The amount of time it takes for the Uber vehicle to reach your destination, the automated chatbots of the plethora of service companies, the advertisements made-to-order just for you, and Netflix, YouTube, or Instagram content recommendations are customised to your preferences. All that and more are feasible today only because of machine learning.
In fact, machine learning, in its various forms and in association with other General-Purpose Technologies (GPTs), has become so ubiquitous that modern day life is quite unimaginable without it. Yet most of us, the everyday patrons of machine learning, are unaware of what this technology entails. In this article, we shall aim to answer that question as well as unravel the unique opportunities that machine learning presents, in particular in sales.
It was through a seemingly innocuous game of Checkers that the bedrock of machine learning was laid. Arthur Samuel, an American computer scientist and pioneer in the field of artificial intelligence, created the Samuel Checkers Playing Programme, the world’s first self-learning programme to play games. He is also credited with coining the term “machine learning.” Through his seminal paper titled “Some studies in machine learning using the game of checkers,” published in 1959, inspired by his seeming defeat at a game of checkers by an IBM computer and his later works, Samuel founded the initial principles of machine learning. He defined machine learning as “the field of study that gives computers the capability to learn without being explicitly programmed.”
Machine learning (ML) can be broadly defined as a discipline of artificial intelligence (AI) that, through the analysis of statistics, data, algorithms, and optimisation actions, identifies patterns, makes accurate predictions, and enables the performance of automated tasks, i.e., without human intervention.
Application in real life
ML algorithms make the assessment of data simpler by making predictions and classifications. Its actions are quicker and have more accuracy than those of humans. ML assists in uncovering patterns often hidden to the human eye. What’s more is that ML can continuously learn from its actions, optimising results for better future performance.
Ease in data assessment can positively impact business decisions such as pricing and marketing strategies, lead generation, and customer segmentation, ideally generating substantial economic value.
ML algorithms that rely on Natural Language Processing (NLP) can be used in Automatic Speech Recognition (ASR) such as those integrated in new-age mobile phones, computer speech recognition, speech-to-text, and automated text translation. Customer support, virtual agents, and messaging chatbots that rely on NLP are paving the way for cost-effective engagement with customers, resolving customer issues, and offering personalised choices to customers.
Among other uses of ML are image and object recognition, automated robotics, fraud detection, the assessment of medical scans and self-driving cars.
Machine learning in sales
Sales are a set of actions undertaken by a company with the aim of generating profit. It involves selling products and services to customers. Sales are an important metric of business growth and, ultimately, revenue creation. Often, though not exhaustively, sales can involve prospecting new clients and leads, catering to customer requirements through the creation, supply, and sale of products and services, account servicing, market evaluation, product demonstrations, closing negotiations, and transactions. However, the traditional approach to sourcing potential customers is not only time and resource consuming but also largely contingent on luck. Sales teams often end up devoting valuable time to leads that fail to convert. R&D teams frequently expend valuable resources on products that miss the mark and fail to sell. Relying merely on human prowess for such tasks is rapidly proving to be redundant. This redundancy has provided the most crucial stimulus for companies to seek reinforcement from machine learning.
Machine learning can enable a constructive understanding of customer behaviour, purchase history, and consumption patterns. Such actionable insights aid sales teams to identify potential leads, increase conversion rates, predict and reduce close times, and create new products to cater to market demand.
The sales process relies heavily on making accurate sales forecasts and using insights. Unsurprisingly, then, companies that use artificial intelligence and machine learning algorithms in their sales process see their lead numbers rise by 50%, their average talk times drop by 60-70%, and their costs reduced by 40-60%. Needless to say, advances in technology have historically been key drivers of enhanced economic efficiency. Machine learning is a transformative tool that can be used to optimise the sales operations of a company.
Ways in which machine learning can be used to improve sales and revenue
Leading the way – lead scoring
Scoring leads is an exasperating process. It involves the analysis of customer data like age, job description, disposable income, and industry, as well as customer behaviour such as spending pattern, responsiveness to emails, site clicks, and so on – to discern consumers with potential for conversion into customers generating high yields for the company.
Machine learning algorithms can process enormous historical data to eliminate phoney leads and dead ends. They can define and identify specific traits of high potential leads. So, instead of manually filtering consumer data or relying on blind luck, gut feelings, or hit-and-miss approaches, sales teams can focus on data driven quality leads with higher conversion-potential from Marketing Qualified Leads (MQL) into Sales Qualified Leads (SQL). Both the time and effort of the sales staff can be optimised by focusing on people who have a higher probability of being converted into paying customers for the business, resulting in faster closing rates and improving sales productivity.
Oracle of the future – sales forecasting
Traditionally, a sales team is required to spend countless hours manually sifting through spreadsheets, customer information, and industry updates to predict the demand for products and services. However, ML predictive analysis tools can be directed towards demand forecasting at exponential speed. Machine learning generates accurate sales predictions based on time-series analysis, regression analysis, and decision trees. Since machine learning can analyse huge data sets, its predictions are much more accurate than those performed by humans.
The algorithm can be used to evaluate buying and consumption patterns, market trends, and historical sales figures to predict future sales and trends. Reliable information about future sales and trends can equip businesses to supervise investment, adapt to market fluctuations, set achievable targets, and make informed decisions. Armed with such data, businesses can be optimally positioned to plan supply, manufacturing, and investment strategies to cater to future demand and circumvent uncertain investments in risky products or selling strategies. This can further improve customer satisfaction, thereby enhancing sales and revenue.
Rolling the dice on price – optimising pricing strategy
Product pricing can be a grey area conventionally founded on trial-and-error methods. Additionally, the multifaceted influence of the internet has galvanised consumers’ ability to effortlessly compare the prices of competitive products. AI and machine learning can analyse factors such as pricing data, operating costs, inventory, competition, promotions, discounts, occasion, and purchase history to compute price elasticity vis-à-vis demand for consumer groups, enabling companies to arrive at optimal pricing for the widest customer base. Optimal pricing tends to be a decisive factor in gaining one’s competitive edge and driving revenue.
Personalised campaigns and customer segmentation
In 2019, JPMorgan Chase partnered with an AI company after its ML tool increased Chase’s email outreach by a historic feat. ML was used to generate more effective marketing copy, i.e., the tool created new email campaigns to attract higher click engagement and email responsiveness based on existing email drives. In its pilot, Chase saw as high as a 450% lift in click-through rates on ads rendered by the ML tool, compared with others in the 50-200% range. As evident, targeted marketing campaigns ensure increased conversion, thereby expanding revenue.
Similarly, ML technologies can process behavioural data such as click patterns and purchase histories to uniquely tailor marketing and pitching campaigns for customers. Personalising a marketing campaign or pitch can realistically address customer pain points and provide a customised experience. Adopting a more customer-centric approach to sales is vital for increasing customer satisfaction while lowering attrition rates. Machine driven analysis can also be used for customer segmentation based on demographics, social media engagement, and other criteria to create targeted outreach campaigns.
Spurning the churning – churn rate and customer lifetime value
Churn rate or rate of attrition, is the percentage of customers that cease to generate revenue for a company (e.g., stop purchasing products or engaging in business activity) within a designated period. Customer lifetime value (CLV or CLTV) is a metric that represents the total net profit a company can expect to generate from a customer throughout their entire relationship. Machine learning models can apply techniques to isolate customer categories at risk of churning, as well as patterns relating to customer disengagement and dissatisfaction (eventually leading to attrition). The information can then be leveraged into interception actions by sales teams, such as by providing proactive engagement and customised incentives, to reduce or even prevent customers from exiting. This allows for maintaining the health of customer relationships and fostering customer loyalty. Strengthening customer satisfaction and CLV is essential for the long term growth of businesses.
Testing the water – sentiment analysis
Natural Language Processing (NLP) algorithms can evaluate texts like social media posts to gauge consumer attitudes towards a product, brand, person, or company. Customers tend to buy from companies they associate the most with or from companies with established goodwill. Targeted campaigns can use sentiment analysis and feedback data to educate customers, build a wider customer-base and improve brand image and credibility. The result is an increase in marketability (of a product, brand, or company) and long-lasting customer patronage, enhancing business productivity and maximising revenue.
Destination automation – mechanisation of routine tasks
An average sales representative’s time is spent more on mundane tasks such as scheduling appointments, responding to emails, systemizing data, and so on. Such tasks are often low-value, costing time and resources for the company. Smart process automation (SPA) and machine learning processes can mechanise routine yet time consuming tasks.
Automation can also rely on NLP to create chatbots and AI virtual assistants that cater to customer grievances, Frequently Asked Questions (FAQs) about various products and services, provide personalised customer service for tasks such as product browsing, providing account statements, updating personal information, and even cross-selling products specially identified with potential for purchase by customers. Amelia, the “cognitive agent” developed by IPsoft, can parse natural language to understand customers’ questions, handling up to 27,000 conversations simultaneously and in multiple languages. Amelia is also programmed to involve a human agent when she can no longer assist.
Automation will create more pockets of time for sales teams to focus on networking, pitching, building customer relations, finalising deals, and innovating new business strategies. This will undoubtedly enhance sales teams’ efficiency, thereby leading to increased sales and revenue generation.
In addition to the above, ML can be used for optimising landing pages, data mining projects, text, speech, and image recognition, predicting cart abandonment, and gaining wider knowledge into customer behaviour, all of which can play a vital role in enhancing sales and maximising revenue.
Conclusion
From that first computer victory over a human at a game of checkers in 1959, to the more recent defeat of grandmaster Hikaru Nakamura by Stockfish in 2021, machine learning has evolved only to become more intelligent. Businesses that have embraced AI and machine learning are already reaping the rewards in terms of an increase in leads and appointments, cost reductions, and call time reductions. Millions more are being saved each year through automation alone. Servion Global Solutions has predicted that by 2025, 95% of customer interactions will be powered by AI.
However, as ML develops, there are important questions, such as those relating to its legal and ethical implications, that still need to be addressed. Machine learning technology can and will transform many jobs in the economy, but automation of entire jobs will be less significant than the reengineering of processes and the reorganisation of tasks. The focus of researchers, as well as managers and entrepreneurs, should, therefore, be not just on automation, but on job redesign. Human intelligence, imagination, and empathy cannot be automated and should be at the core of all human endeavour. Machine learning should therefore serve as a supplemental tool to augment revenue, albeit an important one.
The verdict is therefore out and the unanimous decision is that AI and machine learning are ushering in an era of unprecedented technological advancements. Transforming the business landscape and the roles in it, AI and ML prove the old adage, work smarter, not harder. Industry leaders and decision makers will play crucial roles in determining how well and in what manner these technologies are adapted. Companies harnessing these tools can only stand to gain, provided AI and ML are implemented with a humane approach.
This article was written by Suryanshi Bothra. The article delves into the background of the case, its judgement, and its lasting impacts. This article will also shed some light on the essentials that were outlined in the case regarding the quashing of an FIR by the High Court.
It has been published by Rachit Garg.
Table of Contents
Introduction
The case of the State of Haryana & Ors. v. Bhajan Lal & Ors. (1990) is a landmark judgement delivered by the Supreme Court of India in 1990. The case has managed to create a place for itself in the legal history of India. This case deals with the court’s power to interfere in matters of investigation related to corruption based on allegations. It particularly deals with cases of abuse of the legal process for personal gains. This verdict provided seven crucial guidelines regarding the application of Article 226 of the Constitution. This deals specifically with cases concerned with quashing First Information Reports and criminal proceedings. In this article, we will delve into a detailed analysis of this case, i.e., the State of Haryana v. Bhajan Lal (1990). This judgement managed to provide a structured framework, which is also known as the Bhajan Lal test. This test has been very widely cited in subsequent cases. This test consists of a two-step inquiry. It involves subjective and objective criteria. The case acts as a guide to the observations and criteria that are essential when considering applications for quashing criminal proceedings. We will unravel the facts, legal issues, and arguments presented by both sides.
Details of State of Haryana v. Bhajan Lal
Case name
State of Haryana & Others v. Ch. Bhajan Lal & Ors.
Case No.
Civil Appeal No. 5412 of 1990
Judgement date
21 November 1990
Parties to the case
Petitioners
State of Haryana & Ors.
Respondents
Ch. Bhajan Lal & Ors.
Represented by
Petitioner
Advocates, namely, N.S. Hedge, Additional Solicitor General, Arun Jaitley, Additional Solicitor General, R.B. Datar, Hemant Sharma, and B.K. Prasad.
Respondent
Advocates, namely, K. Parasaran, P. Chidambaram, R.K. Garg, Ayasha Karim, and Indu Malhotra.
Justices, namely, S.R. Pandian and K. Jayachandra Reddy.
Author of the Judgement
Justice S.R. Pandian.
Background of State of Haryana v. Bhajan Lal
Dharam Pal complained against Ch. Bhajan Lal before Ch. Devi Lal, who was the Chief Minister. Ch. Bhajan Lal was the then Union Minister for Environment and Forests when the proceedings were initiated. He had previously served as a minister and was the Chief Minister of Haryana between 1982 to 1987. There existed a massive political rivalry between Ch. Devi Lal and Ch. Bhajan Lal. On account of this rivalry, both parties filed several criminal cases and countercases against each other. This led to a lot of bad blood between them. Jasma Devi, who was the wife of Ch. Bhajan Lal, had contested elections from Adampur. She won the election against Mr. Dharam Pal.
On 12th November 1987, Dharam Pal accused Bhajan Lal of accumulating huge properties worth crores of rupees. These allegations included details about the construction of a lavish house, petrol pumps, shops, and the purchase of land. According to these allegations, he also held cars, jewellery, and shares in the cinemas of Sirsa and Adampur. These properties were in the name of his family members, relatives, and people close to him. The cost of the properties seemed disproportionate to his known sources of income. He cited 20 different allegations. The allegation was that he was misusing his power, position, and influence. He was undervaluing the market price of the properties and that all the transactions were ‘benami’ in nature.
The complaint was endorsed by Ch. Devi Lal and the Director General of Police (DGP). The DGP instructed the Superintendent of Police in Hisar to investigate the allegations against Ch. Bhajan Lal. A case was registered under Sections 161 and 165 of the Indian Penal Code, 1860, and also under Section 5(2) of the Prevention of Corruption Act, 1988. The third appellant, who was the SHO, registered the case and deployed an inspector along with constables to the specified location. The SHO led the investigation and forwarded a copy of the FIR to the magistrate and other designated offices.
Proceedings in the Punjab and Haryana High Court
Court’s observations
Three separate statements were filed by Inspector Kartar Singh on behalf of the State of Haryana, another by Ch. Devi Lal, and a third by S.P. Lekhi and Inspector Tara Chand. The High Court examined the contentions and the statements. It then presented the following observations:
The allegations seemed imaginary.
Dharam Pal’s only intention was to begin a criminal proceeding. He did not verify his allegations and was solely dependent on the police investigation to find proof.
The allegations, therefore, come from a desperate place.
The allegations were indiscriminate and were further made irresponsibly.
The allegations were made to politically favour Devi Lal and to avenge his loss against the petitioner’s wife.
The individual statements were filed by S.P. Lekhi Ram and Tara Chand about 8 months later. The court held that malice could only be attributed to them and not Devi Lal.
There were allegations regarding the non-application of mind by Lekhi Ram and Tara Chand. The court observed that the affidavits were made because the S.P. felt pressure and, therefore, did not indicate any real application of mind.
Judgement of the Punjab and Haryana High Court
The Punjab and Haryana High Court referred to various judgments of the Supreme Court and the State of West Bengal & Ors. v. Swapan Kumar Guha & Ors. (1982) and decided that the allegations presented by Dharam Pal did not constitute a cognizable offence. The court granted the petitioner’s request, and Dharam Pal was charged with the costs of the Writ Petition. Chhabil Dass, who was not a party in the writ petition, filed an affidavit claiming that he had enough material to provide proof for the various allegations against Bhajan Lal. As he was not a party to the application presented before the High Court, his application was rejected.
Issues raised
Whether or not the registration of the case under Section 154(1) of the CrPC by itself warrants an investigation under Chapter XII of the Code?
Was the offence prima facie visible in the FIR under Section 4 read with Section 3 of the Prevention of Corruption Act of 1978 while also considering the requirement of Section 2(c) defining the expression “Money Circulation Scheme”?
Whether or not, under Section 157 of the Code of Criminal Procedure, the police officers have unrestricted power in the realm of investigation. Whether the courts exercise judicial review over the power vested in the police in the investigation stage or whether the police are wholly exempted?
Whether or not the High Court was justified in quashing the FIR and the proceedings? Also, were the proceedings of the investigation legally sustainable? If not, then to what extent?
Whether or not there is any valid order from the S.P. that authorises the Station Houses Officer to investigate the offence falling under Section 5(1)(e).
In what category of cases can FIRs or criminal proceedings be quashed in the exercise of the power of the High Court under Article 226 of the Constitution of India? And under what circumstances can the High Court exercise its inherent powers under Section 482 of the CrPC?
Arguments of the parties in State of Haryana v. Bhajan Lal
Appellant
Mr. Rajinder Sachhar and the Advocate General of the State of Haryana appeared for the appellant. They were assisted by Mr. Mahabir Singh. While Mr. R.K. Garg represented Dharam Pal, Mr. R.K. Garg contended that the allegations contained in the complaint constituted a cognizable offence. He argued that the allegations warranted the registration of a case. They cited that registration was contemplated under Section 154(1) of the Criminal Procedure Code. Moreover, he emphasised that there must be a thorough investigation according to Sections 156, 157, 159, etc, from Chapter XII of the Code. He claimed that the High Court had no justification to quash the FIR and the proceedings. He also obliterated the court for intervening in the police investigation.
Mr. Rajinder Sachhar and Mr. R.K. Garg argued that the High Court, while exercising its jurisdiction under Article 226, overstepped. Interfering with the investigating powers of the police officials nullified the entire proceeding, starting from the registration, especially when the allegations made in the complaint impliedly constitute offences under the Prevention of Corruption Act. Therefore, this interference is unjustifiable and violates the principles laid down by the court.
The learned counsels submitted that the observations of the High Court bench should not be endorsed. According to them, accepting such observations could have disastrous consequences for the democratic system. It could adversely affect the country’s welfare. Allowing such a judgement could lead to future administrations turning a blind eye to the wrongdoings of older governments. It would lead to corruption and malfeasance going unreported. They believe that there is no basis for concluding that there was any political gain in reporting Ch. Bhajan Lal.
Respondent
K. Parasaran and P. Chidambaram appeared on behalf of the first respondent. The respondents, Bhajan Lal and others, contended that the allegations were deeply rooted in political animosity. The allegations were not genuine, and this suggests an old, long-standing rivalry. He claimed that this complaint was not an effort to disclose information for the public interest. According to the respondents, the allegations had mala fide intent based on personal vendetta. They argued that the complaint aimed to ruin Bhajan Lal’s reputation and put a dent in his political career. The respondents also claimed that the officers were not in the right capacity to begin the investigation.
Mr. Parasaran agrees with the High Court and argues in the Supreme Court that the judgement of the High Court is well reasoned. He pleads with the Supreme Court not to overturn the High Court’s judgement. According to them, the political rivalry fueled the attempt of character assassination against Bhajan Lal. According to the appellants, Dharam Pal is being used as a tool to file false allegations. He then contended that even if the allegations were true, they would not constitute an offence that would warrant registration of the case. The High Court saw all the allegations and concluded that letting the investigation go on would be unjust.
Mr. Chidambaram objected to the new allegations, stating that their sole intention was to prejudice the court. He urged the court not to consider the allegations, as they are baseless. Mr. Parasaran criticised the police officer for overstepping. He accused them of making a rash decision when registering the FIR and beginning an investigation. He pointed out that the High Court held that the police officer was overzealous and loyal to Devi Lal.
Laws and precedents discussed in State of Haryana v. Bhajan Lal
Krishna Ballabh Sahay & Ors. v. Commission of Enquiry & Ors. (1968)
The court in this case referred to the State of Punjab v. Gurdial Singh & Ors. (1979) and many other related cases. All of these judgements were cited to justify that under Section 154(1) of the CrPC, it is mandatory for the police officer to register a case if the allegations are cognizable offences. Further, Section 155(4) states that when two offences are involved, in which one of them is cognisable, then the entire case will be considered cognizable. Sections 156, 157 and 159 of the CrPC highlight that if the police have reason to suspect a cognizable offence, they can proceed with the investigation, or if there is not enough ground, they can dispense it. The above mentioned judgements emphasise that courts cannot intervene and stifle the police investigation. The police have exclusive investigating powers in cases of cognizable offences as long as they comply with all essential provisions and guidelines. However, the magistrate can intervene to direct an investigation or a preliminary inquiry.
State of Bihar & Anr. v. J.A.C. Saldanha & Ors. (1979)
The court cited this case, S.N. Sharma v. Bipen Kumar Tiwari & Ors. (1970), and many other related cases to substantiate the interpretation of the phrase “reason to suspect” used in Section 154(1). It clarifies that the phrase “reason to suspect” refers to any rational reasoning that could lead a reasonable person to believe that a cognizable offence had been committed. This inference does not always prove anything, but in some cases, it is enough to begin an investigation. Other than a reason to suspect, Section 157(1) states that police must be satisfied that there is sufficient ground for investigation.
Furthermore, this case discusses the interplay between Sections 156, 157, and 159 of the CrPC. Section 156(1) empowers the officer-in-charge of the police station to investigate cognizable offences. The judgement highlights the interpretation of Section 157(1), which outlines the process of reporting to a magistrate when an officer suspects the commission of a cognizable offence. The role of the Magistrate and the High Court in overseeing investigations specified in Section 159 is also discussed. D.A. Desai and Justice Bhargava underline the exclusive role of police in the investigation process. The case also highlights the powers under Article 226 of the Constitution to intervene if it is convinced that the investigation is mala fide. The citation serves as authority when considering the cautions that high courts should take while quashing FIRs. The court disapproved of the High Court’s interference before the completion of an investigation.
Pakala Narayana Swami v. Emperor (1939)
This is the next significant case that the Court referred to. In this case, the Court held that only police officers can investigate an offence, and the powers they can exercise must be in strict compliance with Chapter XII of the CrPC. Section 157(1) uses the expression “reason to suspect,” which contrasts with Section 41(1)(a) and (g) of the CrPC, where the term “reasonable suspicion” is used. The judgement provides clarity on the term “reason to suspect” and how it should be interpreted in its plain and ordinary meaning by citing the explanation given by Lord Atkin, who emphasised that when the meaning of the words is plain and simple, we should try to find the supposed intention of the words. The potential advantages and disadvantages of meaning should not be considered when the meaning is simple. The magistrate cannot interfere; however, Chapter XIV of the code requires the police to keep the magistrate informed of the investigation at all times. The court also talked about the limitations on the power of the police.
Emperor v. Khwaja Nazir Ahmed (1944)
The court cited this case, R.P. Kapur v. The State of Punjab (1960), as a reference to establish that the High Court’s views regarding the flaw in the written statement were incorrect. The High Court said that a failure to submit the written statement was a failure on the government’s part. They concluded that, due to this flaw, it should be assumed that the respondent has disproved all allegations. The Supreme Court says that these are inconceivable. The apex court, however, does recognise the vagueness of the allegations. It emphasises that no details regarding the properties or under whose names the properties were registered are provided. The Privy Council in Emperor v. Khwaja Nazir Ahmad also dealt with the responsibilities of the police under Sections 154 and 156 of the Code. The case emphasises the statutory right of the police to investigate cognizable offences. The functions of the judiciary and the police intermingle. Individual liberty and maintaining law and order can only be achieved if both entities do their respective functions without intervention. The council emphasises that the role of courts becomes prominent only in the later stages of the proceedings. It acknowledges that there is an exception where the court’s function begins a little early. Section 491 of the CrPC gives directions in cases where the writ of habeas corpus becomes applicable.
Other important cases referred by the court
State of West Bengal & Ors. v. Swapan Kumar Guha & Ors. (1982) was also cited in the case. In the judgement, Justice Chandrachud agreed with the judgement of Justice A.N. Sen and Vardarajan. They stated that the condition for initiating an investigation under Section 157 of the CrPC was that the FIR must disclose a cognizable offence that has been committed. He mentioned that there should be no such thing as unfettered discretion. In Nandini Satpathy v. P.L. Dani & Anr. (1978), Justice Krishna Iyer expressed his view that a police officer should be precise, sensitive, and constitutionally conscious while performing his duties. An officer who does not follow the said guideline is said to have violated or disregarded the guaranteed right of “testimonial tacitness”.
In Prabhu Dayal Deorah etc. etc. v. The District Magistrate, Kamrup & Ors. (1973), Justice Matthew emphasised the preservation of personal liberty. He highlighted the historical importance of adhering to procedural safeguards in protecting personal liberty. In P. Sirajuddin v. Government of Madras & Ors. (1982), Justice Mitter emphasises the importance of conducting a preliminary inquiry before charging a public servant, especially if he is holding a position of power. It is justified by the potential harm that these charges can cause to the individual as well as the department. Justice Mudholkar in State of Uttar Pradesh v. Bhagwant Kishore Joshi (1963) expresses that, in cases where there is a prohibition in CrPC, a police officer is permitted to conduct preliminary inquiries before the registration of the offence.
Judgement of the court in State of Haryana v. Bhajan Lal
The Supreme Court, in a judgement dated 21st November 1990, set aside the High Court judgement. It was decided that quashing the FIR by the High Court was not valid because it was not legally and factually sustainable. This part of the High Court judgement was set aside. However, the commencement as well as the entire investigation too were quashed. The court also mentioned that the third appellant lacked valid authority under Section 5A(1) of the Prevention of Corruption Act, 1988. The provision states that only an officer at the rank of an inspector or above can take up the investigation of an offence under Clause (e) of Section 5(1). The judgement highlighted that the Superintendent of Police (SP) was over-enthusiastic and hasty when he instructed the Station House Officer to investigate. However, even though he lacked authority, the investigation was necessary. The court emphasised how it was crucial for the officer authorising such investigations to provide reasons for granting permission. It also held that not holding outgoing governments accountable for their misdeeds lays down an alarming position. Therefore, such a view cannot be judicially approved. They acknowledged that before an investigation is initiated, it is essential for the court to ensure that the allegations are not rooted in mala fide intent. The objective of Section 5A is to protect politicians and public servants from being harassed and victimised by frivolous investigations. Investigative authorities must adhere strictly to the provisions. However, if one provision is not followed, it does make the whole investigation illegal.
