on of the business of the assessee on considerations of business expediency. It was submitted that the extra price paid for the purchase of sugarcane was out of business expediency and, therefore, the entire purchase price was an allowable deduction.
11. The learned Counsel for the assessee also relied on the Supreme Court decision in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 for the proposition that the expression “wholly and exclusively” did not mean “necessarily”. It was submitted that the Revenue authorities had been harping on the theme that the expenditure in question was not necessary whereas such a consideration was not to be taken into account while deciding the issue as to whether the expenditure was wholly and exclusively laid out for purposes of the assessee’s business or not.
12. In short, the learned Counsel for the assessee submitted that the payment of extra purchase price was debited on considerations of business expediency and had to be allowed by the Revenue authorities as a deduction.
13. The learned D.R. submitted that the whole exercise done by the assessee was only to increase the share capital of the cooperative society. It was submitted that since the capacity of the mill was to be increased, more capital was required for that purpose. It was submitted that in the Board’s meeting held on 2-3-1990, the first item on the agenda was regarding raising of share capital because that was upper-most in the minds of the Board of Directors and that the payment of Rs. 20 per qtl. extra to the canegrowers was employed as a device to have more capital without paying the taxes. The learned D.R. submitted that on the one hand, the assessee talked of the clamour being raised by the members of the cooperative society for compensation for the rise in the cost of inputs and, on the other hand, out of the increase of Rs. 20 per qtl. a sum of Rs. 18 was utilised for increasing the share capital and only Rs. 2 was earmarked for paying in the form of cash to the members. The learned D.R. submitted that after the canegrowers had agreed to the payment of minimum price as per the individual agreements entered into by them with the assessee, there were no compelling circumstances or considerations of business expediency which warranted the increase in price. It was also submitted that the timing of the decision was also quite significant inasmuch as the decision was taken towards the fag end of the crushing season and only a paltry amount of Rs. 2 was, in fact, to be paid in cash to the canegrowers and the remaining amount was retained by the assessee without paying any dividend or interest to the canegrowers. It was also submitted that if the sugar mills situated in the adjoining area could get the sugarcane at the minimum price, what was the difficulty with the assessee to obtain requisite quantity of sugarcane from the canegrowers who in any case were committed to supply the same. It was also pointed out that in the case of Haryana Cooperative Sugar Mills Ltd. (supra) the increase was very marginal from Rs. 13.75 per qtl. to Rs. 15.25 per qtl. whereas in the instant case, the increase was Rs. 20 per qtl. It was emphasised that year after year, the Government had been increasing the minimum price of sugarcane by Rs. 5 per qtl. and the assessee at one stroke had increased the purchase price by Rs. 20 per qtl. The learned D.R. emphatically submitted that the whole purpose behind this device was to provide capital in the books without paying the taxes to the Income-tax Deptt.
14. We have carefully considered the rival submissions as also the facts on record. At our instance, the assessee supplied certain information with regard to assessment years 1991-92, 1992-93 and 1993-94. For instance, we were told that as against the minimum price fixed at Rs. 40 and Rs. 36 per qtl. respectively for two varieties of sugarcane in the year under consideration, minimum price fixed for assessment year 1991-92 was Rs. 45 and Rs. 41 per qtl. respectively and similarly for assessment years 1992-93 and 1993-94, the minimum price was Rs. 49 and Rs. 45 per qtl. respectively and Rs. 50 and Rs. 46 per qtl. respectively. We were further informed that the price was increased to Rs. 60 and Rs. 56 per qtl. respectively in the year under consideration whereas for assessment year 1991-92, the same price was paid. It was also submitted that for assessment year 1992-93 only minimum purchase price was paid to the canegrowers and that same was the position for assessment year 1993-94.
15. The enquiries made further revealed that for assessment year 1987-88, the assessee declared profit of Rs. 31.62 lacs but there were brought forward losses. For assessment year 1988-89, the profit declared was of the order of Rs. 1.53 crores. For assessment year 1989-90, the profit declared was of Rs. 2,36,76,836 and there was a brought forward loss of Rs. 1.72 crores. For assessment year 1990-91, the net profit declared was Rs. 4,43,36,907. This was done after the payment of extra price of the sugarcane at Rs. 4,15,25,680. In other words, if the extra price had not been paid for the sugarcane, the assessee would have for the first time shown bumper profits in its books of account. On the net profit of Rs. 4,43,36,907 the assessee provided for income-tax for the year at Rs. 1,15,52,000 and the balance of Rs. 2,69,55,638 was taken to the general reserves account in the balance-sheet. It is also significant to note that it is only in the year under consideration that the accumulated loss of Rs. 58,92,269 suffered in the previous years stood completely wiped out and there was substantial positive income available to the assessee.
