MYCOL PRIVATE LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THERE is pretty little law directly involved in this income-tax reference. It, however, demands a wholesome approach to corporate taxation. The assessee is private company. The managing director of this company is a married woman called Aunsuyadevi. The company was described by its learned counsel, Mr Veeraraghavan, as a "family company". This is an expression used in serious legal discussion even in England. The phrase occurs in one of Justice Rowlatt's judgments. It you turn to company law, you know of no such company. We have heard of one-man companies, an impossibility under corporate law, but very much of a phenomenon if you look at corporate realities. Most one-man companies are, however, man-and-wife companies or family companies. Income-tax law has had to do with business houses and trading families which have incorporated themselves as companies. To many family men and women, innocent of company law, it is quite an artificial situation of find husband and wife, father and son, brother and sister, in laws and in-laws going through the motion of board-roof etiquette, passing resolutions, signing minutes books, entering into contracts of service, getting paid salaries, voting themselves benefits and the like. Company law is bereft of family feeling, if it is coldly approached, It insists on the members of the family doing the right thing as members of the company. Income-tax, however, sees through the facade. It has got to, most of the time there is no need to lift the veil of incorporation. In many compani held by families, the veil is made of pure gauze. It is the prerogative of the ITO to see through things to get at the fiscal relatives. Recently the income-tax code has made an express enabling provision. Not that the ITO has had any real need to be armed with a specific power. The express provision, however, in so many words, enables the ITO to disallow certain items of expenditure in what may be broadly described as "closed" companies. The modus operandi in such cases is that the expenditure incurred by the company is debited to the company and in all in the company and who is a close relationship with the others, having a controlling interest. This provision in the Indian I.T. Act, 1922, was s. 10(4A) of the Act. Its replica is to be found in s. 40(c)(i) of the present I.T. Act, 1961. The provision reads as follows :

(2.) THE sum and substance of this enabling provision is to arm the ITO with the power to disallow the remuneration paid to a director of a company if he is satisfied that the expenditure laid out in the payment of such remuneration is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by the company from such expenditure.

(3.) THE question in this reference is :