The court stated that it is essential to have information on a cognizable offence for registering an FIR. If the information satisfies the requirements under Section 154(1) of the CrPC then the officer-in-charge has no option but to register a case by filing an FIR. While a police officer cannot investigate a non-cognizable offence, they can do so by obtaining an order from a magistrate having proper authority, subject to the conditions mentioned in Section 155(3). In cases where there is more than one offence, the entire case is deemed cognizable. The investigation is deemed an exclusive field for the police, and the courts cannot interfere with the investigations. Chapter XIV of the CrPC has a scheme that involves keeping the magistrate informed of the investigation at all stages, but they cannot intervene. If the police officer exceeds his legal authority, the courts can intervene, consider the nature and extent of the breach, and then pass an appropriate order. The judgement emphasises the need for the protection of human dignity and highlights that no entity should have unquestionable rights or unlimited powers.
The High Court had considered the non-filing of a written statement by the state government a serious flaw. It said that the non-filing disproved all the allegations against Ch. Bhajan Lal. The Supreme Court, on the other hand, disagreed with the High Court. It argued that the investigation was in a premature state. Therefore, the government did not possess the necessary details regarding the allegations against Bhajan Lal. On the matter of the over-enthusiasm of the S.P., the court said that the filing of the complaint on the same day of receiving it was a little over-enthusiastic. Especially when the complaint lay in the DGP’s office for 9 days. This enthusiasm was unprecedented and, therefore, raised a lot of questions. One of the questions was the reason for assigning the investigation to the Station House Officer. The court disapproved of the S.P.’s actions because he deviated from normal procedure. He should have been extra careful, knowing the seriousness of the charges against a former Chief Minister. The Court, however, did state that, even though his conduct was wrong, it cannot be a ground for quashing the FIR.
To answer the question of what happens in cases of false allegations, the court highlighted that individuals who make false allegations resulting in damage to reputation can be held liable under Section 182, Section 211, and Section 500 of the IPC. Further, they could also be sued for damages. In this case, the allegations constituted a cognizable offence. Therefore, it did not fall under the category of cases that could warrant the High Court to exercise its power of quashing the criminal proceedings. The court rejected the contentions of mala fide intent when considering the question of whether the quashing of the FIR was legally sustainable. The court based this judgement that in this premature state of the investigation, it cannot evaluate the results and, therefore, cannot ascertain mala fide intent. The court also set aside the character assassination and personal gain contentions. The court determined that the primary purpose of the registration of the case was to gather enough evidence and then build a case.
Regarding the submission of Chhabil Das, the court dismissed the submission, claiming that the submission suggested ulterior motives. It also declared that there was no substance to these arguments. Regarding the validity of the statutory power of the inspector, they referred to the case of H.N. Rishud and Inder Singh v. The State of Delhi (1954). The court mentioned that it is mandatory under Section 5A of the Prevention of Corruption Act that the investigation be conducted only by an officer at the rank of an inspector or above. The court, however, clarifies that this violation does not affect the competence and jurisdiction of the court or the trial. The State Government had authorised the inspector to investigate the offences falling under Section 5 of the Act. The prosecution failed to provide sufficient reasoning, which led to the passing of an order to investigate by the Superintendent of Police (SP). The orders seem to have been granted casually without considering the legal principles. The S.P., however, had not ordered the SHO to investigate. This was considered a violation by the High Court. The case was registered under Sections 161 and 165 of the IPC too. However, the government had authorised the investigation only under Section 5(2) of the Prevention of Corruption Act. According to this, the SHO had no authority to investigate offences under Sections 161 and 165. The court held that if the government feels the need for a new investigation, it must comply with Section 5A(1).
On the presentation of new allegations by the appellants, the court agreed with Chidambaram that, at this stage, they cannot go into the validity of the allegations. Their allegations could only be examined by the proper court after a thorough investigation.
The court set aside the High Court judgement and claimed that quashing the FIR was not factually or legally sustainable. The High Court order directing Dharam Pal to provide costs to Bhajan Lal too was set aside. The appeal was disposed of with no order as to the costs.
Guidelines given in Bhajan Lal case
The Supreme Court in the Bhajan Lal case laid down seven guidelines which must be followed by the High Court when exercising the powers specified in Section 482 of the CrPC. This provision allows the High Court to quash criminal proceedings, which are an abuse of the process of court. What constitutes an abuse of process by the court? Filing false FIRs and making false allegations is an abuse of process by the court. The powers under this section were unchecked. Bhajan Lal, therefore, draws these boundaries within the rules.
If the allegations in the FIR do not prima facie constitute an offence, they can be quashed. If it is found after consideration that the allegations are not sufficient to establish or presume that there is an offence, then the court can quash the FIR.
One ground for quashing an FIR is non-disclosure of any cognizable offence in the allegations mentioned in the FIR. Section 156(2) of the CrPC provides an exception to this rule that the police can be investigated in the matter even if there is no indication of a cognizable offence if a special authorisation is given by the magistrate.
FIRs can be quashed when undisputed allegations in the FIR fail to establish essential elements of a criminal element. There must be supportive evidence because a criminal proceeding without the accused would abuse the process of the court. It violates the fundamental rights of the accused.
When the allegations only constitute a non-cognizable offence, the police cannot begin an investigation without the permission of a magistrate. This rule is specified under Section 155(2) of the CrPC. Crimes that do not cause harm to society fall under this purview. This is aimed at restricting the unlimited powers of the police. It safeguards innocent individuals from unwarranted police investigations in cases where the alleged offence is non-cognizable.
Cases where the allegations in the complaint are too absurd and improbable can warrant the quashing of the FIR. It is usually done in cases where the accusations are irrational and way too far-fetched. The allegations must give clear reasons to initiate an investigation against the accused.
There is an explicit prohibition or restriction that prevents the initiation or continuation of criminal proceedings. It highlights cases where there are frameworks that offer alternative remedies that are effective in addressing the allegations made. Sections 195, 196, 197, 198, and 199 of the CrPC provide pre-conditions necessary to start an investigation.
When the case is tainted with bad faith and has the underlying motive of causing harm the FIR can be quashed. If the court determines that the intention of filing the case is mala fide. The court may intervene for the protection of the rights of the accused. It makes sure that the court and the criminal justice system are not being used to further personal vendettas.
Conclusion
This article discussed a landmark case, the State of Haryana v. Bhajan Lal (1992) in detail. It has significantly contributed to India’s legal history and has influenced many future cases. Its contribution as a precedent in proceedings for quashing an FIR or criminal proceedings has been significant. Especially in cases of abuse of the legal process with mala fide intent. The Bhajan Lal test balances the need for public interest with serving justice. Moreover, the case underscores the importance of following the chain of command according to statutory provisions when it comes to an investigation. The Supreme Court emphasises that the court should not interfere in investigations very often. When recognising the power of the High Court, the court tries to prevent the abuse of the legal process. The principles laid down in this case act as a guide for courts when evaluating applications for quashing criminal proceedings.
Frequently Asked Questions (FAQs)
What is the inherent power of the High Court?
The inherent power of the high court in this case refers to Section 482 of the Code of Criminal Procedure. One of the primary objectives of this provision is to give the High Court power to quash FIRs and criminal proceedings when the court feels it to be invalid or unnecessary. This power can only be exercised when the court feels that the legal process is being abused. It also deals with settling disputes by quashing, but the aim is to ensure that the settlement is genuine. It also protects victims and witnesses.
What is the difference between writ jurisdiction under Article 226 and inherent power under Section 482 of the CrPC?
Article 226 of the Indian Constitution empowers the High Court to issue writs. The powers of this provision extend to civil, criminal as well as administrative matters. It is not limited to any specific area of law. The primary purpose is to protect fundamental rights and provide remedy for the violations of those rights. Section 482 of the CrPC grants the High Court powers to prevent the abuse of court processes by quashing criminal proceedings and FIRs. It can only be invoked in criminal cases. The powers granted by Section 482 can be exercised by a High Court on any subordinate court under its jurisdiction.
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This article is written by Kaushiki Keshari and Ishani Khanna. This article is further updated by Debapriya Biswas. This article explores the meaning of corporate personality, covering the different types and theories of corporate personality as well as the components that form the personality of a corporate entity.
Table of Contents
Introduction
There are two types of persons that are recognised under law — natural persons and artificial (or fictitious) persons. A natural person, as per its definition, is any individual who has natural rights and obligations, like a human. Meanwhile, an artificial or fictitious person can be referred to as an individual who is not natural or human, like a corporation. However, that does not mean artificial persons do not have rights or obligations, because they do due to their fictitious personhood that is made by law.
This fictitious or artificial personhood of corporations and other corporate entities originates from the concept of corporate personality, which we will explore in this article in detail.
What is corporate personality
As briefly discussed earlier, corporate personality can be defined as a legal concept that gives a corporate entity personhood in the eyes of the law. In simpler words, corporate personality allows a company to be legally recognized as an artificial or fictitious person for the enforcement of its rights and obligations. These rights include the right to own properties under its name along with the right to enter into contracts and agreements as a party. In addition to that, corporate entities can sue and be sued just like any other person recognised by the law.
This concept was established and coined by the House of Lords in the landmark judgement of Salomon v. Salomon & Co. Ltd. (1897), in which it was held that a corporation has an identity that is separate and completely independent from its shareholders and other members working under it. Thus, due to the separate identities, the shareholders and members of the company cannot be held accountable for the actions taken by the company in its name. This separate legal identity is known as the corporate personality, which is responsible for giving a company its artificial personhood.
The legal aspects of the corporate personality of any company can vary from nation to nation since the laws of each jurisdiction depend on the legal provisions and case laws of the said region. Due to the varying precedents and laws of each jurisdiction and nation, there can be a lot of differences in the rights, liabilities, and commitments of companies.
Thus, to establish or recognise the corporate personality of any corporate entity or organisation, three conditions need to be fulfilled:
There should be an organisation or association formed by several individuals with a specific purpose or goal.
The said entity should have different organs or departments that can act upon corporate functions, such as management, sales, human resources, import and export, etc.
The organisation or association shall have a ‘will’ as per legal fiction.
Once all of these three conditions are met, the corporate entity or organisation can be legally recognised for its corporate personality and enjoy its advantages. These advantages include the privilege of owning assets and property during business transactions and conducting financial transactions in the name of the company while operating independently from the shareholders and its members. However, to represent the collective will, a common seal is often used by the entities.
As a result of its corporate personality, a company can engage in similar rights and actions as an individual, which include opening and managing bank accounts, taking debts, lending money, hiring employees, entering into contracts and agreements, as well as suing and being sued. This is especially beneficial for the shareholders of the company, who are technically its owners but can also act as creditors, given the occasion.
While some shareholders may own a significant portion of the shares of a company, it would not make them personally responsible for the company’s actions. This can also be applied vice versa, where the company is not liable for the shareholder’s actions. This is because the shareholders are not the company’s agents and cannot be legally bound to the company’s actions or even bind the company through their actions outside of the affairs of the company.
In other words, a company is neither an agent nor a trustee for its members or shareholders. The assets and property owned by the company are not inherently theirs. This also means that neither the members nor the shareholders of a corporation can be directly held accountable for the legal matters to which the company is a party. They can, however, collectively make decisions in a general meeting as the ‘will’ of the company but cannot directly exercise their rights in such matters.
This legal distinction is usually established upon the incorporation of a company, where it is established as a juristic person in the eyes of the law. In simpler words, a corporate entity can have the same rights and obligations once it is incorporated and legally recognised. In its essence, a company operates no differently than any other legal person, with a representative or an agent carrying out the company’s actions for it.
This view was supported by the Privy Council in the landmark case of The Citizen’s Life Assurance Company v. Brown (1904), where it was ruled that corporations can also be held accountable for their actions indicating malicious intent. Thus, ‘artificial’, ‘juristic’, or ‘legal’ persons such as corporate entities and organisations or associations of people are capable of having rights and liabilities just as any natural person, once legally recognised.
Features of corporate personality
As mentioned earlier, corporate personality is distinct from natural personality. Some of the features that make corporate personality distinct are given as follows:
Artificial personhood
Corporate personality gives a fictitious or artificial personhood to corporate entities. This enables the corporate entities to have their own presence separate from their agents and conduct day-to-day business activities such as financial transactions in their own name. It also allows a company to engage in actions such as opening and managing bank accounts, taking debts, lending money, hiring employees, entering into contracts and agreements, as well as suing and being sued.
Rights and obligations
Once incorporated, a company gains its separate personality from its members and shareholders. This corporate personality enables them to have their own rights and obligations since they are recognised as a legal person in the eyes of the law.
Independent operations
Corporate personality enables a company to operate independently from the shareholders and its members. This is possible due to a separation between the company and its members by creating a separate legal identity or personality, which we will cover more in detail later in the article.
Collective will
While corporate personality creates a separation between the identity of the company and its members, a company cannot quite function without its members either. As an artificial person, a company needs natural persons to act as its agents or representatives.
The will of the natural persons forming the company; that is, its members and shareholders help create the will of the company. Their collective will is decided by voting in general meetings and whatever decision is made by the majority, the company would act on it. This decision would then be expressed through a common seal, which is the physical symbol of such collective will.
Evolution of corporate personality
The concept of corporate personality slowly developed from the late 1800s, with Foss v. Harbottle (1843) being the first case where the identity of a company was considered separate from its members and shareholders. In this case, two members of a company had sued an outside party in the name of the company. The reason for the suit was that the company suffered a significant loss in property due to the negligent and fraudulent actions of the outside party.
The Court of Chancery held that while the actions of the defendant may have been fraudulent, the two shareholders were not proper plaintiffs as they lacked the qualifications to represent the whole company. As mentioned earlier, a collective will of the shareholders is needed to make decisions as a company. In the present case, there was no such collective will, only the will of the two individual shareholders.
Thus, according to the Court, the company suffering the loss can be held as a proper plaintiff or claimant. And as a legal entity itself, the company has the power to initiate a suit in its name. The Court held that the identity of the members of the company is distinct from its corporation and thus, they do not have the right to sue the defendants for the damage incurred to their company.
In the end, the Court dismissed the case, stating that the corporation needed to file a suit in its own name to claim the damages instead of the shareholders of the company attempting to sue on its behalf.
This ideology of a company having a separate identity from its members and shareholders was later backed by the Calcutta High Court in the case of Re: The Kondoli Tea Co. Ld. vs Unknown (1886).
In the aforementioned case, a tea estate was transferred over to Kondoli Tea Company Limited, which was paid in the form of the company’s shares and debentures. The issue arose when the matter of taxation of such a transfer came into question. Since there were only eight shareholders in the transferee company, the argument was raised that they only passed over the tea estate property to themselves under a different name. However, the shareholders contented against it and refused to pay the ad valorem tax due on the transaction of the land, for which they were sued.
The Calcutta High Court ruled in the favour of the shareholders, stating that the company exists as a separate legal identity from its shareholders and that any property transferred to its name should be recognised as the property of the corporation. The shareholders of the company, regardless of their numbers, should not be held liable for the tax on a transaction done under the name of the company.
The Court also emphasised how the tea estate transferred was the property of the Kondoli Tea Company Ltd, which was a legal entity with the capability to outlast all of its members beyond their lifetime. Thus, whoever the shareholders of the company were did not matter or affect the transaction since the company was not synonymous with its shareholders.
However, the actual concept of corporate personality, not just a different legal entity, was first established in the landmark judgement of Salomon v. Salomon & Co. Ltd. (1897). This case established the idea of a corporate ‘veil’ or ‘shield’ that protected the members of a company from the decisions taken in the name of the company during the course of business.
In the aforementioned case, Mr Salomon had incorporated a company of which he was the majority shareholder as well as the principal creditor at the same time. The issue arose when the company went bankrupt and the procedure of insolvency was initiated by the liquidator. Since Mr Salomon had secured debentures, the payment of his loans was to take precedence over the unsecured debts of other creditors. However, since he was the majority shareholder and also the one who incorporated as well as managed the company, the question arose if the priority of his debentures should be allowed as such.
In the initial judicial proceedings, the company was interpreted to act as an agent for Mr Salomon, thus, making the ruling against him and making him responsible for the unsecured debts of the other creditors. However, the House of Lords overturned this ruling and held that the company has a separate legal identity from that of its shareholders and due to this identity, the shareholders cannot be held liable for the actions taken in the course of business in the name of the company.
The Court also held that the company had seven members who were constituted with all due procedure, thus making the incorporation of the company legitimate. Just because Mr Salomon was the primary handler of the business of the company does not mean he would be accountable for all its debts.
Another significant case that led to the further development of the concept of corporate personality wasHL Bolton Engineering Co Ltd v TJ Graham Sons Ltd. (1956). In this case, the respondent company had leased its property to the appellant company in 1941. The appellant company, sometime later, had sublet the said premises in another lease. After thirteen years, the respondent corporation notified the appellant of the termination of the lease, and they subsequently notified the subtenants as well.
The issue arose when both notices were declared ineffective due to the enactment of the Landlord and Tenant Act, 1954. The respondent re-notified the subtenants with a fresh notification as per the newly enacted Act and opposed the renewal application for the tenancy by the subtenants. The subtenants argued against it, stating that they had paid for the interest within the past five years. In turn, the respondent company stated that they intended to move back to the premises to conduct business.
During the judicial proceedings, however, it was discovered that no formal resolution was passed by the directors of the respondent company regarding this matter. The plaintiff argued that the respondent company could not terminate the lease without passing a formal resolution to show the collective will of the company. Meanwhile, the Respondent stated that even without such a resolution, the actions of the company still expressed its collective will for the same. They highlighted that they had been meeting with the architects and conducting other actions that relayed the will of the company to occupy the premises to conduct their business.
The Court of Appeal held the judgement in favour of the Respondent, stating that the will of directors could be interpreted as the will of the company. According to the Court, a company could be equated to a living organism, with its members acting as the organism’s nervous system while its directors or board of directors as the brain of the company. Based on their intentions and orders the company functions. In simpler terms, the members of the company act as its limbs and organs and thus, any functions conducted by the company can be interpreted as the will of the members that are acting as its agents (or limbs).
Another case that played a significant role in the development of corporate personality as a legal concept was Lee v. Lee’s Air Farming Co. Ltd (1960), where New Zealand’s Judicial Committee of the Privy Council iterated on how a company’s legal personality can differ from its members and how a director of a company can still be considered employed by the company despite controlling it alone.
In this case, the respondent company was created by the appellant’s husband, who also acted as a majority shareholder and director. He was the major decision-maker and had the final say in every decision taken in the name of the company. Unfortunately, the director had expired during his employment as a pilot, following which the appellant had sought compensation under the New Zealand Workers’ Compensation Act, 1922 for work-related injury from the respondent company.
During its initial judicial proceedings, the appellant’s claim was dismissed since the Court recognised her husband as the employer (or the company) himself rather than a worker for the company, given how he had complete control over the corporation. However, this ruling was overturned once the case was brought to the Privy Council. The Council held that the company has its own personality and identity that differs from that of its members. And while a single owner can run it, that does not mean the owner and the company become synonymous or interchangeable.
According to the Council, the contractual relationship of employer and employee between the respondent company and the appellant’s husband cannot be overlooked only because he was the primary shareholder of the company. Thus, the respondent company was liable for compensation to the appellant since there was a service of contract between the company and her (now) deceased husband.
Thus, this is how the concept of corporate personality evolved in the field of company law. Many other concepts surrounding the same, such as the doctrine of corporate veil and limited liability also developed alongside this, which we will discuss later in the article.
Types of corporate personality
Corporate personality has two types: Corporation Aggregate and Corporation Sole. Let us discuss each type in a more detailed manner.
Corporation Aggregate
Corporation Aggregate, as the term suggests, is a type of company that is formed by combining several individuals working under it either as members or as shareholders. In other words, it is a corporate existence that is made up of various natural persons but still maintains a separate legal identity from its members, shareholders, and employees.
A corporation aggregate acts as a unit where the individuals under the company are ‘absorbed’ into one identity rather than existing as separate legal persons. It focuses on the legal relationship between the members of the corporation, which is made for a specific purpose common among all its members. This purpose can be anything, whether it be financial, charitable, legal, or even political. This concept of corporation was first introduced in England by the Royal Charter, which was later added to its Act.
The main feature of this type of corporate personality is the perpetual succession of the positions of its members and business. That is, even after the retirement or death of any of its members or shareholders, their titles will merely pass on to the next individual, and the corporation will carry on. This is how many corporations continued their business ventures for more than a century.
The legal character of these corporations is based upon the recognition by law that they receive upon incorporation of the company after registering their Articles of Association (AOA) and Memorandum of Association (MOA). The MOA acts as the constitution of the corporation, while the AOA acts as the legal guideline that helps frame the ‘laws’ regulating the legal relationships within the company.
As observed in the landmark case of Tata Engineering and Locomotive Company Ltd. v. Province of Bihar (1964), a corporate body is a person under the law, even with its fictitious presence. Just because it is not a natural person does not entail that it would not have any rights or liabilities. A corporation has a completely different identity from its agents and members, as well as their successors. However, the obligations binding the corporation shall also bind its members and agents in lieu, even when the tenure ends and a new individual succeeds them.
In its essence, a corporation aggregate is nothing but a group of individuals with a common purpose who take actions as a unit. They express their collective will through a common seal. The most common type of corporate aggregate observed would be all the private and public limited companies, along with multinational corporations.
Furthermore, there are many advantages to corporation aggregate, due to which it is the most popular type of corporate personality adopted by corporations worldwide. Some of these advantages and utilities are listed as under:
It is easier to handle and aid in administration with this type of corporate personality.
It promotes better cooperation between its members.
It has a better foundation due to its ability to sustain its members perpetually.
A corporation aggregate can be any kind of corporation (general or specialised).
It is more efficient due to various individuals co-existing under such a corporation at the same time.
The members of this type of corporate personality have a separate identity from the corporation and, thus, have their assets protected against losses and debts incurred by the company.
Corporation sole
Unlike corporation aggregate, corporation sole consists only of a single individual who has the head and representative in a corporate position. It is more permanent than its counterpart and can also have perpetual succession for that sole individual. The most common examples of this type of corporate personality can be seen in the Presidents and Prime Ministers of nations, as well as the monarch heading a country. Whether it is the Prime Minister of India or the King of England, they will be recognised as a corporation sole.
While the concept of corporation sole is a fictitious and artificial one, the individual heading it is a natural person. The distinction here comes in the form of the position giving the authority rather than the person. For instance, if the Prime Minister of India declares a public holiday, it would be the authority of that fictitious position that would give more power to the declaration than the person in that position.
In most cases, corporation sole is only seen in public offices or as an official position with a more executive character. This type of corporate personality also has its rights and obligations, which might be dictated by a statute, unlike the corporation aggregate.
In India, many official positions can be identified as corporations. This includes the Prime Minister of India, The Governor of any state, the PostMaster General, the Registrar of Trademark and Patents Registry, etc. Even positions like Chief Justice of India and Comptroller and Auditor-General of India can be classified under this type of corporate personality.
The character of a corporation sole, as highlighted by the Supreme Court in the case of S. Govinda Menon vs The Union Of India & Anr (1967), is not much different from that of a general corporation. Even if the person in the position of corporation sole has a regular character, they would not be perceived as having any difference in the eyes of the law. For instance, if the governor of any state is prosecuted for a crime, they would be prosecuted as the governor regardless of the nature of the crime.
Purpose of incorporation
Incorporation of a company, as one may already be aware, refers to the legal procedure of forming a company or any other corporate entity. This procedure allows the company to be legally recognised as a person and gives it a corporate personality that is distinct from its members and shareholders.
The main purpose of such incorporation is to get it recognised in the eyes of the law and to establish an independent identity for the corporation to act under. Since most people cannot directly handle the obligations and debts that might be incurred by a corporation, the independent identity not only protects them from such liability but also helps to create an identity that represents the collective will of its members.
Furthermore, proper incorporation of the company also allows a company to create personhood that has its own rights and legal obligations along with the ability to conduct actions such as opening and managing bank accounts, taking debts, lending money, hiring employees, entering into contracts and agreements, as well as suing and being sued.
Incorporation of a company also reduces the complete control of the shareholders and the directors on the assets and property of the company since they are transferred and owned by the Company only. This also means any debts and liabilities (like lawsuits) of the company are also its own only and the shareholders, directors or any other members of the company cannot be held liable for the same.
With incorporation, the company is institutionalised and recognised legally. In essence, it acts as a little democracy and the incorporation simply helps legalise the same and whatever decision such an institution makes based on the common will of its members and shareholders.
Moreover, once a company is incorporated and gains its own personality, it can act as an artificial person separate and independent from its members. Thus, even if the members of the company change, leave, retire or expire, the company will continue to exist and enjoy perpetual succession.
Benefits of corporate personality
There are many benefits of a corporation having its own personality, some of which are mentioned below:
Independent Identity
As mentioned earlier, corporate personality allows a corporation to have a separate legal identity from its members and shareholders, giving the corporation its own existence and presence. This separation helps protect the shareholders from the liabilities of the actions of the company while giving the company freedom from any arbitrariness that might be committed by its major shareholders or directors.
Such independent identity also allows easier legal proceedings in case of a lawsuit, allowing a company to sue and be sued in its own name. Furthermore, any property that is in the name of the company is solely owned by the company and not any of its members.
However, while all the decisions made in the name of the corporation are treated as its own, its will originates from the collective will of the members composing it. This collective will is expressed during the general meeting through voting and is often seen in the form of a common seal on official documents. Thus, while the company has its own identity and personality, it still derives its authority from the natural persons working under it.
