Municipal Committer vs Shri S.K. Karauli, General Manager, Nahan Foundary Ltd.

R.S. Pathak, C.J.—The facts have already been set out in the judgment of my brother D.B. Lal.

It seems to me that the evidence on the record fails to make out a case against the Respondents. Three complaints were filed by the Municipal Committee, Nahan before the Magistrate. Each related to a construction in some part of the premises of the Nahan Foundry. The Magistrate dismissed the three complaints. Hence the present Criminal Appeals No. 8, 9 and 10 of 1969. I have examined the evidence on the record of each of the three cases. It appears that so far as the construction work in the Foundry is concerned, it was stopped on receipt of the notice dated February 29, 1968. As regards the construction work in the General Manager''s residence and in the residence of P.N. Randev, the evidence does not establish that the construction was proceeded with in defiance of the relevant notices. Accordingly, it must be held that the offence alleged in each of the three complaints is not made out by the evidence on the record. On this ground alone the appeals must fail.

There is one point, however, on which I regret I am unable to agree with my learned brother. It was contended before us that the Nahan Foundry building is a Government building and therefore Section 3 of the Buildings Act, 1889 was attracted, so that the Nahan Foundry building is exempt from the Municipal laws. My learned brother has accepted that contention. It seems to me that the contention is opposed to the basic principles of the Company Law. There is no dispute that the Nahan Foundry Limited, which owns the Nahan Foundry building, is a corporate body registered under the Indian Companies Act. Of its 4,000 shares, 3,997 shares are held in the name of the President of India and the remaining 3 shares arc shown in the names of certain officers of the Himachal Pradesh Government who are said to hold them as nominees on behalf of the President of India.

The mere circumstance that the President of India holds almost the entire share-holding and a negligible number of shares are held by others, docs not obliterate the distinction between the Company and its shareholders. The Nahan Foundry Limited is a corporate body. In the eyes of the law a company is a person distinct from its members or share-holders. It has been described as a metaphysical entity or a fiction of law, with legal but no physical existence. In G.E. Railway v. Turner (1872) 8 L.R. 149 Lord Selborne referred to it: as "a mere abstraction of law". The property of the company does not belong to the share-holders. The Indian Companies Act requires a limited company to have a minimum of share-holders. But even if the number of members falls below that required by statute, the company continues to have a separate corporate existence.

The leading case on the subject is Salomon v. Salomon and Co. Limited (1897) A.C 22 51. Salomon, a merchant, carrying on business, converted his business into a company. He owned twenty thousand shares therein, and his wife and five children were given one share each. He also received mortgage debentures in part payment by the company for the business. Subsequently, the company ran into financial difficulties, and the holder of the debentures appointed a receiver and the company went into liquidation. The question was raised in court whether the debentures issued to Salomon were valid and enjoyed priority over unsecured creditors. The case of the unsecured creditors was that the company was a "one-man company" and a sham. It was held by Vaughan Williams J. that Salomon and Company Limited was a mere alias or agent for Salomon and the latter was liable to pay the unsecured creditors out of his own pocket notwithstanding that his shares had been fully paid up. The decision was affirmed by the Court of Appeal on the ground that the scheme was a fraud and it was never intended by the Companies Act that a company should consist of one substantial person and a number of dummies. On further appeal to the House of Lords the decision was reversed. Lord Halsbury, L.C observed that seven actual living persons held shares in the Company and that therefore the statute was satisfied, and he said that consequently it was not competent to any one to deny that they were share-holders. He pointed out that there was nothing in the statute "as to the extent or degree of interest which may be held by each of the seven, or as to the proportion of interest or influence possessed by one or the majority of the share-holders over the others". It was sufficient, he said, that they were shareholders; the motive for becoming share-holders was irrelevant. "If they are share-holders," he observed, "they are share-holders for all purposes". And Lord Macnaughten said;

It has become the fashion to call companies of this class ''one-man companies.'' That is a taking nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may have been complied with, it is inaccurate and misleading; if it merely means that there is a predominant partner possessing an overwhelming influence and entitled practically to the whole of the profits, there is nothing in that that I can sec contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors. If the shares are fully paid up it cannot matter whether they are in the hands of one or many.

