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Issues involved: Disallowance of consideration money for purchase of sugarcane from a firm where the assessee is a partner.
Summary: The High Court of Bombay addressed the issue of disallowance of consideration money for the purchase of sugarcane from a firm in which the assessee is a partner. The assessee, engaged in the sugar manufacturing business, had purchased sugarcane from the firms of Somaiya Farms, Lakh, and Khanapur, in addition to outsiders, during the assessment year 1962-63. The minimum price fixed by the State of Maharashtra for sugarcane was Rs. 53 per tonne, but the assessee paid Rs. 58.50 per tonne to Somaiya Farms, Lakh. The Income Tax Officer (ITO) disallowed the difference in price, stating lack of justification by the assessee. The Appellate Authority Commission (AAC) and the Tribunal upheld the disallowance, citing lack of arm's length transactions and excessive pricing. The assessee contended that the ITO exceeded his power by disallowing the expenditure as excessive under section 37, which did not cover such a case. The assessee argued that the higher price was not paid due to the relationship between the parties. The Revenue, however, argued that the excess payment was justified due to the relationship between the assessee and the firm, and the price being above the floor price set by the government. The Revenue relied on section 143(2)(b) to verify the correctness of the return but the Court found this section did not empower disallowance based on excessive expenditure. The Court referred to a judgment by the Gujarat High Court, emphasizing that unless a transaction is shown to be sham or not bona fide, taxing authorities cannot disregard the figures in the books of account. In this case, the Revenue failed to prove that the transaction was not bona fide or that the price was different from what was recorded. Therefore, the Court held that the Revenue could not disallow the excess payment merely based on the relationship between the parties and the price being above the floor price. The Court concluded that the Revenue's argument was not valid under the current law and ruled in favor of the assessee. The Court directed the Revenue to pay the costs of the reference to the assessee.
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