In re Sir Dinshaw Maneckjee Petit BariAIR 1927 Bom. 371

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MARTEN, C.J. – For the financial year 1925-26, the assessee Sir Dinshaw Petit has been
assessed for super-tax on an aggregate income of Rs. 11,35,302 arising in the previous year.
Of this sum he objects to Rs. 3,90,804 made up of two sums of Rs.2,76,800 and Rs. 1,14,004,
the former of which arises from Government and other fixed interest bearing funds, and the
latter from dividends in companies. Nothing appears to turn on this distinction, and I shall
accordingly ignore it. Admittedly the assessee is the legal owner of most of these funds in the
sense that they stand in his name and the interest and dividends are paid to him direct.
Admittedly as regards the rest the apparent legal owners are his nominees and he receives the
interest and dividends. Admittedly he has retained all the above interest and dividends and
applied the same to his own use. But he contends that he is only a trustee for certain family
companies which he has formed: that the interest and dividends are theirs and not his: that he
has credited them in account, and that though he has had the benefit of them in specie this is
because the family companies have lent him these moneys at interest which he has credited to
them in account although he has not actually paid the interest in cash. He says that the family
companies are under no obligation to declare a dividend, and are entitled to lend out their
income in this way, even though it results over a series of years in the fixed preference
dividends being unpaid and a large sum representing back income being accumulated in the
hands of the assessee.
The Advocate General on the other hand contends that the alleged disposition by the
assessee in favour of each family company is a sham as is also the declaration of trust that the
transactions are 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. He consequently claims that the sums in dispute represent taxable
income of the assessee under Ss. 2(15), 3, 6, 12, 55, 56 and 58 of the Indian Income-tax Act,
1922.
In consequence of this dispute, the Commissioner of Income-tax has stated a case for our
opinion on the four questions of law submitted in para 15. Question (4) deals with the
genuineness of the alleged loans, but in para 33 the Commissioner explains the basis on which
he has submitted this question, although in one sense it may be said to be a question of fact.
Turning to the facts it appears that in the year 1921 the assessee formed four private
companies 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 four
companies were Petit Limited: The Bombay Investment Company Limited: The
Miscellaneous Investment Company: and the Safe Securities Limited: Each of these
companies took over a particular block of investments belonging to the assessee. But as the
modus operandi was substantially the same in each case it will suffice to follow out the
fortunes of Petit Limited.
Taking then Petit Limited as an example, this family company was incorporated about
April 12, 1921, with a nominal capital of rupees ten millions divided ultimately into 9,99,900

ordinary shares of Rs. 10 each and one hundred preference shares of Rs. 10 each carrying a
fixed cumulative preferential dividend of six per cent. Its issued and subscribed capital
consists of 3,48,604 fully paid ordinary shares all held by the assessee, and three fully paid
preference shares held by three persons who are alleged in para 24 of the case to be his
subordinates and to be entirely under his control, the first being the Secretary of the Petit
Charities, the second being the Secretary of the four family companies, and the third being a
clerk in the same companies. Its primary object as set out in Clause 3(1) of its Memorandum
of Association was to enter into agreement of April 12, 1921 Exhibit B, under which the
assessee sold to the family company 498 shares in Maneckji Petit Manufacturing Company
Limited for Rs. 34,86,000 at the rate of Rs. 7,000 per share in consideration of the family
company allotting him 3,48,600 fully paid shares of Rs. 10 each in its capital.
By a contemporaneous indenture of April 12, 1921, Exhibit C, the assessee executed a
declaration of trust which recited an agreement that the 498 shares should not be transferred
until the family company should call upon the assessee to do so, and that in the meanwhile the
assessee and his nominees would hold the 498 shares as agents and trustees of this family
company. The testatum then contained a formal declaration of trust of these shares by the
assessee for the family company and an agreement by him to cause his nominees to make a
similar admission. 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 names of some thirteen nominees. It is
common ground that hitherto no formal transfers have been called for by the family company.
Consequently the formation of the family company has made no difference to the names in
which these 498 shares are held on the register of the Maneckji Petit Manufacturing Company
Limited.