Limited liability
One of the most popular and sought-after advantages of corporate personality is the limited liability aspect. In simpler terms, it is the privilege of a member or shareholder of a company where their liability is limited by how much they invested in the company. None of the shareholders and investors are liable beyond the amount they have invested in the corporation.
Thus, in the event of insolvency or winding up, none of the liability of debts and obligations of the company falls upon the shareholders and their personal assets. This is especially beneficial given that the liability does not fluctuate with time or price.
Since the company has its own personality and identity, it stands to be liable for its obligations. Such liability is unlimited and all the assets and property relating to its business is seized for the same. In such a scenario, the Limited liability of the shareholders protects them from incurring any further loss. No shareholder or member of the company would be bound to contribute anything more than the nominal value of shares they may have of the aforesaid company. This stands to be one of the more popular benefits of the corporate personality that the investors opt for.
Perpetual Succession
As mentioned earlier, since the identity of a company is not dependent on its members and shareholders, it can exist beyond their lifetime. Even if all the members quit, change, retire or even expire, the company would retain its identity until it has been wound up. The assets, property and any other privileges enjoyed by the company would continue as long as it shall exist.
This is exactly how many companies and businesses have existed and boasted of existing for more than a hundred years
Shares and their transferability
Shares of a company, like any other asset, can be treated as movable property that can be transferred and even inherited. According to Section 44 of the Companies Act, 2013, the nature of shares, debentures and any other interest that a member may have in the company is a movable property that can be transferred in the manner as prescribed by the AOA of the company.
Since the shares are transferable, by selling their shares to the public, a company generates its capital and finances. The maximum corporate finance can be generated in a very quick and easy manner by listing the shares and debentures of the company publicly and allowing public subscriptions at a fixed rate.
Furthermore, this transferability of shares of a company allows easy liquidation of the asset when needed by the investors while also giving stability to the company by providing adequate funds from the investors. Even if the shareholders change, the existence or management of the shares does not change nor is it affected.
Separate assets and property
As mentioned earlier, all the assets and property bought or transferred in the name of the company remain in its name. It is not owned by the shareholders nor do they have any right on property vested in the corporation. This not only allows a perpetual succession of the property through the company despite the changes of its members and shareholders but also allows the company to have complete power over the property just as any other legal person.
A corporation can own, use, sell, transfer, lease, etc., their assets and property just like any other legal person. And since its identity is distinct from its members and shareholders, the chances of fraudulent transfer or arbitrary actions over such property are reduced. This also means that the property in the name of the company is owned by the company itself, not by its shareholders as joint owners, as also held by the House of Lords in the case of Macaura v. Northern Assurance Co Ltd (1925).
While the shareholders do have the power to manage and control all the actions relating to the property, it has to be decided through the voting of a general meeting to convey the collective will of all the members.
Centralised management
The management of any corporate entity is divided into several levels and is considered different from the formative control that is usually exercised by the shareholders. In simpler terms, ownership and management of a company are two completely different things. The management of a company is usually handled by the employees of the company, including the board of directors. They are the ones who decide the policy and actions of the company while the shareholders simply vote and give a general consensus on whether they want the company to act upon such decisions or not.
This centralised form of management helps create more efficiency and a distinction between the identity of the shareholders and the company, in which we can also see the corporate personality playing a vital role. This gives the company its own autonomy and flexibility regarding its decisions and policy-making under the guidance of the professional expertise of its directors and employees.
To sue and be sued
Due to corporate personality and the resulting separate legal identity, registered corporate entities have the capacity to sue and be sued in their own name. And while the company needs to be represented by a natural person, all the liabilities and rights from a lawsuit shall be of the company itself. This includes any kind of claim, compensation, or even punishment for criminal offences. A company can even sue for defamation if its image was hampered by any such false and/or defamatory comment.
Disadvantage
While there are many benefits to corporate personality, there are quite a few disadvantages as well, some of which are given as follows:
Formalities and complexity
Unlike direct ownership businesses or even partnership firms, corporate entities with limited liability require more complex procedures. This can be seen in the form of general meetings to get consensus on every decision to be made by the company along with other procedures where all the members and shareholders of the company have to be notified.
Such formalities often result in unnecessary complexity along an extended delay in time. If the expenses are to be accounted for as well, for the incorporation of the company, the notifying of the shareholders and every other administrative and management formalities, then it can be observed that such actions are quite expensive in comparison to direct ownership businesses.
Not a natural person
While the corporate personality may have given the corporation personhood, such personhood is artificial or fictitious in nature and cannot have the rights that only a natural person can have, like citizenship. And while that also can be seen as a benefit for many people, the issue arises when different countries apply different types of taxes based on such factors. One may argue that the origin place of a company can be considered its domicile but law does not recognise it as such.
Risk of fraud and evasion of obligations
As observed through many recent events, shell companies have often been made by individuals to evade tax and other obligations. Such fraudulent activities, while uncovered and punished justly through the doctrine of lifting the corporate veil, still run rampant. In such cases, corporate personality acts as a double-edged sword.
Separate legal entity
As discussed earlier in the article, a separate legal entity refers to a corporate entity that has a separate legal identity from its members and shareholders. In simpler terms, it is an entity recognised by the law as a judicial person that has an identity independent from the members comprising it. This allows the company to have its own legal existence, allowing it to have rights and obligations like any other judicial person.
Corporate personality usually derives from a separate legal identity as it creates a distinction between the company and its members. Other elements of a separate legal entity include the corporate veil, which we will discuss in the section of the article.
Corporate veil
In a nutshell, corporate personality can be referred to as a legal concept that differentiates a company from its shareholders, directors, officers, and other members. This legal distinction is also commonly known as the ‘incorporation’ of a company or the ‘corporate veil’, and it was first established in the landmark case of Salomon v. Salomon. It is one of the defining aspects of corporate personality since it sets apart a company as a legal entity that is independent of the identity of its members.
Due to this legal distinction between the identities of the company and its members, the company can continue its business for years even after the members working under it retire. In simpler words, through perpetual succession, companies can continue for years even if a majority of their members retire, expire, or resign. Only when the company is winded up will it cease to exist.
Any company with a corporate veil remains unaffected by changes like the resignation of employees, changes in shareholders through share transfers, and even the retirement of their directors. None of these changes impact the company’s rights, immunities, properties, or possessions. It can continue to exist despite all the changes in its membership over the years.
A corporate veil also acts as a protective shield for the members and shareholders of a company, shielding them from the actions of the company that were made in the name of the company itself, especially in cases of default or insolvency. For instance, if a director of a company defaults, only the company would be liable for such a default and not the other members of the company. Thus protecting its members from the consequences of the actions taken in the name of the company. This principle also applies to other corporate actions, like legal breaches and financial obligations.
However, while the concept of the corporate veil is made to protect the members of the company from the effects of the actions carried out in the name of the company, it can often be misused to carry out fraudulent activities by the members of the company. Thus, to resolve this, the process of ‘lifting’ the corporate veil was introduced.
Lifting the corporate veil
As mentioned earlier, the concept of the corporate veil has a lot of privileges that are oftentimes attempted to be misused by the members of a company to commit fraud and other illegal activities in the name of the company. This is done by the members so that in the situation where negative consequences of such fraudulent activity arise, the guilty members can separate themselves from it and instead make the company liable for those actions. In many cases, people have made shell companies just to commit illegal activities and later shift all the blame on the actions of the ‘company’.
In such situations, the law looks behind the corporate veil to identify the actions of the guilty members of the company. It is mostly because an artificial or fictitious person is not capable of committing fraudulent or illegal activity. This principle is known as the ‘piercing’ or ‘lifting’ of the corporate veil, as given under Section 34(2) of the Companies Act, 2013.
In other words, lifting or piercing the corporate veil refers to the process of looking behind the company’s facade as an artificial or fictitious person to find the person liable for the actions committed in the name of the company. This principle uplifts the shield provided by the corporate personality to the members of the company and holds the individual member or shareholder liable for their actions.
As held by the Court of Appeal in the case of Adams v. Cape Industries plc (1990), since a company is an artificial person and can only act through its human representative or agent, the corporate veil usually helps draw a line between the agent and the company for the actions taken in the course of business. The principle of lifting the corporate veil helps to see whether the actions undertaken by the human agents of the company were actually within the course of business or were those actions a misuse of the corporate facade.
Under the company law, a company can find itself liable in two ways:
Direct liability, where the company directly commits the actions; or
Indirect or secondary liability, where the agent or representative of the company commits the actions during any business transactions.
Based on this, the principle of lifting the corporate veil is applied through two methods. In the case of direct infringement, the ‘instrumentality theory’ of lifting the corporate veil is applied. For this theory or method, the Court examines where the corporate entity is used as a shell for its members to act for their benefit rather than the benefit of the business and the company.
Meanwhile, for secondary or indirect infringement, the alter-ego or the other-self theory is applied. This theory advocates that there is a distinct boundary between a corporate entity and its members. Thus, any actions committed by the members or agents of the company not concerning the company or in its name directly or for the business would not be the liability of the company. This theory helps in establishing liability for fraudulent or illegal actions committed by the agents of the corporation for their benefit and usage, even if it is within their course of employment under the company.
Statutory Aspect
There are usually two circumstances in which a corporate veil can be lifted, in which the statutory aspect involves certain provisions from the Companies Act, 2013. These provisions act as a protection for the third parties dealing with the corporate entities for business or any other transactions.
Starting with Section 2 (60) provides for an “officer who is in default”, who is nothing more than a person in charge who would be held liable to any penalty or punishment as prescribed by the Act. This provision provides for the scenarios where the corporate veil is lifted to enact the appropriate justice. Many other provisions in the Act of 2013 reference the same to penalise the persons responsible, such as Section 76A, which penalises contravention of Section 73 that deals with the prohibition of acceptance of deposits from the public and Section 76 deals with the instances where certain companies are allowed by the Act to accept deposits from the public for securities.
Section 3A of the Act talks about the reduction of members in a company beneath the limits given in the statutes. As the minimum number of members is given under Section 3(1), if any company falls short of such numbering and continues with its business for more than six months, then the obligations and liabilities incurred by the corporation would be directly placed on the individuals who are aware of such fact. In a nutshell, if the number of members falls beneath the minimum, the company would no longer have the protection granted by its corporate personality or corporate veil and all the actions taken by the company in such a period would be interpreted as the actions of the members directly.
Meanwhile, Section 5 establishes the AOA and prescribes in the manner which it should be amended and followed. This section gives a rundown of the prescribed manner in which each transaction in the company shall work through, preventing any arbitrary actions. Any transaction or decision made in violation of this section would be considered voidable on the part of the other party.
The Act further draws the line for liability of the members of the company through Section 34 which establishes criminal liability for misstatements in prospectus and Section 35 which establishes civil liability for misstatements in prospectus. Both sections provide for liability placed on the members responsible for the fraudulent activity rather than the company itself. These are further followed by Section 36, which penalises for fraudulently inducing other people or companies to invest money.
On the other hand, Section 38 of the Act penalises members of the company that create fictitious identities to personate and acquire shares, securities or otherwise in a company. This includes the creation of a shell company to solely acquire shares of another company. In such a case, one cannot hide behind the corporate veil of the shell company.
Section 219 establishes the power of the inspector to look into the affairs relating to the company, which may also include looking into affairs of another affiliated company or the members of the aforesaid company. This power especially comes in handy when the investigation is about alleged mismanagement, fraud and other illegal activities, or oppressive policy towards the members of the company, as given under Section 241 of the Act.
The Act also includes provisions like Section 378ZM that provide for penalty for contravention for any persons that willfully fail to provide or furnish information as required or contravene against the provisions of the Act and the chapter herein mentioned. Other provisions such as Sections 447 to 453 also mention liability for persons who may be members of the company or officers who are in default. These provisions help incorporate the doctrine of lifting the corporate veil in the company law without even directly mentioning the term as such.
Judicial Aspect
The other circumstance in which the corporate veil can be lifted is the judicial instances, where the Court observes the facts and interprets the law accordingly to observe whether the corporate veil should be lifted or not. During its evolution, certain instances were categorised through judicial proceedings where the corporate veil would be lifted or pierced, some of which included the determination of the enemy character of the company, fraudulent behaviour or illegal activities conducted by the members of the company, the agency of the company, improper behaviour, sham or facade, tax evasion, etc.
The case of Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (1915) is a classic example of lifting the corporate veil to observe whether the character of the company had changed or not. It was also the first case where the House of Lords established the principle of determination of enemy character of a company, which was later backed by Connors Bros. v. Connors (1938) in which the Supreme Court of Canada pierced the corporate veil to hold that since the German director of the company had complete control over its management, any financial transaction towards the company would lead to helping the economy of the enemy country. Thus, the Court had held the company of enemy character.
Another significant judgement would be the case of Jones v. Lipman (1962), in which the Court of Chancery lifted the corporate veil to see whether there was any ground for fraud on the side of the company. Since the company had only two directors and members with no actual business transaction or usage, the Court held that the defendant had transferred the property in the sale agreement to the company to evade performing his part of the agreement and thus, such action was fraudulent and the transfer was held to be void in nature.
The case of Re: R.G Films Ltd. (1953) can also be taken as another example where the corporate veil was lifted to see whether the films produced by the British company were actually British productions or was the company merely acting as an agent for another company. In this case, it was found that the British company was merely an agent whose banner was used by an American film production company that had the majority of the shares in the said company. Thus, based on this finding, the films produced by the company were not certified as British production films since it would be misleading the audience.
Meanwhile, in the case of Subhra Mukherjee v Bharat Cooking Coal Ltd. (2000), the respondent company had transferred all the assets in its name to the wives of the directors of the company. Upon lifting the corporate veil, the Supreme Court of India found that the said decision was made solely by the directors without any proper consultation or voting from the shareholders of the company. Since such a transfer was not made in the interest of the company and would only benefit the directors of the company, the transfer was held to be void since the whole action itself was a sham.
In a way, it can be concluded that the Court lifts the corporate veil of a company, especially in cases of economic offences that might be committed with the corporate persona as a cover or shield. This can be observed in the case of Santanu Ray v. Union of India (1989), where the company was held liable under Section 11 of the Central Excise and Salt Act, 1944 and was later alleged with violation of the same since attempts to evade excise duty were made through fraudulent actions such as misrepresentation and concealment of relevant facts. The Delhi High Court held that the directors of the company directly responsible for this action should be held liable rather than the company itself, thus, lifting the corporate veil to deliver the appropriate justice for the given instance.
Limited liability
The principle of limited liability arose as a concept contradicting that of the corporate veil. While a corporate veil exists to protect the shareholders and members of a company from any liability arising from the company’s actions, the principle of limited liability holds the partners and shareholders of the business accountable for losses up to a predetermined amount, which does not exceed the amount they had previously invested in the company. In simple words, limited liability holds the shareholders and partners of a corporation accountable for the losses faced by the company, but only up to the amount they have invested in the said business venture. Any additional losses beyond that amount are not incurred by them, thus saving their other assets from facing the same loss.
In large corporate entities, the personal assets of investors or shareholders can be safeguarded from the consequences of the company’s actions, especially if losses are incurred. However, in the case of sole proprietorships, where the owners have a direct role in the company’s operations and can be held responsible for all the company’s liabilities, a corporation traditionally confines the individual risk of its shareholders and investors.
In these types of circumstances, the concept of limited liability helps restrain the accountability of the owner and shareholders to a certain limit, safeguarding their assets from the losses incurred by their business venture.
The most common types of companies seen in the market with a limited liability concept are as follows:
Corporations, where shareholders and investors enjoy limited liability and are only accountable for the losses or debts incurred by the company up to the amount they have invested in the corporation,
Limited Liability Companies, or ‘LLCs’, are corporations in which the shareholders and members are not accountable for the debts or losses incurred by the company. However, it does provide flexibility in taxation to the members of the corporation through the ‘pass through’ method. Through this method, all the losses and profits incurred by the company can be filed in the personal tax returns of the shareholders and members of the corporation.
Finally, the Limited Liability Partnership, or ‘LLP’, is one of the most common forms of limited liability observed in the market. LLPs are partnership business structures with limited liability obligations for the partners of the professional firm. Their liability does not extend to the actions or omissions of other partners but does include the responsibility for the actions of the firm or their actions within the firm.
Fundamentally speaking, the ideology behind limited liability directly opposes the concept of corporate personality since its ideology depends on lifting or piercing the corporate veil and holding the members of the company liable. However, while the concepts may stand as conflicting, both exist in the market and are used by different corporations for the fulfilment of their purposes.
Jurisprudence behind the concept of corporate personality
In philosophy, personality refers to the characteristics and behavioural patterns of a person, generally a human being. However, with time and evolving technology, the definition of personality has been extended beyond that of its humanistic definition.
Now, personality can be defined as characteristics of a ‘person’, that can be artificial or fictitious as long as it is recognised by the law. Legal or judicial personality, on the other hand, is referred to as the characteristic of having rights and legal obligations.
The major reason for giving personality to inanimate objects like corporate entities is to enforce the collective rights and obligations of the people working under or acting as members of the company. Enforcement of their individual rights and obligations regarding the same goal and association can create unnecessary legal complexity. Thus, to reduce such complexity and to enforce the rights and obligations of the members and employees of the companies more efficiently, corporate entities are given their own personhood.
While natural personality exists without recognition, artificial personality given to inanimate objects like corporate bodies needs some kind of recognition to exist. Usually, it is argued to be legal recognition, but many theories argue that corporate personality exists regardless of whether it is legally recognised or not.
Let us discuss these theories in detail.
Theories of corporate personality
Many legal scholars and jurists have given different theories and ideas to explore the nature and character of a corporate entity. However, since no theory is universally agreed upon to determine the exact nature of corporations, each theory is given equal importance. Given below are all of the major theories relating to corporate personality.
Fiction theory
The fiction theory is regarded as one of the first theories made on corporate personality. It was propounded by the famous scholar Savigny and was later supported by various jurists, including Salmond and Holland. As per this theory, the identity of a corporate entity is based on legal fiction and exists as nothing but a mere concept that cannot be applied in practicality. In other words, it regards the personality of a corporation as nothing but a legal fiction made by the law for its convenience.
According to this theory, the character of a corporate entity is completely imaginary, made with the intent to make legal matters easier to navigate through. As per Savigny, a company is nothing but an artificial persona to signify the collective decisions of its members. Since a company does not have its own body, it acts through its agents and representatives. Thus, a company cannot have a separate identity from its members, who are the sole reason for its presence in the practical world.
Under this theory, the character of a corporation is rooted in fantasy, which originates from the identity and character of its members. Furthermore, the fiction theory of corporate personality rejects the idea of any company existing without legal recognition since there is no difference between the identity of the members and the identity of the corporation as per this theory.
This theory defines corporate personality as nothing but a mere invented persona under which the members and representatives of the company carry out their actions. This artificial character is given rights and obligations of its own concerning the motivation or purpose behind its work.
The fiction theory of corporate personality has been criticised the most due to its inability to address the legal obligations of a corporate entity, which include obligations for civil and criminal offences. The biggest critic of this theory was Frederick Pollock, who argued that the fiction theory is not recognised by the English common law. This is so since the first requirement for any entity to be recognised as a legal person under English law is incorporation. Any entity not incorporated is merely a group of individuals, and they cannot assume rights or obligations collectively.
Realistic theory
This theory of corporate personality was developed as a direct contradiction of the fiction theory hypothesis. The realistic theory was developed by Maitland in England and by Johannes Althusious and Gierke in Germany. Many legal scholars, including Sir Frederick Pollock, Lasson, Miraglia, Maitland, Geldat Pollock, and others, have supported this theory.
Jurist Gierke contended that every organisation or association has a will and consciousness based on which it makes its own decisions. Its ability to act and make decisions comes from the collective will of its members, but that does not entail that the organisation is a mere collection of the identities of its members. Instead, every organisation has its own new and separate identity, regardless of its purpose or who it was founded by.
The realistic theory emphasises the practical aspect of corporate personality, highlighting how the company and its actions can differ from those of its members. The character and perception that a company may have in the eyes of its public can be drastically different from how its members are perceived. It argues that the character or even the perception of the character of the company is not always based on law. Rather, it can exist regardless of being recognised by law, since it is the desire and will of the members of the company that give it character.
Corporate personality, according to this theory, exists for every association since the identity and presence of an association or organisation are different from those of its members. While a corporation’s will may be acted upon by the actions of its agents or representatives, they simply act as a physical medium for the corporation. In simple words, this theory states that a corporate entity exists as a social body that acts through its human agents as a medium, which is the physical body. The will of the corporation is manifested through the actions of its members, agents, employees, etc.
Unlike the fiction theory of corporate personality, this theory argues that the presence of a corporation is based on its presence in physical reality through its human agents rather than fantasy. However, while the company may not be a real or natural person, that does not mean it is not a reflection of the will of its agents, who are natural persons. It is not formed by the law but rather merely recognised by it as a separate identity.
This theory focuses on the presence of a company beyond its members, arguing that once an individual joins the corporation, they are absorbed into it and become a part of the collective presence. Unlike the fiction theory, the realistic theory holds that the company has an identity and presence based on the actual factors and actions that the law perceives. This was backed by the House of Lords in the case of Daimler Co. Ltd. v. Continental Tyre and Rubber Co (Great Britain) Ltd. (1916), where it was held that a company remains of the same character regardless of the nationality of its directors or members. Here, the realistic theory was applied to confirm whether making payment to the defendant company would amount to an offence under the Trading with the Enemy Act, 1914, during World War I. The judgement was held in the favour of the defendant, stating that the company exists as a separate identity from its German directors and paying them for the contract would not amount to any such offence.
Professor Gray is one of the major critics of this theory, arguing that collective will does not exist in practicality and merely exists as a fabrication of legal fiction. According to him, a corporate entity does not have its own identity and also exists as an association of humans who are natural persons with their rights and obligations. He argued that this theory is not quite practical since it does not differentiate between an artificial person and a natural person. As per Realistic Theory, a company is as much of a natural person as a human and can exist in reality without any legal recognition, which is not possible in practicality.
Bracket theory
Out of all the present theories, the Bracket Theory of corporate personality is one of the more popular and agreeable ones. Also known as the ‘Symbolist Theory’, this theory was propounded by the famous German scholar, Ihering. The American scholar Hohfeld also supported this theory, albeit in a more modified form. According to Ihering, a corporate entity only exists due to its members and representatives, who also influence the character of the corporation itself. In other words, the members and agents of a corporation also affect its character and personality, thus making the corporate personality dependent on the actions of the members of the company.
The ideology behind this theory is that it is the members who represent the corporation and draw up the character of the corporation. The law only puts up a ‘bracket’ to form a corporate unit, whose rights and obligations are mostly delegated from its members and agents. This is done to increase efficiency in the case of legal applications as well as financial transactions since it is not viable for multiple people to take on collective obligations.
Meanwhile, according to the American jurist Wesley Newcomb Hohfeld, only humans, as natural persons, have rights and obligations. Corporations, as legal personalities, are nothing more than an accumulation of interactions and partnerships between the individuals working under the company. In other words, corporate personality is mostly the establishment of legal relationships between the members of the company, which also includes financial and contractual transactions. Treating a corporation as its own identity helps the courts safeguard rights and obligations.
The major issue with this theory is that it does not define how and when the ‘bracket’ of corporate personality is removed and added. The concept of lifting the corporate veil for this theory is vague and can result in legal inconsistency, especially since in the practical world, the identity of a corporate entity is separate from its members and representatives.
Concession theory
The concession theory of corporate personality was developed by the famous political scholars Dicey, Savigny, and Salmond since the ideology behind it is derived from the concept of a sovereign state. As per this theory, the only reason corporate personality exists is because of the legal recognition given by the state. Similar to the legal theory, it argues that without a legal existence recognised by the state, a corporation cannot exist.
According to this theory, the legal personality of a corporation originates from the state and its concession. This recognition is completely discretionary on the part of the domestic laws and precedents of the state. It emphasises the prudence or authority of the state and how much authority they have to recognise a company’s corporate personality.
The criticism that was faced most by the concession theory was that it puts too much emphasis on the state’s discretionary power and how only upon its concession can a company exist. It also emphasises that if the state wishes, it can also take back the recognition given to the company as a legal person. Such absolute discretionary power can lead to arbitrary actions if left unchecked. This could be especially disastrous in cases where the corporate entity is made for any political purpose.
Purpose theory
The Purpose Theory of corporate personality was propounded by the famous German scholar Alois Ritter von Brinz and further supported by famous jurists like Demilius, Aloysand, and E.I. Bekker from England. This theory focuses on the purpose behind the establishment of a corporation, emphasising that a corporation’s legal rights and obligations can be recognised based on the purposes it fulfils.
In other words, this theory argues that artificial persons like corporate entities should only be given rights and obligations when it helps in the protection and better implementation of the rights and obligations of natural persons working under or with them. It contends that corporate personality is vital to establishing responsibility for corporate entities in case of any legal breach or consequences of the actions committed in their name.
The ideology behind this theory comes from the Stiftung of German Law, which contends that ‘establishments’ or ‘entities’ can also be given rights and responsibilities in certain circumstances for the fulfilment of certain purposes. As seen in the case of M.C. Mehta v. Association of India (2020), certain purposes may include anything ranging from financial obligations to obligations towards the environment. In this case, the Delhi High Court highlighted the obligation of corporations to reduce the growing pollution in Delhi, especially when it was a direct result of their activities. The hazardous ventures taken by the corporations were in direct violation of Article 12 of the Constitution. The Court also highlighted that there was a significant need to formulate new laws and approaches to deter such catastrophic events. Corporate obligations in both public and private areas need to be established, especially in events like gas leaks or severe pollution caused by corporate activities that affect everyone living in the nearby areas, along with immense property damage.
Léon Duguit, a popular French jurist, also supported this theory of corporate personality. According to him, the law exists to bring harmony and cohesion to society by safeguarding the rights of the people. Thus, if the maintenance of social cohesion needs the recognition of the corporate entities as a separate identity to help in the said objective, then it shall be done so.
