Corporate Veil is a concept that isolates shareholders’ personalities from the companies. It shields stockholders from being held accountable for the company’s conduct. The firm and its stockholders are separated by a fictional veil, and the company only operates through its human agents.
Many times, the corporation is seen committing improper/illegal behaviours behind the company’s corporate appearance. As a result, it became critical for the court to pierce the curtain and determine who was guilty for the wrongdoing.
As a result of the lifting of the corporate veil, the court dismantles the corporate shell that protected the dishonest directors who acted against the company’s best interests.
In brief, where a corporate body’s legal entity is used for fraudulent or dishonest objectives, the persons involved will not be permitted to hide behind the corporate personality. The court will break through the corporate shell and use the principle of “lifting or piercing the corporate veil” in such circumstances.
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
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)
FACTS OF THE CASE
- Sir Dinshaw Manckjee Petit, the assessee, was a wealthy man who earned a lot of money from dividends and interest.
- He established four private corporations and agreed to hold a portion of the investment as an agent for each of them.
- For the sake of clarity, I’ll refer to them as Family Companies, despite the fact that no other member of his family benefited directly from them.
- 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 businesses took over a certain portion of the assessee’s investments.
- According to the schedule, 254 of the 498 shares were in his name, 200 were in his wife’s name, and the rest were in the names of 13 other candidates.
- The 498 shares have remained in the safe hands of his nominees’ assessee. The income does as well.
- He credited his earnings to the companies’ accounts and then took them back in the form of a fictitious loan.
- The plan was to divide his income into four pieces in order to avoid paying taxes.
The assessee founded the company solely to avoid paying super-tax, and the corporation was nothing more than the assessee himself. It had no business and was only set up as a legal company to apparently receive profits and interest and pass them on to the assessee in the form of a fictitious loan.
When determining whether a company is properly incorporated under the Companies Act, the court should assume that it is a separate entity from any individual, even if that individual may effectively own all of the company’s shares. However, this does not mean that every alleged transaction between the individual and the firm is lawful and authentic.
The court has the authority to investigate whether the so-called one-man company is indeed a business run by the assessee himself in order to avoid paying taxes.
MARTEN CJ was of the opinion that, ” “The assessee founded the corporation solely to avoid paying supertax, and the corporation was nothing more than the assessee himself. It was constituted solely as a legal organisation to presumably receive profits and interest and ostensibly transfer them over to the assessee as fictitious loans.”
The company was formed solely to allow him to make entries in the company’s books implying that it received interest and dividends and paid them out as loans, when in reality, the receipt of dividends and interest, if it can be called that, was the company’s only business and was in fact the assessee’s business.
Under the conditions, the corporation cannot be considered to be conducting its own business separate from the assessee’s. The money received by the assessee will be treated as corporate dividends. There were no true loans, only income withdrawals disguised as loans.
It was held that the corporation was not a true company at all, but rather that he assessed himself as a limited company. The assessee’s business was not the company’s business, and the alleged loans were not legitimate loans, according to the court.
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