As regards the interest and dividends on the 498 shares, admittedly they have been
ultimately paid to the assessee throughout. Taking for example the entries of September 10,
1924, in the books of the family company itself the cash book shows a receipt of Rs. 24,900
for a half year’s dividend and is then debited to the current account of the assessee. This
current account also contains a debit of Rs. 40,549 in respect of interest due by the assessee
on the alleged moneys of the family company as shown in the journal entry Exhibit G. It also
shows a total debit balance against the assessee of Rs. 7,14,103 which is included in the
balance sheet Exhibit I. 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 has 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, however, purported in its balance sheet Exhibit I to set aside
rupees six lacs to a Depreciation and Reserve fund Account. This, says, counsel for the
assesse, was a wise provision for the rainy day. And indeed Burland v. Earle [(1902) A.C.
83] may be cited as an authority for the proposition that in general a company is entitled to
place profits to a depreciation or to a reserve fund, and that dissentient shareholders in the
absence of a declaration of dividend or bonus or a winding-up cannot challenge the decision
of the majority provided the powers are exercised bona fide.

So much for the accounts. I need not go into them in any greater detail. It suffices to say
that the dividends on the 498 shares remained in fact with the assessee from first to last. All
the rest represented book entries which might represent the truth or might not.
As for the family company itself, its activities were of the most modest description,
despite the thirty-eight objects mentioned in its memorandum. Indeed apart from the primary
object of entering into the above agreement with the assessee it has done little or nothing
except to vary it in an important particular by the declaration of trust. There has been no
additional buying or selling as contemplated by Object 2. The 498 shares remain as they were
in the safe hands of the assessee or his nominees. So does the income also. The company has
been too timid to indulge in any active business. It has been content to be a holding company,
and as counsel for the assessee truly points out, there is no general law against that.
Turning to the Articles of Association they give the assessee complete control as
governing director and indeed there is no other director, for Article 96 which prescribes a
minimum of two directors only applies if there is no governing director. Accordingly, under
Articles 120 and 93 he may exercise all the powers of the company not required to be done at
a general meeting. This would, I think, enable him to lend money under object 4. But
dividends have to be declared by a general meeting. The fiduciary position of the assessee is
to be no bar to the company being bound by the agreement though, having regard to Article
95, it is perhaps not clear that Article 103 enabling directors to contract with the company
applies to the assessee. The audited accounts when approved by a general meeting are to be
conclusive except as regards errors discovered within three months.
It is clear, then, that the company has to act as the assessee wills, provided the terms of
the Indian Companies Act are complied with. But here I wish to emphasize the warning which
Younger, L.J. gave in Inland Revenue Commissioners v. Samson [(1921) 2 K.B. 492]:
“Now, speaking for myself, I do in the light of these considerations, deprecate in
connexion with what are called one-man companies the too indiscriminate use of
such words as simulacrum, sham, or cloak – the terms found in this case – or indeed
any other term of polite invective. Not only do these companies exist under the
sanction, even with the encouragement of the Legislature, but I have no reason
whatever to doubt that the great majority of them are as bona fide and genuine as in a
business sense they are convenient and suitable media for the provision and
application of capital to industry. No doubt there are amongst such companies, as
amongst any other kind of association, black sheep; but in my judgment such terms
of reproach as I have alluded to should be strictly reserved for those of them and of
their directors who are shown to deserve condemnation, and I am quite satisfied that
the indiscriminate use of such terms has, not infrequently, led to results which were
unfortunate and unjust, and in my judgment there is no case for their use.”
And then at pp. 516-7, the learned Judge says:
“In my judgment so long as such a company as this was is recognised by the
Legislature there can be no reason why the contracts and the engagements made in its
name or entered into on its behalf, and themselves ex facie regular, should not
everywhere until the contrary is alleged and proved be regarded as the company’s

and not those of somebody else, any more than there is any reason why the contracts
and engagements and transactions, say even of such a company as the London and
North Western Railway Company, should not be regarded as regular until the
contrary is shown. To my mind it is strange that it should be necessary to insist upon
this aspect of the case at this time of day. But until it is fully realised the loyal
adherence to the principles of Salomon case [(1897) A.C. 22], to say nothing of
obedience to the declared policy of the Legislature – which is required of all Courts –
will not be forthcoming.”