The only criticism of this theory is that interpreting the company as a legal person based on circumstances can increase the chance of inconsistency in precedents. It will not only increase the pressure on the judiciary for such interpretations but also make the process of such legal matters unnecessarily long.
Kelsen’s theory
According to the Austrian jurist Hans Kelsen, there is no distinction between a natural and legal person. In simpler terms, he contended that personality is a legal concept that encompasses all the rights and legal obligations a person may have. Thus, a distinction between a natural and legal person has no meaning since both have rights and obligations in the eyes of the law.
His analytical approach considers all the personhood similar and finds any distinction meaningless. According to him, the legal individuality in any personality is expressed through the different complexities of its rights and obligations. This is how law individualises society and provides the relevant rights and legal obligations.
The major drawback of this theory is that it fails to account for the practical problems faced by different types of personality and how their distinction exists in the practicality. Just like how an artificial person like a company cannot have citizenship, there are many such rights that only a natural person seems to enjoy.
Unfortunately, this theory fails to highlight such practical differences and does not throw any light on the nature of group personality like the artificial personhood of an association or institute.
Organism theory
The organism theory of corporate personality originates from the ideology that a corporation works like an organism, with each of its limbs and organs compared to various departments. For instance, the theory compares members of the company to its limbs and the top authorities, like the Board of Directors, to the head of the organism. Just like how the limbs and head of an organism help it function and fulfil its desired activities, the members of a company help it function and run its businesses. Without its human agents or ‘limbs’, the organism of a corporation would not be able to function
Thus, the organism theory states that a corporate entity is an independent identity that acts as an organism whose limbs are the human agents that help it function in its day-to-day activities. This theory argues that corporations also have their own will and body, just as any organism, and, therefore, should have legal rights as well as obligations.
The focus here is more on the aspect of the will and functionality of the company, stating that a corporate body with its own will and ‘life’ shall also be recognised as a person under the law and have its rights and obligations. Thus, according to this theory, corporate personality is similar to that of an organism, which consists of a head, limbs, organs, and other parts of a body.
This theory is mostly criticised for the fact that it does not explain or include one-person companies or small companies where the departments are not particularly defined or present.
Ownership theory
The ownership theory of corporate personality was first proposed by Bekker, Bzinz, and Demelius before being further developed by Planiol. As per this theory, only people or natural persons should have legal rights and obligations, not companies or any other corporate entities.
This theory argues that the only reason for the existence of any corporate entity is to own common property owned by its members and shareholders. In simple words, corporations are subjectless and intangible property that exists legally only for the common purpose of its members and shareholders. The fictitious or artificial identity given to such entities further fulfils the purpose of owning common possessions and assets.
According to the ownership theory, corporations can enter into contracts and agreements just like any other individual or natural person, since it acts as a common medium for an association of people to own property together. Other rights, such as the right to sue and be sued, are also applied under the same logic.
Furthermore, there are many rights that a human or a natural person may have that a corporation cannot. For instance, humans have the right to citizenship and the right to religion, but this is not the case for corporate entities. While both do share some rights and obligations, companies do not have the same as any natural person may do.
Thus, based on this, the ownership theory argues that if a corporate personality cannot be entitled to all these rights and duties, then it should not be classified as a person and solely be identified as a subjectless property. When taken in the context of estates and assets owned by corporations from or for their business transactions, this theory is sound.
The major criticism of this theory is that it does not particularly account for corporations that do not work for profit or own assets. Such organisations are not made for any type of ownership and only act on a collective cause, which this theory does not address at all.
Conclusion
In the end, the concept of corporate personality is a significant one not only for the company law but also for the business aspirants aiming to open a company, be it small or big. Not only does this legal concept help protect the members and owners of any company from being dragged into the actions of the company, but it also helps establish companies as separate legal entities of their own that can be held liable for their actions.
While a corporate entity may not have a spirit or soul, it does have a will that is dependent on and practised by its members. Thus, giving corporations rights and obligations was the only option to give voice to this collective will, despite a corporation not being a natural person.
Although the speculation about the character of companies and their origins may still be up for debate, it can be agreed upon that their legitimate character is partially fictitious and entirely real. Thus, it can be concluded that the character of companies is in between the two, somehow standing to exist as both at the same time.
Frequently Asked Questions (FAQs)
What is an artificial person?
Oftentimes, the law recognizes organisations, corporate bodies, associations, etc., and gives them legal personhood that allows them to have their own rights and obligations. In such cases, the said entity would be referred to as an artificial or fictitious person. This type of person is not a natural person (that is, human) but only exists as a judicial being with rights and legal obligations.
What does the incorporation of a company mean?
Incorporation of a company is referred to the legal procedure of forming a company or any other corporate entity through formal registration. This procedure allows the company to be legally recognised as a person and gives it a corporate personality that is distinct from its members and shareholders.
Can a company have nationality or citizenship?
A company cannot have citizenship since it is only a legal person and not a natural person so it cannot be classified as a citizen of a country. However, according to the Supreme Court of India in the case of TDM Infrastructure Private Limited v UE Development India Private Limited (2008), a company can have a nationality based on its place of incorporation, regardless of where its central management and administration is located.
References
Dr. N.V. Paranjape (2019), Jurisprudence and Legal Theory, 9th edition, Central Law Agency.
Bryant Smith, 1928, Legal Personality, The Yale Law Journal, Volume 37 No.3), pp 283–299, available at: https://doi.org/10.2307/789740
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The US Constitution was written in 1789, ratified in 1788, and has been in operation since 1789. The main authors of the Constitution were James Madison, Alexander Hamilton, and John Jay. The US Constitution establishes the form of the national government and defines the rights and liberties of the American people. It is based on the idea of separation and balance of powers. Different segments of government possess different powers. These different segments of governments are used as a check against abuse of power by any one segment.
The common law system is the basis of the US legal system. The US Constitution sets up a federal system by dividing powers between the national and state governments. It also establishes a balanced national government by separating powers among three independent branches — the executive, the legislative, and the judicial.
The executive branch, led by the President, assisted by the Vice President and Heads of Agencies, enforces national laws.
The legislative branch, the Congress, consisting of the Senate and House of Representatives, makes national laws.
The judicial branch, the Supreme Court, and other federal courts apply and interpret laws when deciding legal disputes in federal courts.
The state government has the same type of branch. Most federal environmental legislation is administered by the Environmental Protection Agency (EPA).
Each state has a sovereign government. The state government creates and delegates varying degrees of authority and autonomy to local governments.
Federal court system
The U.S. Supreme Court was created according to Article III, Section 1 of the American Constitution.. Congress has the authority to create the lower federal courts.
The federal court system has three main levels:
District courts, which are also called trial court,
Circuit courts, which are the first level of appeal, and
The Supreme Court of the United States, which is the final level of appeal in the federal system.
In the US, there are a total of 94 district courts, 13 circuit courts, and one Supreme Court. The federal district court is the lowest level of the federal court system.
District courts handle trials for both civil and criminal cases within the federal court system. In the US, there are over 670 district court judges. Federal magistrate judges are also delegated some tasks by the district court.
A few subject-specific areas, such as bankruptcy, tax related issues, claims against the federal government, and international trade, are handled by federal trial courts.
The aggrieved party can appeal the verdict of a federal district court to a United States court of appeals. In the US, there are twelve federal circuit courts. The entire circuit court may consider certain appeals in a process called an “en banc hearing.” A few courts have specially dealt with appeals on specific subjects, such as veterans’ claims and military matters. In the case of diversity jurisdiction, a plaintiff is allowed to file a lawsuit in federal court. Diversity jurisdiction is applicable when the defendant is located in a different state. The second condition is that the “amount in controversy” must be more than $75,000.
In the US judicial system, the Supreme Court of the United States is the highest court. It has the power to decide appeals on all cases brought in federal court or those brought in state court but dealing with federal law. After the verdict of the circuit court or state supreme court, either party may choose to appeal to the Supreme Court. To hear the case, the parties may file a “writ of certiorari” with the court. The cases are heard when there are errors or conflicting decisions across the country on a particular issue. The US Supreme Court is situated in Washington, D.C.
Cases involving the constitutionality of a law, such as US laws and treaties, issues related to ambassadors and public ministers, disputes between two or more states, admiralty law, bankruptcy, and Habeas corpus issues, are dealt with by the Federal Court System.
State court systems
The structure of the state court system is similar to that of the federal court system. It is generally composed of three main levels: trial courts, state appellate courts, and a state Supreme Court. A decision on federal matters made in a state Supreme Court will be rarely petitioned to the U.S. Supreme Court.
The Supreme Court has the final authority to interpret the Constitution. It can set aside any law — federal, state, or local that conflicts with any part of the Constitution. In some cases, the national and state governments have concurrent powers.
The State Court System deals with mostly criminal cases, probate involving wills and estates, contracts, tort (personal injuries), and family law (marriages, divorces, adoptions), etc.
Legal actors in the US
Federal judges are nominated by the President and confirmed by the Senate. Federal judges may be removed from office for misbehaviour through impeachment proceedings. Federal magistrate judges are appointed by the district court by a majority vote of the judges. Some tasks of the district court are delegated to federal magistrate judges. They serve for a term of eight years full-time and four years part-time and they can be reappointed after the completion of their term.
The federal judges and the members of the Supreme Court are referred to as “justices.” The chief justice is an administrator of the court.
State court judges are selected by election, appointment for a given number of years, appointment for life, or combinations of these methods.
The United States Attorney (USAO) has responsibilities including prosecuting criminal cases, representing the United States in civil cases and collecting debts owed to the federal government when administrative agencies are unable to do so. U.S. attorneys must be nominated by the president and confirmed by the Senate. He serves a four-year term.
Jury service is a civic duty. A jury participates in deciding the outcome of legal disputes. Juries are usually made up of 12 jurors. They are randomly selected as qualified citizens from counties within the district by the courts. There are two types of juries serving different functions in the federal trial courts: petit juries and grand juries. Petit juries are also known as trial juries. They decide both criminal and civil cases. A grand jury mainly deals with criminal matters and assesses evidence presented by a prosecutor. A jury must be unanimous for either a guilty or not guilty decision. If a jury is unable to reach a unanimous verdict, then the case may be retried with a new jury. However, the judge decides questions of law. Federal jurors are paid $50 for each day of service. They may also be eligible for certain travel reimbursements and allowances.
Advocates are legal professionals who are trained and licensed. They represent individuals, organisations, or groups in legal matters. Their role extends to providing legal advice, negotiating settlements, drafting legal documents, and advocating for their clients’ interests. They can specialise in various areas such as criminal law, civil litigation, corporate law, family law, intellectual property law, environmental law, and many more.
Legal procedures and due process
Legal procedures in the United States are complex. Legal procedures vary depending on the type of case and the jurisdiction. The American legal system is based on a system of federalism. Generally, state civil procedure mirrors many of the federal rules.
In general, state civil procedure mirrors many of the federal rules. This is because the Federal Rules of Civil Procedure were adopted by the Supreme Court in 1938 to create a uniform set of rules for all federal civil cases. Many states have adopted similar rules for their own state courts.
However, there are some key differences between federal and state civil procedures. For example, the rules governing discovery are more limited in federal court than in state court. This is because the Federal Rules of Civil Procedure are designed to streamline the litigation process and reduce costs.
Another key difference is that state courts have more flexibility to create their own rules of procedure. This is because the Federal Rules of Civil Procedure are only binding on federal courts. State courts are free to adopt their own rules, as long as they are not inconsistent with the federal rules.
As a result of these differences, it is important for attorneys to be familiar with both federal and state civil procedure rules. This will ensure that they are able to effectively represent their clients in court.
Here are some of the key features of the American legal system:
The Constitution: The Constitution is the supreme law of the land. It establishes the framework for the federal government and defines the rights of citizens.
The courts: The federal courts are responsible for interpreting the Constitution and federal laws. The state courts are responsible for interpreting state laws.
The jury system: The jury system is a fundamental part of the American legal system. Juries are made up of ordinary citizens who are responsible for deciding the facts of a case.
The right to counsel: The right to counsel is guaranteed by the Constitution. This means that everyone who is accused of a crime has the right to an attorney.
The rule of law: The rule of law means that everyone is subject to the law, including the government.
Due process of law is a fundamental principle that ensures fairness, justice, and the protection of individual rights in legal proceedings. It serves as a safeguard against arbitrary actions by the government and upholds the rule of law. Due process can be traced back to the Magna Carta in 1215. Due process guarantees that no person will be deprived of life, liberty, or property except by the lawful judgement of their peers or the law of the land. The concepts of due process, the rule of law, and democracy are closely interconnected.
Evolving legal landscape
Today, law firms are facing the following challenges:
With the help of advanced technologies, law firms are enhancing efficiency, improving client service, and streamlining legal processes. However, it also presents challenges such as data security, revolutionised legal research, and vast amounts of electronic evidence in litigation. Cyber security Risks are increased. Secure cloud-based platforms can enhance data protection. Additionally, artificial intelligence (AI) technologies can automate repetitive tasks, increasing productivity and reducing costs.
Today’s clients demand more transparency, quicker response times, enhanced communication, and cost-effective solutions. Client relationship management (CRM) systems can help law firms better understand client preferences, provide personalised attention, and deliver tailored services.
Critiques and reforms
Some of the main flaws of the legal system in the US include the following:
In the US, many poor people are unable to afford lawyers for litigation due to the high cost of legal services. Jury trials are expensive and require twelve people.
The legal system is biased against the poor. So many innocent people are wrongfully convicted of crimes they did not commit.
It is difficult for US citizens to understand their rights and obligations due to the complexity of the US legal system. It is not only clouded by politics but also influenced by money.
Innocent defendants get pressured to plead guilty. Today, American criminal justice has mostly become a system of pleas, not a system of trials.
For relatively minor offences, people are sent to prison. The appellate process is lengthy. The US system uses force against peaceful people. America became a country with the highest incarceration rate in the world. This indicates the immense failure of dispensing basic human rights.
White males in the US dominate the legal profession. There is unfairness and discrimination against other groups, such as women and minorities. In the US criminal justice system, personal backgrounds, unconscious biases about race, gender, and appearance play a more important role in outcomes than the actual law. One study by researchers at Cornell found that defendants with more stereotypically “black features” were more likely to be sentenced to death. People with thicker lips, wider noses, and darker skin have been more likely to receive the death penalty.
Due to the overcrowded and inefficient American justice system, cases can take years to wind their way through the courts. More than 90 percent of lawsuits are settled before trial. Many of those cases that are tried are settled before a final verdict.
The system is too lenient on criminals. A lot of the US legal system is based on incorrect assumptions about human behaviour.
In America’s criminal justice system, police and prosecutors have no accountability for law enforcement. US cops are almost never prosecuted for the crimes they commit under the colour of law.
In the US courts, eyewitness identifications are highly unreliable. It became more unreliable, especially where the witness and the perpetrator are of different races. Due to mistaken eyewitness testimony, there have been more than a third of wrongful conviction cases in US courts. Forensic fingerprint identification almost never deals with whole fingerprints.
The US Supreme Court has been criticised for giving the federal government too much power to interfere with state authority.
In the US, there is judicial interference in political disputes. The US Supreme Court is not very open and transparent about how it makes decisions.
According to the Centre for American Progress, the national dialogue around reform during the summer of 2020 has suggested some solutions.
Americans are demanding more investments in safety beyond policing. They expect investments in civilian first-responder programmes, community-building solutions, and violence intervention models.
There is a need to promote police accountability for the harmful and, in some cases, deadly consequences of their actions.
It is required to end unjust punishments for substance use, particularly for communities of colour.
It is very essential to eliminate racial disparities across the justice system.
It is a great demand to remove barriers facing individuals affected by the justice system after serving their sentences.
American legal framework regarding the right to freedom of expression
Here are some of the key features of the American legal framework regarding the right to freedom of expression:
The First Amendment to the United States Constitution is the most important source of protection for the right to freedom of expression. The First Amendment guarantees the right to free speech, religion, and assembly.
The Supreme Court has interpreted the First Amendment to protect a wide range of speech, including political speech, religious speech, and commercial speech.
There are some limitations on the right to free speech. For example, the government may restrict speech that is likely to incite imminent lawless action, such as a riot. The government may also restrict speech that is obscene, defamatory, or that reveals national security secrets.
In addition to the First Amendment, there are a number of other laws that protect the right to freedom of expression. For example, the Freedom of Information Act (FOIA) gives the public the right to access government information. The Privacy Act protects the privacy of personal information held by the government. And the Copyright Act protects the rights of authors and artists to their creative works.
The American legal framework regarding the right to freedom of expression is a complex and ever-evolving system. It is a system that is essential to the functioning of a democratic society. By protecting the right to freedom of expression, the American legal system helps to ensure that the voices of all citizens are heard and that the government is held accountable.
Conclusion
The U.S. legal system is based on fairness, rules, and a balance of power. The system is designed to prevent abuse of power through a division of authority between the federal and state levels. It involves three branches of government – legislative, executive, and judicial. All the branches play a different vital role.
Judges, attorneys, and juries play important roles in the legal system. The concept of due process guarantees fairness and justice for all. The legal system faces challenges like technological advancements and changing client expectations.
However, the US legal system faces critiques such as high legal costs, complexity, and issues of bias. Legal reforms are required to improve the legal system and make it more fair, open, and equal for everyone.
Now that your business has produced some very impressive technology or content, other businesses want to use it. It might seem obvious to licence your intellectual property in order to make money. Make sure you are aware of the legal ramifications before you sign on the dotted line, though. You risk losing ownership of your intellectual property or not generating as much money as you should if you enter the market with closed eyes.
This is where you, as the business owner, come in. Companies interested in your intellectual property don’t always have your best interests at heart. Their objective is to maximise their profits, not yours. But with some knowledge of IP licencing law and a well-crafted licencing agreement, you can navigate these aspects successfully. This article will walk you through the key things you need to know so you can licence your intellectual property with confidence.
What is corporate intellectual property licencing
Companies can authorise third parties to use their intellectual property (IP), including trade secrets, patents, trademarks, and copyrights, by licencing this intellectual property. Leasing intellectual property to other businesses can be a significant source of income and expansion for your company. On the other hand, you can licence intellectual property (IP) from other businesses to obtain access to their exclusive knowledge and technology, which you can then use to enhance your own products, services, and operations.
Key elements of corporate IP licencing include:
Identification and valuation: Companies evaluate their IP assets and determine their commercial value before considering licencing opportunities.
Licencing agreements: Licencing agreements are legal contracts that outline the terms and conditions of the IP licence, including the scope of use, duration, royalty rates, and any restrictions.
Royalty structures: Royalty payments can be structured as a fixed fee, a percentage of sales, or a combination of both. The royalty rate is negotiated based on factors like the value of the IP, the market potential, and industry standards.
Licencing models: There are different types of licencing models, including exclusive licences (granting sole rights to the licensee), non-exclusive licences (allowing multiple licensees), and cross-licensing agreements (where companies exchange IP rights).
Product development and commercialisation: Licensees typically use the licenced IP to develop products, services, or technologies with the aim of commercialising them and generating revenue.
IP protection and enforcement: Both licensors and licensees have responsibilities to protect and enforce the licenced IP rights, including taking appropriate legal action against unauthorised use or infringement.
Duration and termination: Licencing agreements typically specify the duration of the licence period and the conditions for termination or renewal.
What can be licenced
Almost any kind of IP is available for licencing, including:
Patents: Licences provide the ability to use an invention that is patent-protected and is granted through licences. This is typical of modern technologies.
Trademarks: Licences provide the ability to use a brand name, logo, or other mark in connection with particular goods or services. Franchising is a good example.
Copyrights: Licences provide the ability to use and distribute creative works, such as books, articles, films, music, and software, and are granted under licences.
Trade secrets: Licences provide limited access to valuable corporate data, such as production procedures or client lists, which can be obtained with licences. Usually, non-disclosure agreements are essential.
Benefits of licensing
Licencing provides IP owners with several advantages:
Generate revenue from your IP without having to manufacture, market or sell actual products. This could be a simple, low-overhead way to make money.
Gain wider exposure and new opportunities for your IP through the licensee’s use. This could result in new applications or further licencing agreements.
Licence restrictions allow you to maintain control over how your IP is used to protect brand integrity and company values. You determine the best terms of the licence.
For licensees, the main benefits are:
Gain access to valuable IP that can improve your products, reduce costs, or open up new business opportunities. Otherwise, it could be challenging or impossible to acquire this expertise on your own.
Pay only for the rights you need. Licencing is often cheaper than acquiring a company outright to get its IP. You only pay for what you use.
Licences are often non-exclusive, allowing multiple companies to licence the same IP. This provides more flexibility and competitive opportunities.
In summary, corporate IP licencing is a strategic way for businesses to maximise the value of their intellectual property. Both IP owners and licensees can benefit from well-structured licencing deals. The key is finding good partners and negotiating fair and balanced terms.
Challenges associated with corporate IP licensing
Corporate IP licencing offers numerous advantages, but it also comes with its own set of challenges. Here are some of the key challenges associated with corporate IP licensing:
Complexity of IP licencing agreements: IP licencing agreements can be highly complex and involve various legal, technical, and commercial considerations. Drafting and negotiating these agreements requires specialised expertise and a deep understanding of IP rights and licencing terms.
Identifying and evaluating IP assets: Accurately identifying and valuing IP assets can be challenging, especially for organisations with extensive IP portfolios. A comprehensive IP audit is essential to assess the value of IP assets and determine which ones are suitable for licencing.
Managing IP rights: Managing IP rights effectively is crucial for successful IP licencing. This includes tracking IP filings, renewals, and maintenance fees, as well as ensuring compliance with licencing agreements and relevant IP laws and regulations.
Pricing and royalty negotiations: Determining appropriate pricing and royalty rates for IP licences can be complex. Factors such as the value of the IP assets, market conditions, and competitive landscape need to be carefully considered to ensure a fair and mutually beneficial agreement.
Risk of misuse or unauthorised use: There is always a risk that licensees may misuse or engage in unauthorised use of the licenced IP. This can lead to reputational damage, financial losses, and potential legal disputes.
Confidentiality and IP protection: Protecting confidential information and trade secrets during the licencing process is essential. Robust confidentiality agreements and measures to safeguard sensitive information are necessary to prevent unauthorised disclosure or misuse.
Managing cross-border IP licensing: Licencing IP across multiple jurisdictions can introduce additional complexities due to variations in IP laws, regulations, and enforcement practices. Understanding and complying with different legal frameworks is crucial to avoid legal pitfalls and ensure effective IP protection.
Managing supply chain complexity: In complex supply chains, managing IP rights and licencing arrangements can be challenging. Coordinating IP-related activities across multiple tiers of suppliers and partners requires careful attention to detail and effective communication.
Types of corporate IP : patents, trademarks, copyrights, trade secrets
As a business, your intellectual property (IP) is among your most valuable assets. To maximise the value of your IP, you may licence it to other companies. There are three main types of IP that companies commonly licence
Patents
Patents protect inventions and new technologies. If your company holds any patents, you can licence them to other companies to manufacture or sell the invention in exchange for licencing fees and royalties. For example, if you hold a patent on a new manufacturing process, you might licence it to companies in the same industry. Licencing patents is a great way to generate revenue from your IP without having to commercialise the invention yourself.
Trademarks
Trademarks are distinctive names, logos, slogans, and designs that identify a company’s products or services. Many well-known brands and logos are trademarks. If you have a strong trademark, you can licence it to other companies to use in association with their products or for promotional merchandise. For example, Coca-Cola licences its brand and logo to apparel companies to print on t-shirts, water bottles, and other gear. Licencing trademarks is an easy way to expand your brand’s visibility and generate extra revenue.
Copyrights
Copyrights protect original works of authorship like books, articles, music, movies, software, and more. As a company, you may hold copyrights to content, multimedia, or software that you’ve developed. You have the licence to distribute and use that content for other companies. For example, a news publisher could licence article reprints to other websites or an educational software company could licence its programmes to schools. Copyright licencing provides another opportunity to generate revenue from your IP.
Trade secrets
Licencing your corporate IP, whether patents, trademarks, copyrights or trade secrets, to other companies is a smart way to maximise the value of your intellectual property. With the right licencing strategy and agreements in place, IP licencing can become an important source of income and help grow your business.
Key legal considerations for IP licencing agreements
When licencing your intellectual property (IP) to another company, there are several key legal considerations to keep in mind. Failing to address these points upfront can lead to issues down the road.
Ownership rights
Be very clear about who owns the IP rights, especially if any IP was co-developed. Specify if ownership will transfer to the licensee or remain with you, the licensor. If ownership is retained, detail the scope of rights granted, like exclusive or non-exclusive use.
Licence scope
Clearly define the scope of the licence to avoid misunderstandings. Specify the IP covered, permitted uses, licence duration, and renewal options. Will the licence be for a single product or an entire product line? A single territory or global? The more specific the scope, the less chance of disagreement.
Royalties and payments
Establish upfront how much the licensee will pay for the rights granted under the agreement. This is typically an upfront fee and/or ongoing royalty payments, such as a percentage of sales revenue. Specify payment amounts, schedules, and reporting requirements to avoid late or missed payments. Consider a most favourable licensee clause to ensure you get the best deal.
Quality control
To protect your brand and IP, you’ll want to specify certain controls over how the IP is used. This may include pre-approving all uses of your trademarks, reviewing the licensee’s goods or services for compliance with your standards, or reserving the right to inspect facilities where your IP is used. Fail to do this, and you risk your IP becoming generic or of lower perceived quality.
Non-disclosure
Require the licensee to keep all information shared under the agreement confidential to avoid unauthorised use or disclosure of your IP. Be specific about what information is considered confidential and for how long. This is especially important if any secret or proprietary IP will be shared
Indemnification
Consider requiring the licensee to indemnify you against any claims, losses, or damages resulting from their use of the licenced IP. This helps ensure you are not held liable for issues outside of your control. You may choose to indemnify the licensee against third party claims resulting from defects in the IP itself.
