Corporate Veil 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
• Investments
• 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:
  
  1. Petit Limited
  2. The Bombay Investment Company Limited
  3. The Miscellaneous Investment Limited &
  4. 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 nominees.
• 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 evade taxes.
   

Held:

• 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 loan.
• 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 genuine.
• 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 pretended loans."
• 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.

Written By: Shashwata Sahu, Advocate, LLM, KIIT School of Law