This brings me then to the law on the points in dispute, and I may preface my
observations by saying that I have almost been brought up as it were on Salomon case for
when I was a pupil in the Chambers of Mr. R.J. Parker, he, with the independence and clarity
of thought which afterwards characterised his judgments on the Bench, advised that the
decisions first of Mr. Justice Vaughan Williams and afterwards of the Court of Appeal were
erroneous in law – a view which was afterwards upheld by the House of Lords. I am,
therefore, not likely to depart now from the principles of Saloman case even though I am in a
different land. It is indeed one of the foundations of modern Company law, and until one can
grasp the true significance of the legal entity thus created by Statute, much must remain dim
to the understanding of those grappling with the subject.
Let us start then clearly with this that there was here a company duly incorporated under
the Indian Companies Act and that this company was a separate entity from the assessee Sir
Dinshaw Petit, just as much as, say, his secretary or any other third party might be. But
because there was this separate entity which I will call X, it does not necessarily follow that
every alleged transaction between the assessee and X was valid or that it represented a real
transaction. We in this country are extremely familiar with the benamidar. Benami
transactions abound, for they are employed extensively to hide the truth from inquisitive eyes.
For instance, in a mofussil appeal last term we had a case of the truth being hidden for over
thirty-seven years the modus operandi being for many years a sham mortgage, and later on for
even greater security a sham sale to a third party. In that particular case the motive was to
defeat creditors, should a speculative business prove unfortunate. No doubt in many cases the
rules of evidence prevent the parties to the instrument from giving oral evidence to show that
the document is not what it purports to be. But these rules do not prevent the Crown from
enquiring into the truth in the present case, for, in my judgment, S. 92 of the Indian Evidence
Act does not apply.
It is contended by counsel for the assessee that we are 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. In my judgment, that contention is erroneous. Whether the separate entity is
a company or an individual matters little or nothing in this respect. With the company just as
with the individual you may start with the presumption that a duly executed transfer is a
genuine document. But you may yet eventually find on proper evidence that in fact it was an
instance of the sham transfer which we are all familiar with in the case of individuals, 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. It is on a par with funds
provided for what is known as “window dressing purposes” in the City of London at the close
of a particular financial period. And as regards the point I am now on, I see no vital
difference between cash in the shape of coin or notes on the one hand and shares on the other
hand. Coin or notes are more easy to manipulate, for coin cannot easily be traced and notes
probably will not be in this country. Shares can be traced, but they have this advantage over
coin that only a printing press is requisite. And should the transaction be upset, it only means
that the shares will never in law have left their slumber as uncalled or nominal capital, or at
any rate must be restored to their slumber. There is consequently no risk of any one depriving
any of the parties of what does not really matter, viz., the coin or notes of the Realm.
But though I hold that it is permissible in law for the Crown to enquire into the
genuineness, the transactions between the assessee and the family company, it would be quite
wrong to start with the presumption that those transactions are sham ones. On the contrary
one should start with the presumption that they are genuine, and throw the onus on the Crown
to prove the contrary. [See Lord Justice Younger’s judgment in Samson case [(1921) 2 K.B.
492] already cited. We must, therefore, look closely into the facts of the present case, and
then see whether there is evidence sufficient in law to enable the Commissioner to hold – as
he did hold – that the Crown had discharged that onus. Or as it might be said in a jury case
whether there was in law evidence to go to the jury, and whether on that evidence a jury of
reasonable men could find that in fact the transactions were sham ones.
Now the main facts here are not disputed. I have already set them out, and need not
repeat them. And one striking element is that the company has never yet obtained sole legal
possession and control of the property which it purported to buy. Nor can one point to clear
and definite evidence that the Company is carrying on a genuine business as a separate entity.
The registered agreement of sale of April 12, 1921 which was mentioned in the Memorandum
and Articles of Association was an ordinary contract for the sale and purchase of a block of
shares. In the natural course of events that contract should have been completed by a formal
transfer and delivery of the share certificates, and the subsequent entry of the company’s
name as share-holder. Why then should there be the unregistered document of the same date
by which the company was not to get the ordinary rights of a purchaser, and to that extent was
not to carry into effect the agreement, Exhibit B, mentioned in Cl. 3(1) of the Memorandum?