Discussing these key points with your legal counsel and addressing them in your licencing agreements will help set the right legal framework to protect your interests in any IP licencing deal. Doing so gives you the best chance of a successful, mutually beneficial partnership.
Negotiating licence scope, term and territory
When negotiating the scope, term, and territory of an IP licence, several key points should be considered. Think of these as the foundations of your agreement. The scope defines exactly what intellectual property rights are being licenced. This could include:
Patents (design, process, etc.)
Trademarks
Copyrights
Trade secrets
Be as specific as possible in listing the IP, products, services, etc. covered. For example, you may licence Patent #12345, which covers the design of a solar panel but excludes any improvements or new patents. The scope should match your business objectives.
The term refers to the length of time the licence is in effect. Common terms are 3 to 5 years for technology, longer for trademarks and copyrights. Consider your product lifecycle, the time needed to commercialise IP, and other factors. You want a term that allows you enough time to benefit, without locking you in long-term if it needs changing. Terms can often be extended if both parties agree. The territory specifies the geographic regions where the IP can be used. This could be a country, region, or worldwide. Define territories that match your distribution channels and growth plans. If licencing IP for a new product launch, you may start with a pilot territory, then expand over time. You can also exclude territories where IP rights don’t exist or aren’t enforceable.
Negotiating a balanced scope, term and territory for your IP licence will lay the foundation for an agreement that benefits both parties. Be prepared to discuss your key objectives, priorities and concerns to reach a compromise that works for your current needs as well as your future business goals. With open communication, win-win deals are possible!
Royalties : determining a fair rate and payment structure
When licencing your intellectual property (IP) to another company, determining fair royalty rates and payment structures is crucial. Royalties are essentially the fees paid by the licensee for the right to use your IP.
Royalty rates
Royalty rates are often calculated as a percentage of sales revenue from products that incorporate your IP. The industry standard can vary quite a bit based on the technology field and how core your IP is to the end product. Do some research on recent licencing deals for comparable technologies to determine an initial range. You’ll want to consider factors like:
The uniqueness and demand for your IP. Groundbreaking or highly sought-after tech can command 5-10% or more.
Whether your IP is a key component or ancillary to the end product,. If integral, aim higher.
The licensee’s projected product sales and growth. Higher volume and faster growth mean higher potential royalties.
Your bargaining position. Do you have other interested parties? How eager is the licensee? The more leverage you have, the better.
Ongoing support is required. Higher rates are reasonable if you’re providing significant tech support or continuing R&D.
Payment structures
Royalty payments typically follow one of two models:
Royalties are based on actual sales. This is the most straightforward method. The licensee pays based on periodic sales reports, e.g., quarterly. However, it can be complex to track and audit sales, and payments may fluctuate.
Upfront lump sum plus ongoing royalties. This combines an initial lump sum payment at signing to secure rights with ongoing royalty payments. The upfront fee provides immediate value, while royalties maintain the alignment of interests over time. The split between upfront and ongoing fees depends on your needs and risk tolerance.
Negotiating a fair and favourable deal takes effort and patience. But with a reasonable starting position, a flexible mindset, and a willingness to compromise, you can craft an agreement that benefits both parties. Keep an open mind, focus on mutual gains, and you’ll be well on your way to win-win.
Ownership, infringement and indemnification clauses
When licencing intellectual property (IP) to another company, several key legal clauses will determine who retains ownership and control, as well as responsibilities in case of infringement. It’s important to understand these to protect your rights.
Ownership
Who will retain ownership of the IP being licenced? For corporate IP like patents, trade secrets, and trademarks, the licensor (you) will usually retain full ownership. The licensee is granted certain rights to use the IP for a limited time. Make sure the agreement clearly states that you retain all ownership and rights not expressly granted in the licence.
Infringement
What happens if a third party infringes on the licenced IP? The agreement should specify that the licensor (you) has the initial right to enforce against infringement, allowing the licensee to join any legal action if needed. The licensor should not give up the right to control enforcement, as that could weaken your ownership rights.
Indemnification
Who will be responsible if the licenced IP infringes on another party’s rights? Include clauses requiring the licensor (you) to indemnify (compensate) the licensee for any costs arising from such infringement claims. You should also require the licensee to indemnify you for any claims arising from their unauthorised use of the IP.
Cross-indemnification clauses will specify each party’s duty to indemnify the other in certain circumstances. For example, you indemnify the licensee for claims arising from the licenced IP itself, while they indemnify you for claims arising from their modifications to it.
Restrictions
List any uses of the intellectual property that are forbidden, such as the licensee’s inability to sublicense or transfer the licence to another party, to safeguard your ownership. It is also possible to limit the area, domains of application, or categories of goods that are covered by the licence. These assist in making sure the IP is only used in the ways that you have authorised.
Following these tips will put you in a legally sound position when licensing your intellectual property to another company. While the agreement may be complex, understanding ownership, infringement, indemnification and restriction clauses will help safeguard your rights and clarify responsibilities between both parties.
Confidentiality, non-disclosure and non-compete terms
When licencing intellectual property to another company, certain legal protections need to be put in place. Confidentiality, non-disclosure and non-compete agreements help safeguard your trade secrets and prevent unfair competition.
Confidentiality
A confidentiality agreement, also known as a non-disclosure agreement or NDA, requires the other party to keep sensitive information private. This includes trade secrets, proprietary data, and other intellectual property that is not protected under a patent or copyright. Ensure that the terms of any confidentiality agreement are explicit about the information that is safeguarded and for how long. Typically, 2-5 years is standard, but for highly sensitive data, you may want up to 10 years.
Non-compete
A non-compete agreement stops the other business from directly competing with you for a predetermined amount of time by using your intellectual property. For example, if you licence a proprietary manufacturing process to another firm, a non-compete would prohibit them from selling a competing product using that same process. For non-compete agreements to be enforced, their scope must be “reasonable.” Therefore, restrict restrictions to a particular region, time frame (usually 1-3 years), and sort of good or service.
Due diligence
Before signing any licencing agreement, conduct thorough due diligence on the other party. Ensure they have the resources and drive to appropriately use your intellectual property. Examine their finances, track record, managerial experience, and facilities. Find out whether they have any direct rivals who could be able to obtain your trade secrets. To test the relationship before committing to anything long-term, think about beginning with a limited licencing agreement.
Regular auditing rights are a smart addition as well, as they let you see how the other company is utilising your intellectual property. Additionally, remember to include appropriate termination clauses in case they violate the terms of the contract or cease operations. With the right legal protections and by choosing your licencing partners carefully, you can maximise the revenue potential of your intellectual property while minimising risks.
Due diligence : assessing validity and strength of IP portfolio
Make sure your intellectual property (IP) portfolio is strong and legitimate before licencing it to another business. This is known as due diligence. To ensure they can be legally defended, this entails examining all patents, trademarks, copyrights, and trade secrets.
Double check that any patents or trademarks you plan to licence have been properly filed and that all maintenance fees are paid and up to date. Make sure the specifications and claims in your patents are broad enough in scope to cover all commercial embodiments of the invention. Review the prosecution history for any limitations or weaknesses that could impact enforceability.
Examine whether your IP has been challenged in litigation or reexamination and the outcome. Check if any third parties have filed patents, trademarks or copyrights that could impact your IP rights. Search for any potentially invalidating prior art.
Evaluate the overall competitiveness and commercial potential of your IP. Consider conducting surveys to gauge customer interest in your technology or brand. See if there are any competing IP portfolios that could limit the success or lifespan of your IP. Try to determine realistic royalty rates and licence terms based on the strength and significance of your IP.
Confer with IP legal experts on any uncertainties or concerns with your due diligence findings. It’s best to resolve all major issues before negotiations begin, so you have a strong grasp of the true value and leverage points of your intellectual property. Conducting comprehensive due diligence upfront will put you in the best position to negotiate the most favourable IP licencing deal.
In summary, evaluating validity, enforceability and competitive strength is key. Do your homework, review IP rights thoroughly and get legal advice. Position yourself for the best licencing outcome.
Best practices for ongoing IP licence compliance and governance
Best practices for ongoing IP licence compliance and governance involve careful monitoring and management. As with any legal agreement, failing to properly oversee an IP licence can lead to loss of rights or legal trouble down the road.
To keep your IP licence in good standing, establish a system to track key dates and deadlines. Note when payments, reports, audits, renewals or any other licence obligations are due. Set calendar reminders well in advance so you have adequate time to fulfil the requirements. It may help to assign responsibility for compliance to specific employees or departments to ensure accountability.
Conduct periodic reviews of the IP licence terms to refresh your memory. Make sure any new products, services or business activities align with the scope of the licenced rights. Look for any changes that could impact compliance, like amendments to the agreement or updates to laws and regulations.
Maintain thorough records related to the IP licence including correspondence, financial documents, product details and more. Complete and file any required reports or forms on time. These records may be needed for audits, renewals or in cases of disputes.
Build a collaborative relationship with the IP owner or licensor. Open communication can help avoid misunderstandings and make it easier to address any issues that arise. Provide updates on how the licenced property is being used and any planned changes that could affect the licence.
Consider conducting internal audits to identify any gaps in compliance before the licensor does. Take corrective action as needed to prevent loss of rights or legal consequences. External audits by the IP owner should also be approached cooperatively.
Staying on top of an IP licence through good governance and compliance practices helps reduce risks. With diligent monitoring and management, you can maintain a healthy, long-term licencing relationship and continue leveraging the intellectual property to benefit your business.
Conclusion
So there you have it—the basics of what you need to know legally when it comes to corporate IP licencing. While the technical and financial aspects can seem complicated, keeping your legal ducks in a row from the get-go will save you a tonne of headaches down the road. Do your due diligence, work with experienced attorneys, and take the time to understand exactly what rights and responsibilities you’re taking on under any new licencing agreements. Your business’s intellectual property is hugely valuable, so make sure any deals you strike are structured to properly protect your interests for the long run. With the right knowledge and the right partners in your corner, corporate IP licencing can be a very rewarding strategy to grow your company. But go in with your eyes open—and this guide in hand!
This article is written by Janani Parvathy J, and it provides a detailed legal analysis of the case, ‘Rajesh @ Sarkari & Anr v. State of Haryana’. This article elaborates on the facts, issues, and arguments by both parties and analyses the entire judgement.
It has been published by Rachit Garg.
Table of Contents
Introduction
Rajesh @ Sarkari & Anr. v. State of Haryana (2020) is a judgement of utmost importance. This case not only becomes a precedent for its evidential analysis but also for its factual analysis. It touches upon several aspects of the Indian Penal Code and the Indian Evidence Act. It established the evidentiary value of the Test Identification Procedure and laid down principles regarding the same. The Test Identification Parade is done to test the memory of the witnesses and check whether the witnesses can identify the accused without any external aid. It shall serve as a precedent to guide judicial decisions. Along with its legal importance, since the case revolves around the conviction of a gangster, it also deeply affects society.
Details of Rajesh @ Sarkari & Anr. vs. the state of Haryana (2020)
Case name – Rajesh @ Sarkari & Anr. v. State of Haryana
Bench-Justice Dr D.Y. Chandrachud, Justice Indu Malhotra, and Justice Indira Banerjee
Petitioners – Rajesh @ Sarkari & Anr.
Respondents – State of Haryana
Judgment Date – November 03, 2020
Facts of Rajesh @ Sarkari & Anr. vs. the state of Haryana (2020)
Statements made in the FIR
Sandeep Hooda, the son of Azad Singh Hooda, was studying law at Maharishi Dayanand University, Rohtak. On December 26, 2006, he went to the law department of his university to prepare for his law exams. On the same day, his father, i.e., Azad Singh and brother, i.e., Sunil Singh, went to see him when they could not reach him by phone. After arriving at the university at 2:30 pm, they saw six men standing under the tin sheds, and some of them started firing shots at Sandeep. The father and son further noticed the three accused leave on a silver-coloured Pulsar motorcycle towards the Delhi road upon seeing them reach the spot. Sandeep Hooda subsequently collapsed on the ground and started bleeding from his right foot, abdomen, arm, left temple and thigh. The eyewitnesses, namely, Azad Singh and Sunil Singh, also stated before the police that, though they had not noticed the number plate of the vehicle used by the assailants, they would still be able to identify the accused if brought before them. En route to the Pandit Bhagwat Dayal Sharma Post Graduate Institute of Medical Sciences (PGIMS) Rohtak hospital, Sandeep succumbed to injuries. Subsequently, the First Investigation Report (FIR) was filed, and the police began an investigation. The complainant alleged that his son, Sandeep Hooda, had bad relations with some people and suspected that they were the ones who could have killed him. Investigations led to the arrest of three accused, Rajesh alias Sarkari, Ajay Hooda, and Pehlad (hereinafter addressed as accused 1, 2, and 3 respectively). The accused were charged under Section 302 of the Indian Penal Code, 1860 read with 34 of the Indian Penal Code, 1860 (hereinafter referred to as “IPC”).
Initiation of the trial proceedings
The Section 302 case was then brought for trial before the Chief Judicial Magistrate, Sessions Court, as the court of sessions possessed the local jurisdiction. The trial against the first two accused persons, namely, Rajesh and Ajay, was initiated after the order of the Chief Judicial Magistrate on 25th September 2005. Subsequently, on 31st March 2008, the Chief Judicial Magistrate passed another order for the trial of accused 3, namely, Pehlad. Both of these orders were then consolidated, and final charges were framed on 8th May 2008. The trial then began, and the prosecution relied on its 24 witnesses and the Forensic Scientific Laboratory report (FSL report), whereas the defence produced 5 witnesses. The materials recovered from the crime scene included seven empty cartridges, one lead, blood-stained soil, and a liquor bottle. Further, one pistol from Rajesh’s house and another from Ajay’s house were recovered, respectively.
Proceedings in the Sessions Court
Arguments from the Prosecution
The prosecution witnesses included the father (PW4), the brother (PW5) of the deceased, and the police officers who investigated the crime. The FSL reports revealed that a 7.62 mm Mauser pistol was used to fire shots at the victim. It also discovered two reformed and mutilated bullets found in the body of the accused, possibly from a country-made gun, and seven fired bullets from the crime scene. The postmortem report revealed thirteen injuries on the victim’s body. Additionally, the prosecution also highlighted the fact that the accused refused to undergo the test identification parade.
The prosecution put forward the following:
The testimony and identification of the accused by the principal eyewitnesses, PW4 and PW5.
The Pulsar motorcycle, which was used by the accused to escape from the crime scene, has been obtained from the residence of Rajesh alias Sarkari.
In an investigation by PW21, SI Ram Singh, pistols, and the alleged murder weapons were discovered in the rented residences of both accused 1 and 2 respectively.
Arguments by the Defence
The defence relied on five witnesses to prove the accused not guilty. The five witnesses presented by the defence include the owner of Ajay Hooda’s rented house, i.e., Zile Singh, a person named as a co-accused with the victim in another case, i.e, Rajesh Jogpal, the newspaper editor of Hari Bhoomi newspaper, i.e., Shamsher Singh; Parveen and Sikander, friends of the victim who were also present at the crime scene. All three accused also denied all the allegations raised against them and argued that the victim was also an offender.
The witnesses stated the following before the court:
According to the statements of Zile Singh, who is the house owner, he neither lent the house to accused 2 nor did the police ever come to search the house to seize the alleged murder weapon.
The statement given by Rajesh Jogpal, DW2, says that he and Sandeep together underwent trial for a case, that the trial was completed, and that Sandeep’s father stood as a surety for him in that case.
The newspaper editor stated that only three publications had the name of the accused, and so no violation of their privacy has happened.
DW-4, Parveen, in his statements, said that he, Sikandar and Sandeep were standing near the cycle stands and consuming alcohol. Following this, 5-6 people came there and fired multiple shots at Sandeep. After this, he along with Sikandar, took the victim to the hospital and later informed PW4 and PW5 about the same.
Sikandar also stated on similar lines that he and Parveen took the victim in the Santro car to the hospital and later informed the complainants.
Point of Contention
One major factual point of contention was that the prosecution witnesses 4 and 5 (father and son) stated that they took the victim to the hospital, while the defence witnesses 4 and 5 (friends) claimed that they were the ones to take Sandeep to the hospital, and PW4 and PW5 reached the hospital only after being informed by DW4 and DW5.
Judgement by Sessions Court and High Court
The Sessions Judge, after analysing the arguments and evidence, ruled in favour of the prosecution, holding the accused persons guilty of murder and awarding them imprisonment for life. In January 2019, the High Court also, on the same lines, upheld the conviction of the accused for murder. The accused persons then appealed to the Hon’ble Supreme Court.
Issues raised
Whether the refusal of the accused persons, the appellants in this case, to undergo a Test Identification Parade possess any significance?
Whether PW4 and PW5 present at the crime scene during the commission of the murder on 26th December 2006 and whether they witness the complete scene?
Arguments of the parties in Rajesh @ Sarkari & Anr. vs. the state of Haryana (2020)
The appellants and respondents put forward several factual and legal arguments. They are:
Appellants
The appellants were represented by senior counsel, Mr. Rakesh Khanna. He placed two main contentions before the court.
Absence of the principal eyewitnesses at the scene
The counsel on behalf of the appellant argued that PW4 and PW5, the father and son of the victim, were neither present at the crime scene nor did they escort the victim to the hospital. Thus, their testimonies are unreliable and false.
The FIR reports mention that Parveen rushed Sandeep in Sadeep’s car to the hospital, but it contradicts the statements made by PW4 and PW5 that they had accompanied the victim to the hospital.
Statements by DW4, Parveen, and DW5, Sikandar, provide support to the statements made in the FIR. Statements of DW4 and DW5 further mentioned that neither PW4 nor PW5 were present at the crime scene and that other relatives of the deceased reached the hospital 10-15 minutes after their arrival.
Further, the information sent by the casualty medical officer of PGIMS, Rohtak, shows that Parveen, son of Zile Singh, brought the victim to the hospital. But unfortunately, the record, instead of mentioning Parveen, son of Zile Singh, mistakenly recorded Sandeep Lehri, son of Zile Singh.
The counsel also relied on the case of State of Rajasthan v. Daud Khan (2015) to establish that blackening of the wound could mean proximity of the victim to the murder weapon. In the present case, the postmortem report found a blackened wound on the body of the deceased victim. Thus, it could be concluded that the murderer, with the murder weapon, was standing very close to the deceased. This would lead to the conclusion that PW4 and PW5, who stood outside the gate and were far away from the deceased and the murder weapon, would not have observed the crime properly.
Forensic Scientific Laboratory reports
Three Forensic Scientific Laboratory (FSL) reports were provided by the FSL laboratory, the first two relating to the first FIR and the last one relating to the second FIR. The first report analysed three parcels, which included the clothes of the deceased, the fired pistol, and the fired bullet. The second report included fired pistols and misfired and fired bullets in four different parcels, and the third report contained five parcels. The third report contained, blood-stained earth, 7.62 mm Mauser fired pistol bullets, blood-stained clothes and mutilated fired bullets recovered from the body of the deceased. The counsel for the prosecution highlighted several discrepancies in the FSL reports to strengthen its case.
The second FSL report had 4 parcels. The first parcel had a pistol with 7.65mm cartridges and a live 7.65 mm cartridge case, which was recovered from accused 1 and marked W/1. The second parcel had one 7.62mm cartridge, which was recovered from the house of Accused 1. The laboratory test results stated that both pistols were test-fired and found to be in working condition.
Pistol W/2, the pistol recovered from Accused 2, and the test-fired bullet submitted with the second parcel were neither received nor acknowledged, along with the description of articles received in the third FSL examination.
The contradictions in the second and third FSL reports regarding the cartridges were also highlighted by the counsel. The second FSL indicates usage of 7.62/0.30 mm cartridge chambers, whereas the third FSL mentions a 7.62 mm cartridge. The recovery memo mentions recovering 7 empties and 1 cartridge bearing the description ‘S’, whereas, in the second FSL report, a 7.62mm/0.30 mm cartridge is mentioned.
There is also no evidence that assistant director R.K. Koshal, who performed the third FSL report, was ever informed about the relationship between the remaining reports.
Assistant director R.K. Koshal, who prepared the third FSL report, concluded that shots were fired from a specific bullet without complete information being provided to him. The investigating officer also admitted that the inscription on the empty shells was different from that mentioned in the FSL reports.
Another important point put forth by the counsel was that though the third FSL report concluded that cartridge cases C/1 to C/7 and bullets, BC/1 to BC/3 had been fired from a country-made gun, the analyst was never provided with the pistol W/2, the gun recovered from accused 2.
An examination of the ballistics examiner could have helped resolve some discrepancies, but a non-performance of the same adds doubt to the credibility of the forensic report analysis. The counsel further stressed the non-examination of the ballistics examiner to prove the existence of discrepancies.
The counsel of the appellant, after accentuating the above differences, and emphasising the suspicion of non-examination of the ballistics expert-created, called for a ruling in favour of the appellant.
Respondent
The counsel for the state, led by Mr. Deepak Thukral, opposed all submissions made by the appellants and put forth their arguments.
Several of the submissions made by the respondents, represented by the State, focused on proving the existence of PW4 and PW5 at the crime scene and their active role in taking the victim to the hospital.
The counsel submitted that PW4 and PW5 were indeed principal eyewitnesses who were present at the crime scene. The counsel to substantiate their point stated that PW5 had given the tracksuit of the deceased to the police, thus making it inferable that they were present at the scene.
Since PW4 and PW5 reached the crime spot on a motorcycle, they could not have lifted the deceased’s body using the same and had to carry the victim in Praveen’s (DW1) car to the hospital.
Additionally, the extensive cross-examination of both witnesses also lends credibility to the testimonies they have given. Further, the statements of PW4 and PW5 on the incident are supplemented by the medical evidence provided. Statements from PW4 and PW5 accurately mention a pistol and bullets being fired.
The third report wrongly mentions that W/2, i.e., the pistol analysed in the second parcel, was obtained from Accused 1. Despite this or any other omission, the accused should be held liable under Section 302 of the IPC read with Section 34, as murder weapons were retrieved from their houses, and witness statements also establish their guilt.
The refusal of the accused to undergo a test identification parade indicates their guilt. Privacy concerns to justify their refusal could be refuted by the fact that only one of the newspapers published the accused’s photographs.
The ballistics examiner could not be examined because of a procedural delay. The FSL report was submitted by the respondent only after the completion of the hearing of statements by the appellants.
The defence relied on Mohan Singh v. State of Madhya Pradesh (1999). The SC, in this case, observed that the blackening of injury had several factors apart from just the proximity of the victim to the weapon.
The counsel, on behalf of the defence, then urged the court to consider the facts and evidence put forward by them and provide a suitable judgment.
Laws and precedents discussed in Rajesh @ Sarkari & Anr. vs. the state of Haryana (2020)
Legal provisions
Section 9 of the Indian Evidence Act, 1872: This provision explains significant facts and the method of presenting them. It describes what relevant facts are, i.e., facts that support another fact or inference, facts that rebut, facts that help establish the identity of something or someone, or facts that depict a relationship between two people. The court, in this case, interpreted Section 9 to include facts that establish the identity of the accused as relevant.
Section 302 of IPC: This provision contains the punishment for the offence of murder. Murder refers to the act of killing another with the intention to kill or intending to cause such bodily harm as will likely result in death. Murder can result in imprisonment for life or the death penalty, along with a fine. The accused in the present case were convicted under Section 302 for murder and punished with life imprisonment. The central question posed before the SC was to analyse the guilt of the accused under Section 302.
Section 34 of IPC: Section 34 deals with criminal acts done by multiple people with a common intention. This provision mandates the presence of two or more people, a common intention, and a criminal act performed in furtherance of the common intention. The accused, Rajesh, Ajay Hooda, and Pehlad, were charged under Section 34 IPC for the commission of murder, jointly and with a similar intention.
Section 25 of the Arms Act, 1959: It prohibits and punishes the sale, manufacture, dealing, export, possession, and usage of arms or ammunition without a licence, in contravention of Section 7, and for an illegal purpose. Punishment for the above offences can range from imprisonment for 7 years up to life imprisonment. Conversion of an imitation firearm into an actual firearm, smuggling of arms into and from the country, and illegal sale by unregistered sellers of firearms are also punished by this Act.
Section 162 of the Code of Criminal Procedure, 1973: This provision deals with statements made by witnesses to the police in the course of the investigation. It not only states that the witness statements need not be signed but also lays down the evidentiary value of such statements. Statements made under this section can be used only for contradiction by the opposing counsel, under Section 32(1) of the Indian Evidence Act for dying declaration, and under Section 27 for discovery statement. The court in this case held that identification parades shall be governed by Section 162.
Case lawsblog.ipleaders.in/tamil-nadu-prohibition-act-1937/
Mohinder Singh v. The State (1950) and Gurucharan Singh v. State of Punjab (2020): In Mohinder Singh, the prosecution could distinguish between rifle and gun to find the murder weapon only based on duly qualified expert evidence. The evidence of an expert proved most helpful in ascertaining the murder weapon and pattern. In a later case, Gurucharan Singh v. State of Punjab, a gun was stated as a murder weapon devoid of expert evidence. The court in Gurucharan held that the rule in Mohinder Singh that the prosecution needed expert evidence to establish the murder is flexible, and the evidence of an expert would become necessary when direct evidence is not available. These cases have been discussed by the SC to emphasise the circumstances for wanting expert advice, i.e., the ballistics expert in the present case.
Sukhwant Singh v. State of Punjab(1995): This case highlights how disastrous the omission of some items to be sent for forensic analysis could be. The empty and sealed pistol, forgotten to be sent for ballistics, became a turning point in this case. This case points out that negligence by the police in sending all evidentiary samples for analysis is undesirable. In the present case, the court cited another,State of Punjab v. Jugraj Singh (2002), to point out that the prosecution’s case cannot be disbelieved only because no expert witness was presented by them.