16. We have, therefore, to see in the background of the entire facts and circumstances of the case whether there was any justification for paying extra cane price of Rs. 20 per qtl. over and above the minimum price fixed by the Government and whether there were business considerations which actuated the assessee to increase the price or the increase was done for extra commercial considerations. We have carefully looked into the sort of representation signed by a few canegrowers, a copy of which is available at page 61 of the assessee’s compilation. In the said representation, it is mentioned that the assessee has shown excellent results and looking to the increase in the cost of fertilizers, etc., the canegrowers should be compensated and rewarded and paid at the rate of Rs. 64 to Rs. 70 per qtl. This in a way is a request to the management to fix a particular price over and above the minimum price. There is no threat held out in this representation that if it is not done, they will not supply the sugarcane or that they will not increase the area for sugarcane cultivation. The learned Counsel for the assessee has submitted that there was an imminent threat of strike by the canegrowers with the result that the management had to issue appeals to the canegrowers to continue the supply of cane to the mill so that the manufacturing activities were not hampered and business was conducted smoothly. A similar point was raised in the written submissions before the lower authorities also. We specifically asked the learned Counsel for the assessee to prove the existence of a threat by the canegrowers in this regard. The best that the learned Counsel for the assessee could do in these circumstances was to point out to an appeal issued by the management, a copy of which is available at page 62 of the assessee’s compilation in which the canegrowers have been asked to continue supplying the sugarcane to the assessee and they have been assured that they will be paid the minimum price as and when fixed. There is absolutely no evidence produced before us to show that the things had reached such a point that if the assessee had not increased the price by Rs. 20 per qtl. as purchase price, the business of the assessee would have jeopardised.
The said appeal also appears in the context of the start of the crushing season and the farmers have been issued an appeal by the management to continue supplying the sugarcane with the promise that they will be given the minimum price as and when fixed by the Government. There is no whisper much less a promise, of an increase which has been done at the fag end of the crushing season. If the assessee had capitalised the amount after paying the taxes, there would have been no difficulty or quarrel with the approach of the assessee. But in the present case, it is clear that the assessee has employed a device to increase its capital without paying the taxes which are due to the exchequer. It is also significant to note that whereas in the year under consideration the sugarcane has been purchased at the rate of Rs. 60 and Rs. 56 per qtl. respectively, the purchase prices paid in assessment years 1992-93 and 1993-94 are much less being Rs. 49 and Rs. 45 per qtl. for assessment year 1992-93 and Rs. 50 and Rs. 46 per qtl. respectively for assessment year 1993-94.
17. Much has been made by the learned Counsel for the assessee that it was because of this incentive that the area under cultivation increased and the availability of sugarcane also increased. We notice that up to the crushing season 1989-90, more than 24500 acres of land was under sugarcane cultivation and more than 45 lac qtls. of cane was available. In the year under consideration, the area went up to 28959 acres and the cane available rose to 53.84 lac qtls. There was further increase in the area as well in the availability of cane for the crushing season 1991-92. These figures, however, do not show that it was as a result of increase in the purchase price for assessment year 1990-91 that either the area under cultivation went up or the quantity of cane available showed an increase. When the growers came to know that the capacity of the mill had been increased and they found that the minimum price paid to them was quite remunerative, the sugarcane area was bound to increase and so was the case with the availability of sugarcane. These figures do not show that it was because of the increase in the purchase price that the canegrowers had done something extraordinary to justify the increase in the rate.
18. The learned Counsel for the assessee drew our attention to the bye-laws of the cooperative society and submitted that the bye-laws permitted the capitalising of a certain amount of the sale price and that Rs. 18 per qtl. was capitalised under the bye-laws of the cooperative society. It was, however, admitted by the learned Counsel for the assessee that for assessment years 1992-93 and 1993-94 even the minimum amount mentioned in the bye-laws was not capitalised.
