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P.B. GAJENDRAGADKAR, C.J. – These writ petitions have been placed for hearing
before us in a group, because they raise a common question of law in regard to the validity of
the demand for sales tax which has been made against the respective petitioners by the Sales
Tax Officers for different areas. Broadly stated, the case for the petitioners is that the
appropriate authorities purporting to act under the different Sales Tax Acts are attempting to
recover from the petitioners sales tax in respect of transactions to which the petitioners were
parties, though the said transactions are not taxable under Article 286 of the Constitution. The
authorities under the respective Sales Tax Acts have rejected the petitioners’ contention that
the transactions in question are inter-State sales and have held that Article 286(1)(a) is not
applicable to them. A similar finding has been recorded against the petitioners under Article
286(2). The petitioners’ grievance is that by coming to this erroneous conclusion, a tax is
being levied against them in respect of transactions protected by Article 286(1) (a) and that
constitutes a breach of their fundamental rights under Article 31 (1). It is this alleged
infringement of their fundamental rights that they seek to bring before this Court under
Article 32(1). It has been urged on their behalf that the right to move this Court under Article
32(l) is itself a fundamental right, and so, under Article 32(2) an appropriate order should be
passed setting aside the directions issued by the Sales Tax Authorities calling upon the
petitioners either to pay the sales tax, or to comply with other directions issued by them in
that behalf.
- The Tata Engineering and Locomotive Co. Ltd., the petitioner is a company registered
under the Indian Companies Act, 1913 and carries on the business of manufacturing, inter
alia, diesel truck and bus chassis and the spare parts and accessories thereof at Jamshedpur in
the State of Bihar. The company sells these products to dealers, State Transport Organisations
and others doing business in various States of India. The registered office of the petitioner is
in Bombay. In order to promote its trade throughout the country, the petitioner has entered
into Dealership Agreements with different persons. The modus adopted by the petitioner in
carrying on its business in different parts of India is to sell its products to the dealers by virtue
of the relevant provisions of the Dealership Agreements. Accordingly, the petitioner
distributes and sells its vehicles to dealers, State Transport Organisations and consumers in
the manner set out in the petition. The petitioner contends that the sales in respect of which
the present petitions have been filed were effected in the course of inter-State trade and as
such, were not liable to be taxed under the relevant provisions of the Sales Tax Act. The Sales
Tax Officer, on the other hand, has held that the sales had taken place within the State of
Bihar and were intra-State sales and as such, were liable to assessment under the Bihar Sales
Tax Act. In accordance with this conclusion, further steps are threatened against the petitioner
in the matter of recovery of the sales tax calculated by the appropriate authorities. The
petitioner is a company and a majority of its shareholders are Indian citizens, two of whom
have joined the present petitions. - Writ Petitions Nos. 202-204/1961 have been filed by the State Trading Corporation of
India Ltd. The shareholders of this Corporation are the President of India, and two Additional
Secretaries, Ministry of Commerce and Industry, Government of India; one of these
Secretaries has joined the petitions. It may incidentally be stated at this stage that these writ
petitions were heard by a Special Bench of this Court on 26th July, 1963 in order to determine
the constitutional question as to whether the State Trading Corporation Ltd. can claim to be a
citizen within the meaning of Article 19 of the Constitution. The majority decision rendered
in these writ petitions on the preliminary issue referred to the Special Bench was that the
petitioner as a State Trading Corporation is not a citizen under Article 19, and so, could not
claim the protection of the fundamental rights guaranteed by the said article. That is why this
petitioner along with other petitioners have made the petitions in the names of the companies
as well as one or two of their shareholders respectively. It is argued on behalf of the
petitioners that though the company or the Corporation may not be an Indian citizen under
Article 19, that should not prejudice the petitioners’ case, because, in substance, the
Corporation is no more than an instrument or agent appointed by its Indian shareholders and
as such, it should be open to the petitioners either acting themselves as companies or acting
through their shareholders to claim the relief for which the present petitions have been filed
under Article 32.
