Problem of Corporate Citizenship and Fundamental Rights in India

A question has been asked : “Take two of the rights guaranteed under Art. 19 (1) (f) and (g). Can it be suggested that a corporation which, let us assume, is Indian in every sense of its term — its shareholders, are Indians, its directors are Indians, its capital is Indian — that such a corporation should not have the right under cl. (f) to acquire, hold and dispose of property, or under cl. (g) to practise any occupation, trade or business?”1  This, indeed, is a very legitimate question, and the reason is obvious : The advent of industrial revolution in India has thrown up into prominence the corporate personality of associations of men — companies and corporations. This is not a fortuitous growth but a necessary stage in the economic development of the country. Yet corporations are not infrequently accorded only a grudging recognition in law, even though, as juristic persons with an independent legal existence, they are subjects of rights and liabilities along with natural persons.  The laws relating to the citizenship of India are contained in Part II of the Constitution and in the Indian Citizenship Act (LVII of 1955). While the constitutional provisions deal with the question of citizenship at the commencement of the Constitution, the Citizenship Act, on the other hand, provides for its subsequent acquisition and termination. As some of the fundamental rights under the Constitution are guaranteed only to the citizens of India, it is important to inquire whether an artificial juristic person, such as a body corporate, can be an Indian citizen and thus be entitled to those fundamental rights that are guaranteed exclusively to the citizens.  The development of the law bearing on the question of corporate citizenship and the availability of those exclusive fundamental rights to corporate bodies have unfortunately not been uniform throughout the country. The question first came up for decision in the Supreme Court in Chiranjit Lal v. Union of India 2 where a point was raised as to the violation of the fundamental rights of a company inter alia under Art. 19 of the Constitution, which Article guarantees certain rights exclusively to the citizens of India. As the application before the Supreme Court was made not by the company itself but by one of its shareholders, no decision was necessary upon the question. Mukherjea, J. remarked that “a discussion of the fundamental rights of the company as such would be outside the purview of our enquiry. It is settled law that in order to redress a wrong done to the company, the action should ‘prima facie’ be brought by the company itself”. The learned Judge nevertheless felt impelled to make the following observation, namely, that “the fundamental rights guaranteed by the Constitution are available not merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of the right compels the inference that they are applicable only to natural persons.”  Though the fundamental rights guaranteed by our Constitution including those under Art. 19, were thus made available to a corporation 3, it was by no means finally settled whether a corporation can be a citizen within the meaning of Article 19 of the Constitution, or, for that matter, within the meaning of any other Article. The point again came up before the Supreme Court in Bengal Immunity Co. Ltd, v. State of Bihar 4, but was not decided. Das Ag. C, J. held that “ ............. it is, nevertheless, unnecessary for the purposes of this appeal, to decide whether a juristic person like a company is a citizen as defined in Part II of the Constitution and as such entitled to the benefits of Art. 19.” The point was again left undecided by the Supreme Court, but with an unmistakable bias in favour of corporate citizenship, when S. K. Das, J., in the case of, Sewpujanrai Indrasanrai v. Collector of Customs 5, held that, “Assuming that a company can be a citizen as defined in the Constitution, respondent 4 admittedly is a foreign company possessing no rights of a citizen of this country. On the same assumption the Bharat Bank Ltd., respondent ‘ 5, being an Indian Company may have the rights of a citizen under Art. 19; but in the circumstances which we shall presently state, we do not think that its complaint as to the infraction of a fundamental right can be raised at this stage.”  While the Supreme Court has thus left the question as to whether a corporation can be a citizen or not, open, the High Courts in Madras 6 and Punjab 7 categorically answered the question in the negative. In the Madras case, viz., Narasaraopeta Electric Corporation Ltd. v. State of Madras, it was held that Art. 19 (1) (f) “applies only to ‘citizens’ and a company incorporated under the Companies Act does not satisfy the requirements of the definition of citizen in Art. 5.” Similarly, in the Jupiter General Insurance Co, Ltd. v. Rajagopalan, the Punjab High Court observed that :  ‘The question for decision is whether the expression ‘citizen’ used in Art; 19, Constitution of India, includes a corporation. In such cases the rule is that the question must be decided upon the construction put upon the statute ........ The answer to the question whether a corporation is a citizen within the particular statute depends upon the intent to be gathered from the context and general purpose of that statute. Clauses (a) and (b) of Art. 5 do not apply to corporations. Articles 6 and 8 of the Constitution which deal with the rights of citizenship of persons who have migrated to India from Pakistan and the rights of citizenship of persons of Indian origin residing outside India, have likewise no application to corporations. Article 19 (1) (a) to (e) cannot possibly apply to corporations. In Art. 39 (a) the expression ‘citizen’ means ‘men and women’. For the foregoing reasons, I think that a corporation is not a citizen within Art. 19, Constitution of India.” And again that, “Article 19 relates to citizens. The question is whether a company is a citizen ........... I am of the view that Art. 5 applies to natural born persons and not to artificial persons and a reading of the next Article of Part II in which Art. 5 finds a place makes it abundantly clear that what is intended by the word ‘citizen’ is a natural born person and not an artificial person.”  