I had a similar experience at my first dojo. It turned out that the teacher had his own organisation (a 'federation' consisting of precisely two dojos) and was awarding his own gradings; including his own and the last time I checked he was up to eighth dan. However, for everyone else, there were impossibly high standards. I stayed for a year and didn't do a grading. Another guy that I used to practice with was there for seven years, training regularly and no grading as yet, not even a sixth kyu. I could go on.
My eyes have since been opened after training elsewhere, but what you describe has some of the characteristics of a cult and I'd also say in my first dojo the instructor was something of a bully and seemed to enjoy inflicting pain and undermining his students' efforts.
My advice? Check out your instructors lineage and if it's not 100% kosher, go elsewhere. Life is too short for this kind of nonsense.
(By the way, the instructor I'm talking about is in London and has a minor role in Petere Goldsbury's autobiographical reminiscences in the columns section-although he is not named).