19. Now we come to the case law relied on by the learned Counsel for the assessee. The first case is the decision of the Tribunal in Haryana Cooperative Sugar Mills Ltd.’s case (supra). The facts of the case were these: The minimum price for the sugarcane was fixed by the Government of India at Rs. 13.75 per qtl. The assessee, however, paid an additional cane price at the rate of Rs. 1.50 per qtl. which was allowed by the Assessing Officer. The learned Commissioner of Income-tax intervened under Section 263 of the Act and held that the order passed by the Assessing Officer was erroneous insofar as it was prejudicial to the interests of the Revenue. A major part of the Tribunal’s order is devoted to the two questions which were raised before it, namely, whether the Assessing Officer had made proper investigation at the time of original assessment and whether his order had merged with the order of the first appellate authority when the learned Commissioner of Income-tax assumed jurisdiction under Section 263. It is only towards the very end of the order that the Tribunal considered the merits of the case in a few lines and held that the additional payment by the assessee over and above the minimum price of the sugarcane fixed by the Government of India was a payment laid out wholly and exclusively for purposes of the business of the assessee. It is also significant to note that in that case, the increase was only of Rs. 1.50 per qtl. against the minimum price of Rs. 13.75 per qtl. whereas in the present case, the increase is Rs. 20 per qtl. It is also important to note that in the case of Haryana Cooperative Sugar Mills Ltd. [supra) the representatives of the canegrowers were present when the decision was arrived at and they voluntarily agreed that the amount of additional cane price may be retained by the mill as interest-free loan till 30-6-1977 and thereafter the amount may be paid in cash. In the present case, however, a fantastic increase of Rs. 20 per qtl. was given and a sum of Rs. 18 per qtl. was capitalised without the agreement with the canegrowers and only a sum of Rs. 2 per qtl. was to be paid in cash. No details have been furnished before us as to when the cash component was actually paid to the growers. Be that as it may, the increase of Rs. 20 per qtl. was absolutely disproportionate and not reasonable. Moreover, the facts of the case relied upon, are distinguishable.
20. The learned Counsel for the assessee has relied on the Supreme Court decision in Pravara Sahakari Sakhar Karkhana Ltd. ‘s case (supra). In that case for certain years, the reference applications had been rejected but for certain years these had been accepted by the High Court. The Supreme Court held that the High Court was not justified in accepting the CITs applications under Section 66(2) of the Indian Income-tax Act, 1922. This case does not give the facts as to how much was the increase for the year which was held to be reasonable and what were the circumstances in background. This case, according to us, is hot directly on the issue before us.
21. The learned Counsel for the assessee relied on the Gujarat High Court decision in the case of Marghabhai Kishabhai Patel & Co. (supra) and of Bombay High Court in the case of Godavari Sugar Mills Ltd. (supra). The Bombay High Court has followed the decision of the Gujarat High Court and we would, therefore, be discussing the decision of the Gujarat High Court. In the case before the Gujarat High Court, the assessee was a registered firm carrying on the business in tobacco on its own account as well as on commission basis. In the assessments for certain years the Assessing Officer added back certain items on the ground that the purchase price paid for tobacco to seven partners of the firm and to the father of three partners, was inflated. On these facts, the High Court held that unless it has been shown that the transactions in question were sham ones or unless the value shown was not the value in the books of account or unless these were not bona fide transactions, it was not open to the taxing authorities to disregard the figures of the transactions shown in the books of account of the firm. For arriving at this decision, the Gujarat High Court relied on the Supreme Court decision in CIT v. A. Raman & Co. [1968] 67ITR 11 in which it was held that avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. Suffice it to say, that the Supreme Court had an occasion to re-consider its earlier decision in the cases of A. Raman & Co. (supra) and McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 it was held that tax planning may be legitimate provided it is within the framework of the law but colourable device cannot, be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. According to the Supreme Court, it is the obligation of every citizen to pay the taxes honestly without resorting to certain subterfuges. The observations of tax avoidance in A. Raman & Co. ‘s case (supra) were disapproved by this later decision of the Supreme Court. Justice Chinnappa Reddy made very succinct observations on the theme of tax avoidance to which the other Judges of the Supreme Court agreed as mentioned at page 171 of the report.
22. We have no doubt in our mind that in the present case, the assessee by employing this device of increasing the sugarcane price which is not a bona fide transaction has deprived the Revenue of its dues and has, therefore, indulged in tax avoidance which should be frowned upon and not permitted. On the amount of Rs. 18 per qtl. which has been retained by the assessee, no dividend has been declared and the canegrowers have not received any benefit out of the same till date. This is what we were told at the time of hearing of the appeal.