- These petitions are resisted by the respective States on the ground that the petitions are
not competent under Article 32. The respondents contend that the main attack of the
petitioners is against the findings of the Sales Tax Officers in regard to the character of the
impugned sale transactions and they urged that even if the said findings are wrong, that
cannot attract the provisions of Article 32. The validity of the respective Sales Tax Acts is not
challenged and if purporting to exercise their powers under the relevant provisions of the said
Acts, the appropriate authorities have, during the course of the assessment proceedings, come
to the conclusion that the impugned transactions are intra-State sales and do not fall under
Article 286(1)(a), that is a decision which is quasi-judicial in character and even an erroneous
decision rendered in such assessment proceedings cannot be said to contravene the
fundamental rights of a citizen which would justify recourse to Article 32. In other words, the
alleged breach of the petitioners’ fundamental rights being referable to a quasi-judicial order
made by a Tribunal appointed under a valid Sales Tax Act, does not bring the case within
Article 32. That is the first preliminary ground on which the competence of the writ petitions
is challenged. - There is another preliminary objection raised by the respondents against the
competence of the writ petitions. It is urged that the decision of this Court that the State
Trading Corporation is not a citizen, necessarily means that the fundamental rights guaranteed
by Article 19 which can be claimed only by citizens cannot be claimed by such a Corporation,
and so, there can be no scope for looking at the substance of the matter and giving to the
shareholders indirectly the right which the Corporation as a separate legal entity is not directly
entitled to claim. The respondents have urged that in dealing with the plea of the petitioners
that the veil worn by the Corporation as a separate legal entity should be lifted and the
substantial character of the Corporation should be determined without reference to the
technical position that the Corporation is a separate entity, we ought to bear in mind the
decision of this Court in the case of State Trading Corporation of India Ltd. [AIR 1963 SC
1811]. Basing themselves on this contention, the respondents have also argued that if the
fundamental rights guaranteed by Article 19 are not available to the petitioners, then their plea
that the sales tax is being collected from them contrary to Article 31(1) must fail.
- That takes us to the question as to whether the petitioners, some of whom are
companies registered under the Indian Companies Act and one of whom is the State Trading
Corporation, can claim to file the present writ petitions under Article 32 having regard to the
decision of this Court in State Trading Corporation of India Ltd. The petitioners argue that
the said decision merely held that the State Trading Corporation of India Ltd. was not a
citizen. The question as to whether the veil of the Corporation can be lifted and the rights of
the shareholders of the said Corporation could be recognised under Article 19 or not, was not
decided, and it is on this aspect of the question that arguments have been urged before us in
the present writ petitions. - The true legal position in regard to the character of a corporation or a company which
owes its incorporation to a statutory authority, is not in doubt or dispute. The Corporation in
law is equal to a natural person and has a legal entity of its own. The entity of the Corporation
is entirely separate from that of its shareholders; it bears its own name and has a seal of its
own; its assets are separate and distinct from those of its members; it can sue and be sued
exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its
members; the liability of the members or shareholders is limited to the capital invested by
them; similarly, the creditors of the members have no right to the assets of the Corporation.
This position has been well established ever since the decision in the case of Salomon v.
Salomon and Co. [(1897) AC 22 (HL)] was pronounced in 1897; and indeed, it has always
been the well-recognised principle of common law. However, in the course of time, the
doctrine that the Corporation or a Company has a legal and separate entity of its own has been
subjected to certain exceptions by the application of the fiction that the veil of the Corporation
can be lifted and its face examined in substance. The doctrine of the lifting of the veil thus
marks a change in the attitude that law had originally adopted towards the concept of the
separate entity or personality of the Corporation. As a result of the impact of the complexity
of economic factors, judicial decisions have sometimes recognised exceptions to the rule
about the juristic personality of the corporation. It may be that in course of time these
exceptions may grow in number and to meet the requirements of different economic
problems, the theory about the personality of the corporation may be confined more and more. - But the question which we have to consider is whether in the circumstances of the
present petitions, we would be justified in acceding to the argument that the veil of the
petitioning corporations should be lifted and it should be held that their shareholders who are
Indian citizens should be permitted to invoke the protection of Article 19, and on that basis,
move this Court under Article 32 to challenge the validity of the orders passed by the Sales
Tax Officers in respect of transactions which, it is alleged, are not taxable. Mr Palkhivala has
very strongly urged before us that having regard to the fact that the controversy between the
parties relates to the fundamental rights of citizens, we should not hesitate to look at the
substance of the matter and disregard the doctrinaire approach which recognises the existence
of companies as separate juristic or legal persons. If all the shareholders of the petitioning
companies are Indian citizens, why should not the Court look at the substance of the matter
and give the shareholders the right to challenge that the contravention of their fundamental
rights should be prevented. He does not dispute that the shareholders cannot claim that the
property of the companies is their own and cannot plead that the business of the companies is
their business in the strict legal sense. The doctrine of lifting of the veil postulates the
existence of dualism between the corporation or company on the one hand and its members or
shareholders on the other. So, it is no good emphasising that technical aspect of the matter in
dealing with the question as to whether the veil should be lifted or not.