What advantage could the company get by being content with a declaration of trust by the
vendor alone? And if it represented a genuine bargain, why should it be thus concealed from
those inspecting the Memorandum or searching the Register? On the other hand, one can
clearly see the disadvantages to the company by the course the alleged transaction took.
Substantially the company could not begin the business contemplated by Cls. 3(2) and (3) of
the Memorandum until they de facto acquired the shares which constituted their only asset. A
law suit might be necessary to force the alleged trustee or his nominees to execute the
necessary transfers or to deliver up the share certificates. And there were other risks in thus
leaving all their property in the hands of a sole trustee or his nominees, for he and they could
have given a good title to any third parties who presumably would be quite ignorant of the
alleged but concealed trust. On the evidence before us, the company has not even got any
admission of this trust by the fourteen nominees of the assessee set out in the schedules to

Exhibits B and C. For all we know they may not even be aware of it, despite the agreement
by the assessee in Exhibit C that he will cause these nominees to admit the trust. It is true that
the agreements set out the denoting numbers of the shares. And so the shares may be said to
be earmarked as being the company’s property. In this respect the copy agreements in the
case stated have made a serious omission. They do not contain the denoting numbers, but I
have called for the originals and find that in fact these numbers were inserted. I have also
called for and inspected the file of the company kept by the Registrar of Joint Stock
Companies, and I find that although neither of the original documents bears any registration
mark the inference I should otherwise draw from the minute of April 12, 1921 is correct, viz.,
that the agreement was registered but that the declaration of trust was not registered. Should,
however, the Maneckji Petit Manufacturing Company Limited have Articles of Association in
a common form giving it a prior lien for advances to any individual shareholders, then it may
be that the family company might be postponed should the assessee or his nominees be
indebted to the Maneckji Company.
No substantial argument was advanced to us to explain why the device of this concealed
declaration of trust was resorted to. One can hardly accept the excuse given to the Income-tax
authorities that it was to save trouble that formal transfers were not executed. If, so, why go
to the trouble of two documents Exhibits B and C instead of one? The real reason may be to
preserve the assessee’s voting powers in the Maneckji Company. But that is a matter again
for his benefit, and not necessarily for the company’s advantage. It would be quite consistent
with the transaction being a sham one.
Turning next to the alleged loans of the dividends year by year to the assessee, it appears
clear that it is the assessee who receives these dividends in the first instance from the
Maneckji Company. There is no suggestion that the Maneckji Company has been instructed
to pay those dividends to the family company. Accordingly, the rest is 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 is the important thing is kept by the
assessee throughout. And one startling circumstance is that beyond the accounts we have
nothing in writing whatever to establish the alleged agreement for loan by the family
company. Of the importance of this alleged agreement there can be no doubt. By it the
family 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 is not even a minute on the subject. And we are asked to infer the
agreement from the accounts and the yearly balance-sheets. If, however, this was a genuine
agreement, why should it also not see the light of day, or at any rate find a place in the
company’s minute book? And none the less so because the governing director with his wide
powers was purporting to lend the company’s money to himself.
The result is that we have a case which is the exact opposite of Salomon v. Salomon &
Co., in the essential facts which I am now considering. There was a genuine and prosperous
business in Salomon case, viz., that of a boot and shoe manufacture. That 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. He tried to save it, and Lord Macnaghtten 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.
That contention the House of Lords demolished.
So, too, in Inland Revenue Commissioners v. Sansom, there was a genuine timber
business carried on by the limited company, which made large profits during the war. These
profits were not distributed in dividend, but were alleged to have been lent to Mr. Sansom the
governing director who held all the shares but one. The question was whether these loans
were genuine. Sansom himself gave evidence and satisfied the Commissioners that he was
telling the truth. The appellate Court confirmed their decision, and pointed out that Mr.
