TELCO V. STATE OF BIHAR, AIR 1965 SC 40
FACTS
- 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.
- 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.
ISSUE
- 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?
- 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?
HELD
The petitions filed by the petitioners were 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.
- The second preliminary objection raised by the respondents was that the petitions filed by the petitioners were not competent as companies/corporations are not citizens and cannot plead for a violation of a fundamental right.
- The Supreme Court analysed the nature of transactions that were conducted. Article 19 which is a fundamental right is guaranteed to the citizens of India and does not cover the ambit of companies/corporations. Any violation of the fundamental right is against the State and therefore, in terms of any business of the company is a matter of the corporation. The internal business of a company is not the concern of the citizens.
- The petitioner’s contention of filing a petition cannot be held competent. 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. Thus, in simple words, the company has a legal entity of its own, which is entirely separate from its members and shareholders.
- The lifting of the corporate veil is also not necessary in the present case. The petitioner’s plea under Article 19(1)(g) and Article 32 is not strong enough to invoke the piercing of the corporate veil. The objection raised by the respondent was upheld and the petition was dismissed.
- “The corporate veil” is a legal concept that separates the actions of a company from the actions of its shareholders, and protects shareholders from being liable for the company's actions. In other words, shareholders and directors are not responsible if the company gets into debt or if anything else goes amiss. Court actions will be against the company itself, not its directors.
COMMENTARY
“A company is also not allowed to lay claim to fundamental rights on the basis of its being an aggregation of citizens. Once a company or a corporation is formed, the business of the company or corporation is not the business of the citizens but that of the company or corporation formed as an incorporated body, 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. Thus, under the Constitution, a company has no fundamental rights which are expressly available to citizens only. It can, however, claim the protection of those fundamental rights which are available to all persons, whether citizens or not, for example, the right to own property.”-