1. The assessee in this case is a public limited company owning a spinning mill managed by a managing agency firm by name Balakrishna and Company, of which one V. L. Balakrishnan is a partner. In the previous year ending on December 31, 1956, the total purchases of cotton, both Karunguni and Cambodia, made by the assessee amounted to Rs. 20,15,779. The said sum included purchases to the extent of Rs. 6,43,838 made from two persons, R. Krishnaswamy and K. Palani-swamy. The purchases from the above two persons were at the rate of Rs. 980 and Rs. 871 per pothi for Cambodia and Karunguni, respectively. The above rates represent the ceiling prices fixed for Cambodia and Karunguni cotton. But the rates at which Karunguni and Cambodia were purchased from some other persons were much less. The assessee had also paid for the cotton purchased from some others at the ceiling rates and such purchases amounted to Rs. 1,57,208. On an enquiry by the Income-tax Officer as to how the ceiling rates had been paid for the cotton purchased from the above two persons, the assessee stated that the cotton purchased from the above two parsons really belonged to V. L. Balakrishnan, who is one of the managing partners of the managing agency firm, that as the provisions of the Companies Act prohibited purchases from the managing agents, the purchases had been routed through the above two persons, and that the cotton purchased from V. L. Balakrishnan was really of a higher quality than the cotton purchased from others and had in fact been used in the manufacture of a higher count of yarn. The Income-tax Officer in the course of the assessment, found on evidence that Krishnaswamy and Palaniswamy from whom cotton had been purchased at the ceiling rates were merely name-lenders for V. L. Balakrishnan who was the director in charge of the mill, that the purchases were in fact effected from a ginning factory belonging to V. L. Balakrishnan, and that compared with the prices paid to the other dealers from whom cotton had been purchased, there has been an inflation in the prices of cotton purchased from the said V. L. Balakrishnan to the extent of Rs. 52,127. This amount was arrived at by the Income-tax Officer on the basis that there has been an inflation of Rs. 70 per candy of Karuuguni and Rs. 80 per candy of Cambodia. The Income-tax Officer also found some other defects in the accounts maintained by the assessee. He, therefore, made an addition of a sum of Rs. 75,000 to the income disclosed by the books of account, by invoking the proviso to Section 13. of the Indian Income-tax Act, 1922.
2. There was an appeal to the Appellate Assistant Commissioner. He confirmed the finding of the Income-tax Officer that there was inflation in the price of cotton purchased from the said two persons, R. Krishnaswamy and K. Palaniswamy, name-lenders for V. L. Balakrishnan. He, however, disagreed with the Income-tax Officer as regards the other defects pointed out by him. He, therefore, held that the addition of Rs. 75,000 is not justified and that an addition of Rs. 40,000 would meet the requirements of the case.
3. The assessee appealed to the Appellate Tribunal, contending that the company having paid for the cotton purchased from the above two persons at the ceiling rate, no addition to the income could be justified on the ground that the assessee has concealed the income by showing a larger outlay, even if the said V. L. Balakrishnan from whom cotton had been purchased might have had the benefit of the higher price. The assessee also invoked the principle of the decision of this court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax,
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that there was no justification for the revenue authorities to make the addition of Rs. 40,000 for the assessment year 1957-58 '
4. Before us, it is contended on behalf of the revenue that the Tribunal has proceeded on an erroneous assumption that there has been an income addition on the basis of the only circumstance relating to the purchase of cotton at the ceiling prices. It is pointed out with reference to the orders passed by the Income-tax Officer and by the Appellate Assistant Commissioner that the addition came to be made in view of the defects in the account by invoking the proviso to Section 13. The learned counsel for the revenue in the first instance contended that both the Income-tax Officer and the Appellate Assistant Commissioner proceeded on the basis that the assesses has inflated the purchase price of cotton to show a larger outlay than the actuals and that, in the face of their orders, the Tribunal is not justified in holding that the ceiling price has actually been paid by the company in respect of the purchases of cotton made from V. L. Bala-krishnan. It has also been pointed out by the learned counsel that the Tribunal proceeds on the basis that the revenue had conceded that the full amount of the ceiling price had been paid for the entire purchase of cotton made from V. L. Balakrishnan, while, in fact, there was no such concession by the revenue. But, a close scrutiny of the orders of the Income-tax Officer and the Appellate Assistant Commissioner shows that they impliedly proceeded on the basis that the full amount of the ceiling price had been paid by the assessee, though the real price for the cotton purchased would be considerably less. As a matter of fact, the orders nowhere point out that the actual ceiling price was not in fact paid but only a lesser price was paid in relation to the cotton purchased from V. L. Balakrishnan by the assessee and that the purchase prices of cotton have been so manipulated as to show the payment of a larger price than what was actually paid. We are, therefore, of the view that, on the facts, the Tribunal is justified in proceeding on the basis that the entire ceiling price was paid by the assessee to V. L. Balakrishnan for the purchases of cotton effected from him.
5. The learned counsel for the revenue then contends that even if the full ceiling price has been paid by the assessee for the cotton purchased from V. L. Balakrishnan, on the findings given by the Income-tax Officer as well as by the Appellate Assistant Commissioner as to the real value of cotton, the entire amount cannot be allowed as an expenditure incurred wholly and exclusively for the purpose of the business and that on their finding a part of it should be taken to have been used for an extra-commercial purchase benefitting the said V. L. Balakrishnan. In this connection the learned counsel refers to the following finding given by the Income-tax Officer :
' It is, therefore, quite evident that the purchases from the above two persons are always at higher rates, viz., at the ceiling rates as the cotton really belonged to Sri V. L. Balakrishnan, director-in-charge of the assessee-company, and as the profit arising out of the above transactions must have gone to the personal benefit of the managing agent.'