Sansom’s case was corroborated by the fact that one of the alleged loans had undoubtedly
been paid by him to the family company. Here we have got nothing of that sort. The assessee
has not ventured to give any evidence and the finding of the Commissioner is against the truth
of his story. Nor have any of the alleged loans been repaid. If then the Court of Appeal in
Sansom case had the present facts before them, I think their judgments show that a different
conclusion would have been arrived at. Thus Lord Sterndale, M.R., says:
I think it only needs the statement of those facts to show that anybody would
approach the matter with a very considerable amount of suspicion and I think the
prima facie tendency of anybody’s mind would be to say – This transaction of loans
or advances without security and without interest is a mere fiction. It is all nonsense,
and the real fact is that Mr. Sansom was receiving under the guise of loans or
advances the profits which were made by the company which he controlled and in
which he held practically the whole of the impression off-hand. And that no doubt
was part of but only a part of the case which was made before the Commissioners.
Now the Commissioners have found that these were genuine loans, that they were
loans by the company to Mr. Sansom, and that they were not mere pretences to hide
the fact that he was receiving the profits of the company. They saw him; he was
examined before them, and I suppose they had before them all Mr. Sansom’s and the
company’s books and all the materials that could be provided. They are business
men who I have no doubt have heard of one-man companies and are perfectly
familiar with the questions which arise upon them, and they were certainly as well
fitted as we are to come to a conclusion of fact in the matter. They did come to that
conclusion. I shall allude to the particular terms of their findings later on, but they
did come to that finding. It seems to me that for reasons which I shall give this really
puts an end to this case, which, in my opinion, depends entirely upon questions of
fact.
And Scrutton, L.J., says:
That assessment came before the Commissioners, who had to decide on this point
whether these were genuine loans or whether they were merely a disguise for profits
of the company received by the shareholder. Now personally I feel that I should have
approached the consideration of that question with the strongest presumption that
they were really profits and not loans; the whole thing looks extremely suspicious.
But the Commissioners saw Mr. Sansom, they heard him cross-examined, they

heard other witnesses, they heard all that could be said on either side, and they heard
that in the earlier years of the company a similar loan appeared in the books which
had been repaid by Mr. Sansom to the company, and after hearing all the evidence
they found that these were genuine loans. Now, whatever I might have thought, not
having seen the witnesses, I do not see how I can possibly interfere with a finding of
the Commissioners, who are judges of fact and who have seen Mr. Sansom, that these
were genuine loans.
And Younger, L.J.:
I wish, however, to express, if I may be allowed to do so, my fullest concurrence
with what has fallen from Scrutton, L.J., and also from the Master of the Rolls on the
question in relation to these loans, as it must have presented itself to the Crown
before the case came before the Special Commissioners at all. The transactions
between Mr. Sansom and the company in relation to these loans are indeed on the
fact of them very singular.
Lord Justice Younger further goes on to point out the singular feature that Mr. Sansom
was thus exercising his powers as governing director to lend the company’s moneys to
himself without interest and without security. The case for our decision presents similar
features, except that the alleged loan is said to carry interest.
I next turn to Jacobs v. the Commissioners of Inland Revenue [(1925) 10 T.C. 1], which
was a case decided in the Court of Session, Scotland, on June 4, 1925, by the Lord President
(Lord Clyde) and Lord Cullen and Sands. There, again, there were genuine businesses, viz.,
shops carried on by the several companies in which Mr. Jacobs held substantially all the
shares. Here also the profits were alleged to have been lent to Mr. Jacobs. But in this case the
Special Commissioners held that the loans were not genuine loans, and the Court of Session
upheld their decision. Lord Clyde in the course of his judgment stated as follows:
My Lords, in this case the question and the only question, put to us is whether the
Special Commissioners were entitled to find that the sums withdrawn were part of the
appellant’s income and as such liable to Super-tax. We are not the Judges of Appeal
on questions of fact but on questions of law only, and, therefore, the only question
before us is whether the appellant can make out that upon the facts, either admitted or
proved, which are itemised …the Commissioners could legally – that is to say, could
reasonably, without being unreasonable – arrive at the finding in fact which is
submitted for our consideration…I confess I can find no ground at all which would
justify me in saying that the Commissioners were not entitled to form the conclusion
in fact at which they did arrive…I think it is probably true that it would have been
better if the last part of that finding had been expressed in the same form as the
earlier portions of the finding are expressed, namely, a finding that the loans were not
genuine loans but were in point of fact payments drawn from the profits of these
companies by the appellant and formed part of his income. But, after all, that is
nothing but a question of form; it is not one of substance; I have no doubt at all that
on the facts, admitted or proved, there was ample ground upon which the
Commissioners could reasonably arrive at the result which they reached, and that is

enough for the decision of the only question put to us. I think the question ought to
be answered in the affirmative.
