IN RE: DISHAW MANECKJEE PETIT

1927
EXECUTIVE SUMMARY
• FACTS: WEALTHY MAN FORMED 4 PRIVATE COMPANIES, ACTED AS AGENT AND WITHHELD
A MAJOR BLOCK OF THEIR SHARES. THE COMPANIES RECEIVED INTEREST AND DIVIDEND
INCOME WICH HE OBTAINED IN THE FORM OF PRETEND LOAN. THIS AIDED IN SPLITTING
INCOME INTO 4 PARTS AND EVADE TAX.
• ISSUE:  IS COMPANY A SHAM FOR AVOIDING TAX LIABILITY? CAN THE CORPORATE VEIL
BE LIFTED?
• HELD: YES, THE COMPANY WAS FORMED AS A MEANS FOR AVOIDING SUPER-TAX,
COMPANY WAS NOTHING MORE THAN THE ASESSEE HIMSELF. YES, THE CORPORATE VEIL
CAN BE LIFTED.
The assessee, Dinshaw
Maneckjee formed 4 pvt. Ltd.
companies.
Each of these At the same time, he executed a Trust Deed
companies took over a which stated that the investment of the
particular block of his company shall be held by him as a trustee/agent
investments. of the company.

The company was doing no

He stated that the legal owners are his
business other than receiving
nominees, and he receives the interest and
dividends and lending that to
dividends in the capacity of a trustee, that the
Dinshaw as a loan with an
interest and dividends are theirs and not his.
interest.
All the shares in these companies except for 3,
No attempts were made to
were held by him. The 3 shares were held by
repay the loan, nor to pay the
his subordinates who were in his complete
interest.
control.
CONTENTIONS

• ASSESSEE’S ROLE IN COMPANY

• COMPANY’S ENGAGEMENT IN BUSINESS ACTIVITY
• PRESUMPTION OF TRANSACTION AND INTENT BEHIND COMPANY.
• GENUINENESS OF THE LOANS- FINDINGS OF THE COMMISSIONER
• COMPANY-ASSESSEE (SEPARATE ENTITIES?)
SALOMON | DINSHAW

FACTS –
MAJORITY SHAREHOLDERS
USING COMPANY AS TOOL TO EVADE LIABILITIES?
DIFFERENCE IN DECISIONS-
SALOMON – COMPANY WAS NOT USED AS A TOOL TO DEFRAUD CREDITORS. IT
WAS A LEGITIMATE SHOE BUSINESS, CREDITORS KNOWINGLY EXPOSED
THEMSELVES TO
THE RISK. CORPORATE VEIL EXISTS
DINSHAW – COMPANY AS A SHAM TO EVADE TAX LIABILITY. LIFTING
CORPORATE VEIL.

POINTERS: SHAREHOLDER STRUCTURE; ENGAGEMENT OF COMPANY IN

BUSINESS ACTIVITY; FRAUD; CONCEALMENT OF FACTS; INTENT BEHIND
TRANSACTIONS.
HELD
“THE COMPANY WAS FORMED BY THE ASSESSEE PURELY AND
SIMPLY AS A MEANS OF AVOIDING 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
PRETENDED LOAN.”
THE COURT HELD THAT, THIS IS A JUST SITUATION WHERE IT IS
NECESSARY TO SEE WHO'S BEHIND THE
COMPANY, AND THUS LIFTING OF CORPORATE VEIL IS
ABSOLUTELY JUSTIFIED IN THIS SITUATION AS TO SEE
REAL TRANSACTION. THEREFORE, IN ORDER TO FIND THE
WRONGDOER, THE COURT LIFTED THE VEIL WHICH IS
AN EXCEPTION TO THE SEPARATE PERSONALITY PRINCIPLE.
• SECTION 15 OF THE COMPANIES ACT 1993 (“ACT”) STATES THAT A COMPANY
HAS A LEGAL PERSONALITY IN ITS OWN RIGHT AND IS SEPARATE FROM ITS
SHAREHOLDERS. THIS IS A PRINCIPLE KNOWN AS THE SALOMON PRINCIPLE,
ORIGINATING FROM THE CASE OF SALOMON V A SALOMON & CO LTD.
• THE CORPORATE VEIL DOES NOT PROVIDE PROTECTION TO ITS
SHAREHOLDERS AND DIRECTORS FOR THEIR PERSONAL CONDUCT OR
ALLOW COMPANIES TO BE USED FOR SHAM TRANSACTIONS. ACCORDINGLY,
THE COURTS MAY LIFT OR PIERCE THE CORPORATE VEIL.
• IN THE CASE OF TAX EVASION OR UNAUTHORISED TAX AVOIDANCE, THE
COURTS MAY LOOK PAST THE SALOMON PRINCIPLE, PIERCE THE CORPORATE
VEIL AND DECLARE THE COMPANY A SHAM.
• THE COURTS WILL ONLY LIFT OR PIERCE THE VEIL WHERE AN INEQUITABLE
SITUATION MAY BE OCCURRING BEHIND THE CORPORATE FAÇADE BASED ON
THE FACTS OF EACH CASE. THE CORPORATE VEIL IS VITAL FOR THE
LEGITIMATE USE OF THE CORPORATE STRUCTURE AND THE PROTECTION OF
SHAREHOLDERS AND DIRECTORS AND THUS, BY ITS VERY EXISTENCE,
PROMOTES THE PLAYING FIELD FOR TAKING COMMERCIAL RISKS.
THANK YOU!!