1964 (2) TMI 32 - SC - Companies Law

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? Held that - We are satisfied that the argument based on the distinction between the two rights guaranteed by article 19(1)(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 contusion 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 second preliminary objection raised by the respondents is upheld and the writ petitions are dismissed as being incompetent under article 32 of the Constitution.

Issues Involved:
1. Validity of the demand for sales tax.
2. Whether the transactions were inter-State sales protected under Article 286(1)(a) of the Constitution.
3. Competence of writ petitions under Article 32.
4. Whether corporations can claim fundamental rights under Article 19 through their shareholders by lifting the corporate veil.

Issue-wise Detailed Analysis:

1. Validity of the demand for sales tax:
The petitioners challenged the validity of the sales tax demands made by Sales Tax Officers, arguing that the transactions in question were inter-State sales and thus not taxable under Article 286(1)(a) of the Constitution. The authorities under the respective Sales Tax Acts rejected this contention, holding that the transactions were intra-State sales and therefore taxable.

2. Whether the transactions were inter-State sales protected under Article 286(1)(a) of the Constitution:
The petitioners argued that the sales were effected in the course of inter-State trade and thus protected under Article 286(1)(a). The Sales Tax Officers, however, concluded that the sales took place within the State, making them intra-State sales subject to state sales tax. The petitioners claimed this erroneous conclusion violated their fundamental rights under Article 31(1).

3. Competence of writ petitions under Article 32:
The respondents argued that the writ petitions were not competent under Article 32, asserting that the main attack was against the quasi-judicial findings of the Sales Tax Officers. They contended that even if these findings were wrong, they did not attract Article 32. The validity of the Sales Tax Acts themselves was not challenged, and the respondents relied on the decision in Smt. Ujjam Bai v. State of Uttar Pradesh, which held that errors made by quasi-judicial authorities under valid laws do not justify petitions under Article 32.

4. Whether corporations can claim fundamental rights under Article 19 through their shareholders by lifting the corporate veil:
The petitioners, including companies and the State Trading Corporation, argued that although the corporations themselves were not citizens under Article 19, their shareholders, who were Indian citizens, should be allowed to claim the protection of Article 19 by lifting the corporate veil. The respondents countered this by citing the decision in the State Trading Corporation of India Ltd. case, which held that corporations are not citizens and thus cannot claim rights under Article 19.

Judgment:

1. Validity of the demand for sales tax:
The court did not delve into the merits of whether the transactions were inter-State or intra-State sales, as it found the petitions incompetent under Article 32.

2. Whether the transactions were inter-State sales protected under Article 286(1)(a) of the Constitution:
The court did not decide on this issue due to the preliminary objections being upheld.

3. Competence of writ petitions under Article 32:
The court upheld the respondents' second preliminary objection, ruling that the writ petitions were incompetent under Article 32. The court reasoned that the decision in the State Trading Corporation of India Ltd. case precluded corporations from claiming fundamental rights under Article 19, and thus, the petitions could not be maintained even if shareholders joined the petitions.

4. Whether corporations can claim fundamental rights under Article 19 through their shareholders by lifting the corporate veil:
The court rejected the argument that the corporate veil should be lifted to allow shareholders to claim fundamental rights under Article 19. It held that corporations and companies, being separate legal entities, cannot achieve indirectly what they cannot achieve directly. The court emphasized that the Constitution intended to limit Article 19 rights to citizens, and extending these rights to corporations through the doctrine of lifting the veil was not permissible.

Conclusion:
The court dismissed the writ petitions as incompetent under Article 32, upholding the respondents' second preliminary objection. There was no order as to costs.

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