That case seems to me very close to the present one, except that here we have not got a
company carrying on an open business like a shop. The circumstances, therefore, are more
unfavourable to the assessee.
If, however, the genuineness of the alleged transfer or declaration of trust is once
admitted, there is another class of case which is clearly set out in the judgment of Scrutton,
L.J., in Sansom case at p. 507, and which raises:
The question whether it can be said that the business which is being carried on by
a company is really the business of an individual and consequently the profits made
by that company are really his profits, and he is assessable in respect of them.
In the American brewery cases, for instance, it has been held that the business carried on
in America ostensibly by an American company was really the business of the English
company which held all the shares, it was held that the profits of the foreign company were
not the profits of the English company, and that the English Company was not carrying on the
business of the foreign company.
In the present case, however, the part played by the quarrelsome and independent Mr.
Hime in Sansom case fall to the lot of three subordinates of the assessee. But they can hardly
be said to be in the same independent position as Mr. Hime, and there is no suggestion that
they are quarrelsome. They have not even been paid their preference dividends, and no protest
on their part is on record. Further, we have here a feature which is not present in the other
cases, viz., that the alleged transfer or declaration of trust is itself challenged.
It was argued for the assessee that in England legislation became necessary to defeat the
device of accumulating profits and refusing to declare a dividend; and that we are really being
asked to do what legislation alone can enable us to do. But that argument does not touch a
sham transfer nor a sham loan. And in any event I think it is erroneous in the present case.
This is not the first time when plausible paper schemes under the Companies Acts have not
stood the test of examination in a Court of Law. And even if it should be held that the
payment of the moneys to the assessee was illegal without a declaration of dividend, it may
yet be that the assessee would be liable for tax as was the case of the bookmaker in Partridge
v. Mallandaine [(1886) 18 QBD 276], or as regards the illegal abwabs in Birendra Kishor
Manikya v. Secretary of State [AIR 1921 Cal. 262].
On the other hand, the fact that the family company has paid tax on the interest credited to
it by the assessee in respect of the alleged loans does not necessarily involve the conclusion
that the loans were genuine, nor estop the Crown from now showing that these loans were
illusory. Paying tax on the alleged interest arising from the loan was much cheaper for the
assessee than paying super-tax on the dividends themselves.
After giving then my best consideration to the able arguments presented by counsel, I
have arrived at the clear conclusion that there was here 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. I would, accordingly, hold on questions, Nos. 1 and 4 that in law the
Commissioner was entitled on the facts to decide question No. 1 in the affirmative and
question No. 4 that the loans in question were not genuine loans but were merely withdrawals
of income disguised as loans.
Questions Nos. 2 and 3 should each be answered in the negative.
Speaking for myself, I would prefer to confine my judgment to the path indicated for the
High Court in S. 60 (5) of the Indian Income-tax Act 1922, viz., the decision of the questions
of law raised in the case stated by the Commissioner. But as the Commissioner to some extent
invites our opinion on the facts, and as it may be argued that one or other of the questions is a
mixed question of law and fact, I may be permitted to add that on the law and the facts, I
would answer question No. 1 in the affirmative, and question No. 4 by holding that the loans
in question were not genuine loans but were merely withdrawals of income disguised as
loans. Accordingly, in my judgment, the sums in dispute represented taxable income of the
assessee under the Indian Income-tax Act, 1922.
KEMP, J. – This is a reference under S. 66(2) of the Indian Income-tax Act, 1922, and
involves the consideration of the legal entity known as a “one-man company.” The assessee
is a well-known and wealthy citizen of Bombay and the assessment relates to the financial
year 1925-26.
The four limited liability companies are of the same nature and were formed in the same
way. The four companies are (1) Petit Limited, (2) the Bombay Investment Company
Limited, (3) Miscellaneous Investment Company Limited, and (4) Safe Securities Company
Limited. It will be sufficient for the purposes of the reference to take as a typical case the first
company, Petit Limited. I may here say that out of the total subscribed capital of over thirty
to forty lacs of each company, only shares of the face value of Rs. 30 were not in the
assessee’s name. These last were in the names of his employees, who are under his control.