6. Based on the said finding, it is urged on behalf of the revenue that once the transactions of purchase of cotton are found to have been effected partly to benefit the director, V. L. Balakrishnan, it is open to the Income-tax Officer to disallow such portion of the price as is found to have gone for the benefit of the director and that the disputed sum of Rs. 40,000 should in fact be taken to be the amount which has gone for the benefit of the director and not incurred for the business of the company. What in effect the revenue contends is that the addition of Rs. 40,000 could be justified as a disallowance for the portion of the amount said to have been expended for the purchase of cotton but actually paid out to the director.
7. We are not, however, in a position to take the above finding given by the Income-tax Officer as conclusive of the question as to whether the director, V. L. Balakrishnan, did in fact get any benefit out of the purchase transactions and whether the disputed sum of Rs. 40,000 represented the actual benefit that arose out of the transactions. As a matter of fact, the Income-tax Officer has not given that finding based on any of the entries in the accounts of the assessee or on any enquiry made by him as to the actual benefit which has accrued to the director. He merely proceeds on the basis of the difference in prices paid for the purchase of cotton from the said director and from others. The difference in prices may be due to various circumstances such as the quality of cotton, the time of purchase or the market conditions. As a matter of fact, it has been found that the assessee had also purchased cotton at the ceiling rates from other dealers to the extent of Rs. 1,57,208. It is not, therefore, possible to infer from the mere payment of ceiling price for the cotton purchased from the director that the sum of Rs. 70 and Rs. 80 were actually paid to the director in excess for Karunguni and Cambodia respectively with a view to benefit him and to treat the said alleged excess price paid as the actual benefit received by the director as a result of the purchase transactions, and disallow the same under Section 10(2)(xv) on the ground that the said sum did not represent the actual expenditure incurred by the company wholly and exclusively for its business.
8. It is not in dispute in this case that the purchase of cotton was in fac made and the Tribunal also finds that the payment in full at the ceiling rate had been made by the assessee. In such circumstances, we are of the view that the Income-tax Officer cannot disallow a portion of the sale price actually paid on the ground that that portion was not wholly and exclusively laid out for the purpose of the business. In Sanjeevi and Co. v. Commissioner of Income-tax, : 62ITR156(Mad) it has been pointed out that the jurisdiction of the revenue under Section 10(2)(xv) is confined to deciding the reality of the expenditure, viz., whether the amount claimed for deduction was factually expended or not, and whether it was wholly and exclusively for the purpose of the business, and that once it is found that the expenditure has been really incurred wholly and exclusively for the purpose of the business, the deduction of the entire amount should follow as a matter of course. The same view has also been taken in Amarjothi Pictures v. Commissioner of Income-tax, : 69ITR755(Mad) . The above decisions clearly lay down the proposition that once an expenditure has really been incurred wholly and exclusively for the purpose of the business, it is not for the revenue to go into the question of reasonableness while construing the question of allowance under Section 10(2)(xv).
9. But the learned counsel for the revenue, however, contends that the question of reasonableness will arise only when the expenditure is shown to have been incurred wholly and exclusively for the purpose of the business, that the Income-tax Officer in this case has not embarked on the question of reasonableness, but is merely finding out whether the entire expenditure has been incurred wholly and exclusively for the purchase of cotton and that it is well within his jurisdiction to find out whether a portion of the expenditure has really been incurred wholly and exclusively for the business while applying the provisions of Section 10(2)(xv). Reference is made by the learned counsel for the revenue to the decision in Bengal Enamel Works Ltd. v. Commissioner of Income-tax, : 77ITR119(SC) . But we are of the view that the said decision will not enable the revenue to cut up the expenditure really expended for the purpose of the business and find oat whether a portion of the expenditure so cut up was entitled to the benefit of Section 10(2)(xv). But, as a matter of fact, the Supreme Court in the said decision points out :
'But the taxing authority may disallow an expenditure claimed on the ground that the payment is not real or is not incurred by the assessee in the course of his business or that it is not laid out wholly and exclusively for the purpose of the business of the assessee. Thereby the authority does not substitute its own view of how the assessee's business affairs should be managed, but proceeds to disallow the expenditure because the condition of its admissibility is absent. '
10. The above observations clearly indicate that the Income-tax Officer's jurisdiction to disallow an expenditure will arise only when the payment is not real or is not incurred by the assessee in the course of the business or if it is not laid out wholly or exclusively for the purpose of the business. As has been pointed out by this court in Commissioner of Income-tax v. Raman and Raman Ltd., : 71ITR345(Mad) , for eligibility of an allowance under Section 10(2)(xv) there should be a nexus between the expenditure and the purpose of the business, and the expenditure should have been wholly and exclusively laid out for that purpose, and once it is established that factually such an expenditure has been incurred for the purpose of the business, the revenue or the court cannot justifiably claim to put itself in the arm-chair of a businessman or in the position of the board of directors and assume the role of ascertaining how much is a reasonable expenditure having regard to all the circumstances. Having regard to the fact that the expenditure incurred for the purchase of cotton is indispensable for the production of yarn and as such has a close nexus with the business of the assessee, it is not possible for the revenue to go into the question whether the payment of the price at the ceiling rates is reasonable or not, once it is found that full amount at the ceiling rate has been paid off.
11. In our view we have to sustain the order of the Tribunal in this case. The question referred is, therefore, answered in the affirmative and against the revenue. The revenue will pay the costs of the assessee. Counsel's fee Rs. 250.