IN RE SIR DINSHAW MANECKJEE PETIT, AIR 1927 BOM. 371

IN RE SIR DINSHAW MANECKJEE PETIT, AIR 1927 BOM. 371

 

FACTS

• Sir Dinshaw Maneckjee Petit was a wealthy man. He derives his income from dividend and interest. In order to evade tax he established four companies and used his income in these four companies as investment.
• He called them as his Family companies for convenience of reference but no member from his family had ever received any direct benefit from these companies.
• The name of these four Companies were Petit Limited; the Bombay Investment Company Limited; the Miscellaneous Investment Limited; and the Safe Securities Limited. Each company has taken a particular part of Dinshaw income.
• But as the modus operandi was substantially the same in each case it will suffice to follow out the fortunes of Petit Limited.
• It was found that there were 498 shares of the companies out of which 254 were in his name, 200 were in the name of his wife and 13 were in the safe hands of nominees.
• The Attorney General clearly stated that the disposition by the Dinshaw in favour of each company is a simulacrum, as is also a declaration of trust and the transactions made were only on paper but not in real. He subsequently claimed that the sums in dispute represented taxable income of the Dinshaw in accordance with the Section 2(15), 3,6,12,55,56,and 58 of Indian Tax Act, 1922.
• Apart from entering into an agreement with Dinshaw, the companies were not involved in any active business but held 38 objects in its memorandum.

 

ISSUES

• Whether the companies formed by Sir Dinshaw to be treated as a separate legal entity?
• Whether the dispute that newly formed companies by Dinshaw was a simulacrum is valid?

 

HELD

The company was created by him merely, so that he could make entries in the company’s books suggesting that it received the interest and dividends and paid them as loans whilst in reality the receipt of dividends and interest, if it could be called the business of the company, was its only business and was in fact the business of the assessee himself.

• 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 simply created as a legal entity to ostensibly receive the dividends and interests and to hand over them to the assessee as a pretended loan.
• The company was created by him merely so that he could make entries in the company 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.
• In this respect the company cannot be regarded as carrying on its business separate from that of 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 the assessee himself disguised under the legal entity of a limited company.

 

COMMENTARY

“The court has the power to disregard a corporate entity if it is used for tax evasion or to circumvent tax obligation."- Avtar Singh“The dividends and interest income received by the company was handed back to Sir Dinshaw as a pretended loan. It was held that the company was formed by the assessee purely and simply as a means of avoiding tax and company was nothing more than assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them over to the assessee as pretended loans.”