Judgment in Rajesh @ Sarkari & Anr. vs. the state of Haryana (2020)
Through its judgment, the court sought to answer three main questions: the presence of PW4 and PW5 at the crime scene, the third FSL report, and the evidentiary value of the refusal of the accused to undergo TIP.
Presence of PW4 and PW5
The Supreme Court observed the following aspects with regard to the presence of PW4 and PW5 as eyewitnesses at the crime scene.
PW4 is the father of the deceased, and PW5 is the son. Based on the FIR report, it can be said that PW4 and PW5 visited the police station to find the whereabouts of Sandeep, the deceased victim, and after they could not trace him through the phone, they left on a bike to find him. Although PW4 and PW5 credit themselves for taking the deceased to the hospital, the FIR report states that Parveen (DW4) and another boy brought the victim to the hospital.
In the chief and cross-examination of prosecution witnesses, the father and son agreed on a few aspects, namely, that they were present at the crime scene, witnessed the entire incident, and could identify the accused if brought before them, but contradicted themselves on other aspects. PW4, in his examination, mentions the help of a third person in the Santro while removing the deceased, whereas PW5 does not.
The court also found several obstacles that could disprove the version of the only eyewitnesses to the prosecution. The ruqqa, i.e., written intimation, mentioned only ‘Sandeep Lehri’, son of Zile Singh Hooda, as the one who brought the victim to the hospital. The court also found the reasoning of the court below that PW4 and PW5 were shocked enough to be unable to sign the ruqqa to be improbable.
The Supreme Court also rejected the argument of the prosecution that the tracksuit handed over by PW5 to the police would substantiate the presence of the eyewitnesses. The court, to respondents’s dismay, held that the tracksuit could only defend the presence of both witnesses in the PGIMS but not in the university.
The failure on the part of the prosecution to produce and lead Parveen and Sikander will impact the correctness of the version and the presence of the eyewitnesses, on whom the complete prosecution case depends. The court held that doubt exists on whether PW4 and PW5 were present at the crime scene during the commission of the crime and also identified some gaps in the analysis performed by the session judge.
Another significant aspect pointed out by the court was the cases filed against the deceased. The deceased was a co-accused in a case along with accused 1. PW4, in his cross-examination, denied that Sandeep had a case with Rajesh and that he had ever visited the court. Despite PW4 being a surety for the deceased in the case against the accused, he still denied going to court for the same. On the other hand, PW5 (brother) remembers going to court on a few occasions with his brother (deceased) and father but does not recall the cause.
After analysing the above facts, the court held that the statements of witnesses PW4 and PW5 were suspicious.
FSL report
The Supreme Court observed the following aspects with regard to the FSL report.
In total, there were three FSL reports received in this case. The first FSL report contains three parcels; the second contains four parcels; and the third contains five parcels. The ballistics expert who prepared the first two reports and the expert who prepared the third report are different. The police allegedly recovered two murder weapons, W/1 and W/2.
While evaluating the third FSL report, the court found some irregularities. The third ballistic report neither mentions nor evaluates W/1. It also states that W/2 (the only murder weapon) was seized from the house of Accused 1 (Rajesh).
Though according to the police investigation, two weapons (W/1 and W/2) were seized, only one was analysed in the last report. Additionally, what the court found strange was that the second FSL mentions retrieving W/1 from Rajesh’s house and W/2 from Ajay’s, but the third FSL contradicts it by describing the seizing of W/2 from Rajesh. The reliance of the prosecution on the second FSL report further increases doubts about the credibility of the third report. In conclusion, the third ballistics examiner was not given access to W/1.
Concerning the non-examination of the ballistic examiner, the prosecution claimed that the FSL reports were provided by the defence, and that too after the completion of the appellant’s statements. To examine this issue, the court had to refer to several cases.
The SC discussed Mohinder Singh v. The State (1950), Gurucharan Singh v. State of Punjab (2020), Sukhwant Singh v. State of Punjab (1995), State of Punjab v. Jugraj Singh (2002), and two others. The court concluded that the necessity of a ballistics examination must be decided based on the nature of the evidence already available. The court further held that when direct evidence about the nature of injuries is available, the examination of the ballistics examiner would not be mandatory.
The court further observed that an examination was necessary owing to the multiple contradictions relating to the murder weapon. The court categorised this case as one where direct evidence to establish the injuries was absent. Thus, the court held that the non-examination of the ballistics examiner was highly doubtful.
Principles of Test Identification Parade
The last issue to be dealt with by the Supreme Court was the effect of the rejection of TIP. Test Identification Parade (TIP) is a practice where the accused is made to stand amongst commoners and then be identified by the witness. It helps assess the honesty of the witness. The court analysed eight precedents to establish the purpose of conducting TIP, the evidential value of TIP, the weight of a refusal to undergo TIP, and the procedure of performing a TIP. The TIP is conducted by the Judicial Magistrate at the jail.
The court summarised some landmark cases on this topic, and laid down 12 principles regarding the test identification parade:
The test identification parade is performed to test the memory and establish the credibility of the witnesses. It is done to determine whether the witnesses can identify the accused without external aid for the prosecution to identify whether any or all of them could be stated as eyewitnesses to the crime.
TIP is not statutorily mandated. No provision in either the CrPC or the Evidence Act explicitly provides statutory authority for a Test Identification Procedure. The accused and investigating agency can neither be forced to undergo nor perform TIP respectively.
Identification parades shall be governed by Section 162, CrPC. Section 162 contains some rules surrounding the statements given by witnesses.
For accuracy, the TIP must be done soon after the arrest of the accused. This would prevent the witness from seeing the accused before the TIP.
The identification of the accused by the witness is considered substantive evidence.
Facts establishing the identity of the accused are a part of Section 9 of the Indian Evidence Act and hence should be treated as relevant.
A TIP may help confirm the identity of the accused if required.
Generally, the court should look for corroborating evidence for the witness’s identification of the accused, but, in cases where the court is completely satisfied with the evidence of the accused, corroboration is not required.
The failure to hold a TIP does not necessarily question the credibility of the accused.
The importance of identification differs on a case-to-case basis and must be determined by the court based on the circumstances.
Identification of the accused is not required in cases where circumstances are enough to establish the guilt of the accused.
The lower courts, depending on the available evidence and circumstances of each case, may obtain an adverse inference from the refusal of the accused to participate in the TIP.
The court further observed that the accused and PW4 (father) had met before because the deceased and the accused once had a common case against them. In the cross-examination, PW4 accepted acting as surety for his son in the criminal cases against him. Although PW4 denied attending a case where Rajesh (Accused 1) was the co-accused, PW5 in cross-examination admitted that such a possibility existed. The court held that a refusal to undergo TIP could not be the only reason to hold the accused guilty. Thus, the court concluded that in the backdrop of other discrepancies, such as the doubt about the presence of eyewitnesses and the contradictory FSL reports, the refusal by the accused to undergo TIP assumes secondary importance. The Supreme Court finally held the accused not guilty and allowed the appeal because the prosecution was unable to prove their case beyond reasonable doubt. All bail bonds filed by the accused were cancelled, and their 12-year imprisonment came to an end.
Conclusion
This case reflects the adversarial nature of the Indian legal system. According to common law principles, the accused is innocent until proven guilty, and the complete burden of proving the guilt of the accused beyond reasonable doubt rests on the prosecution. In this case, the Supreme Court showcased the effectiveness of weighing the different evidence presented as primary and secondary. The SC laid down principles surrounding the Test Identification Parade and established its evidentiary value. This case also highlights the importance of the application of precedents on a case-to-case basis and a circumstantial analysis of the evidence.
Frequently Asked Questions (FAQs)
What is the Test Identification Parade?
Test Identification is the process where the accused is made to stand along with other people in a line. The witness is then asked to identify the accused without any help from the group of people standing there.
What are the provisions related to the Test Identification Parade?
In Rajesh @ Sarkari & Anr. v. State of Haryana (2020), the SC laid down 12 provisions governing the test identification parade. An adverse inference from refusal to undergo TIP can be obtained only when direct evidence to establish the guilt of the accused does not exist. In all other situations, the performance of a TIP is not mandatory. Identification of the accused through TIP is a relevant fact under the Indian Evidence Act, and the statements made through TIP are governed by Section 162 of the same Act. A TIP must also be done immediately after the arrest of the accused.
What is the purpose of the Test Identification Parade?
A TIP is performed for the following reasons:
To check the honesty of the witness
To find out the credibility of the statements made by the witness
To check whether the witness can identify the accused without any external help.
When is the examination of the FSL expert necessary?
The examination of the FSL expert may not be required in all cases, but in cases where solid evidence regarding the death, injury or weapon is not available, and when the FSL reports are contradictory or unclear, the examination of the expert would be necessary.
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This article was written by Satyaki Deb and further updated by Pujari Dharani. This article provides an exhaustive case analysis of the landmark case of Indra Sawhney v. Union of India (1992) and an overview of the subsequent precedent case laws related to reservation from an analytical viewpoint.
Table of Contents
Introduction
The provision of reservations in educational institutes and public services, whether Centre or State, in favour of disadvantaged or marginalised sections of society are provided by the governments even today. However, the Constitution of India at its inception does not mandate the governments to abide by it. Indeed the issue of the reservations was left open to the Government ruling at the Centre to take a decision after conducting due surveys about the real and current scenarios, and that too for the initial ten years, not beyond. These enabling provisions of the Constitution are evidently being used by the Governments for political purposes. Although the intention of the Constituent Assembly is genuine as it aims to remove the historical exploitation and sufferings of backward classes and the same has been recognised by the Indian judiciary to ensure that the aim is upheld by adequate representation in the public services and other measures, whether such aims are purposefully implemented or not is still a question. One such case where the Indian judiciary recognised the legislative intent beyond reservations and gave effect to the same by its judgement is Indra Sawhney & Ors. v. Union of India & Ors. (1992).
The nine-judge bench case of Indra Sawhney & Ors. v. Union of India & Ors. (1992) is a case that got written in stone by the Indian judiciary and is both blessed and cursed, perhaps to eternally witness the dynamic power play and friction of political opportunism, pro-reservation and anti-reservation sentiments in India. This landmark case was the miracle child of Indian judicial pragmatism, conceived at the backdrop of nationwide chaos and violent protests against the implementation of the infamous Mandal Commission Report’s 27 per cent quota for the socially and educationally backward classes (SEBCs) in all the central government jobs and public institutions. This article attempts to portray this three-decades-old landmark case law in a simplified manner and analyses the same at the altar of transformative Constitutionalism, succeeding landmark Supreme Court cases on the reservation and the present day’s socio-political stage.
Brief details of Indra Sawhney v. Union of India and Ors. (1992)
Name of the case
Indra Sawhney & Ors. v. Union of India & Ors.
Date of the judgement
16th November 1992
Parties of the case
Petitioner
Indra Sawhney
Respondent
Union of India
Represented by
Petitioner
Advocates, namely, M.L. Verma, G.L. Sanghi, S.K. Verma, Manoj Prasad, Minoti Mukherjee and A.K. Srivastava, K.K. Venugopal.
Justice M.H. Kania, the then Chief Justice of India, Justice M.N. Venkatachaliah, Justice S.R. Pandian, Justice T.K. Thommen, Justice A.M. Ahmadi, Justice Kuldip Singh, Justice P.B. Sawant, Justice R.M. Sahai and Justice B.P. Jeevan Reddy constituted a nine-judge Bench.
Brief history and facts of Indra Sawhney v. Union of India and Ors. (1992)
A case analysis should be done comprehensively from all possible perspectives, and so this legal article must briefly witness, through an unbiased lens, the necessary background political and economic angles that will demonstrate the culmination of the broad canvas where this landmark case law was portrayed.
Article 16(4) of the Constitution of India
Before we move forward to the facts of the case and deep analysis of the judgement, let us first understand what Article 16(4) of the Constitution of India talks about as the current case is all about interpreting this provision.
This provision enables the State to create any laws or special provisions to benefit the backward classes of citizens who do not have adequate representation in public services. This provision is just an enabling provision, thus, any person from backward class cannot seek special benefits as a matter of right. As the word “backward class” is not defined in the Constitution, it is prone to be challenged by citizens, which is the result of the present case as one of the issues raised is the definition of backward class and who is competent to determine classes for the purpose of this provision.
Kaka Kalelkar Commission: The First Backward Classes Commission
The discussions in the Constituent Assembly on the draft of Article 10(3), which resembles the current provision of Article 16(4), reveal that a few communities demanded the State to confer reservations in the matter of public employment. This demand is a major cause for adding Clause (4) to Article 16. It is pertinent to look into the observations made by the chairman of the drafting committee, Dr. B.R. Ambedkar, which are reproduced below:
“Then we have quite a massive opinion which insists that although theoretically it is good to have the principle that there shall be equality of opportunity, there must at the same time be a provision made for the entry of certain communities which have so far been outside the administration.”
After the Constitution came into force on 26th January, 1950, there was a demand from the public on the Centre to make provisions for reservations similar to reservations for O.B.Cs (Other Backward Classes), which have been provided even before the commencement of the Constitution, in southern states.
The then Central Government realised its duty to provide reservations for backward classes in India on such demand and, for that purpose, the First Backward Classes Commission, also popularly known as the Kaka Kalelkar Commission, was formed way back in 1953 videArticle 340 (Appointment of a Commission to investigate the conditions of backward classes) of the Indian Constitution, but its report (1955) was effectively rejected in 1961 as the Central Government did not satisfy the basis for determining the backward classes. On August 16, 1961, the Central Government instructed State Governments to lay down its own test on which basis the backwardness of a class will be determined; provided, in the opinion of the Central Government, such basis shall be in economic terms rather than caste. It further stated that the State Government is at discretion to release its own lists identifying backward classes for the purpose of providing reservations to such category of people as envisaged under Articles 15 and 16 and may follow the same leaving All-India list prepared by the Central Government under Article 338(3) practically ineffective. State Governments, complying with these instructions, formed a commission to identify the socially and educationally backward classes for providing reservations in public services. However, there are no reservations for other backward classes in central services, though given to Scheduled Castes (SCs) and Scheduled Tribes (STs).
Mandal Commission: The Second Backward Classes Commission
In January 1979, the Janata Dal, headed by the then Prime Minister Moraji Desai, through a Presidential Order formed the Second Backward Classes Commission (popularly known as Mandal Commission), which was chaired by Sir B.P. Mandal. This Commission was tasked with determining the criteria or test to decide the issue of who shall come under the category of socially and economically backward classes (SEBCs) for the purpose of reserving jobs in the public sector. The Commission submitted its report in December 1980 to recommend steps for the upliftment of the SEBCs. The summary of the chapters in the Commission’s report is provided in the below table.
Brief Report
Chapter
Deals with
Description
Chapter I
Constitution of the Kaka Kalelkar Commission
The Report of the Commission and aftermath of the report. It also exposed the internal inconsistency of the first commission of the report.
Chapter II
Status of Other Backward Classes in some States
Various reservation provisions for OBCs in different states.
Chapter III
Methodology and database
It informs what procedure the commission adopted and the material collected by them.
Chapter IV
Interrelationship between Social Backwardness and caste
It explains how the fourth caste, i.e., Shudras, were oppressed, intellectually and physically, and the historical injustices they suffered.
Chapter V
Social Dynamics of caste
It explains the pivotal role caste plays in politics and public life.
Chapter VI
Social Justice, Merit and Privilege
The merit depends upon environmental privileges and disadvantages in an elitist society.
North-South Comparison of Other Backward Classes Welfare
Two southern states, namely, Tamil Nadu and Karnataka and two northern states, namely, Bihar and Uttar Pradesh are taken into consideration for the said comparison.
Chapter IX
Evidence by Central and State Governments
Chapter X
Evidence by the Public
Chapter XI
Socio-Educational Field Survey and Criteria of Backwardness
It declared that the said survey is the most comprehensive inquiry made by the Commission.
Chapter XII
Identification of O.B.Cs
It concluded that the people belonging to OBCs are around 52% of the total population in India.
Chapter XIII
Recommendations (including reservations in services)
This Mandal Commission Report, inter alia, proposed a 27 percent government quota for the SEBCs on top of the pre-existing 22.5 percent reservation for the SCs and STs.
Chapter XIV
Summary of the Report
Test for determining backward classes
The Commission recommended two different tests for Hindus and non-Hindus separately to determine whether a candidate is socially and educationally backward. Those tests are:
If the candidate is a Hindu – the test is that the candidate is not among three Dvij (twice-born) Varnas, i.e., Brahim, Kshatriya, Vaishya, as well as both his father and grandfather did not study more than primary education. The former conveys social backwardness and the latter conveys educational backwardness.
If the candidate is non-Hindu – the test is that the candidate is a convert from Hindu, who is socially backward; if he is not a convert, whose parent’s income is below the poverty line, i.e., Rs. 71 per head per month, as well as both his father and grandfather did not study more than primary education.
Indicators for the backwardness of a class
The Commission conducted a detailed survey, a brief of which is provided in Para 16 of the original judgement, to conclude with the following eleven indicators to determine the backwardness of a class. The eleven indicators were categorised into three broad headings. These are reproduced in the below table.
Social indicators
Castes/Classes considered as socially backward by others
Castes/Classes which mainly depend on manual labour for their livelihood
Castes/Classes where at least 25% of females and 10% of males above the State average get married below 17 years of age in rural areas and at least 10% females and 5% males do so in urban areas
Castes/Classes where participation of females in work is at least 25% above the State average.
Educational indicators
Castes/Classes where the number of children in the age group of 5-15 years who never attended school is at least 25% above the State average
Castes/Classes where the rate of student dropout in the age group of 5-15 years is at least 25% above the State average
Castes/Classes amongst whom the proportion of matriculates is at least 25% below the State average
Economic indicators
Castes/Classes where the average value of family assets is at least 25% below the State average
Castes/Classes where the number of families living in Kuccha houses is at least 25% above the State average
Castes/Classes where the source of drinking water is beyond half a kilometre for more than 50% of the households
Castes/Classes where the number of households having taken a consumption loan is at least 25% above the State average
Allotment of points
Because the above-stated indicators are not of equal importance for the purpose of determining the backwardness of a class, separate weightage was allotted to every indicator in each group. All the social, educational and economic indicators were given a weightage of 3 points, 2 points and 1 point each respectively. Therefore, the total score will be 22 points. If a caste scores less than half of the total points i.e., not more than 11 points, such caste will be treated as backward and the rest will be termed forward classes.
The aftermath of the submission of the report
Before this Mandal Commission Report could be put into effect, the coalition Janata Dal government fell and the Indira Gandhi-led Congress government came into power. Now, the Congress government did not implement this report for a long time until they lost again to V.P. Singh-led Janata Dal in 1989. After coming back to power, the Janata Dal issued an Office Memorandum (OM) to implement the Mandal Commission Report as per their electoral promises, but this pushed the country into a chaotic time filled with violent anti-reservation protests where many students burned themselves to death protesting against reservation.
The Janata Dal fell again amidst these widespread disturbances and the P.V. Narasimha Rao-led Congress government came into power in 1991 and issued another O.M. to implement the Mandal Commission Report with a couple of modifications, namely, the introduction of the economic criterion in the granting of reservations by giving preference to the poorer sections of the SEBCs within the proposed 27 percent quota and a further 10 percent reservation grant to the economically challenged sections of the people not enjoying any reservation schemes. But still, the massive violence continued, and India kept on suffering tremendous loss of life and property. Finally, on 11th September 1990, the Supreme Court transferred to itself all writ petitions challenging the implementation of the Mandal Commission Report, and thus, began the two-year-long tussle where the Supreme Court tried balancing judicial pragmatism with political opportunism.
To see the other side of the coin, at that time, the LPG (Liberalisation, Privatisation, Globalization) policy was also introduced in 1991, which was a giant step for India, and as massive structural and economic realignments started happening, with the floodgates open for the international private players, how far reservation could be effectively implemented to uplift the SEBCs was also becoming a serious question.
Issues addressed by the case of Indra Sawhney v. Union of India and Ors. (1992)
Indra Sawhney, an advocate, challenged the implementation of the recommendations cited in the Mandal Commission Report by filing a Public Interest Litigation (PIL) under Article 32 of the Constitution of India. One of the major concerns raised in this PIL is the recommendation of caste to be taken as a main criterion for deciding who will fall under the ‘backward class’.
To a layman, the only issue before the Supreme Court was whether the Mandal Commission Report was valid or not. However, in reality, the Apex Court was tasked with determining various complex issues that had far-reaching implications, and the broad eight issues of this landmark case can be categorised in a simple manner as follows:
Scope and extent of Article 16(1) and Article 16(4)
Issue 1: Whether Article 16(4) an exception to Article 16(1) and would be exhaustive of the right to reservation to posts in services under the State?
Definite parameters for the term “backward class of citizens” and the criteria to identify them
Issue 2: What would be the meaning of the term “Backward Class” in Article 16(4) of the Constitution
Whether ‘caste’ by itself could constitute a ‘class’?
Whether economic criterion by itself could identify a class for Article 16(4)?
Whether backward Classes in Article 16(4) would include Article 46 as well?
Issue 3: If economic criterion by itself could not constitute a Backward Class under Article 16(4) whether the reservation of posts in services under the State based exclusively on economic criteria be covered by Article 16(1) of the Constitution?
Nature and extent of the reservations permissible
Issue 4: Can the extent of reservation to posts in the services under the State under Article 16(4) or, if permitted under Articles 16(1) and 16(4) together, exceed 50% of the posts in a cadre or Service under the State or exceed 50% of the appointment in a cadre or Service in any particular year and can such extent of reservation be determined without determining the inadequacy of representation of each class in the different categories and grades of Services under the State?
Issue 5: Does Article 16(4) permit the classification of ‘Backward Classes‘ into Backward Classes and Most Backward Classes or permit Classification among them based on economic or other considerations?
Issue 8: Would reservation of appointments or posts “in favor of any Backward Class” be restricted to the initial appointment to the post or would it extend to promotions as well?
Legislative and executive power to make reservation provisions and judicial power to review them
Issue 6: Would making “any provision” under Article 16(4) for reservation “by the State” necessarily have to be by law made by the Legislatures of the State or by law made by Parliament? Or could such provisions be made by an executive order?
Issue 7: Will the extent of judicial review be limited or restricted in regard to the identification of Backward Classes and the percentage of reservations made for such classes, to a demonstrably perverse identification or a demonstrably unreasonable percentage?
Contentions raised by both parties in Indra Sawhney v. Union of India and Ors. (1992)
The contentions raised by both parties are presented as follows:
Contentions of the petitioners in the Indra Sawhney case
Here, the lead petitioner was advocate Indra Sawhney and the arguments were advanced by legendary counsels like Nani Palkhivala, K.K. Venugopal, Mr. P.P. Rao, and Smt. Shyamala Pappu. Their contentions can be briefly stated as follows:
It was argued that the reservation system is fueling the evil caste system and dividing the society into two halves, namely forward classes and backward classes. This was leading to mutual hatred, thereby causing increased conflicts in society. The goal of a welfare state would remain a distant dream until equal opportunity was provided to everyone. Granting reservations based on caste was against the constitutional guarantee of equal opportunity for all, and such a violation of the fundamental right of an individual would be disastrous for the development of society.
If reservation at all was to be provided, it should be provided based on the latest census and not the old census of 1931, for then only the actual quantum of backward classes (OBCs) could be properly identified. For this end, a new commission under Article 340(1) should be formed.
Caste cannot and should not be the main basis for granting reservations. Other important factors like education, social and economic factors should be prioritised over caste for the grant of reservation. Mr. K.K. Venugopal referred to Articles 38(2) and 46, which instruct the State to reduce or eliminate inequalities that are faced by the weaker sections of the society and the efforts to be taken to promote their educational and economic interests, to draw an inference that the objective of “specialprovisions” in Article 16 is to reduce the inequalities in income and concluded that the economic factor should be taken into account to determine backward classes and privileged people belonging to the backward classes should be excluded from receiving the benefits of such provisions by introducing the concept called “creamylayer”.
It was further argued that implementation of the Mandal Commission Report would amount to rewriting the Constitution at the burial grounds of the right to equality. Moreover, the implementation of the Mandal Commission Report would greatly jeopardize the efficiency of the public administration system and would bring the same to a grinding halt.
In relation to the issue of the competent authority to make “provisions” referred to in Article 16(4), Mr. K.K. Venugopal contended that the provisions should only be made by the legislative organ of the State and not by the executive organ. Because the power of legislating should be used cautiously as it has an effect on the fundamental rights of other citizens and there is a greater possibility of abusing such power if given to the executive. If such power is given to the legislative organ, debates and discussions will be held where various opinions are presented by the members of the Parliament before enacting such a provision.
It is submitted by the petitioners that the reservations in the promotion are not contemplated in Article 16(4) as it would lead to ‘double reservations’. This will be a result of disinterestedness among candidates of the open category because their merit and performance will be of no value as reserved candidates will benefit from reservation at every successive stage. It will also go against the provision of Article 335, i.e., maintenance of efficiency in administration because a reserved candidate has lesser competition and their efforts will not be up to their optimum potential. Thus, it will also go contrary to one of the fundamental duties to strive towards excellence envisaged in Clause (j) of Article 51A of the Constitution of India.
Contentions of the respondents in the Indra Sawhney case
The main contentions of the respondents can be briefly stated as follows:
It was argued that reservation based on the Mandal Commission Report was a necessity to uplift the backward classes of society, and this upliftment would protect them from social injustices and exploitations of all kinds. Moreover, the Mandal Commission Report was a continuation of the first minority commission (Kaka Kalelkar Commission) report, and the first minority commission report also recommended positive steps to uplift the backward classes of society.
The contention of the petitioners that the Mandal Commission Report was based on the old census report of 1931 was argued to be baseless, for only the community-wise population figures were obtained from the 1931 census report. The identification of other backward classes had been made based on the 1961 census report.
It was argued that due care and a variety of thorough tests had been used by the Mandal Commission to identify the other backward classes in society that do indeed need positive support for their upliftment.