The case of the Bombay High Court (1) throws some light on this vexed question in the sense that it shows up the problem more clearly. On appeal, however, the Supreme Court once again avoided the issue by holding that, “Nor is it necessary for us on this occasion to consider whether a company is a citizen within the meaning of Art. 19 and indeed the point has not been argued before us” 8. According to Chagla, C. J., of the Bombay High Court, “Although domicile is a question of private international law, rights and acquisition of citizenship is a creation of municipal law (as opposed to international law) 9, and it is only Parliament by municipal law that can determine who is a citizen. It would be perfectly competent to Parliament by legislation to provide that a corporation satisfying certain conditions should be deemed to be a citizen for the purpose of Art. 19(1) but Parliament has not done so” 10. Chagla, C. J. then goes on to add : “The fundamental right guaranteed to every citizen under Art. 19 (1) (f) and (g) is guaranteed as much to a citizen as to a corporation. We are conscious of the difficulty ............. as to the Constitution of a corporation and under what circumstances and in which cases we would hold that a corporation is a citizen and a Corporation is not a citizen ............. I think it is sufficient to decide this case on the facts before us where all the shareholders are Indian citizens, and all the directors are Indian citizens.” The Bombay case thus establishes at least two propositions, viz., first, that a corporation is not incapable of being a citizen; and secondly, that a corporation whose shareholders and directors are citizens of India, is entitled to the fundamental rights guaranteed under Art. 19 (1) (f) and (g) of the Constitution.  It will be necessary to examine the observations of the learned Chief Justice of Bombay a little more closely. In the first place, there is now not much room for doubt that “rights and acquisition of citizenship is a creation of municipal law”; but it is also equally true that the question of ‘domicile’ is closely related to it. Lord Westbury in his classic judgment in Udny v. Udny 11 laid the foundation of this modern common law view (as opposed to the civil law treatment of the subject in the continental countries of Europe) in England and in America by pointing out that at birth, every individual has a double status: one — political — which determines his nationality, and the other — civil — which depends on his domicil, gives him the character of a citizen, and governs his personal law. “The law of England”, according to Lord Westbury, “.......... ascribes to each individual at birth two distinct legal states or conditions; one by virtue of which he becomes the subject of some particular country, binding him by tie of national allegiance, and which may be called his political status; another by, which he has ascribed to him the character of a citizen of some particular country and as such is possessed of certain municipal rights and subject to certain obligations, which latter character is the civil status or condition of the individual and may be quite different from his political status. The political status may depend on different laws in different countries; whereas the civil status is governed universally by one single principle, namely that of domicil which is the criterion established for the purpose of determining civil status ..........” This distinction between the political and the civil status should never be lost sight of, the former depends on nationality whereas the latter is regulated and controlled by domicile alone. And it is important to appreciate that nationality and domicile are two different conceptions. An Englishman, for example, while owing allegiance to the Crown, may so change his residence that many of his legal rights and obligations will be determined by a foreign system of law — the law of his new domicile.  Now, on the analogy of an individual, the domicile of origin of a corporation would be that of the country of its incorporation. For, Huddleston, B. said, “.............. taking the analogy between a natural and an artificial person, in the case of a corporation you can say that the place of its registration is the place of its birth..........” 12. Again, both Lord Cave, L. C. and Younger, L. J. spoke of a company’s place of incorporation as the place of its birth 13. Lord Sumner also made a similar comparison, viz., “........... this (the form of incorporation prescribed by the English Companies (Consolidation) Act, 1908) at the most does no more than bring the embryo company to birth ..........14  India having grown up on common law tradition, there should, therefore, be hardly any difficulty in accepting that a corporation registered in India should have all the rights under the Indian municipal law, except, to quote the language of Mukherjee, J., (2) “where the language of the provision or the nature of the right compels the inference that they are applicable only to natural persons.” In other words, a corporation which is registered in India, has a ‘civil status’ in the sense Lord Westbury used the expression, and therefore, has the character of a citizen in that sense.  