Sir Dinshaw Maneckjee Petit Case [AIR 1927 Bombay 711]: Doctrine Of Lifting Of Corporate Veil Established

Key Takeaways

• A company is regarded as a separate legal entity distinct from its members and shareholders as a result of which, the shareholders or directors cannot be held personally liable for any offence or liabilities of the company. This is known as Corporate Veil.
• However, it may so happen that taking immunity under this corporate veil; members, directors, or shareholders defraud creditors, outsiders or employees. That is when this veil is lifted and the person behind the veil is held for the fraudulent or ultra vires act.
• As per the Companies Act 2013, this concept is known as ‘Lifting of Corporate Veil’.

Date Of Judgement
29th November 1926

Bench
IR Amberson Marten KT, Honorable Mr. Justice Kemp

Subject

This case dealt with the lifting of corporate veil. As per the Companies Act, 2013, a company on incorporation, becomes a separate legal entity distinct from its members and acquires the status of an artificial person clothed with certain rights and obligations. The members, directors, and shareholders enjoy this immunity as a result of the concept of separate legal entity. This concept is known as a corporate veil. As the name implies, it is used to cover or conceal or protect. This veil may be lifted in case of fraud, misrepresentation or providing false information. The person behind the veil is identified and held liable for the fraudulent and ultra vires act.

Overview

• The assessee, Sir Dinshaw Maneckjee Petit, was an affluent man. He had formed four private companies namely Petit Limited; the Bombay Investment Company Limited; the Miscellaneous Investment Limited; and the Safe Securities Limited; and agreed to hold a block of investment as an agent.
• The assessee’s aggregate income of Rs. 11,35,302 attracted a total tax of Rs. 3,90,804 out of which, Rs. 2,76,800 were received from the Government and other fixed interest-bearing funds and Rs. 1,14,004, from dividends in companies.
• Sir Dinshaw’s counsel contended that he is only the trustee of the family companies which he had formed, and that the interest and dividends received were that of the family companies. The money credited to his account are loans, although he has not actually paid the interest in cash.
• The Advocate General asserted that the disposition by the assessee in favor of each family company is a sham, as is also the declaration of trust, and that the transactions are only on paper and fictitious. The family’s business is only in the nature of the agent of the assessee and that in any event, the alleged loans are not genuine loans. He consequently claimed that the sums in dispute represent taxable income of the assessee under Sections 2 (15), 3, 6, 12, 55, 56, and 58 of the Indian Income Tax Act, 1922.
• The newly formed companies had 38 objects in its memorandum. Apart from entering into agreements with assessee, it wasn’t involved in any active business.

Issues

1. Whether the companies formed by Sir Dinshaw Maneckjee Petit were to be treated as separate legal entity?
2. Whether contention that Sir Dinshaw Maneckjee Petit’s newly formed companies was a sham is valid?

Judgement Analysis

• The court remarked that the company was recognized under the legislature, and hence could not be regarded as simulacrum or sham just because it was a One Person Company.
• The Court relied heavily on the merits of the Salomon v. Salomon case, and it contended that the concept of a separate legal entity does not give the privilege to treat every alleged transaction as a real transaction. The Bombay High Court stated that the transactions between the assessee and his companies were of the nature of ‘window dressing’.
• The Court, on the further inspection of the documents of the company, established that there was neither a formal transfer, nor delivery of share certificates and neither did the original documents bear any registration mark.
• The court further cited the Inland Revenue Commissioners v. Sansom [1921] 2 K.B. 492, where the alleged loans had undoubtedly been paid by Mr. Sansom to the family company and it was not a mere pretense to avoid taxes. The court intended to state that just by virtue of giving or taking loans within the family companies would not amount to it being a bogus or sham company. The company formed by Sir Dinshaw did not carry on any business; it was formed merely to evade taxes by handing over the dividend and interest income of the assessee as pretended loans.
• The court inferred that Sir Dinshaw Maneckjee Petit’s companies was merely formed for evading supertax on his taxable income and the company was nothing more than the assessee himself. Under these circumstances, it cannot be regarded that the company was separate legal entity from the assessee.

Conclusion

The Bombay High Court held that the company was formed solely and simply for the reason of evading super taxes. The company formed did no business, it was formed merely as a legal entity to ostensibly receive the dividends and interest and to hand them over to assessee to as pretended loans. This case highlighted the fact that separate legal entity would grant no protection involving cases related to the protection of revenue.

Click here to download the original copy of the judgement