The contention of the petitioners that the Constitution was being rewritten by the Mandal Commission was baseless as the formation of Mandal Commission and its report was formed under Article 340 with the assent and under the authority of the President of India.
Mr. Ram Jethmalani, appearing for the State of Bihar, reminded the historical suffering and exploitation faced by the backward castes, referred to as “Shudras”. He argued that the expression “backward classes” refers to those classes who are inadequately represented in the apparatus of the Government and, hence, poverty is not an irrelevant factor in determining backwardness. He states that “the provision for reservation is really a programme of historical compensation. It is neither a measure of economic reform nor a poverty alleviation programme.” Mr. Jethamalani referred to various U.S. judicial decisions and, thus, contended that the competent authority to exercise the power of deciding the criterion in determining backwardness is the State and Courts have power only to review such criterion as to whether it is in conformity to the Constitution of India.
It was contended that the reservations shall be provided in favour of a class or group, but cannot be decided based on one particular individual because Article 16(4) states that the reservations are to be provided to the backward classes of citizens, not backward citizens. Therefore, a class as a whole shall be considered and determined whether it is backward, if so reservations are to be given in favour of such class as a whole.
It was argued that caste is a relevant factor to be considered for determining backwardness, although Clause (2) of Article 16 prohibited discrimination on the grounds of caste, among other grounds, because the protective discrimination is made not due to the caste but due to the backwardness of that class.
It was argued that the issue of reservation in promotion should be decided upon as the O.M. in question provided reservation in direct recruitment, not to the promotions and the constitutional question should not be decided in a vacuum.
Judgement of Indra Sawhney v. Union of India and Ors. (1992)
The nine-judge bench of the Indra Sawhney case
On 16th November 1992 this judgement was delivered and the names of the Hon’ble judges who constituted its constitutional bench are as follows:
M.H. Kania, CJ
M.N. Venkatachaliah J.
S. Ratnavel Pandian J.
Dr. T.K. Thommen J. (Dissenting judgement)
A.M. Ahmadi J.
Kuldip Singh J. (Dissenting judgement)
P.B. Sawant J
R.M. Sahai J. (Dissenting judgement)
B.P. Jeevan Reddy J.
Justice B.P. Jeevan Reddy penned the leading judgement for himself and his brother judges namely M.H. Kania J., M.N. Venkatachaliah J. and A.M. Ahmadi J. Justices S. Ratnavel Pandian and P.B. Sawant wrote concurring opinions. This constituted the majority judgement and the dissenting opinion was given by Justices Dr. T.K. Thommen, Kuldip Singh and R.M. Sahai. So, in a 6:3 majority judgement, the decision of the P.V.Narasimha Rao government to introduce a 27 percent reservation for the SEBCs based on the Mandal Commission Report was upheld subject to certain conditions.
Cases referred by the Bench in Indra Sawhney case
Before delivering a judgement and giving a ratio decidendi to every issue raised in the current case, the Court went through all the previous important judicial decisions given by the Honourable Supreme Court in various cases as well as by the U.S. Supreme Court. The cases which are cited by the Court are as follows:
Judicial decisions by the Supreme Court of India
The following are the landmark judicial decisions taken by the Supreme Court of India with regard to the special provisions for reservations to socially and educationally backward classes provided by the State.
Name of the case cited
Judicial decision given by the Supreme Court of India
Allotment of seats in Medical and Engineering colleges in the manner prescribed by the Madras Government’s ‘Communal G.O.’ is violative of Articles 15(1) and 29(2) as the allotment is made based community of the students they belong, which found to be discriminative on the basis of caste.This decision led to the insertion of Clause (4) to Article 15 in 1951 by the Constitution (First Amendment) Act.
Caste cannot be the sole and dominant criterion for determining backwardness. The provisions for reservations should be reasonable, i.e., should not go contrary to Article 15(1), and below the 50% mark.
The “carry forward rule”, which makes reserved seats to be non-reserved if unfilled due to less reserved candidates in that year and increases the reserved posts by such number in the next year, was held to be unconstitutional as it resulted in more than 50% mark.
Reservation on the grounds of both occupation and income, even if the caste is not taken into consideration, is valid and not violative of Article 15(4).
Caste is considered to be a class of citizens and reservation solely based on caste is valid if those citizens are socially and educationally backward. The burden of proving that the caste as a whole is not SEBC is on the petitioner.
Poverty should not be the sole criterion to identify SEBCs as the purpose of Articles 15(4) and 16(4) is to remove social and educational backwardness and not a programme for poverty alleviation.
“Means test”, i.e., consideration of economic conditions of a class, should be used to identify SEBCs after 2000 so as to ensure that reservations are provided to deserving people.
Judicial decisions by the U.S. Supreme Court
A brief history of the discrimination against Blacks in the U.S.
The Supreme Court in the Indra Sawhney case referred to the state of affairs in the U.S. concerning the present issue, i.e., providing reservations to the backward classes, just to give a glance of how another democracy, which has similar situations as to the backward classes, is dealing. The situations of the people who are considered as Blacks or Negroes in the United States are similar to that of Scheduled Castes, Scheduled Tribes and Backward Classes in India. Blacks in the U.S. were not treated as citizens, but looked down on as slaves and deemed to be the property of their masters who had legal authority over them. However, this problem is less complex in the U.S. when compared to India because the backward classes consist of fewer groups or classes, namely, Blacks, Spanish-speaking people, Indians, Purto Ricano, Aleuts, among other groups, amounting to less population. Whereas, backward classes in India, including Scheduled Castes and Scheduled Tribes, constitute the majority of India’s population. The kind of oppressive practices like untouchability which is practised in India can be seen nowhere, not even in older civilisations.
The problem of Blacks has been prevalent in the South and Midwest of the U.S. for many decades even though the Thirteenth Amendment and the Fourteenth Amendment of the U.S. Constitution prohibited slavery and guaranteed equality respectively. All cases against such practices of slavery are not helpful in eradicating their sufferings.
After World War II, the situation underwent a sea change. The doctrine of “separate but equal”, which was evolved in the case of Plessy v. Ferguson (1986), was overruled in notable cases, namely, Brown v. Board of Education (1954) and Boiling v. Sharpe (1954). After these landmark cases, there have been many judicial decisions which have prohibited the practices which discriminate against blacks in every sphere of daily life.
Nevertheless, there is no change outside the courts in the practical scenario. For centuries, blacks were backward not just socially, but also economically and educationally due to the discrimination, poverty and shame they suffered. Even today, they are not in a position to compete with their white counterparts who are well-off socially, educationally and economically. The same is the situation with minorities in India.
Four landmark cases of the U.S. Supreme Court
The following are the four landmark judicial decisions taken by the U.S. Supreme Court; those observations are referred to by the Supreme Court of India before giving an issue-wise ratio decidendi in the Indra Sawhney case.
The Court decided to stay the judgement as the issue of admissions policy became moot. However, Justice Douglas observed that reserving seats in a Law School for Blacks and admitting them is not against the Equal Protection Clause as there can be no fixed formula to decide the potential of an applicant just solely based on the test scores.
Three viewpoints are found in this case regarding special admissions programs reserving a fixed quota i.e., 16 seats in a Medical University. Those are The consideration of the ‘race’ factor is justified to increase the representation of minorities in the medical profession and, hence, is not a violation of Federal or State Constitutions or Title VI of the Civil Rights Act, 1964. Thus, it is valid.Bakke, one who was excluded from consideration in respect of 16 seats, is a victim of reverse discrimination as his exclusion is solely because of his race, he being white. It is observed that it is a violation of Title VI.The consideration of ‘race’ as a factor for admitting minorities for diversity is observed to be valid based on the Fourteenth Amendment, but the concept of fixed quota is invalid.
The Court rejected the challenge of a provision which mandated the State to allot not less than 10% of federal funds to Minority Business Enterprises (MBEs) for local public works as the aim of the provision is to address the issue of discrimination and rectify the past inequalities by increasing minority participation.
This case is marked as a shift in judicial approach towards racial classifications as it was held to be constitutionally permissible if they serve vital governmental functions even if it does not address the issue of discrimination.
In this way, the Supreme Court of India in the present case referred to the significant judicial decisions in various cases given by the U.S. Supreme Court to analyse how another similar democracy is dealing with this issue of discrimination of backward class and benefits of reservations for them over general candidates.
Ratio decidendi of the Indra Sawhney case
Besides the broad issues mentioned above, this complex case required the answers to various other allied miscellaneous questions too. So, for the ease of understanding of the readers, the ratio part will be assimilated and envisaged in a question (issue) and answer format. Thus, the judgement in this landmark case is portrayed as follows:
Scope and extent of Article 16(1) and Article 16(4) – reservations and constitutional mandate
Issue 1, i.e., whether Article 16(4) is an exception to Article 16(1) and would be exhaustive of the right to reservation to posts in services under the State?, was one of the prime issues that needed to be addressed by the Hon’ble Bench. It was held in this regard that “clause (4) of Article 16 is not an exception to clause (1) of Article 16. It is an instance of classification implicit in and permitted by clause (1)… it must be read along with and in harmony with clause (1).” A cursory reading of clauses (1) and (4) may give us an apparent understanding that clause (4) is the exception to the right to equality of opportunity to all citizens guaranteed under clause (1) of Article 16. This landmark judgement cleared this significant confusion by announcing that these two clauses needed to be studied in harmony with each other and that clause (4) is not an exception clause. This was held by the majority in paras 57, 121(2)(a) of the judgement.
Thus, this judgement affirmed the obiter dicta in State of Kerala v. N.M. Thomas (1975), where the majority rejected the argument that Article 16(4) is an exception to Article 16(1) and stated that clause (4) of both Article 15 and 16 are instructions to the State to make positive efforts to enforce the principle of equality which is laid down in Article 14, 15 and 16.
Coming to the extent of Article 16(4), the expression “special provisions” not only implies reservations but also includes preferences, concessions and exemptions. The Supreme Court considered the reservations to be the highest form of the special provision, whereas preferences, concessions, exemptions, and relaxations are the lesser forms. The Court observed that the provision made by the State can extend to preferences, concessions and exemptions under Clause (4) of Article 16 if the State thinks that its purpose is to facilitate the proper and complete effectiveness of the reservation.
Definite parameters for the term “backward class of citizens”
Laying down the boundaries of the term “backward class of citizens” was another achievement of the Hon’ble Bench in the Indra Sawhney case. This becomes more significant for two reasons, namely- it limits the identification criteria applicable in identifying the same and it differs from the phrase “socially and educationally backward classes of citizens” enshrined in the subsequently introduced Article 15(4) [introduced vide the Constitution (First) Amendment Act, 1951] as compared to the phrase “backward classes of citizens” enshrined in Article 16(4).
The Court referred to the following in order to define the term “backward class of citizens”.
Various observations of the judges in landmark cases of the Supreme Court of India.
Various words such as class, castes, communities, etc. are used in various legislations or executive orders before the commencement of the Constitution.
The debates of the Constituent Assembly, especially the speeches of Dr. B.R. Ambedkar, however, the Court noted that this consideration is just for reference purposes and not conclusive.
The effects of the caste system, which is evidently practised in Hindu society, on other religions, like Christians, Muslims, etc., even though the non-Hindu religions do not recognise caste.
The impact of the caste system even today refers to the instances of his identity, endogamy, irrespective of a person’s higher studies, going abroad, earning more money or being employed in a higher post or office.
The interrelationship and nexus among caste, occupation and poverty in both urban and rural areas.
In this context, the majority held that from the word ‘class’ the following could not be concluded, that:
“class” was antithetical to “caste”, or
a caste could not be a class, or
a caste as such could never be taken as a backward class of citizens.
It was further held that the word ‘class’ in Article 16(4) meant ‘social class’ and not ‘Marxist class’. The Constitutional makers were prudent enough to not use the term ‘caste’ in Section 16(4). Thus, the majority Bench decided that a caste could be defined as a social class — ‘a socially and occupationally homogeneous class’. In this context, the Supreme Court observed that “we are not saying it (caste system) ought to be encouraged. It should not be. It must be eradicated. That is the ideal – the goal. But any programme towards betterment of these sections-classes of society and any programme designed to eradicate this evil must recognise this ground reality and attune its programme accordingly. Merely burying our heads in the sand – Ostrich-like – wouldn’t help. One cannot fight his enemy without recognizing him.”
For further references in this regard, one may see paras 80, 81, 82, 121(3)(a) and 577 of the original judgement.
Not necessary to be both socially and educationally backward
With regard to the question of whether the backward classes are both socially and educationally backward, the Supreme Court firmly stated that the ‘class’ mentioned in Article 16(4) is a social class by looking at the context or purpose of the provision. If we look at the pre-independence era, only people belonging to upper castes were engaged in administrative activities and people belonging to Scheduled Castes, Scheduled Tribes, and other similar backward classes along with Muslims and Christians had no place in such activities. This imbalance is sought to be removed by reserving a few posts in public services for people belonging to the backward class, thus, leading to enactment of the said provision. The said provision does not have any qualifying words to ensure it is an inclusive provision unlike Article 15(4) because of which the word “backward classes” includes Scheduled Tribes, Scheduled Castes and all other backward classes of citizens including the socially and educationally backward classes. This made a way to make Article 16(4) much wider than Article 15(4) so that whoever does not fall under the “socially and educationally backward class” in the later provision may belong to the “backward class” as contemplated in the former provision. Because of this reasoning, the Court refused to accept that the ‘class’ in Article 16(4) shall qualify to be backward both socially and educationally.
Classification of classes as backward class and more backward class
The Supreme Court decided that there is no constitutional or legal prohibition on the State to classify a particular class as backward and more backward and, hence, such classification will not be invalid if done reasonably. The reasoning behind allowing such classification by the Court is similar to that of a creamy layer. That is, among various backward classes, a few classes, for instance, goldsmiths, are advanced when compared with other backward classes. If everyone is provided with the same reservations, the more backward classes may suffer and less backward classes would acquire the benefits of such reservations. To prevent this injustice, the Court permitted the Commission and the State to decide upon the matter as to sub-classification of classes into backward classes and more backward classes. If it is an arbitrary classification, the same can be challenged in the court requiring its intervention in the matter.
For example in this regard, refer to Para 92A of the original judgement.
The criteria to identify the backward class of citizens
Before giving its view on the criteria to identify the backward classes of citizens, the Supreme Court made it clear that the said task is on the Commission or Authority which is appointed for such purpose. However, the Court also clarified beforehand that if such authority uses caste among Hindus and occupation among non-Hindus as a basis to identify the backward classes, it shall not for this reason be unconstitutional or unlawful. If a caste as a whole is backward, it can be a basis to determine the backwardness of a class. Therefore, there is no uniform and standard procedure or method to be adopted. In the end, what the Court requires is that the procedure adopted by the authority concerned for such a purpose should adopt a fair and adequate procedure and the entire population should be covered. The Supreme Court also held that the issue of wrong identification or no identification of a particular caste or class by the authority concerned would be heard in a court of law.
The criteria used to identify the backward class of citizens can be better understood when studied under the following heads:
Class-caste nexus
The majority of the Indra Sawhney Bench was of the opinion that “class” in Article 16(4) meant social class and they justified the same by stating that the classification attempted by Article 16(4) was not on the basis of caste but on the ground that the caste is found to be a backward class and inadequately represented in the public administration system. Thus, the majority agreed with the Mandal Commission that the social backwardness was indeed because of the educational and economic backwardness of the caste and that such social backwardness was attributable to the caste. In other words, “class” under Article 16(4) could be read as “caste.”
By this, the Court did not obligate the State to consider caste to determine the backwardness of a class. The Court just stated that considering caste as a factor is valid and the State is allowed to do so if it is in its opinion that the caste is backward as a whole. To the question of whether an occupation and income without any reference as to the caste be a criteria to determine the backwardness of a class, the Court answered in the affirmative. The Court observed that “Indeed, this test in the Indian context is broadly the same as the one adopted by the Mandal Commission. While answering Question 3(b), we said that identification of backward classes can be done with reference to castes along with other occupational groups, communities and classes. We did not say that that is the only permissible method. Indeed, there may be some groups or classes in whose case caste may not be relevant to all. For example, agricultural labourers, Rickshaw pullers/drivers, street hawkers etc. may well qualify for being designated as Backward Classes.”
All this led to the laying down of the two-fold test by which reservation can be provided based on caste. In other words, if the following two criteria are met, then caste can be the dominant factor in determining backward classes for the purpose of reservations as per the Mandal Commission Report. The tests are as follows:
The test of backwardness.
The test of inadequate representation.
The justification that was given for stating that caste can be the dominant factor in the determination of the backward class is that Article 16(4) requires identification and not classification and thus any factor that was causing social and educational backwardness of a class of citizens can be the basis for identification. So, if caste is made the dominant basis for identifying backward classes, then Article 16(4) is not disturbed. In addition to this, the Court also held that the circumstances of the people of a particular caste need not be similar to that of the circumstances of Scheduled Castes and Scheduled Tribes, unlike Article 15(4). For further references in this regard paras 83, 83A, 121(3)(b), 206, 231, 366 and 412 of the original judgement may be referred to.
The test of inadequate representation
The State may provide reservations to those who are backwards as well as inadequately represented in public services. Whether a class is adequately represented or not depends upon the subjective satisfaction or the opinion of the State, which can be formed based on the materials it has or appoint a Commission to get more material for the purpose of having knowledge of the current scenario before drawing an opinion. The said opinion of the State, i.e., executive, can be challenged and the Court can exercise judicial review, which was ruled by the Supreme Court in the case of Barium Chemicals Ltd. & Anr. v. Company Law Board & Ors. (1967).
Economic criteria
The majority of the Bench refused to recognise economic criteria as the sole determining factor of backwardness. That is the reason the ten percent reservation of economically backward sections was rejected by the majority Bench. However, the economic criteria can be an additional factor to categorise a class as a backward class along with the consideration of social backwardness.
The “Creamy Layer” exclusionary principle
The “Creamy Layer” exclusionary principle is another feat of the majority Bench of Indra Sawhney. By virtue of this principle, the advanced sections of the OBCs were excluded from the benefits of the reservation. The justification that was provided in this regard is that when some members of the OBCs have advanced significantly socially (which in the context necessarily means economically and may also mean educationally), they would be misfits in the class as then the connecting thread between them and the remaining class snaps. In other words, a person belonging to a backward class on whom reservations are provided to uplift them is already socially, educationally and economically forward and will not be qualified to say that he fits to be in such class which is categorised as having person backwards in various aspects because one of the characteristic feature of ‘class’ is having common traits among a group of persons. If people, who belong to a backward class but are advanced much, are excluded from ‘the backward class’, then such a ‘class’ will be a compact one and the truly backward people will enjoy the fruits of reservations.
But as a corollary to this “Creamy Layer” exclusionary principle came the dire possibility of taking away with one hand what was given by the other. So, there was a necessity to have a drawing line to exclude the creamy layer from the benefits of reservation without jeopardising the non-creamy layers. Hence, to this end, a duty was imposed on the Centre and the states to evolve the said basis for the exclusion of the creamy layer within a time period of four months and six months, respectively, and to subsequently implement the same. To follow this order, the government formed the Ram Nandan Prasad Committee to evolve the required criteria for the exclusion of the creamy layer. It sought to exclude the following:
“i. Persons holding constitutional posts.
ii. Class I officers of the All India Centre and Slate services.
iii. If both parents are Class II officers, children are not eligible.
iv. Those with a gross annual income of Rs. 1 lakh and above in the non-governmental sector.
v. Property holders based on the extent of land holdings.”
Nature and extent of the reservations permissible
The Supreme Court dealt with the following issues.
Whether the 50% rule is mandatory to be followed by the State in providing reservations to the backward classes?
If the 50% rule can be breached by the State, under what circumstances?
Would the 50% rule be applied to all forms of reservations?
The Court referred to observations of a few Justices in the landmark cases like Balaji, Devadasan, Thomas, Vasant Kumar and Karamchari Sangh before answering the said question.
The 50% rule and exceptional circumstances
The Supreme Court clearly decided that the reservations of seats in public services in favour of backward classes of citizens should not exceed 50%. In this regard, the Court also distinguished between adequate and proportionate representation and clarified that Article 16(4) talks about adequate representation. Through the principle of adequate representation, the State can able to decide such classes, whose members are less in public and administrative services or completely outside the public services, whereas the principle of proportionate representation is mostly used for the purpose of Articles 330 and 332 of the Constitution of India, which deals with reservation of seats in the Lok Sabha and State Legislative Assemblies respectively in favour of Scheduled Tribes and Scheduled Castes as per their respective population.
In addition to this, this rule is applied only to reservations, not to other forms like exemptions, concessions, etc. The rule of not breaching 50% shall also be applicable to the ‘carry forward rule’.
However, the Court also allowed the State to transgress the set-out limit in exceptional circumstances, which are easily predicted in a diverse society like India. Nevertheless, the State shall cautiously transgress the 50% rule. And, the year will be considered as a unit for applying 50% rule, not the total strength of the cadre because if the case is the latter one, the open category candidates will suffer a lot especially when there is a shortage of applicants from backward classes.
The Court also clarified that this is not a communal reservation and the person belonging to a backward class could be able to secure a seat without any help of the reservation conferred on him by the State will not be considered against the quota reserved for such class, thus, he will be deemed to be open category candidate.
Vertical and horizontal reservations
There are two types of reservations, namely:
Vertical reservation
Horizontal reservation
Horizontal reservations are provided by the State because of which equal opportunity is provided not only to the backward classes but also to other categories of disadvantaged citizens such as women, veterans, transgender persons, and persons who are differently disabled. These reservations are also called “inter-locking reservations”, which means that they will cut across vertical reservations. The Court provided an example for better understanding. It stated, “Suppose 3% of the vacancies are reserved in favour of physically handicapped persons… if he belongs to S.C. category he will be placed in that quota by making necessary adjustments.”
Distinguish between vertical and horizontal reservations
Basis of differentiation
Vertical reservation
Horizontal reservation
Meaning
When a specific number of seats in services are specially reserved, it is called vertical reservations
When no special reservation is made, but a preference is made in favour of certain categories of disadvantaged citizens such as women, veterans, transgender persons, and persons who are differently disabled, it is called horizontal reservations
Provided under which provision
Article 16(4) of the Constitution of India
Article 16(1) of the Constitution of India
Example
Reservations provided to Scheduled Castes, Scheduled Tribes and Other Backward Classes
Reservations for women, differently-abled persons, etc.
Reservations in promotion
After looking into the contentions made by both parties to the petition, the Court decided to give a final decision on the issue of reservation in promotion. The Court in General Manager, Southern Railway v. Rangachari (1961) decided that reservation would be allowed if the ground for promotion is merit to ensure representation of backward-class candidates in higher stages of public services as well. However, if the ground is anything other than merit such as seniority, then there will be no reservations provided. The Supreme Court in the present case agreed with the reasoning given by the petitioners that such reservation may result in disinterest among reserved candidates as there is lesser competition because they should only compete among themselves, not with every candidate. The Court answered the question of reservation in promotion by reading Article 16(4) along with Article 335 of the Constitution of India, which deals with Claims of Scheduled Castes and Scheduled Tribes to services and posts and held that there shall be no reservations in case of promotions as it affects the efficiency of the administration.
Later, in 1995, Clause (4A) was added to Article 16 by way of the Constitution (Seventy-seventh Amendment) Act, 1995. To know more about this, click here.
No reservations in technical posts
The Supreme Court advised the State by referring to Article 335 to not make reservations in certain technical posts in which duties entrusted are to be performed in the interest of the public at large and, therefore, require a high level of competency, efficiency and skill to perform the functions attached to the post. The Court provided a few examples for technical posts. Those are
Defence Services including all technical posts therein but excluding civil posts.
All technical posts in establishments engaged in Research and Development including those connected with atomic energy and space and establishments engaged in the production of defence equipment;
Teaching posts of Professors – and above, if any.
Posts in super specialities in Medicine, engineering and other scientific and technical subjects.
Posts of pilots (and co-pilots) in Indian Airlines and Air India.
The above list is just illustrative and not exhaustive. However, the Court explicitly stated that “it is advisable”, thus, it is not a compulsion imposed on the State to be bound to comply with the same. The Court clarified by stating that the Government of India has the authority to decide on the matter of not making any reservations.
Other economically backward sections of the people
The issue of a 10% quota in favour of other economically backward sections of the people who are not covered in any governmental schemes mentioned in O.M., i.e., the open category candidates, is raised before the Court. The Court held that this quota is constitutionally impermissible.
Brief principles with respect to the extent of the reservations
The following principles were evolved in this landmark case regarding the nature and extent of reservations permissible under the Indian Constitution:
It was held that there was no legal or constitutional bar to the sub-classification of OBCs. Hence, if on the basis of the degrees of social backwardness, classification is done, then separate quotas of reservations would have to be kept for each class of backward classes.
Reservations based on the dominant identifying factor of caste are permissible but should be restricted to initial appointments only and not to subsequent promotions. However, without compromising the efficiency of administration, the States may offer donations, exemptions, concessions, etc. to enable the OBCs to compete for the advancement of their career.
The rule of reservations cannot be called anti-meritarian but as and when necessary there can be an exclusion of this rule to certain posts and services (for example- defense services).
The reservation granted under Article 16(4) should not cross fifty percent. Only in exceptional circumstances can this strict rule be transgressed, but only when an extraordinary or special case is made out and only with the application of extreme caution.
While applying the fifty percent rule, a year is to be considered as a unit and not the entire strength of the cadre or service. Moreover, the “carry forward rule” is not per se unconstitutional, but even when such a rule is applied for unfilled reserved vacancies, the fifty percent ceiling limit should not be breached.
