is a concept that separates the personality of shareholders from
that of the company. It protects the shareholders from being liable for the
actions of the company. There is a fictional veil that exists between the
company and its shareholders, and a company acts only through its human agents.
Many times it is seen that the company commits improper/illegal acts behind the
corporate personality of the company. Thus it became important for the court to
lift this veil and see who was responsible for the improper conduct.
So through the lifting of the corporate veil, the court breaks the corporate
shell which gave protection to the fraudulent directors who did things against
the interest of the company.
In short , where the legal entity of a corporate body is misused for fraudulent
and dishonest purposes, the individuals concerned will not be allowed to take
shelter behind the corporate personality. In such cases the court will break
through the corporate shell and apply the principle of what is known as "lifting
or piercing the corporate veil".
Typical Assets Protected by a Strong Corporate Veil:
- Home and Vacation Property
- Automobiles and Other Personal Assets
- Personal Savings
- Retirement Money
- Personal and Business Real Estate
- Education Funds
- Other Businesses
In Re Sir Dinshaw Maneckji Petit Bari,
AIR 1927 Bom.371
2 Judge Bench: K Amberson Marten, Kt.,C.J.(author) & Kemp
In this case the concept of lifting of the corporate veil in case of tax
evasion was discussed.
Dinshaw incorporate: 4 Companies
(doing no business & all the capital invested by Dinshaw )
4 Companies -- Investment
Dividend & Interest
Loan to Dinshaw
(which was never repaid)
Fact Of The Case
- The assessee, Sir Dinshaw Manckjee Petit, was a wealthy man enjoying
huge income from dividends and interests
- He formed four private companies and agreed with each to hold a block of
the investment as an agent for it.
- Which I will call Family Companies for convenience of reference,
although in fact no other member of his family took any direct benefit thereunder.
- The names of these 4 companies were:
- Petit Limited
- The Bombay Investment Company Limited
- The Miscellaneous Investment Limited &
- The Safe Securities Limited.
- Each of these companies took over a particular block of investments
belonging to the assessee.
- The schedule showed that of these 498 shares, 254 stood in his name and
200 in the name of his wife and the rest in the name of some 13 other
- The 498 shares remain as they were in the safe hands of the assessee of his
nominees. So does the income also.
- He credited the income received by him in the accounts of the companies
and took it back in the form of a pretended loan.
- The whole idea was to split his income into four parts with a view to
Written By: Shashwata Sahu, Advocate
- The company was formed by the assessee purely and simply as a means to avoid
super-tax and the company was nothing more than the assessee himself. It did no
business, but was created simply as a legal entity to ostensibly receive the
dividends and interests and to hand them over to the assessee as a pretended
- Whether a company is duly Incorporated under the Companies Act, the
court should start with a presumption that it is a separate entity from any
individual although that individual may practically hold all the shares of
the company. But it would not necessarily follow that every alleged
transaction between such an individual and the company would be valid and
- The court is empowered to go into the question as to whether the
so-called one man company is really a business carried on by the assessee himself for the
purpose of avoiding payment of tax.
- It was held by MARTEN CJ that,
" The company was formed by the assessee purely and simply as a means of
avoiding supertax and the company was nothing more than the assessee himself. It
did not make any business but was created simply as a legal entity to ostensibly
receive the dividends and interests and to hand them over to the assessee as
- The company was created him merely so that he could make entries in the
company's books suggesting that it received the interests and dividends and
paid them as loans while in reality the receipt of the dividends and
interest, if it can be called the business of the company, was its only
business and was in fact the business of the assessee himself.
- Under given circumstances company cannot be regarded as carrying on its
business separate from that of the assessee. The money received by the assessee
will be regarded as dividends paid by the company. There were no genuine loans
but merely withdrawals of income disguised as loans.
- It was held that the company was not a genuine company at all but merely
he assessed himself disguised under the legal entity of a limited company.
The business was not the business of the company but of the assessee himself, and
that the alleged loans were not genuine loans.
LLM, KIIT School of Law