23. The learned Counsel for the assessee also relied on the Madhya Pradesh High Court decision in Gwalior Sugar Co. Ltd.’s case [supra) in which the assessee-company manufacturing sugar entered into an agreement with its subsidiary, an agricultural company, for the supply of sugarcane. The agricultural company was to utilise its land for growing sugarcane and those lands were in the vicinity of the assessee’s factory. The agricultural company was bound to sell its entire production of sugarcane to the assessee at the rate fixed by the Government and also entitled to charge premium for the cane of better variety. The assessee advanced loans and also paid extra price for sugarcane to the agricultural company due to its poor financial condition. The interest on loans was foregone and extra price for the cane was claimed as a deduction. The assessee claimed that the expenditure was incurred to ensure supply of raw material and the expenditure in question was incidental to the assessee’s business and was allowable. The High Court held that it was because of the assurance and assistance given by the assessee-company that the agricultural company continued to grow cane and it did not divert its land and farms to other crops which were more profitable. It was further observed that the agricultural company was bound by an agreement to utilise whole of its land for growing cane and supplying entire production to the assessee-company only, which amounted to 13% to 20% of the assessee’s requirements. It was further observed that this arrangement was convenient to the assessee because the lands were in close proximity to the sugar factory. On these facts, the expenditure incurred by the assessee was held to be incidental to the assessee’s business.
24. From the above facts, it is clear that there was a quid pro quo in the arrangement arrived at by the parties which is absent in the present case. In the present case it was only the presumption of the assessee that if they were paid price at the rate 5 of Rs. 20 per qtl. which is unreasonable in any case, the growers would bring more area under cane cultivation and would supply more sugarcane to the assessee. There is no agreement between the canegrowers and the assessee for the increase in the area of cultivation or for the supply of sugarcane. In fact, in the subsequent years, the purchase price paid by the assessee to the canegrowers was the minimum price fixed by the Government and even lower than the price allegedly paid by the assessee in the year under consideration. The facts before the Madhya Pradesh High Court were, therefore, clearly distinguishable.
25. The learned Counsel for the assessee relied on the Supreme Court decision in the case of Sassoon J. David & Co. (P.) Ltd. (supra). In the said case, the Supreme Court vheld that the expenditure may be incurred voluntarily and without any necessity but if it is incurred for promoting the business and to earn profit, the assessee can claim deduction under Section 10(2)(xu) of the Indian Income-tax Act, 1922 corresponding to Section 37 of the Income-tax Act, 1961. The proposition of law laid down by the Supreme Court is a salutary proposition but does not advance the case of the present assessee. It is true that the Assessing Officer cannot sit in judgment as to whether a particular expenditure incurred by the assessee is necessary or not but that expenditure has to be wholly and exclusively for purposes of the business of the assessee. When we apply this test, we find that the payment of additional price of Rs. 20 per qtl. was not at all laid out wholly and exclusively for business purposes of the assessee.
26. In the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57, the Supreme Court had an occasion to consider the question whether an amount claimed as expenditure was laid out or expended wholly and exclusively for purposes of business. It was held that merely because of the existence of an agreement between the assessee and his employee for payment of a certain remuneration and the fact of the actual payment, the Income-tax Officer is not bound to hold that the payment was made exclusively and wholly for purposes of the assessee’s business. According to the Supreme Court although there might be such an agreement in existence and the payment might have been made, it is still open to the Income-tax Officer to consider all the relevant factors and determine for himself whether the remuneration paid to the employee or any portion thereof is properly deductible under Section 10(2)(xu) of the Indian Income-tax Act.
27. In the case of Bengal Enamel Works Ltd. v. CIT [1970] 77 ITR 119, the Supreme Court held that where an amount paid to an employee pursuant to an agreement is excessive because of “extra commercial considerations”, the taxing authority has jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purposes of the business.
28. On the basis of the above discussion, we have no hesitation to say that even if the assessee could pay sugarcane price over and above the minimum price fixed by the Government, the entire additional price of Rs. 20 per qtl. was not bona fide and was highly excessive and unreasonable. In our opinion, the price of Rs. 2 per qtl. payable in cash could be the only reasonable amount which can be said to have been wholly and exclusively laid out for the business purposes of the assessee on the facts and in the circumstances of the case. The amount at the rate of Rs. 18 per qtl. which was capitalised, was done only to deprive the Revenue of its due taxes and was clearly disallowable. This was a device employed by the assessee to deprive the Revenue of its dues. If there was any justification for the increase in the cane price and if there were any business considerations for actuating the canegrowers to bring more area under sugarcane cultivation, then the price of Rs. 2 per qtl. payable in cash was sufficient for the aforesaid purpose. We, therefore, hold that the price of Rs. 18 which was taken to the capital account was for extra commercial purposes and was not wholly and exclusively laid out for the business purposes of the assessee and that only Rs. 2 per qtl. was allowable as a deduction. The Assessing Officer is directed to work out the exact disallowance to be made on the basis of the above.
29. In the result, the appeal is partly allowed.