In Re Dishaw Maneckjee Petit, AIR 1927 Bom 371

This is a landmark case law where the corporate veil was lifted to make the actual person behind the sham companies liable for a super-tax on an aggregated income. It was an instance of the sham transfer, even though the transaction ends with the formal registration of the document before the Registrar.
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Introduction

In re Sir Dinshaw Maneckjee Petit (1927), Sir Dinshaw Petit was a rich man having dividend and interest income. He was assessed for super-tax on an aggregate income of Rs. 11,35,302 arising in the previous year. He wanted to avoid income-tax. For this purpose, he had formed four private companies, in all of which he was the majority shareholder. The companies made investments and whenever interest and dividend income were received by the companies, he applied to the companies for loans, which were immediately granted, and he never repaid. In a legal proceeding the corporate veil of all the companies were lifted and the income of the companies treated as if they were ofSir Dinshaw Maneckjee Petit.

Facts

Sir Dinshaw Petit was assessed for super-tax on an aggregate income of Rs. 11,35,302 arising in the previous year. In the year 1921 the assessee formed four private companies to avoid income-tax which he called family companies for convenience of reference, although in fact no other member of his family took any direct benefit thereunder. The names of these four companies were Petit Limited; The Bombay Investment Company Limited; The Miscellaneous Investment Limited, and the Safe Securities Limited. Each of these companies took over a particular block of investments belonging to the assessee.The companies made investments and whenever interest and dividend income were received by the companies, he applied to the companies for loans, which were immediately granted, and he never repaid.

Issue

  • Whether 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?

Contentions

The advocate contended that the alleged disposition by the assessee in favour of each family company is a sham, as was also the declaration of trust, that the transactions were all paper transactions and not real. That if the family company carries on any business, it does so solely as the agent of the assessee, and that in any event the alleged loans are not genuine loans.

Accordingly, on the assessee’s own showing, the family company has been accumulating all its past income by handing it over to the assessee at interest with the result that by December 31, 1924, the total had reached Rs. 7,14,103. It had not even paid its preference dividend of in all Rs. 30 per annum on the three preference shares held by the three subordinates of the assessee.

It was contended by the opposite counsel that that the Court was bound to accept the agreement Exhibit B, and declaration of trust Exhibit C of April 12, 1921, as effecting in law what they purport to effect.

Judgement

The judges came to the conclusion that there was there in law evidence on which the Commissioner might reasonably find as a fact (1) that there was no genuine transfer or declaration of trust in favour of the family company, and (2) that the alleged loans were not genuine loans. The Judges accordingly hold that the loans in question were not genuine loans but were merely withdrawals of income disguised as loans.

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The Court held that whether the separate entity is a company or an individual matters little or nothing in this respect.[1]With the company just as with the individual you may start with the presumption that a duly executed transfer is a genuine document. It was an instance of the sham transfer, even though the transaction ends with the formal registration of the document before the Registrar, and the handing over of the purchase consideration in cash in his presence- cash which is conveniently provided by a third party for a few hours or minutes, and which will be restored to him after the conclusion of the ceremony before the Registrar.

Analysis

The alleged loans of the dividends year by year to the assessee, it appeared clear that it was the assessee who received those dividends in the first instance from the Maneckjee Company. There was no suggestion that the Maneckjee Company had been instructed to pay those dividends to the family company. Accordingly, the rest was merely a matter of book entries, viz., to credit the cash to the company and then to transfer it to the debit of the assessee’s account. The actual cash which after all was the important thing was kept by the assessee throughout. And one startling circumstance was that beyond the accounts there was nothing in writing whatever to establish the alleged agreement for loan by the family company. Of the importance of that alleged agreement there could be no doubt that by it thefamily company practically bound itself hand and foot to do no business, for its cash immediately on receipt was to be handed back to its vendor and promoter at a fixed rate of interest. And yet there was not even a minute on the subject.

The judgement given in this case was the exact opposite of Salomon v. Salomon & Co.[2]Unlike this case there was a genuine and prosperous business in Salomon’s case, viz., that of a boot and shoe manufacturer. The business was transferred to the limited company, and there was no question but that thenceforth the limited company carried on that business. That the company subsequently fell on evil days was no fault of Mr. Salomon. Lord Macnaghten expressly negatived any fraud or dishonesty on his part. Nor was there any concealment. The creditors were, therefore, forced to argue that in effect no separate entity was created by the Statute, and that a person holding the bulk of the shares might be held liable as if he was the sole proprietor or a partner.

Conclusion

In this case, the assessee wanted to avoid income-tax. Solely for this purpose, heformed four private companies, in all of which he was the majority shareholder. The companies made investments and whenever interest and dividend income were received by the companies, he applied to the companies for loans, which were immediately granted, and he never repaid. Hence, in this case the corporate veil of all the companies were lifted and the income of the companies were treated as if they were ofSir Dinshaw Maneckjee Petit.

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[1] Maneckji Pestonji Bharucha v. Wadilal Sarabhai & Co. (1926) 28 Bom. L.R. 777

[2] Salomon v. Salomon & Co., [1896] UKHL 1: [1897] AC 22.

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