All the shares and securities stand in the name of the assessee or his nominees but the assessee
says that they belong to the companies.
Taking the case of Petit Limited, it was a company which was registered on April 12,
1921, with a capital of one hundred lacs divided into ten lacs of shares of Rs. 10 each. There
was one hundred preference shares and the remaining 9,99,900 shares were ordinary shares.
The issued capital is 3,48,604 ordinary shares and three preference shares. The three
preference and four ordinary shares were paid for in cash, i.e., Rs. 70. The assessee took up
all the other ordinary shares. The three preference shares were allotted: one to the secretary,
Petit Charities, one to the secretary of the four companies, and one to the clerk of the four
companies. The assessee held 498 shares some in his own name and some in the names of his
nominees of the Maneckji Petit Company of the value of Rs. 7,000 each. By an agreement
dated April 12, 1921, the assessee purported to sell these shares to the company in return for
the allotment of the company’s shares, i.e., for 3,48,604 ordinary shares.
Then by a declaration of trust of the same date in favour of Petit Ltd. in which it is recited
that it was agreed that the shares and securities were not to be transferred until the Company
called upon the vendor to do so but that in the meantime the vendor and his nominees should

hold the respective shares standing in their respective names as agents and trustees for the
company, the vendor stood possessed of the shares upon trust for the company and agreed to
cause all his nominees to admit that they held the shares in their names as trustees for the
company. No transfers have been called for by the company. What happened subsequently
was this. As soon as the dividend and interest on the shares and securities were received by
the assessee a book entry was made in the books of Petit Limited crediting that company with
the amount and on the same day a debit entry was made debiting the assessee with the same
amount. In other words the interest never found its way into Petit Limited but when received
by the assessee was treated as an advance made to him by the company
At the date of the last balance sheet a sum of over rupees seven lacs is shown as due by
the assessee in the books of Petit Limited for these alleged advances and accrued interest. It
may be mentioned that no interest was paid in cash but the interest was added to the amount
of the loans in the books of Petit Limited. The only cash, therefore, which Petit Limited
received was the Rs. 70 for the three preference and four ordinary shares.
The Memorandum of Association of the company contains thirty-eight objects for which
it was formed and a perusal of the Articles of Association, especially Articles 4, 6, 34 and 93,
shows that the governing director of the company, i.e., the assessee himself, had a paramount
say, in the affairs of the company. It was possible for two other ordinary directors to be
nominated by him but, so far as the evidence before us goes, no such directors have been
nominated and in fact the governing director, i.e., the assessee, has had the entire control and
management of the company. No remuneration was paid to him as governing director. The
meeting of the so-called board to record the company’s registration was attended only by the
assessee himself as governing director and the solicitor to the company.
The Income-tax Commissioner contends that this is not a genuine one-man company and
that the dividends on the shares and securities are really the income of the assessee.
Now this was a one-man company. It was properly formed and registered as a company
under the Indian Companies Act and it had a separate legal entity. There was nothing prima
facie illegal about it.
Here in India, as I have already pointed out, limited liability companies are liable to
super-tax but at a rate which is very much less than the rate of super-tax on the income of
individuals. It is, therefore, obvious that it was to the assessee’s interest that the dividends
and shares should be considered as belonging to the company rather than to himself. The
well-known case of Salomon v. Salomon & Co. shows that where there is a genuine transfer
by an individual of his business to a limited liability company consisting even of himself and
his family so long as the business carried on by the company is its business and is really not
the business carried on by the individual himself and the requirements of the Indian
Companies Act have been complied with, the individual is not liable to indemnify the
company against the claims of its creditors.
I have already referred to the control which the assessee in this case exercised under the
Articles of Association and as the holder of all the issued ordinary shares in this company.
The three preference shares were held by his nominees and employees. A perusal of the
current account in the company’s books shows that the dividends and interest alleged to have

been received by the company were credited in the limited share account of the company and
the same day debited to the assessee by way of loan. As I have pointed out none of the
dividends or interest ever reached the company. Only credit and debit entries were made.
