M/S. Electronics Corporation of India Ltd. v. Secretary, Revenue Department

This case is about whether the company who is a lessee of Central government can be exempted from the tax or its corporate personality can be used as a defence by the State government to levy tax.
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Introduction

When a company is incorporated, it is treated as a separate legal person. It is one of the most popular principles of corporate law. It is accepted both in Indian and English law. The company gets the same treatment and enjoys the same rights and responsibilities as that of a legal person. It can sue and be sued. This case is also about whether the company who is a lessee of Central government can be exempted from the tax or its corporate personality can be used as a defence by the State government to levy tax.

Facts

In 1963, the State of Andhra Pradesh had provided a big part of the land to the Department of Atomic Energy of the Central Government. In 1964, the same land (220.25 acres) given to the Department of Atomic Energy was given to the appellant company. 

The Appellant Company is registered under Company law. At that time there was Andhra Pradesh Non-Agricultural Lands Assessment Act, 1963 which governs the tax in the State.

The Act defines an owner as to any person for the time being receiving or entitled to receive whether on his account or as an agent, or trustee, guardian, manager, receiver for another person or any religious, educational or charitable purpose, rent or profits from the non-agricultural land or for the structure constructed on such land, in respect of which the word is used[1].

But there was an amendment in the Act in the year 1974 with effect from 1st July 1974. The owner definition was amended and it now also includes the land owned by the State or Central government i.e. the lessee, if the land has been leased out by that Government for any commercial, industrial or other non-agricultural purpose[2].

Section 3 of the acts talk about the levy of a tax to be paid by the owner of such land. On 1st of October, 1978 the respondent issued the demand notice to the appellant company for non-agricultural assessment of the land owned by the company.

They demanded the sum from the period-

1970-71 to 1973-74Rs.1,91,189.68.
1974-75 to 1978-79Rs.11,98,826.32

So, the appellant company filed the writ petition in the High Court against the demand notice. The High Court held that the Company is the distinct person in the eyes of law and it should give the tax to the State.

The appellant company not satisfied by the High Court judgement filed the appeal in the Supreme Court. Here’s the present appeal.

Issues

The following issues were raised by the parties-

  1. Whether the appellant company is protected under Article 285 of the Indian Constitution?
  2. Whether the company is the lessee of the Central Government or not?
  3. Whether the Distinction can be drawn between the company and the shareholder even though the shareholder is one?

Contentions, Arguments and Decision by the Court

Issue 1

It was contended by the appellant company that it was the lessee of the land which was owned by the Union of India. The Union of India cannot be taxed by the virtue of Article 285 of the Constitution and the said act cannot be applied to the company’s land. It is further contended that out of the extent granted to the petitioner an extent of 29 acres is covered by buildings, an extent of 12 acres by roads and the rest of the area is meant for future expansion. It is also submitted that an extent of 14.25 acres is being used for agricultural purposes.[3]

Article 285[4]– Exemption of property of the Union from State taxation

(1) The property of the Union shall save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State

(2) Nothing in clause ( 1 ) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.

According to the appellant company, the Union government holds the share of the appellant company wholly. It was also said that the appellant company is a government company and it is protected under Article 285. It was contended by the State government that it can assess tax so long as the appellant company is the leader of the Central Government by the amended act. As the Act specifies to assess tax for the specific purposes namely, commercial, industrial or any other non-agricultural purpose, including residential purpose[5].

It also supported its contention by placing reliance on Article 289[6] of the Indian Constitution.

The appellant company also placed reliance on the case- Air India Statutory Corporation &Ors. vs. United Labour Union &Ors[7]– It talks about the instrumentality or agency of the State and how it is to be understood whether the government has full control over the company or not.

Held- Neither Article 285 has to do anything with the current case nor has the control of the government to play any role in the case. This argument was quashed. It was also mentioned that to assess tax for the specific purpose it is for the authority to decide to what extent the land is used.

ISSUE 2

It was contended by the appellant company that they are not the lessee of the Central government which itself contradicts their first contention. So, the second contention was also quashed.

ISSUE 3

According to the State, a clear distinction must be drawn between the company and the shareholders. As the company is a registered company under the corporate law and it has a separate legal personality in the eyes of law.

The following cases were put by the State in its defence-

In Western Coalfields Limited v. Special Area Development Authority, Korba&Anr[8].-

The Court reviews its earlier judgment on this point. It was held even though the whole share capital before it has been subscribed by the Central Government, it cannot be predicted that the appellant company itself is owned by the government. The company has a distinct legal personality apart from the government. The question in the matter is of the land and not who holds the share capital.

In RustomCavasjee Cooper vs. Union of India[9]

It was held that the company has a separate legal personality and is a juristic person in the eyes of law. A shareholder doesn’t owe the property of the company but it has merely an interest in the company.

Summary of the Court Decision

Held- This contention three was accepted by the Court. It was said that the Company has separate legal personality apart from its shareholders and the company is liable to pay the non-assessment tax to the State as per the Act. It was also held by the court that the act has no retrospective effect which means demand made for paying the payment of tax before the effect of the amendment is quashed. And the demand made after the effect is upheld, the appellant company shall be at liberty to file appeals within 8 weeks from the date of this order, wherein it will be open to them to establish the actual extent of the land that was used at the relevant time for commercial, industrial or other non-agricultural purposes.

Analysis

According to my opinion, the said judgment is correct in the eyes of law and the reason behind is also correct. As it is one of the basic principles of corporate law that a company has a distinct personality and it should not be confused with the shareholders as the same personality. It could not be taken as a shield to exempt oneself from paying taxes. When a company is registered in the Company law it enjoys many rights and liberties apart from the shareholders now when the time has come to pay tax the company could not use the defence that it wholly controlled and owned by the shareholders. This decision of the court has been used as precedents for many cases.

Conclusion

Although the strict corporate personality has always been used by the courts. But there have been many developments in the field of law. It is not always good to strictly follow the clear distinction between the company and its shareholders as the latter always use this shield to defend oneself after doing any fraud or something.  Now many times courts have lifted the corporate personality to catch the culprit who is using this façade as a defence. In recent times, the court doesn’t strictly follow the principle but depends on courts whether they will pierce the veil or not.

Also read The doctrine of Lifting of Corporate Veil


[1] M/S.  Electronics Corporation of India Ltd V. Secretary, Revenue Department, Govt. of Andhra Pradesh AndOrs, AIR 1999 SC 1734, Available at https://indiankanoon.org/doc/160293/.

[2] Ibid.

[3]Supra note 1.

[4]https://indiankanoon.org/doc/1353284/.

[5]Supra note 3.

[6] Exemption of property and income of a State from Union taxation

(1) The property and income of a State shall be exempt from Union taxation

(2) Nothing in clause ( 1 ) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for such trade or business, or any income accruing or arising in connection therewith

(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government.

Available at https://indiankanoon.org/doc/69694/.

[7] 1997(9) SCC 377

[8] 1982(1) SCC 125

[9]  1970(1) SCC 248