1. The question to be answered in this reference at the instance of the assessee reads thus :
'Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in not allowing the full consideration money of Rs. 4,97,308 paid to the firm of Somaiya Farms, Lakh and Khanapur, for purchase of sugarcane because the assessee happened to be a partner in the said firm ?'
2. The assessee carries on the business of manufacture and sale of sugar. It has factories at Sakarwadi and Lakshmiwadi. It owns a sugarcane farm. It s a partner with a 25% share in profits in two firms, Somaiya Farms, Lakh, and Somaiya Farms, Khanapur. It purchases sugarcane from these two firms as also from outsiders, bagaitdars. It also uses sugarcane grown at its own farm.
3. Sugarcane was procured by the assessee in this manner during the assessment year with which we are here concerned namely, 1962-23. The previous year ended on May 31, 1961. The State of Maharashtra fixes a minimum price at which sugar factories can purchase sugarcane. The price is fixed with reference to each sugarcane factory. For the relevant assessment year, the minimum price fixed was Rs. 53 per tonne. The assessee purchased 8,501 long tonnes of sugarcane during that year from Somaiya Farms, Lakh, and paid a price of Rs. 58.50 per tonne. The ITO in the assessment order noted : 'As no case has been made out by the assessee company for allowance of higher prices, the difference of Rs. 5.50 per long tonne on 8501.18 is disallowed as in last year.'
4. In appeal before the AAC, the contention of the assessee that the ITO had erred in disallowing Rs. 46,756 on account of purchase of sugarcane from Somaiya Farms was disallowed. A similar contention advanced in connection with the assessment year 1961-62 had also been disallowed. The evidence produced was the same for both the years. For the reasons stated in the appeal for the earlier year, the AAC confirmed the addition.
5. The assessee went up in further appeal to the Tribunal. The Tribunal noted that a similar point had come up for consideration in the assessee's case for the earlier year and that it had been held that disallowance was called for. It was submitted that the facts were the same as in the earlier year. For the reasons stated by the Tribunal in that earlier order, it held that the disallowance was called for, but restricted it to Rs. 4.50 per tonne.
6. Reference to the Tribunal's earlier order shows that it concluded that the transactions of purchase of sugarcane by the assessee from Somaiya Farms 'cannot be said to be arm's length transactions and there is absolutely no evidence to support the very high price of Rs. 57.50 per ton. It is interesting to note that even for the alleged superiority of the assessee's own sugarcane, the maximum price claimed was Rs. 53 per ton. In our opinion, the disallowance was justified.'
7. Mr. Dastur, learned counsel for the assessee, submitted that the ITO had no power to disallow any expenditure that had been incurred on the ground that it was excessive. The deduction for the expenditure was claimed under s. 37 as being expenditure laid out or expended wholly and exclusively for the purposes of the assessee's business. The only power at the relevant time which the ITO had to disallow expenditure was that contained in s. 40(c) as it then read. The provisions of s. 40(c) did not cover a case such as the present one.
8. Mr. Dastur submitted that it was erroneous to presume that a higher price had been paid because of the relationship between the parties or to benefit any one of them. Neither was in any way benefited.
9. Mr. Dastur relied upon the judgment of the Gujarat High Court in Marghabhai Kishabhai Patel & Co. v. CIT : 108ITR54(Guj) . We shall refer to it hereafter.
10. It was urged by Mr. Jetly, learned counsel for the Revenue, that four factors had to be borne in mind : that a floor price for sugarcane had been fixed by the Government; that more than the floor price had been paid by the assessee to Somaiya Farms; that the assessee was a partner in Somaiya Farms; and that the assessee had failed to establish that the price had been paid for better sugarcane. In Mr. Jetly's submission, because there was a relationship between the assessee and Somaiya Farms and the price which had been paid to Somaiya Farms was more than the floor price, the decision to regard the price paid to the Somaiya Farms as excessive was justified. The power to so regard the price paid to Somaiya Farms and to disallow it was, in Mr. Jetly's submission, inherent in s. 143(2)(b).
11. Section 143(2)(b) provides that where a return has been made under s. 139 and the ITO considers it necessary or expedient to 'verify the correctness and completeness' of the return by requiring the presence of the assessee or the production of evidence in this behalf, he shall serve on the assessee a notice requiring him to attend and produce the evidence on which he relies in support of his return. The power to 'verify the correctness and completeness' of an assessee's return does not, patently, invest the ITO with the power to disallow expenditure which has been in fact incurred by the assessee for the purposes of his business upon the ground that such expenditure or unreasonable. Section 143(2)(b) does not, therefore, assist the Revenue. The Revenue does not rely upon the provisions of s. 40(c), to which Mr. Dastur adverted. We need not, therefore, consider them.
12. In our view, the case before us is squarely covered by the judgment of the Gujarat High Court in Marghabhai Kishabhai Patel & Co. v. CIT : 108ITR54(Guj) , with which we are in agreement. The assessee there was a registered firm carrying on business in tobacco on its own account as well as on commission basis. In the assessments for the assessment years 1962-63 to 1965-66, the ITO added back certain items on the ground that the purchase price paid by the firm for tobacco purchased from seven partners of itself was inflated. The ITO calculated the average of the price paid to the seven partners and the average of the price paid to others from whom the assessee had purchased tobacco and based the additions upon such difference. The AAC and the Tribunal agreed with the ITO. The learned judges of the Gujarat High Court referred to the judgments of the Madras High Court in Sri Ramalinga Choodambikai Mills Ltd. v. CIT : 28ITR952(Mad) , of the Gujarat High Court in CIT v. Keshavlal Chandulal : 59ITR120(Guj) and of the Supreme Court in Calcutta Discount Company : 91ITR8(SC) , and held that 'unless it has been shown that the transaction in question is a sham one or unless the value shown was not the value in the books of account or unless it was not a bona fide transaction, it is not open to the taxing authorities to disregard the figures of the transaction shown in the books of account of the assessee. It was nobody's case that the transactions of sale between the partners and the firm were not bona fide transactions nor was it the case of the Revenue that they were sham transactions or that the price paid in respect of each of these transactions was other than the one set out in the books of account of the firm. In these circumstances, it appears to the learned judges that the taxing authorities had no right to substitute either the market price or the average price in place of the price or value agreed to between the parties to the transaction.
13. In the instant case also, it is not the Revenue's case that the transaction of sale was not bona fide or was sham or that the price was other than the price shown in the assessee's books. It is only if this was established by the Revenue that it would be entitled to treat the price paid as excessive and disallow the excess. It is not enough for the Revenue to say, as was done before us, that because there is relationship between the assessee and the other party to the transaction and the price paid is more than the floor price, or even the market price, the price paid is, ipso facto, excessive and the excess must be disallowed.
14. We may mention that the position under the Act as it stands today might be different by reason of the fact that s. 40A has been introduced with effect from April 1, 1968.
15. In this view of the matter, we answer the question in the affirmative and in favour of the assessee.
16. The Revenue shall pay to the assessee the costs of the reference.