It is clear then that unless there are exceptional circumstances, such as the circumstance that fraud has been commissioned and the company is a fiction or a myth it is not open to the court to pierce the veil of the corporate personality of a company and determine whether the shares are owned by those shown in the share register or are held by some of them as nominees of the others. The relationship between the share-holders, whether they arc independent of each other or not, is of no concern for that purpose. The corporate body remains a distinct entity from the members constituting it.

In Ebbw Vale U.D.C. v. South Wales Traffic Licensing Authority (1951) 2 KB 366 the facts were these. The shares of an omnibus company providing passenger road service were by statutory power acquired by the British Transport Commission which held all, save two, shares in it. The omnibus company applied to the licensing authority to increase the fares but the Ebbw Vale U.D.C. objected on the ground that as the services provided by the company were, in fact, provided by the British Transport Commission the licensing authority had no jurisdiction to hear the application. The Court of Appeal held that the omnibus company had retained its character as a separate legal entity and did not act as an agent of the Commission, that consequently the services were provided by the company and not by the Commission and therefore the licensing authority had to consider the charges scheme. Cohen L.J. observed:

...it is quite plain that Parliament when it passed this Act had in mind the general rule of law to which I have referred as laid down in Salomon v. Salomon and Co. and many other cases, that a subsidiary company is not the agent of the parent company, but is an entirely separate entity. Its acts are not the acts of the parent company, '' and the parent company is not responsible for its acts or defaults, in the absence of special provision in some contract between the parties.

Another case of interest is Lee v. Lee''s Air Farming Ltd. (1961) A.C. 12. The Defendant company was formed for the purpose of carrying on the business of aerial top-dressing. Lee held all but one of the shares in the company and was governing director of the company and chief pilot. He was killed while piloting the company''s aircraft, and his widow claimed compensation for his death under the New Zealand Workers'' Compensation Act, 1922. She would be entitled to compensation if it was established that Lee was a ''worker'' as defined by the Act, namely, "any person who had entered into or worked under a contract of service...with an employer...." The claim was opposed on the ground that Lee was not a "worker" within the statutory definition as the same person could not be both employer and employee. The Judicial Committee held that there was a valid contract of service between Lee and the company, and Lee was therefore a "worker" within the meaning of the Act.

It is plain then that the Nahan Foundry Limited is a distinct and separate entity and cannot be confused with the President of India and the Government officers who are shown as the sole share-holders of the company. Consequently, the Nahan Foundry building belongs to it and not to the Government. It is not a Government building. Section 3 of the Government Buildings Act, 1889, exempts Government buildings from Municipal laws where the building is "used or required for the public service or for any different purpose, which is the property or in the occupation of the Government, or which is to be erected on land which is the property or in the occupation of the Government". The Nahan Foundry building is not the property of the Government. Inasmuch as it is in the occupation of the company, it is not in the occupation of the Government. Consequently, in my opinion, the exemption conferred by Section 3 of the Government Buildings Act cannot be extended to the Nahan Foundry building.

My learned brother has pointed out that the Government owns the company, that there is a budget provision with the Government to meet the expenditure of the company, that the profit and loss are accounted for by the Government and the entire business is done by the Government. With great respect, it seems to me that the indicia referred to above cannot justify the conclusion to which my learned brother has come. It may be that as the entire capital fund proceeded from the Government the company may be described as a Government company. It may also be that the conduct of its business is controlled by officers of the Government. Nonetheless, it continues to be a company which is a distinct entity from the Government. Although the Government has provided the capital fund, that fund has been employed by the Government in the acquisition of the share capital of the company. The Government owns the shares, but nonetheless the capital is the property of the company. Any profits enjoyed by the company are profits belonging to it. It is only when a dividend is declared on the shares that the profits may be distributed to the share-holders. When the President of India receives any part of the profits, the amount is received by him as a share-holder''s dividend. The business of the company is conducted by the officers of the Government, but when they conduct that business they do so as the management of the company and not in their status as Government officers. The Nahan Foundry Company Limited is not a Government department, and therefore I am unable to appreciate the circumstance that the Government maintains a budget provision to meet the expenses of the company and that the profit and loss are accounted for by the Government. If the Government is doing so, it is probably only by way of information. I hold that the three complaints made by the Municipal Committee, Nahan, against the General Manager, Nahan Foundry Limited, cannot be treated as misconceived on the ground that the Nahan Foundry building is a Government building.