- It is unnecessary to refer to the facts in these two cases and the principles enunciated
by them, because it is not disputed by the respondents that some exceptions have been
recognised to the rule that a corporation or a company has a juristic or legal separate entity.
The doctrine of the lifting of the veil has been applied in the words of Palmer in five
categories of cases: where companies are in the relationship of holding and subsidiary (or subsubsidiary) companies; where a shareholder has lost the privilege of limited liability and has
become directly liable to certain creditors of the company on the ground that, with his
knowledge, the company continued to carry on business six months after the number of its
members was reduced below the legal minimum; in certain matters pertaining to the law of
taxes, death duties and stamps, particularly where the question of the “controlling interest” is
in issue; in the law relating to exchange control; and in the law relating to trading with the
enemy where the test of control is adopted. In some of these cases, judicial decisions have no
doubt lifted the veil and considered the substance of the matter. - Gower has similarly summarised this position with the observation that in a number
of important respects, the legislature has rent the veil woven by the Salomon case.
Particularly is this so, says Gower, in the sphere of taxation and in the steps which have been
taken towards the recognition of enterprise-entity rather than corporate-entity. It is significant,
however, that according to Gower, the courts have only construed statutes as “cracking open
the corporate shell” when compelled to do so by the clear words of the statute; indeed they
have gone out of their way to avoid this construction whenever possible. Thus, at present, the
judicial approach in cracking open the corporate shell is somewhat cautious and circumspect.
It is only where the legislative provision justifies the adoption of such a course that the veil
has been lifted. In exceptional cases where courts have felt “themselves able to ignore the
corporate entity and to treat the individual shareholder as liable for its acts”, the same course
has been adopted. Summarising his conclusions, Gower has classified seven categories of
cases where the veil of a corporate body has been lifted. But it would not be possible to
evolve a rational, consistent and inflexible principle which can be invoked in determining the
question as to whether the veil of the corporation should be lifted or not. Broadly stated,
where fraud is intended to be prevented, or trading with an enemy is sought to be defeated,
the veil of a corporation is lifted by judicial decisions and the shareholders are held to be the
persons who actually work for the corporation. - That being the position with regard to the doctrine of the veil of a corporation and the
principle that the said veil can be lifted in some cases, the question which arises for our
decision is; can we lift the veil of the petitioner and say that it is the shareholders who are
really moving the Court under Article 32, and so, the existence of the legal and juristic
separate entity of the petitioners as a corporation or as a company should not make the
petitions filed by them under Article 32 incompetent. We do not think we can answer this
question in the affirmative. No doubt, the complaint made by the petitioners is that their
fundamental rights are infringed and it is a truism to say that this Court as the guardian of the
fundamental rights of the citizens will always attempt to safeguard the said fundamental
rights; but having regard to the decision of this Court in State Trading Corporation of India
Ltd., we do not see how we can legitimately entertain the petitioners’ plea in the present
petitions, because if their plea was upheld, it would really mean that what the corporations or
the companies cannot achieve directly, can be achieved by them indirectly by relying upon
the doctrine of lifting the veil. If the corporations and companies are not citizens, it means that
the Constitution intended that they should not get the benefit of Article 19. It is no doubt
suggested by the petitioners that though Article 19 is confined to citizens, the Constitutionmakers may have thought that in dealing with the claims of corporations to invoke the
provisions of Article 19, courts would act upon the doctrine of lifting the veil and would not
treat the attempts of the corporations in that behalf as falling outside Article 19.
