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TMI Blog1926 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... rest 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. 2. 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 Sections 2 (15), 3, 6,12, 55, 56 and 58 of the Indian Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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 other 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. 7. 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 Exhibit F shows a receipt of ₹ 24,900 for a half year's dividend which appears at p. 18 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no general law against that. 10. Turning to the Articles of Association, they give the assessee complete control as governing director (see Art. 93); 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 (see Art. 95). 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 (see Articles 72, 127 and 128). The fiduciary position of the assessee is to be no bar to the company being bound by the agreement Exhibit B (see Article 4); 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 declaration of trust Exhibit C is not referred to. The audited accounts when approved by a general meeting are to be conclusive except as regards errors discovered within three months. (See Article 150). 11. It is clear, then, that the company has to act as the assesses wills, provided the terms of the Indian Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen 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 Salomon's 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. 14. 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 really matter, viz., the coin or notes of the Realm. 16. But though I hold that it is permissible in law for the Crown to enquire into the genuineness of 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 Sansom's case [1921] 2 K.B. 492, 516-17 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even got any admission of this trust by the fourteen nominees of the assessee set out in the schedules to Exhibits B and 0. 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, Exhibit D, is correct, viz., that the agreement Exhibit B was registered but that the declaration of trust, Exhibit C, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d prosperous business in Salomon's case, viz., that of a boot and shoe manufacturer (see p. 47). 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 (p. 49), and Lord Macnaghten expressly negatived any fraud or dishonesty on his part (p. 52). 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. 21. So, too, in Inland Revenue Commissioners v. Sansom [1921] 2 K.B. 492 (which I have already cited) 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. Mr. Sansom himself gave evidence and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners, 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 suspicions. 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. 23. And Younger L. J. says (p. 517):- 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. 26. 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. 27. 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's 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend (see Section 21, Finance Act, 1922); 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 Q.B.D. 276, or as regards the illegal abwabs in Birendra Kishor Manikya v. Secretary of State for India (1920) I.L.R. 48 Cal. 766.. It is however, unnecessary for me to decide this latter point. 31. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 10 T.C. 1) 36. 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. 37. A copy of our judgments should be sent to the Commissioner as provided by Section 66 (5). I would order the assessee to pay the costs of this reference. Kemp, J. 38. This is a reference under Section 66 (2) of the Indian Income-tax Act, XI of 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. 39. The questions submitted for our opinion are set out in paragraph 15 of the reference. It is unnecessary to detail them at length in my judgment. 40. The assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary shares and three preference shares. The three preference and four ordinary shares were paid for in cash, i. e., ₹ 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 ₹ 7,000 each. By an agreement dated April 12, 1921, (Exhibit B), 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 (Exhibit C) of the same date in favour of Petit Limited 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for myself, I do in the light of these considerations, deprecate in connection 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. Starting, therefore, with this assumption of a perfectly valid legal entity created by the assessee, we have to consider whether this assumption has been rebutted. It is admitted that the company has paid no dividend and here it may be appropriate to refer to the distinction with reference to super-tax as regards limited liability companies in England and in India. In England prior to the Act of 1922 limited liability companies were not liable to super-tax. It was found, however, that in some cases they avoided payment of income-tax by omitting to declare a dividend on their profits. Consequently, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (p. 507). Similarly, in what are known as the American brewery cases-the Apthorpe v. Peter Schoenhofen Brewing Co., Ltd. (1899) 4 T.C. 41 St. Louis Breweries, v. Apthorpe (1898) 4 T.C. 111 and United States Brewing Company, Limited v. Apthorpe (1898) 4 T.C. 17 the Commissioners found as a fact in each case that the head and seat of the Government of the American company were in England, and that the business carried on in America was the business of the English Company. I think it is clear, therefore, that, apart from the effect to be given to a finding of the Commissioners, the Court is entitled to go into the question as to whether the so-called one-man company is really a business carried on by the assessee himself for the purposes of avoiding payment of tax, In Gramophone and Typewriter, Limited v. Stanley, [1908] 2 K.B. 89 the Court held that the mere fact that one company holds all the shares in another does not necessarily make the second company the business of the first. And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... really the income of the assessee liable to super-tax. 49. 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 expenses in the company's Profit and Loss account ₹ 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 amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1908] 2 K.B. 729, 742, on appeal [1909] A.C. 466 but that case is distinguishable from the present one. There the object was to bar the entail and the Duke did create an effective arrangement although incidentally it had the effect of escaping death duty. Later, the fee simple was charged but the transaction was not a fictitious one in the opinion of the majority of the House. 54. 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. 55. 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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