Introduction

• This case deals with the lifting of the corporate veil if it is used for tax evasion or to circumvent tax obligation.

Facts

• In this case, the assessee, Sir Dinshaw Maneckjee Petit, formed four private limited companies. Each of these companies took over a particular block of investments belonging to the assessee.
• The assessee holds all the shares of the company except three, which were held by his subordinates who were under his complete control.
• The whole work of the companies was to do no business apart from receiving dividends, his income, and handing them back to the assessee as loans.
• This was the kind of way for the assessee to reduce tax by dividing his income among four parts.
• The assessee was assessed for supertax, deeming that the profits of the company were profits of the assessee himself and that the alleged loans were not genuine.

Issues Involved

• Whether the business was set up by the assessee for tax evasion?
• Whether the corporate veil of the company be lifted to determine the question of tax liability?

Observations

• The Court observed that while a company should be presumed a separate legal entity from its shareholders, even if one individual holds all shares, this does not necessarily mean every transaction between the individual and company is valid or represents a real transaction.
• The Court found the companies here were merely the assessee disguised as legal entities, created solely to receive dividends and interest and hand them over to the assessee as pretended loans to avoid super-tax.
• The companies did no real business.
• The shares and securities were held in the assessee's name, with interest and dividends received directly by the assessee.
• The burden was on the assessee to show they were truly held for the companies, not himself.
• The companies never obtained full legal possession or control of the purported purchased assets, nor were there completed transfers or trust deeds granting ordinary purchaser rights. The "loans" were not repaid.
• The Court reasoned there were no genuine transfers or trusts for the companies, and the "loans" merely withdrawals of income disguised as such.

Conclusion

• The Court finally held that the company was not a genuine company, and it was formed by assessee just for tax evasion. Hence, the corporate veil is lifted in this case.