We do not think this argument is well founded. The effect of confining Article 19 to
citizens as distinguished from persons to whom other Articles like 14 apply, clearly must be
that it is only citizens to whom the rights under Article 19 are guaranteed. If the legislature
intends that the benefit of Article 19 should be made available to the corporations, it would
not be difficult for it to adopt a proper measure in that behalf by enlarging the definition of
“citizen” prescribed by the Citizenship Act passed by Parliament by virtue of the powers
conferred on it by Articles 10 and 11. On the other hand, the fact that the Parliament has not
chosen to make any such provision indicates that it was not the intention of Parliament to treat
corporations as citizens. Therefore, it seems to us that in view of the decision of this Court in
the case of State Trading Corporation of India Ltd., the petitioners cannot be heard to say
that their shareholders should be allowed to file the present petitions on the ground that, in
substance, the corporations and companies are nothing more than associations of shareholders
and members thereof. In our opinion, therefore, the argument that in the present petition we
would be justified in lifting the veil cannot be sustained.
- Mr Palkhivala sought to draw a distinction between the right of a citizen to carry on
trade or business which is contemplated by Article l9(1)(g) from his right to form associations
or unions contemplated by Article l9(1)(c). He argued that Article 19(1)(c) enables the
citizens to choose their instruments or agents for carrying on the business which it is their
fundamental right to carry on. If citizens decide to set up a corporation or a company as their
agent for the purpose of carrying on trade or business, that is a right which is guaranteed to
them under Article 19(1)(c). Basing himself on this distinction between the two rights
guaranteed by Article l9(1)(g) and (c) respectively, Mr Palkhivala somewhat ingeniously
contended that we should not hesitate to lift the veil, because by looking at the substance of
the matter, we would really be giving effect to the two fundamental rights guaranteed by
Article l9(l). We are not impressed by this argument either. The fundamental right to form an
association cannot in this manner be coupled with the fundamental right to carry on any trade
or business. As has been held by this Court in All-India Bank Employees’ Association v.
National Industrial Tribunal [(1962) 3 SCR 269], the argument which is thus attractively
presented before us overlooks the fact that Article 19, as contrasted with certain other articles
like Articles 26, 29 and 30 guarantees rights to the citizens as such, and associations cannot
lay claim to the fundamental rights guaranteed by that article solely on the basis of their being
an aggregation of citizens, that is to say, the right of the citizens composing the body. The
respective rights guaranteed by Article 19(1) cannot be combined as suggested by Mr
Palkhivala, but must be asserted each in its own way and within its own limits; the sweep of
the several rights is no doubt wide, but the combination of any of those two rights would not
justify a claim such as is made by Mr Palkhivala in the present petitions. As soon as citizens
form a company the right guaranteed to them by Article l9(l)(c) has been exercised and no
restraint has been placed on that right and no infringement of that right is made. Once a
company or a corporation is formed, the business which is carried on by the said company or
corporation is the business of the company or corporation and is not the business of the
citizens who get the company or corporation formed or incorporated, and the rights of the
incorporated body must be judged on that footing and cannot be judged on the assumption
that they are the rights attributable to the business of individual citizens. Therefore, we are
satisfied that the argument based on the distinction between the two rights guaranteed by
Article l9(l)(c) and (g) and the effect of their combination cannot take the petitioners’ case
very far when they seek to invoke the doctrine that the veil of the corporation should be lifted.
That is why we have come to the conclusion that the petitions filed by the petitioners are
incompetent under Article 32, even though in each of these petitions one or two of the
shareholders of the petitioning companies or corporation have joined.
- The result is, the second preliminary objection raised by the respondents is upheld and
the writ petitions are dismissed as being incompetent under Article 32 of the Constitution.
