TELCO(Tata Engineering and Locomotive Co.) Ltd. v. State Of Bihar, 1964

 INTRODUCTION

This case talks about the "lifting of the veil of corporate/company" to ensure the rights or liabilities of the shareholders of a company/corporation as it is an agent of the shareholder.

FACTS

• The company was registered in Bombay and involved in the business of manufacturing diesel trucks, buses, and spare parts and accessories at Jamshedpur, Bihar.
• He used to distribute and sell his products to different dealers who are located in different states of the country.
• A sales tax was being demanded by the sales tax Authorities of different states.
• Two shareholders of TELCO Ltd., the petitioner joined a writ petition filed by State Trading Corporation under Article 32 of the Constitution of India(CoI). 

Petitioner's Contentions

1. The transactions done by the Company were inter-State sales and therefore as per Article 268 of the Constitution, it had been prevented from being taxed by the State authorities.
2. The imposed tax breaches the Fundamental Right to Property under Article 31(1) and the Court should pass an appropriate order under Article 32(2) setting aside the directions issued by the Sales Tax Authorities.

Respondents Contentions 

1. The said transactions were intra-state trade, therefore it is not covered by Article 268 of the Constitution. Hence it is liable to assessment under Bihar Sales Tax Act.
2. The company is not a citizen to enjoy the Fundamental Rights. FR is guaranteed only to the citizens.

Issue

1. Whether the veil of the Corporation can be lifted and the rights of the shareholders could be recognized under Article 19 or not.

Arguments of Petitioner's Council

1. The Corporation is no more than an instrument or agent appointed by its shareholders. Since all the shareholders of the petitioner company are Indian citizens, the Court should look at the substance of the matter and give the shareholders the right to challenge that the contravention of their FR should be prevented.
2. The Constitution makers 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 on that behalf as falling outside Article 19.
3. By lifting the corporate veil, it will ensure two FRs of Article 19(1) i.e. clause (c) which entitles the right to form associations or unions, and clause(g) which enables the right to carry on trade or business.

Ratio Decidendi 

1. If we accept the petitioner's argument, 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 are not citizens, it means that the Constitution intended that they should not get the benefit of Article 19.
2. The provision not to include corporations as citizens in the Citizenship Act clearly indicates the intention of Parliament not to treat corporations as citizens.
3. 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.
4. Article 19 guarantees rights to the citizens, and associations cannot lay claim by merely being an aggregation of citizens. A combination of any of the two Fundamental Rights would not justify the claim, as argued by Palkhivala. Once a company is formed by using Article 19(1)(c), the business now belongs to the company and not to the citizens who formed it.

Decision

• Dismissed the writ petition 
• The corporate veil can not be lifted.
• The petitions filed by the petitioner under Article 32 are incompetent             

The doctrine of the lifting of the veil 

It is an exception to the rule of juristic personality of the corporation.

• Palmer categories 5 kinds of cases where the Doctrine of lifting of veil can be applied;-

1. Companies are in the relationship of holding or subsidiary companies
2. The 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; 
3. Matters on the law of taxes, death duties, and stamps, particularly where the question of the “controlling interest” is in issue; 
4. The law relating to exchange control; and 
5. Law relating to trading with the enemy where the test of control is adopted.

• Similarly, Gower categorizes 7 kinds of cases. He states it is not possible to evolve a rational, consistent, and inflexible principle. He stated that to prevent an intended fraud or trade with an enemy Doctrine of lifting of veil can be applied.