As regards the third complaint, whether the copy of the resolution filed by the Committee authorising the filing of the complaints is admissible in evidence, I consider it unnecessary to go into the matter because the three appeals must fail for want of evidence in support of the complaints.

The appeals are dismissed.

D.B. LAL, J.

These arc three criminal appeals preferred to this Court under special leave granted to the complainant under Sub-section (3) of Section 417 of the Code of Criminal Procedure. The complainant is the Municipal Committee, Nahan, and the facts giving rise to these appeals arc as follows:

A complaint was filed by the Municipal Committee Nahan, u/s 195A(2) of the Punjab Municipal Act, 1911 (as applicable to Himachal Pradesh) against Shri S.K. Karauli, General Manager, Nahan Foundry Ltd., Nahan, with the allegations that the latter started construction of buildings within the premises of the Foundry without taking prior sanction of the Committee u/s 189(1). The Committee served him with a notice as provided in Section 195A(1), but the General Manager failed to comply with the terms of such notice and as such was liable to be punished for an offence under that section. One Keshav Nath Overseer of the Committee was directed to enter the premises under an order made by the Committee dated 29-2-1968 and he made a report that unauthorized construction was being done. In this manner the General Manager had deliberately violated the provisions of sections 189 and 195A and was thus liable to be prosecuted under Sub-Section (2) of Section 195A.

The constructions inside the Foundry had started at three specific places and therefore three complaints were filed which have given rise to these three appeals. Since a common question of law and fact arises in all the three appeals, they can be disposed of conveniently by a single judgment.

The learned Magistrate First Class who heard these complaints, was of the opinion that the complaint was not filed by a person authorized by the Committee within the meaning of Section 228 and as such the prosecution could not be sustained. On behalf of the Committee a cyclostyled copy of resolution No. 15 passed in the Municipal Committee Meeting held on 24-3-1960 was filed. In that resolution, one Jagmohan Sanitary Inspector was authorized by the Committee to file complaints for prosecution of persons who violated the provisions of the Punjab Municipal Act, 1911. The learned Magistrate held that this resolution was not properly proved and as such could not be read in evidence. He further held that the Foundry was a Government building to which Section 3 of the Government Buildings Act, 1889 applied and as such Section 189 of the Punjab Municipal Act, 1911 was not attracted and no prosecution could be launched with reference to Section 195A(2) of that Act. On these grounds, inter alia, the learned Magistrate dismissed the complaint and acquitted the General Manager of the Foundry.

The Complainant-Municipal Committee felt aggrieved of the decision, and after obtaining special leave u/s 417(3) of the Code of Criminal Procedure, filed these three appeals which have come up for our consideration.

In its grounds of appeal, the Committee has specifically taken up two pleas, namely, that the copy of the resolution filed by the Committee was admissible in evidence, and that the Foundry could not be considered to be a Government building for attracting Section 3 of the Government Buildings Act, 1889.

I would take up the second plea raised by the learned Counsel representing the Committee in the first instance. It has been urged before us, that the Foundry is registered under the Indian Companies Act and having been a corporate and juristic body, its buildings could not be treated as Government building so as to attract the provisions of the Government Buildings Act, 1889. I am aware of the distinction usually drawn between the legal status of share-holders of a company and the company itself which is a corporate body under statutory provisions. That distinction has been drawn by their Lordships of the Supreme Court in Bacha F. Guzdar Vs. Commissioner of Income Tax, Bombay, . The position of share-holders in a company is distinct from the juristic position of the company itself. A share-holder has not got a right in the property of the company. He acquires a right in the profits of the company and as such he could not be identified with the company itself. But in my opinion this controversy is totally besides the point so far as the facts of these cases are concerned. The General Manager accused is not a share-holder and is not being prosecuted as such. Me is an agent of the Foundry and being instrumental to the construction of unauthorized building without sanction of the Committee, he was prosecuted u/s 195A(2) of the Act. The short controversy relates to the legal status of the building occupied by the Foundry with pointed reference to its being owned and occupied or required for a public purpose, by the Government. I can at best quote Section 3 of the Government Buildings Act, 1889 in order to appreciate this question:

Exemption of certain Government buildings from municipal laws to regulate the erection, etc. of buildings within municipalities:

Nothing contained in any law or enactment for the time being in force to regulate the erection, re-erection, construction, alteration or maintenance of buildings within the limits of any municipality shall apply to any building used or required for the public service or for any public purpose, which is the property, or in the occupation, of the Government, or which is to be erected on land which is the property, or in the occupation, of the Government:

Provided that, where the erection, re-erection, construction or material structural alteration of any such building as aforesaid (not being a building connected with defence, or a building the plan or construction of which ought, in the opinion of the Government concerned, to be treated as confidential or secret) is contemplated, reasonable notice of the proposed work shall be given to the municipal authority before it is commenced.

