Madhuri, famous singer, was a rich woman in her late twenties. She enjoyed huge dividend and interest income from various sources. She formed three private companies and agreed with each to hold a block of investment as

The issue in question relates to the lifting of the corporate veil under judicial interpretations. Normally Courts are reluctant or very cautious about the lifting of the veil of corporate personality to see the real persons behind it. The facts of the case are that Madhuri, a famous singer, was a rich woman enjoying large dividends and interest income. She formed three private companies and agreed with each to hold a block of investment as an agent for it. The Income received was credited in the accounts of the company but the company handed back the amount to her as a loan in disguise. This way she divided her income in three parts in a bid to reduce her tax liability. It was held the company was formed by the person purely and simply as a means of avoiding tax and the company was nothing more than the person/assessee herself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans. The Court decided to disregard the corporate entity and ascertain the real persons behind as it was being used for tax evasion (Re. Sir Dinshaw Maneckjee Petit, A.I.R. 1927 Bombay 371). Thus, on the basis of the above, it can be concluded that formation of Company to reduce tax liability is illegal in reference to fundamental concepts of company formation.