Nor was any interest paid on the amount of the loan standing to the assesses’ debit in the
books of the company but the interest was credited every year to the company in the account.
Here I may properly deal with the contention that because the Income-tax Authorities have
hitherto treated the dividends and interest as part of the income of the company, they are now
estopped from contending otherwise. In my opinion, they are not barred from claiming on an
investigation of the true facts of the case that the profits of the company are really the income
of the assessee liable to super-tax.
There are other facts which suggest that the company in this case was formed by the
assessee purely and simply as a means of avoiding super-tax and that the company was
nothing more than the assessee himself. It did no business but was created purely and simply
as a legal entity to ostensibly receive the dividends and interest and hand them over to the
assessee as pretended loans. In the balance-sheet as at December 31, 1914, the amount set
down for depreciation and the balance on profit and loss account make up the balance
standing to the debit of the assessee in his current account on January 1, 1924. The expense
in the company’s Profit and Loss account Rs. 15,383-11-0 are debited to the assessee’s
current account with the company. The whole of the dividends and interest on the shares and
securities ostensibly supposed to belong to the company have been from year to year received
by the assessee and merely credit and debit entries made in the company’s books to support
the case of a series of loans made every year to the assessee. The assessee’s current account
with the company shows the large amount of Rs. 7,14,103-8-11 due by him for these alleged
loans and interest on them. Nothing has been repaid on this account and in this connexion it
may be observed that in Sansom case the Courts found that some of the earlier loans had been
repaid.
The only cash with the company is Rs. 70 made up of the amount paid for the three
preference and four ordinary shares.
The shares and securities stand in the assessee’s name. The agreement dated April 12,
1921, between the assessee and Petit Limited provided for the purchase of the shares by the
allotment of 3,48,600 fully paid up shares. The indenture of trust recites that it has been
agreed that the shares shall not be transferred until the company calls upon the vendors so to
do and then proceeds to declare that the vendor shall stand possessed of shares in the
company. As a matter of fact the company has not called on the vendor to transfer the shares.
I agree that one may look at this case from a consideration of the question whether there has
been any real trust or not, but I think the shares being in the assessee’s name and the
dividends having been received by him it lies on him to show in the first instance that as a
matter of fact he really holds them for a company and not on his own behalf. In other words,
he must show he is trustee for the company. I think he has not only failed to show this but the
evidence establishes that as a matter of fact he really held the shares on his own behalf and for
his own benefit whilst professing to hold them as trustee for a genuine and bonafide company.
The company has declared no dividends. The memorandum of association of the
company contains thirty-eight objects; yet the company’s activities have been restricted to the

supposed receipt of the dividends and interest on the shares and securities supposed to belong
to it; and for six years the company has only received the dividends and interest by paper
entries and passed it on to the assessee by way of a supposed loan. So far as the alleged loan
itself is concerned, no resolution of the company has been produced to show that it was
sanctioned or the rate of interest which was to be charged. It was made without security and
no vouchers have been taken for the advances.
I am, therefore, of opinion that in this case the assessee was receiving under the guise of
loans or advances the profits which were made by the company which he controlled and in
which he held all the shares except three which were held by his subordinates. 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.
This really disposes of the argument put forward by counsel for the assessee that if these
moneys received by his client were not loans they were moneys wrongfully received by him
which he is bound to refund to the company and on which, therefore, he is not assessable to
super-tax. I am not prepared, in any case, to accede to this argument where, if the company
be regarded as carrying on its own business separate to that of the assessee, it has made no
attempt and apparently does not intend to recover such sums from the assessee.
Nor can the moneys received by the assessee be regarded as dividends paid by the
company on its shares; for the company paid no dividends and the moneys are not entered in
its books as such.
I would answer the questions: 1. In the affirmative. 2. No. 3. No. 4. They were not
genuine loans but merely withdrawals of income disguised as loans.
PER CURIAM – The judgment of the Court will be: Answer Question No. 1 in the
affirmative: Questions Nos. 2 and 3 in the negative: and Question No. 4 by holding that the
loans in question were not genuine loans but were merely withdrawals of income disguised as
loans.