It is abundantly clear from the above-noted Section 3 that it is attracted to any building used or required for the public service, or for any public purpose, which is the property, or in the occupation, of the Government. The buildings of the Nahan Foundry, for the reasons which I shall presently state, are decidedly used or required for the public service or for a public purpose and furhcr that these buildings are the property of the Government or are in the occupation of the Government. It is undisputed between the parties, that the Government owns each and every share of this company. Majority of the shares are owned by the President of India. A few shares are owned by officers of the Himachal Pradesh Government who too do not possess personal interests in them. They have rather given certificates to indicate that Government owns such shares which exist only under their official designations. Therefore, the Government owns the Company. There is a budget provision with the Government to meet the expenses of the company. The profit and loss are naturally accounted for by the Government. The entire business is done by the Government, and by none else. Therefore, in order to attract the provisions of the Government Buildings Act, 1889, it can safely be concluded that the buildings of the company or Foundry are used or are required to be used by the Government and the buildings are the property of the Government or these buildings are in the occupation of the Government. In all such contingencies, Section 3 is attracted. Therefore, in my opinion, the finding of the learned Magistrate, that the buildings of the Nahan Foundry which are sought to be constructed belong to the Government and are decidedly in the occupation of the Government, is correct. For such buildings, special provision has been made in the Government Buildings Act, 1889, and whatever objection the Committee has for the construction of such buildings, they can make suggestions to the Government and the latter would be at liberty to comply or not, with such objections. The provisions are contained in the Government Buildings Act, 1889. It is manifest, Section 189(1) or any other provision of the Punjab Municipal Act, 1911 could not apply. For this simple reason, the three complaints were misconceived and no prosecution could be instituted against the General Manager.

The other plea submitted by the learned Counsel is, of course, sustainable. It is impliedly held by the learned Magistrate that the copy of the resolution was inadmissible as it could not be satisfactory proof of a public document. For this, reference need be made to Section 78 of the Evidence Act. This section deals with the proof of official documents other than those specified in Section 65. The resolution is covered by Clause (5) of this section and a copy of the proceeding of the Municipal Committee, certified by "legal keeper thereof", could be read in evidence. As evident from the copy of the resolution, the following words occur at its bottom:

attested to be a true copy.

(RAMESHWAR CHAND), Secretary, Municipal Committee, Nahan, District Sirmur.

I have looked up the bye-laws of the Municipal Committee, Nahan, and pertinent reference can be made to bye-laws 1, 2 and 18 which deal with the duties and powers of the Secretary. These bye-laws in substance are that the Secretary exercises general control over the whole municipal establishment; he is responsible for the entire work of the office; he prepares the agenda of every meeting of the Committee and records the minutes; and, he is in charge of the common seal which shall be used to stamp the powers of attorney, deeds, contracts and other important instruments issued or granted by the Committee. The resolution will no doubt be an important instrument which is definitely used in support of prosecution instituted in courts of law. Therefore, it is safe to hold that the Secretary is the legal keeper of the proceedings of the Committee. These proceedings culminating in the said resolution must have been written by the Secretary himself as provided in the bye-laws. He was legal keeper of the minute-book and he issued the copy attesting it to be a true copy of the resolution. Therefore, the resolution was admissible in evidence and being an official document the copy was admissible u/s 78 of the Indian Evidence Act. The cyclostyled copies were prepared by one uniform process and each was a primary evidence of the contents of the other copies. Of course, the copy could not be primary evidence of the original within the meaning of Section 72 of the Indian Evidence Act. Nonetheless, it is a copy of such proceeding of the Committee and having been certified by the Secretary who was legal keeper thereof, it is admissible in evidence being a proof of that document u/s 78 of the Indian Evidence Act.

