Doctrine of Corporate Veil/Separate Legal Entity

  • Blog|
  • 1029 Views
  • |
  • 3 Min Read
  • By Taxmann
  • |
  • Last Updated on 28 April, 2021
  1. Concept of Corporate Veil or Doctrine of Separate Legal Entity

    On registration, the company becomes a separate legal entity. It is also issued a Corporate Identification Number (CIN). According to the principle of independent corporate existence, there exists a veil (parting though fictional) between the company and the rest of the world. This corporate existence different from others is known as Concept or Doctrine of Corporate Veil. The entire edifice of the company form of organization is based on the Corporate Veil.

  2. Lifting (or Piercing) the Corporate Veil

    A company’s acts are the acts of the company. Powers of the company are defined and confined by its Memorandum of Association (M/A). Those who form and manage the company are supposed to form and run the company bona fide in the best interests of the company and work within the powers of the company.

    In case the persons acting on behalf of company misuse the concept of a separate legal entity for ulterior motives, shall it be allowed like that? The answer is in negative. Whenever the corporate entity is wrongly used to defeat the purpose of law or for personal gain, the corporate entity shall be ignored, and the wrongdoers shall be made to pay for their wrongdoings. Wherever the ‘Separate Corporate Entity’ is disregarded or ignored to see behind the obvious and question the real intentions of the persons involved, it is known as ‘Lifting up the Corporate Veil’. The corporate Veil can be lifted in several situations. Situations where corporate veil is lifted, or separate legal entity of company is ignored can be categorized into the following:

    2.1 Under Judicial Interpretations

    The courts have ignored the corporate veil in several cases so far. Some of the important judgments are being discussed here in the following points:

    1. When it is used to avoid or reduce tax liability: Where the companies were formed just to avoid payment of tax by investing huge dividend income in such companies and taking it back in form of pretended loans (and not genuine loans) separate legal entity of company was ignored and the assessee (i.e., Dinshaw) was made to pay tax (Re Dinshaw Maneckjee Petit, 1927). As the companies created by him were found to be sham and not doing any real business.
      Similarly in CIT v. Sri Meenakshi Mills Ltd., 1967, the corporate veil was ignored where it was used for tax evasion.
    2. When it is used as a mask to avoid legal obligation: Where a person (Mr. Horne) who left the firm subject to a condition not to solicit the customers of the firm, formed a company and started soliciting the customers of firm, on being questioned pleaded that it is the company which is doing the business and not he, his argument was not held to be valid. As the company was used as an instrument of fraud to conceal Mr. Horne’s illegal intentions. The court did not allow such a misuse of concept of separate legal entity and ordered discontinuation of such mischief (Gilford Motor Co. Ltd. v. Horne, 1933).
    3. When it is used to avoid legal performance of the contract: Where ‘A who agreed to sell a piece of land to ‘B’, later on due to increase in land prices changed his mind and in order to avoid such a sale formed a company and transferred it to the company took the excuse that he is unable to perform the contract as land no longer belongs to him, corporate entity was disregarded as company was not doing any business and it was used as a cloak for non-performance of contract (Jones v. Lipman, 1962).
    4. In order to know the real character of the company: If those who run the company assume the enemy character (because of outbreak of war) then the company shall also be treated as enemy only. Here the identity of company and those who run the company is being mixed up so a case of lifting of corporate veil (as was established in Daimler Co. Ltd. v. Continental Rubber Tyre Co.).
    5. In order to ascertain the true nature of transaction: A property of M/s. Nichitpur Coal Pvt. Ltd. got vested in the Central Government as a result of the Coal Mines Nationalisation Act, 1973. The company refused to hand over the possession of the property and claimed that property had already been sold. It was argued that wives of the directors (who were brothers) could buy the property as the company was a different person. Here the Apex Court held that the transaction of sale was not bona fide and genuine as
      1. resolution passed for sale dated 21.09.1970 was ante dated document;
      2. wives did not have any independent source of income;
      3. even the agreement and sale deed were not in terms of the resolution;
      4. purchaser did not exercise any rights as owners since purchase.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Leave a Reply

Your email address will not be published. Required fields are marked *

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied