STATE TRADING CORPORATION OF INDIA v. THE COMMERCIAL TAX OFFICER, VISHAKHAPATNAM AND ORS. 1963 AIR 1811

Dated: 26 July 1963 // Before: The Supreme Court of India // Bench Strength: 9

The SC has distinguished nationality and citizenship, stating that every Indian national is not a citizen.

INTRODUCTION

The case State Trading Corporation of India V. Commercial Tax Officer (1963) deals with the major constitutional question of whether a corporation incorporated under the Indian Companies Act, 1956 is a citizen within the meaning of Article 19 of the Constitution. The case mainly deals with the issue of corporate citizenship.

When India’s Constitution was framed, it looked into a State-controlled economy.[1] However, looking at the corporations of India today, the nature and volume of business of corporations have changed drastically.[2] This is why it is essential to discuss the issue of corporate citizenship in India.

In this case, the petitioners submit that their Fundamental Rights guaranteed in the Constitution were violated by the respondents and asked the Supreme Court to quash the respondents’ (State) directions by issuing writs.[3] Opposingly, respondents argue that the Company State Trading Corporation does not fall within the meaning of “citizen” in compliance with Article 19 of the Constitution. A nine-judge bench of the Supreme Court decided the case, and it is one of the landmark cases on the issue of corporate citizenship. The court interprets rights granted under Part III of the Constitution as rights given to all persons and those available for the citizens only. This case made a significant observation in law, and later cases were based on the doctrine or ratio of the State Trading Corporation case.

FACTS

The petitioner is a Private Limited Company named The State Trading Corporation (“STC”) registered under the Indian Companies Act, 1956. The second petitioner is a shareholder partner in the first petitioner company. However, these two petitioners claim to be Indian Citizens because all their shareholders were Indian Citizens. The respondents in the case are (1) the commercial tax officer, (2) The State of Andhra Pradesh, and (3) the Deputy Commissioner of Commercial Taxes. The respondents in the case took action against the company for assessment of sales tax, and notices were issued to them for the payment of sales tax. The petitioner, i.e. STC, contend that being an Indian Citizen, their fundamental rights under Article 19 were infringed, as a result of demands made for sales tax by the respondents.[4] The petitioners moved the Supreme Court under Article 32 of the Constitution for quashing the direction made by the respondents. The main issue raised by the petitioner was that the assessment orders and notices issued by the respondents were against the Fundamental Rights under Article 19 of the Constitution. The court had to decide whether a corporation incorporated under the Indian Companies Act, 1956 is a ‘citizen’ under Part III of the Constitution.[5]

This article attempts to analyse whether STC is a ‘citizen’ within the meaning of Article 19 of the Indian Constitution. If so, it is eligible to have its FRs under Part III of the Constitution enforced by a court of law in India. Secondly, it shall be sought whether STC is an organ of the Government, covered by the definition of under Article 12 of the Constitution.

THE COURT'S ANALYSIS

To understand the issues involved in this particular case, the court examines Part III of the Constitution, which deals with Fundamental Rights. There are two kinds of Fundamental Rights:

  • Available to “any person”: Fundamental Rights given to any person mean rights given to any individual, being an artificial or natural person, irrespective of their For instance, the rights covered u/Arts. 14, 20, 21, 27, 28, and 31.[6]
  • Available Only to Citizens: Rights that are available only to citizens of India are covered u/Arts. 15, 16, 19, 27, 28, 31.[7]

The rights given under Articles 19 (f) and (g) can be enjoyed equally by natural and juristic persons. It is clear from the Constituent Assembly debates that the makers of the Constitution made a clear distinction between Fundamental Rights available to ‘any person’ and those that are available to a ‘citizen’ only.[8] To understand citizens’ rights, the meaning of the term ‘citizen’ must be understood as provided under Part II of the Constitution. From Part II, it is evident that the rights of citizens are not available to juristic persons.  All the sections in the Citizenship Act, i.e. citizenship by birth, citizenship by descent, citizenship by incorporation of territory, citizenship by registration and citizenship by naturalisation are irrelevant to juristic persons.[9]

This case was decided by a 9-judge bench of the Supreme Court of India. Sinha, CJ [majority view] understood the word ‘citizen’ to apply only to natural persons. He opined that The Indian Citizenship Act, 1955 excludes juristic persons from its purview. However, Shah, J believed that juristic persons or artificial persons like a corporation could exercise all civil rights and discharge their legal obligation.[10] He opined that when certain Fundamental Rights are given to juristic persons and natural persons, it should be understood that juristic persons also enjoy some rights under Article 19 of the Constitution. Das Gupta, J applied the doctrine of “lifting of the corporate veil”. He further stated that by applying the doctrine of lifting of veil, company shareholders who are citizens of India should be allowed to claim the status of a citizen under Part III of the Constitution. The view of Das Gupta, J regarding the doctrine of lifting of corporate veil was rejected by the Supreme Court in the latter case Tata E & L Co Ltd v. State of Bihar [1965] that corporations can claim rights under Part III of the Constitution.[11] The learned Chief Justice feared that if implemented, “it would 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”.[12]

If the SC holds that a corporation is covered within the meaning of “citizen”, all rights available under Article 19 should be available to corporations. But certain rights u/Art. 19 do not apply to corporations. These include clauses (b), i.e., to assemble peacefully and without arms, and (d), i.e., to move freely throughout the territory of India. Here, STC is a corporate body incorporated according to the Companies Act, 1956. It is a separate legal entity distinct from its members and is viewed as a legal person. However, the members of the Board do not include their personality in the company. For example, if the members are citizens of India, the company will not become Indian citizens automatically. The personality of individuals and that of the company are two different concepts. Corporations do not have a physical existence and to consider them a legal person is just an abstraction of law.

The SC has distinguished nationality and citizenship, stating that every Indian national is not a citizen. The question of whether a corporation enjoys Fundamental Rights u/Art. 19 should be decided by the courts. The main issue for the SC was whether the Constitution should be read liberally and whether incorporated companies should be allowed to enjoy benefits under Articles 19 (f) and (g). The bench answers this question by looking at the meaning of citizenship and the word citizen in the Constitution because it has not been defined elsewhere. The court by interpreting the Constitution says that the word “citizen” only refers to the citizens of India. The court dismissed the appeal given in this particular case that Corporations can be considered within the meaning of ‘citizen’ in the constitution of India.

LEGAL DEVELOPMENTS AFTER THIS CASE

The cases in which the doctrine laid down in the STC case was applied are (a) Tata Engineering and Locomotive Co v. State of Bihar [1965], (b) RC Cooper v. Union of India [1970][13] and (c) Bennett Coleman v Union of India [1973].[14] In the Tata Engineering case, the court did not apply the concept of the lifting of the veil to understand the rights of the shareholders who are citizens of India. The 5-judge bench stated that it would follow the decision of the State Trading Corporation case. In this case, the issue of lifting of veil was not given due consideration and passed sub silento. However, in the RC Cooper case, the court said the State Trading Corporation case is inapplicable to that case because they are only to deal with the violation of the petitioners’ individual rights and not companies’ rights. The remedy was given to the petitioner irrespective of the detriment caused by the company. Regardless, when the case of Bennett Coleman came before the Supreme Court, it alluded to the theory of “peeping behind the veil”. It tried to look into the nature and rights of shareholders which the State Trading Corporation case failed to do. The Bennett Coleman case makes a clear distinction between the rights of shareholders and that of corporations as a citizen of India. Therefore, it is clear that the ruling of Bennett Coleman is not consistent with the STC case we have discussed. 

CONCLUSION

The question as to whether corporations can come within the meaning of ‘citizen’ under the Constitution should be reimagined. The court’s main finding was that corporations or shareholders could not claim protection under Article 19 of the Constitution. The issue in the case was not even considered in many other cases, and the case of STC dwelled into a question of great constitutional importance.

The court makes a distinction between “nationality” and “citizenship” stating that nationality is based on the place of its incorporation. On the other hand, the United States recognises corporate bodies as citizens in their country. In the case of Bennett Coleman,[15] the SC applied the concept of the lifting of the veil and recognised the rights of its shareholders not following its ruling in STC, finally achieving its constitutional goal of being the protector of Fundamental Rights. The STC took a more liberal stance in Bennett Coleman than in STC. The court held there that a company could not become a citizen within the meaning of the Constitution, and it is only a legal person. Part III, Part II and the Citizenship Act do not recognise companies as citizens. However, the Constitution gives certain Fundamental Rights available to ‘all persons’ in the Constitution.

Today, corporations in India have a greater ambit of powers than the State. The Indian Constitution was set up in the mid-twentieth century with a state-controlled economy in mind. However, there is an apparent change of socio-economic conditions, and therefore, corporate citizenship should be reimagined, and the Parliament should adopt new laws which consider ‘corporations’ as citizens within the meaning of Article 19. It can be seen that there is a development in law over time and the jurisprudence that arose in the STC case was discarded in later cases as the society and business progress in the economy over time.


REFERENCES

[1] The State Trading Corporation v. The Commercial Tax Officer (1963) AIR 1811, 1964 SCR (4) 89.

[2] Krishna Prasad KV, ‘Unveiling the Rights: Corporate Citizenship in India Post State Trading Corporation’ (2010) <http://docs.manupatra.in/newsline/articles/Upload/CB4B7EF5-F1C4-4E37-BEED-3D3DAFEF4DB2.pdf> accessed 27 October 2020.

[3] ibid (n 1).

[4] ibid.

[5] The Indian Law Institute, ‘The Problem of Juristic Personality of a Corporation’, <http://14.139.60.114:8080/jspui/bitstream/123456789/15164/1/022_The%20Problem%20of%20Juristic%20Personality%20of%20a%20Corporation%20(158-163).pdf> accessed 27 October, 2020.

[6] The Constitution of India, Arts. 12, 20, 27, 28.

[7] The Constitution of India, Arts. 15, 16, 19, 27, 28, 31.

[8] ibid (n 5).

[9] The Citizenship Act 1955, ss. 2, 3.

[10] ibid (n 5).

[11] [1965] AIR 40, 1964 SCR (6) 885.

[12] ibid (n 1).

[13] [1970] AIR 564, 1970 SCR (3) 530.

[14] [1973] AIR 106, 1973 SCR (2) 757.

[15] [1973] AIR 106, 1973 SCR (2) 757.

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