The question now therefore is : how far this common law position of the corporation is compatible with the provisions of our Constitution or with those of later legislation of the Parliament. ‘Citizen’ has not been defined by our Constitution, and the only provision which is relevant is contained in Art. 5, which deals with citizenship at the commencement of the Constitution. The word ‘person’ in Art. 5 read with Art. 367 would no doubt include a corporation as well; hence a corporation which was registered in the territory of India at the commencement of the Constitution would at first glance appear to come within Art. 5. If a corporation comes at all within this Article it must come either under Art. 5 (a) or (c), and not under (b) for the obvious reason that the provisions of Art. 5 (b) are inapplicable in the case of a body corporate. But Art. 5 (a) does not appear to have been intended to cover the case of a corporation; for, in that event the two significant expressions in the Article, viz, ‘domicile’ and ‘was born’ — which are the two essential pre-conditions for citizenship under Art. 5 (a) — would render either of them redundant. Because both ‘domicile’ and ‘birth’ mean the same thing, viz., registration, in the case of a corporation. If will presently be seen that Art. 5 (c) also is not probably intended to apply in the case of a corporate body. This Article 5 (c) centres round the question of residence which is by no means an easy question when applied to a corporate body. The difficulty is even greater because the expression, “ordinarily resident”, in the Article has not been defined in the Constitution. No doubt the expression occurs in the Indian Income Tax Act, 1922; but by S. 4B (c) of that Act “a company, firm or other association of persons is ‘ordinarily resident’ in the taxable territories if it is ‘resident’ in the taxable territories.” 15 Therefore, in the case of a corporation there is no difference between ‘ordinary residence’ and ‘residence’ under the income-tax law in India. Moreover, though ‘residence’ is a ground for chargeability, and being ‘not ordinarily resident’ is a ground for partial exemption from tax to which a resident is liable, ‘ordinary residence’ is neither a ground for any further liability to tax nor for any exemptions. Therefore, judicial interpretations of income tax law in India are not likely to be very helpful for the purpose.  The residence of a corporation determines its liability for income-tax also under English law; and the general test of residence has been evolved by the English Courts in the income-tax cases. According to them, a company is regarded as resident in the country where the centre of control exists; or, in other words, where the seat and directing power of the affairs of the company are located, the place of incorporation being only one of the evidentiary facts to be considered in the course of ascertaining where the control resides 16, Though the natural inference from this test of residence would be that a company cannot be resident in two places simultaneously (17), the House of Lords has actually held that a company for the; purposes of income-tax may have a dual residence 17. Of course, a company engaged in active trading operations must have its central con trol in one country and in one country only; a static company, on the other hand, whose only business, is administrative, may be deemed to reside in any country where a substantial part of that business is carried on 18. Further the contention which is sometimes urged that a company is inevitably resident in the country where it is incorporated and where its registered office is situated, is untenable in the light of the judicial decision of the highest Court in England 19.  In contrast to this position in English income-tax law, the American law of taxation follows the traditional American view of the non-existence, and therefore non-residence, of a corporation beyond the country of its incorporation 20. “A corporation can have no legal existence out of the boundaries of the sovereignty by which it is created. It exists only in the contemplation of law, and by force of the law; and where the law ceases to operate, and is no longer obligatory, the corporation can have no existence. It must dwell in the place of its creation, and cannot migrate to another sovereignty” 21. But the theory of non-existence of a corporation outside the boundaries of its origin was later got over by decisions of the Supreme Court which allowed a foreign corporation to be regarded as carrying on business 22 and to be suable in a State in respect of causes of action arising therefrom.  Now, as regards ordinary residence of a company, Lord Sumner said that “a person ‘ordinarily resident” 23 in the United Kingdom as used in the “Income-tax Acts is so inappropriate a term for the person, ‘albeit’ an artificial one, who is always and by law immovably resident in the United Kingdom, that its use cannot be sustained (as regards a company) ..........” (14). Although this observation of Lord Sumner has not escaped criticism from writers of Private International Law on the ground that where the control of a company is divided between the country of its incorporation and some other country, it would be reasonable to hold that it is ‘ordinarily resident’ at its registered office 24, such criticism does not, for out present purpose, make it more probable that Article 5 (c) of our Constitution was intended to apply in the case of a corporation. Indeed, any assumption that a corporation’s place of incorporation is also its ‘ordinary residence’, would militate against its claim to citizenship under Article 5 (c) on the same ground as would prevent it from coming under. Art. 5 (a).  To sum up the effect of American and English decisions on ‘residence’ upon the question of corporate citizenship under Art. 5 (c) of our Constitution, while the American doctrine of domestic residence for domestic corporation makes it impossible for a corporation to become a citizen under Art. 5(c) of the Indian Constitution; the more liberal English Jaw can at best introduce the conception of plurality of residence on the ground of divided control; but in that event, the corporation would most probably be deemed to be ‘ordinarily resident’ at its registered office, thereby making Art. 5 (c) inaccessable to a corporation on the ground that ‘domicile’ and ‘ordinary residence’ being the same thing in the case of a corporation. Art. 5 of the Constitution could not have been intended to apply in the case of an artificial person like a corporation.  If, therefore, the door of entry into the hall of citizenship was only ajar under the Constitution, the Citizenship Act of 1955 25 has shut it completely in the face of a corporation; for Sec. 2(f) of the Act provides that “ ‘person’ 26 does not include any company or association or body of individuals, whether incorporated or not.’’ It is, however, important to remember that the Citizenship Act, 1955, deals only with the acquisition and termination of citizenship subsequent to the commencement of the Constitution; it leaves the question of citizenship at the commencement of the Constitution untouched.  The Bombay case (1) is interesting also from another point of view. It shows a possible line of development of the law in future when our Judiciary would have to face the problem of determining the question of corporate citizenship in India. The principle that the Courts could look beyond the corporate entity, adopted as early as 1809 in the United States of America 27, has been accepted by the Bombay High Court in this case. It is, however, important to remember that the case of Bank of United States v. Deveaux (27) in which the Court made an early attempt to look behind the corporate veil and which was cited with success in the Bombay case, ceased to be good law in America long ago 28.  For a true assessment of the Bombay case and its possible connection with the case of Deveaux, it will be necessary to examine in short the development of the law in America on the subject. It has always been held in the United States that a corporation is not a ‘citizen’ in the sense in which that word is used in the Constitution of that country. According to the accepted view, “the term citizen can be correctly understood in no other sense than that in which it was understood in common acceptance when the Constitution was adopted, and as it is universally explained by writers on government, without exception. A citizen is of the ‘genus homo’, inhabiting, and having certain rights in some State or district ...... ........ these privileges attached to him in every State into which he may enter, as to a human being — as a person with faculties to appreciate them, and enjoy them, and not to an intangibility, a mere legal entity, an invisible artificial being, but to a man, made in God’s own image” 29. Therefore, when the case of the Bank of United States v. Deveaux (27), came up in 1809 for decision in connection with the provisions of the Constitution 30 relating to the jurisdiction of the Federal Courts which gave these Courts power to try actions between citizens belonging to different States, the Supreme Court held that a corporation was not a citizen within the meaning of those provisions, and so that it could not maintain an action against a citizen of a State other than that in which it was incorporated. But following an English case 31, it was also further held that the Courts could, however, look behind the corporate veil, and where all the corporators were found to be citizens of the same State, the corporation could be regarded as a citizen of that State and, therefore, could sue and be sued in the Federal Courts. Later on, in order to avoid inconvenience, all members of a corporation were presumed to be citizens of the State in which it was incorporated; but the presumption was rebutable 32. Finally, by .the end of the ‘nineteenth century the presumption of citizenship became one of law and was irrebuttable 33. This is the present position in America.  The case of the Bombay High Court (1) can now be seen in its proper perspective. It is clear that the Bombay case, in so far as it seeks to establish the principle that the Court can look behind the corporate veil to see the character of the corporators, stands or falls by the authority of the case of Deveaux (27). This authority has been challenged from at least three different angles. In the first place, the principle established has no application at the present time. “The authority in the case of Bank of United States v. Deveaux (27), has been much limited, if not overruled, by subsequent cases and that ‘at the present time the courts of this country (i.e., America) 34 are entirely wedded to the doctrine that the corporators of a corporation are conclusively presumed “to be citizens of the same State as the corporation” 35. Secondly, the authority of Deve-aux’s case has always been limited to the question of jurisdiction, it was never extended to any other citizenship rights under the American Constitution. “In that case the court confined its decision, in express terms, to a question of jurisdiction; to a right to sue; and evidently went, even so far, with some hesitation .............. But the principle has never been extended any further than it was carried in that case ..............’’  And thirdly, the decision in Deveaux’s case even in regard to the question of jurisdiction did not gain universal acceptance in America. Justice Wayne in Letson’s case (32) felt free to say that Deveaux’s case was “carried too far and that consequences and inferences have been argumentative ly drawn from the reasoning employed’’ in that case “which ought not to be followed.’’ According to this learned Judge, the decision of that case “has never been satisfactory to the bar, and ........ not ...... entirely satisfactory to the court that made” it. By no one was the correctness” of it “more questioned than by the late Chief Justice who gave” it. Justice Wayne then went on to add : “We think we may safely assert, that a majority of the members of this court have at all times partaken of the same regret, and that whenever a case has occurred on the circuit, involving the application of The Bank of United States v. Deveaux (27), it was yielded to, because the decision had been made, and not because it was thought to be right.”  In view of this position of the law to America, it is clear that the Judges in India would be rowing against the current of time should they choose to sail in the same boat as the Bombay High Court. The future development of the law of corporate citizenship in India must necessarily be in the realm of conjecture. The present position is that as Indian corporation whose shareholders are all citizens of India is entitled to all the fundamental rights, even those that are guaranteed exclusively to citizens; the question of corporate citizenship, however, is yet at large.  “I have stirred these points, which wiser head in time may settle.”

Author Name: Dr. Bhupen N. Mukerjee