Besides what I have stated above, there is another reason why the prosecution of the accused could not be upheld in these cases. The first notice was issued by the Committee on 8-2-1968 u/s 195A and compliance was required u/s 220 so that the General Manager stopped the construction work within six hours, as prescribed in that section. This was not a notice for prosecution u/s 195A(2). In reply to this notice, on 10-2-1968 one of the Managers of the Foundry wrote to the President of the Committee that the construction did not apparently interfere with anybody''s rights, nor did they infringe any rule of the Committee and as such the work could not be stopped. On 21-2-1968 the Manager again wrote to the Secretary of the Municipal Committee to tell him if the buildings belonging to the President of India were also required to take sanction of the Committee before construction could be done. It was specified that on hearing from the Secretary, the matter would be referred to higher authorities and the construction work would be stopped. No reply was received from the Committee to this letter. On 23-2-1968 Shri Karauli, General Manager again wrote a letter to the Committee and he reiterated that the buildings belonging to the Government did not require prior sanction of the Committee for additional constructions. He also specified that several plans were already submitted to the Committee, but no sanction was forthcoming and hence in public interest, the construction was taken in hand. However, he mentioned that he had stopped the construction work and was waiting for the sanction of the Committee. This letter was again not replied by the Committee. If the construction work was stopped, where was the failure on the part of the General Manager to comply with the notice of the Committee issued u/s 195A(1)? As such no offence could be formulated against the General Manager under that section. Despite this, on 29-2-1968 the disputed notice was sent by the Committee u/s 195A(2) and the General Manager was asked to be prosecuted, because he had not taken prior sanction of the Committee for the construction that he had made.

In all the three complaints, three witnesses each were examined by the prosecution, namely, Babu Lal Peon, Keshav Nath Overseer and Gurcharan Singh another employee of the Committee. If we consider the statements of these witnesses, we find that even they were not sure if the construction work was going on or was already stopped, as stated by the General Manager in his letter dated 23-2-1968. Babu Lal Peon in Criminal Appeal No. 8 of 1969 stated that he did not notice any construction work going on at the spot. He is the Peon who went to serve the notice dated 29-2-1968, on the basis of which the prosecution was instituted. He did not see the construction work going on and this fact coupled with the assertion made by the General Manager in his letter dated 23-2-1968 that they had already stopped the construction work, definitely proves that due compliance was made of the notice u/s 195A(1) and the construction work was stopped. As such it could not be stated that the General Manager had failed to comply with the terms of the notice and prosecution under Sub-section (2) of that section should not have been instituted. The statement of Keshav Nath in Criminal Appeal No. 8 of 1969 may also be considered in this connection. He stated that he was not sure if the work was in progress on the date he gave his statement. No doubt, in his report dated 1-3-1968 he did mention that the construction work was in progress on that date. Krishan Chand Overseer of the Foundry stated in Criminal Appeal No. 8 of 1969 that on receipt of notice the Foundry had stopped the construction work which was done only upto plinth level when the Overseer Keshav Nath visited the Foundry on 1-3-1968. Because Keshav Nath had seen the construction work upto plinth level which was not per se complete, he naturally inferred that the construction work was in progress, although in fact the construction was stopped as submitted by the General Manager in his letter dated 23-2-1968. With this evidence, it was validly inferred by the learned Magistrate that the Committee should not have hurried with the prosecution of the General Manager. In this connection, the finding of the learned Magistrate may be set down in his own words:

That there is nothing on record to show that the Nahan Foundry has not abide by the notice of the Municipal Committee. I am of the view that the Committee once it had entered into correspondence, it should not have instituted these cases unless there was some satisfying defiance on the part of the Nahan Foundry.

In this manner the learned Magistrate was himself in doubt as to whether the construction work was or was not stopped, after the notice was received in the Foundry. His finding was that the Committee had hurried with the prosecution and there was perhaps a compliance of the notice itself. The evidence which I have pointed out above, rather indicates that the Foundry had stopped the construction work and as such there was no case for instituting a prosecution u/s 195A(2).

For these reasons, in my opinion, there is no merit in these three appeals and I am unable to find any rational ground to take a different view than what has been taken by the learned Magistrate. As I do not see any ground to interference, I dismiss the appeals.

This judgment is being given in Criminal Appeal No. 8 of 1969 and shall, of course, govern the decisions in the two connected Criminal Appeals No. 9 and 10 of 1969. A copy of this judgment shall be kept in the records of those appeals.

For the reasons contained in our respective judgments, this and the connected appeals are dismissed.