Legislative and executive power to make reservation provisions and judicial power to review them
The Supreme Court referred to the definition of “State” in Article 12, where it evidently conveyed that not just the Central or State Government, but also local and other authorities being under the control of the Central Government are deemed to be State, and the definition of “law” in Article 13(3)(a), where the words like ‘order’, ‘bye-law’, ‘rule’ and ‘regulation’ appears, to answer the issue of the competent authority to legislate on the reservation provisions. By such references, the Court decided, agreeing with the decision in the Balaji case, that the reservation provisions can be made by even executive authorities, apart from the Central and State Governments. The reasoning given by the Court is that it is hardly possible to make provisions which suit every institution and service only by the legislative bodies. Therefore, it is fair to allow the executive and local and other authorities to decide on the matters of such provisions suitable to their circumstances.
Judicial review by the court
One of the issues is whether the judicial review over matters relating to Articles 15(4) and 16(4) is limited or restricted. The Court clarified that the answer to this question will depend upon the nature of various aspects, namely, subject matter, rights affected, legal and constitutional provisions applicable, etc. Because the political executive is elected by the majority of the people, the Court would presume that the State knew the state of affairs and will of the people and confer due weightage. The Court, thus, concluded stating “More than this, it is neither possible nor desirable to say. It is not necessary to answer the question as framed.”
Permanent statutory body to take up complaints
The power to decide castes or classes to whom reservations will be conferred is on the State. Naturally, there will be complaints as to such a decision by the State. With the same anticipation, the Court desired to have a permanent statutory body comprising experts, whether official or non-official, that can be constituted under Article 16(4) read with Article 340 of the Constitution to take up complaints from the public about whether the inclusion was wrong or omitted and to redress such grievances. The Court observed that the body shall have the following powers.
It shall be empowered to hear the complaints, make enquiries and issue orders as it thinks fit.
The suggestion or opinion of the body shall be binding on the government. If not accepted, the government must provide the reasons for the same.
The government must first ask the body for its recommendation, before including any caste or class.
Therefore, the Court directed to constitute the body at both central and state levels on immediate effect i.e., within four months. The procedure to be followed will be decided by the Government of India and State Governments concerned
Dissenting opinion in the case of Indra Sawhney v. Union of India and Ors. (1992)
The dissenting opinion in the Indra Sawhney case was given by Justices Dr. T.K. Thommen, Kuldip Singh and R.M. Sahai. The significant portions of the dissenting opinions in this landmark case are laid down in a simple manner as follows:
The minority opinion was that all types of reservations came under the purview of Article 16(4) and that no reservation was permissible under Article 16(1). This was against the majority view, which believed that Article 16(4) included within its parameters reservation for backward classes only and not the very concept of reservations.
Justices Thommen, Kuldip Singh, and R.M. Sahai observed that “class” under Article 16(4) could not be read as “caste”. In other words, they refused to consider caste to be the dominant identifying parameter for backwardness.
There was a radical difference of opinion between the majority and the minority with regard to the identification of a class under Article 16(4). The minority was of the opinion that inadequate representation should be the only parameter for the identification of a class under Article 16(4). In other words, it can be said that the minority was of the view that either educational or economic backwardness was leading to social backwardness and that such social backwardness did not emanate primarily because of caste. This can be said to be a classic case of ‘which-came-first, the-chicken-or-the-egg’ syndrome, that is, which caused social backwardness first- caste factor or poor education and economic factors?
Justice Kuldeep Singh’s minority opinion was based on the reasoning that it was poverty that envelopes a class in backwardness and this “culprit cause” of poverty was the invariable reason leading to socio-economic and educational backwardness. In other words, he opined that economic criteria should determine backwardness.
Justice Pandian disagreed with the majority opinion on the sub-classification of OBCs based on the degree of social backwardness and keeping separate quotas of reservations for the sub-classes of OBCs.
Brief summary of the Indra Sawhney judgement
The landmark Indra Sawhney judgement is a lengthy piece of judgement and for the ease of the readers, the crux of the judgement is summarised as follows:
Under Article 16(4), backward classes of citizens can be identified on the basis of caste and not just on an economic basis. Economic criteria cannot be the sole identifying factor for backwardness under Article 16(4). Also, in order to prevent the abuse of power, the identifying examination to determine backwardness should be an objective one and not a subjective one.
Article 16(4) is an independent clause and not an exception to Article 16(1).
Article 16(4) is exhaustive in nature regarding reservations for backward classes only.
Article 16(1) permits reasonable classification and reservation for other classes.
The socially and educationally backward classes under Article 15(4) are different from the backward classes under Article 16(4).
Article 16(4) permits the sub-classification of backward classes into backward and more backward classes.
Creamy layers (socially advanced people) can be and must be excluded from backward classes for the purposes of reservation under Article 16(4).
Reservations shall not exceed 50 percent and even for the purpose of application of the carry forward rule (by which unfulfilled vacancies are filled in the upcoming year), the 50 percent ceiling should not be breached.
There shall be no reservation in promotions.
Other cases after the Indra Sawhney judgement vis-a-vis the development of reservation jurisprudence based on Indra Sawhney
The Indra Sawhney judgement has been substantially disliked by political opportunists and a lot of water has flown down the riverbed of reservation jurisprudence since this landmark case law was pronounced in 1992. Lots of subsequent cases have taken place and constitutional amendments to counter judicial pragmatism have been brought in – all of them bearing more or less direct connections with this precedent case law. The significance of this landmark case law is etched in all these subsequent case laws and constitutional amendments. For a better understanding of the same, the significant post-Indra Sawhney cases and constitutional amendments are briefly portrayed as per their timeline in a tabular and analytical form below to the extent they are connected with the Indra Sawhney case and interconnected with each other:
It was held by the Supreme Court that the reservation should be determined on the basis of the number of posts in the cadre and not on the basis of vacancies.The basic principle of post-based reservation is that the number of posts filled by reservation for any category in a cadre should be equal to the quota prescribed for that category.
The 77th Constitutional (Amendment) Act, 1995 (w.e.f. 17.06.1995)This Amendment was passed to nullify the reservation ban of the Indra Sawhney judgement on promotions of reserved category people.By this Amendment, Article 16(4A) was inserted, which gave the government constitutional sanction to give reservation in promotions to SCs/STs as long as the SCs/STs, in the opinion of the state, are insufficiently represented in the services of the state.
The ‘catch-up rule’ was advocated in this judgement, thereby reiterating Union of India v. Virpal Singh Chauhan (1995).This rule became necessary for the post-constitutional recognition of reservations in promotions.By the virtue of this rule, a general candidate who was promoted after SC/ST candidates because of reservation in promotions for SC/ST, will regain his seniority back if he was senior in the lower cadre.
It was held that Article 16(4) and (4A) are only enabling provisions.The rule of doing away with inadequate representation under Article 16(4) must not adversely affect the efficiency in administration as envisaged under Article 335 of the Indian constitution.In this case, a clarification is requested as to the validity of the decision in Ajit Singh’s (1996) case as confusion is created due to the deviation made in Jagdish Lal vs. State of Haryana (1997).
The Supreme Court said that it was not acceptable that once a backward class would mean always a backward class.It was further said that refusal to exclude the creamy layer from the reservation is a blatant violation of Articles 14, 16(1) and 16(4).The principle of efficiency of administration as envisaged under Article 335 of the Constitution was stressed upon.
The 81st Constitutional (Amendment) Act, 2000 (w.e.f. 09.06.2000)This constitutional amendment was ushered in to facilitate reservations in promotions and for this end, Article 16(4B) was inserted.Through Article 16(4B), the ‘carry-forward rule’ was introduced by virtue of which unfulfilled vacancies were carried forward to subsequent years and were treated as a separate class and this permitted the breach of the 50 percent reservation limit of the Indra Sawhney.Significantly enough, though the unfulfilled vacancies were made a separate class vide Article 16(4B) to breach the 50 percent ceiling limit, this clause also ended up giving constitutional status to the 50 percent ceiling limit prescribed in Indra Sawhney.
The 82nd Constitutional (Amendment) Act, 2000 (w.e.f. 08.09.2000)In the same year of 2000, another constitutional amendment was brought in and this time a proviso was added to Article 335 of the Constitution.By virtue of this proviso, the government became empowered to relax and lower qualifying marks and standards of evaluation for the reservation of SCs/STs in promotion notwithstanding the efficiency of administration requirements mandated by Article 335. Thus, all Supreme Court rulings like the judgement in Vinod Kumar v. Union of India (1996) stressing on non-relaxation of qualifying marks for reservation in promotion to maintain administrative efficiency was undone with this constitutional amendment.
The 85th Constitutional (Amendment) Act, 2005 (w.e.f. 08.09.2000)By this constitutional amendment, Article 16(4A) was amended and the words “consequential seniority” were inserted into it. By virtue of this rule, the reserved candidates who have enjoyed reservation in promotion retain seniority over the general category candidates in subsequent promotions.This nullified the catch-up rule propounded in Union of India v. Virpal Singh Chauhan (1995) and Arijit Singh v. State of Punjab (1996).
The 77th, 81st, 82nd, and 85th Constitutional Amendments were upheld in this landmark case.The theory of guided power containing three controlling factors was laid down by which the Court would strike down any excessive reservation policies that were leading to reverse discrimination and that overall administrative efficiency must be maintained.The three controlling factors envisaged by the five-judge Bench of the M. Nagaraj case to prevent excess reservation are as follows:The 50 percent ceiling limit must not be breached (quantitative factor).There must be a creamy layer exclusion for reservation in promotion (qualitative factor).The state must show by collecting due data that there is indeed backwardness and inadequate representation.
It was held that states need not collect quantifiable data as per M.Nagaraj case to show backwardness as that would violate the precedence of the Indra Sawhney case but the inadequacy of representation must be shown by quantifiable data.The creamy layer exclusion principle for reservation in promotions for SC/Sts was upheld by the five-judge Bench in this case.
The consequential seniority principle introduced by the 2018 Karnataka Reservation Act was upheld overturning B.K.Pavitra I because the State of Karnataka was successful in showing quantitatively by data that indeed SC/STs were inadequately represented and that their reservations for promotions would not prejudice administrative efficiency.It was further held that the creamy layer exclusion principle of the Jarnail Singh case was for reservation in promotions and not for consequential seniority.
It was held unanimously that there was no need to visit the ratio laid down by the landmark Indra Sawhney case.The 50 percent ceiling limit under Article 16(4) must not be breached unless there are extraordinary circumstances as envisaged in the Indra Sawhney case.
The 103rd Constitutional (Amendment) Act, 2019 (w.e.f. 14.01.2019)By virtue of this constitutional amendment, Clause (6) was inserted into both Articles 15 and 16. Clause (6) of Article 15 provides reservations to economically weaker sections for admission to educational institutions, whether public or private, whether aided or unaided by the State, other than the minority educational institutions referred to in clause (1) of Article 30. The amendment aims to provide reservations to those who do not fall in Article 15(5) and 15(5) i.e., effectively, SCs, STs and OBCs.Clause (6) of Article 16 enables the State to make any provision like reservation of posts in public services in favour of economically weaker sections of citizens, shortly termed as “EWS”. However, the quota fixed shall be subjected to the limit of 10% in addition to the existing reservation i.e., 50%. This clause is an enabling provision.
The Supreme Court held that the 103rd Constitution Amendment, which permits the State to make special provisions in relation to admission to private unaided educational institutions in favour of economically weaker sections (EWS) of citizens candidates. is not a violation of the basic structure of the Constitution.
Conclusion
After studying the case analysis of the landmark Indra Sawhney case in detail, it is needless to say that reservation is an extremely sensitive issue and despite sincere attempts by this article, the complexities of the same cannot be untangled into simpler versions. As seen in the above discussions, the canvas of reservation issues based on caste has witnessed a lot of developments in the last three decades. From the violent protest days against Mandal Commission implementation thirty years ago, the questions still remain- how far have the backward people progressed todate? How long do they still need reservations? To what extent and how long should reservations in promotions continue besides initial appointments based on reservations? The National Commission for Backward Classes (NCBC) has now constitutional status by virtue of The Constitution (One Hundred and Second Amendment) Act, 2018. Various government departments and NGOs are working tirelessly to uplift the backward classes of people. But it appears that the above-unanswered questions are willfully kept unanswered. To date, where our constitutional values have evolved for the better in general, there are many villages in India where people will ask you your caste before interacting with you, there are still multiple incidents of caste-based violence where the backward classes have been beaten black and blue for their castes. Three decades of Indra Sawhney and still the story of two Indias continues. On one side there is judicial pragmatism and on the other side there is political opportunism; on one side there are alleged reverse discrimination victims having anti-reservation sentiments, and on the other side Dalit beatings continue. Is the social stigma of casteism too deeply ingrained in India to ever get rid of caste-based reservations? Tomorrow’s young India can indeed be the example where people get recognised strictly based on their work and not caste. Let this dream not be turned into a utilitarian one by political opportunism.
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Section 2 (20) of the Companies Act, 2013 defines a company as any company that is incorporated under this law or any previous law. It is a legal entity formed by associations of individuals to engage in business. A company has its own rights, duties, liabilities, and obligations; it can sue and be sued, which means that it has a separate legal identity that is distinct from the other members of the company.
In the case of Salomon vs. A. Salomon Co. Ltd. (1897), the concept of a separate legal entity of the company was deduced and it was held that the company is independent from its members and shareholders and has an identity of its own. Once a company is incorporated, it becomes an ‘artificial person’, and the veil is used to protect the interests of the owner and members of the company. This corporate personality rule of company law has an exception known as the lifting of the corporate veil. The term lifting of the veil means to remove the imaginary barriers between the company and its members and hold the person who is accountable for the illegal activity conducted under the veil of the company.
Evolution of the concept
In the case ofBacha F. Guzdar vs. CIT, Bombay (1952), the Supreme Court of India accepted the fact that the company has a juristic personality and has a distinct identity from its shareholders.
The company, after its incorporation, enjoyed several rights, such as perpetual succession, the right to sue, transferable shares, limited liability and, above all, separate legal entities. Since a company is an artificial person and it can not practise any illegal activity on its own, if a member of the company commits fraudulent activity and uses the rule of corporate personality to refrain from legal action to convict the real culprit, the adjudicating authority, in some exceptional circumstances, lifts this corporate veil to punish the real accused.
The concept of a corporate veil distinguishes the shareholders from the company and allows the owner to work without any unforeseeable liabilities. The veil protects the shareholders from any mishaps, and the cost is paid by the assets of the company. But when the shareholders misuse the rule of corporate personality, for personal benefits and limit the liabilities to the company, then the court has the power to pierce the corporate veil to decipher the real person hidden behind in the name of the company and will be tried for his fraudulent or undue benefits as per the procedure established by law.
Elements required for lifting the veil
There are three major elements that need to be established by the aggrieved party in court in order to lift the corporate veil:
Control and domination: The party has to prove that the shareholder has complete control and dominance in the company, which is not only confined to “finance but also in its policy and business practice regarding the transaction that has caused the grievances in the party, and the corporate entity as to this transaction has no separate mind, will or existence of its own.”
Improper purpose or use: The second test for lifting the corporate veil is to prove that the stakeholder used its dominant position to commit fraud or deceive the person or any action that was in contravention of the laid provision and has affected the legal rights of such person. The plaintiff has to establish that the corporation has infringed on his rights by their misconduct beyond the fact that the corporation was controlled and dominated.
Resulting damage or harm: In the final test, the aggrieved party has to establish that the dominant stakeholder’s wrong or illegal act has caused damages to the plaintiff. However, if the damage has not been caused by the corporation, then in such cases, the defendant will not be liable. “The fact that the corporate veil could be disregarded for some purposes does not mean that it must be disregarded for all purposes.”
The Supreme Court of India in the case ofL.I.C. India vs. Escorts Ltd. & Others (1985) enshrined that though the company is a separate corporate personality, the court, under certain exceptional circumstances, can pierce the corporate veil. The circumstances under which the corporate veil can be lifted are:
Statutory provisions, and
Judicial Interpretations.
Grounds for lifting of corporate veil
Statutory provisions
The Companies Act, 2013 (here and after referred to as the Act) explicitly provides several specific provisions that allow the adjudicating authority to pierce the corporate veil. Section 2 (60) of the Act defines ‘officer in default’ as the person who acts in contravention of any provision of this Act and will be held liable for penalty or imprisonment as per the given law.
According to Section 7 of the Act, if a company is incorporated by “presenting any false or misrepresenting information or intentionally concealing relevant facts or information in filing the documents for the incorporation of the company,” the promoters, the first directors of the company, and the persons making declarations under clause (b) of subsection (1) shall each be liable for action under Section 447. Provided the Tribunal also has the jurisdiction to take appropriate action on sufficient grounds where the Tribunal can pass an order for changes in the management of the company, remove the name of the company from the register of the companies, or direct the winding up of the company.
Criminal and civil liability for misstatement in prospectus are provided under Sections 34 and 35, respectively, of the Act. It states that if the prospectus of the company contains any misleading or untrue information that can confuse the public and cause damage based on such statements, then every person who knowingly issued such a prospectus will be held liable. Whereas under Section 36 of the Act, if any person knowingly induces any other person by making a false or fraudulent statement or concealing any facts for the investment of money by such person, then he will be liable for fraud under Section 447 of the Act.
When a company fails to repay the deposit, part thereof, or interest within the time specified by the tribunal, then every officer of the company responsible for such default will be held liable under Section 74(3) of the Act.
According to Section 239 of the Act, the central government can appoint an investigating officer for an inquiry about the management of the affairs of the company or the amalgamation or acquisition of its shares and if there has been any offence regarding such activity.
The Registrar of the Company has the power to strike off the name of the company from the Register of the Companies on the application of the company under Section 242(2) of the Act, provided that such company must extinguish all its liabilities and obligations before such application. The officers of the companies misuse the provision to avoid liabilities, defraud the creditors, or evade tax. In such circumstances, the officer in charge of the company will be jointly liable for the fraudulent application for removal of name under Section 251 of the Act.
When the company is in the process of winding up and it appears that the company carried out business to defraud the creditor or any other person, then on the application from the official liquidator, the company liquidator or the creditor, any officer of the company who intentionally tries to defraud shall be held personally liable by the National Company Law Tribunal as per Section 339 of the Act.
Judicial interpretations
The concept of the corporate veil emerged after the landmark case of Soloaman. The courts in India, beside the statutory provisions, have over time laid down certain grounds for lifting the corporate veil by carefully analysing the provisions but these criteria are not exhaustive and change according to the facts and circumstances of the case.
Fraud
The courts have consistently invoked the doctrine of lifting the corporate veil in cases where the officers of the company use the veil to conduct their fraudulent activities and protect themselves from liabilities. In Commissioner of Income-tax vs. Associated Clothiers Ltd. (1963), the Calcutta High Court held that the veil should only be lifted in exceptional circumstances where the statutory provisions are expressly stated, such as lifting the veil in cases of fraudulent activity or misdescription of the company by the shareholders for deceiving the creditors.
Additionally, in the case of Jones vs. Lipman (1962), a person formed a contract to sell his property but after some change of mind, he transferred the property in the name of a company to avoid specific performance under the contract. The court in the case held that the company is only the mask that Lipman holds to avoid liability and performance as per contract; therefore, the court lifted the veil to avoid fraud and misuse of the doctrine and awarded specific performance against the company and Mr. Lipman.
Sham company
When there are multiple corporate bodies but they are majority owned by one person or group of people, these corporate bodies are mere cloaks, and the main purpose for the incorporation of the company was to commit illegal activity. In the landmark judgement of Delhi Development Authority vs. Skipper Construction Company (P) Ltd. and.. (1996), the Supreme Court held that when a director and member of his family incorporate several corporate bodies for illegal activity, then the court can consider them as one single entity owned by the director and their family. Though there is no bar to holding a subsidiary company and the law identifies them as separate legal entities, when there are instances of illegal activity, it can be considered one economic entity.
Tax evasion
The company is a separate legal entity and has the same liabilities as any other legal person. One such liability is to pay tax to the government, and as we know, a company is an artificial person and can do no wrong on their own. The officers of the company use the mechanism of a separate legal entity to evade taxes; therefore, in such circumstances, the court pierces through the veil to hold the person responsible for failure to pay tax. In the case of Vodafone International Holdings BV vs. Union of India (2012), the Supreme Court held that the income tax department has the power to lift the corporate veil if they can establish that the company uses the doctrine of a separate legal entity to evade taxes and to exempt themselves from any liability.
Mere agency of the holding company
When the company uses its subsidiary company as an agency for undue benefits, the court can lift the corporate veil to hold the person accountable for such action. In the case of Smith Stone & Knight Ltd. vs. Birmingham Corporation (1939), the company transferred its asset to a subsidiary company for waiving its liability, stating that they are not the owners of the property. The court lifted the corporate veil and held that the subsidiary company is just an agent of the parent company and the transaction was made to benefit the parent company.
Landmark cases which helped shape the doctrine
In recent times, the courts have pronounced several landmark judgements shaping the doctrine of piercing the corporate veil. Over time, the judiciary has taken new approach in piercing
Singer India Ltd. vs. Chander Mohan Chadha and Ors. (2004)
In the case of Singer India Ltd. vs. Chander Mohan Chadha and Ors. (2004), it was held that the doctrine of separate entity was evolved for the purpose of development in trade and commerce and not to conduct illegal and fraudulent activity to deceive the creditor or any other person. Therefore, the court, under such circumstances, will lift the veil of a separate entity to do justice for the aggrieved party. The court observed that the primary purpose of the doctrine of separate entities is to facilitate the development of trade and commerce. It enables businesses to operate independently, make decisions, and assume risks without exposing their owners to unlimited personal liability. However, this privilege should not be abused to engage in unlawful or unethical practices.
In the present case, the court found that the defendants, Chander Mohan Chadha and Ors., had incorporated multiple companies with the sole intention of syphoning off assets and defrauding creditors. The defendants had used these companies as mere facades to conceal their wrongdoing and evade legal responsibility.
Recognising the need to prevent such misuse of corporate structures, the court lifted the veil of separate entities and held the defendants personally liable for the debts and liabilities of the companies they controlled. The court reasoned that allowing the defendants to hide behind the corporate veil would undermine the principles of justice and fair play and grant them an unfair advantage over their creditors.
The decision in Singer India Ltd. serves as a reminder that the doctrine of separate entities is not absolute. Courts have the authority to pierce the corporate veil and impose personal liability on individuals who abuse this doctrine to engage in illegal or fraudulent activities. This principle ensures that individuals cannot use corporate structures as a means to evade their legal obligations and harm innocent parties.
Richter Holding Ltd. vs. The Assistant Director of Income Tax (2011)
In the case of Richter Holding Ltd. vs. The Assistant Director of Income Tax (2011), the Karnataka High Court held that the income tax department, being the fact finding authority, may lift the veil to find the true nature of the transaction. At the heart of the dispute was the interpretation of Section 2(22)(e) of the Income Tax Act, which empowers the income tax department to disregard the separate legal entity of a company if it finds that the company was formed or is being used for the purpose of avoiding or reducing tax liability. The department argued that this provision granted it the authority to lift the corporate veil and examine the true nature of the transaction in question.
The assessee, Richter Holding Ltd., contended that the income tax department could not disregard the separate legal entity of a company unless it could establish that the company was a sham or a mere facade. The assessee relied on the principle of corporate personality, which recognises a company as a separate legal entity distinct from its shareholders.
The Karnataka High Court, after considering the arguments of both parties, held that the income tax department, being the fact-finding authority, does have the power to lift the corporate veil to find the true nature of the transaction. The court observed that the purpose of Section 2(22)(e) is to prevent tax avoidance and evasion by artificial or contrived arrangements. To achieve this objective, the court held that the department must be able to look beyond the formal structure of a company and examine the underlying substance of the transaction.
The court emphasised that the power to lift the corporate veil is not absolute and must be exercised judiciously. The court laid down certain safeguards to prevent the arbitrary use of this power. For instance, the court held that the department must have reasonable grounds to believe that the company was formed or is being used for the purpose of tax avoidance or evasion. Additionally, the court held that the department must follow due process and provide the assessee with an opportunity to be heard before lifting the corporate veil.
The decision of the Karnataka High Court in Richter Holding Ltd. vs. The Assistant Director of Income Tax (2011) is a significant development in the area of corporate taxation. It clarifies the income tax department’s power to lift the corporate veil and provides important safeguards to protect the rights of taxpayers. This decision serves as a reminder that, while corporate personality is a fundamental principle of the law, it cannot be used as a shield for tax avoidance or evasion.
State of Rajasthan and Ors. vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors. (2016)
In the case of the State of Rajasthan and Ors. vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors. (2016), the Supreme Court held that the veil can be lifted if the company acts against public interest. The Gotan Lime decision is a significant development in Indian corporate law. It sends a clear message that companies cannot use the corporate veil to shield themselves from liability for wrongdoing. The decision also provides a valuable tool for regulators and law enforcement agencies to pursue companies that engage in illegal or unethical conduct.
Here are some of the key implications of the Gotan Lime decision:
Increased accountability for shareholders and directors: The decision makes it clear that shareholders and directors can be held personally liable for the debts and obligations of a company if the company is used to perpetrate fraud or to evade legal obligations. This increased accountability is likely to make shareholders and directors more cautious about the activities of the companies they own and manage.
Greater scrutiny of corporate conduct: The decision is also likely to lead to greater scrutiny of corporate conduct by regulators and law enforcement agencies. Companies will need to be more careful to comply with all applicable laws and regulations, as they may be held accountable for any wrongdoing.
Potential for more lawsuits: The decision may also lead to an increase in lawsuits against companies and their shareholders and directors. Shareholders and directors who are concerned about their personal liability may be more likely to file lawsuits against companies that they believe are engaging in illegal or unethical conduct.
Conclusion
In conclusion, the corporate veil protects the shareholders and officers of the company but when the concept of a separate entity is misused and any fraudulent or illegal activity takes place, under such circumstances, the veil is lifted to punish the actual offender. The courts in India have given several landmark judgements laying down conditions and circumstances under which the veil can be lifted. The doctrine was laid down to establish the fact that incorporating a company does not waive off all the liabilities of the shareholders and personal liability arises whenever the officers of the company act in contravention of the law of the land.
The internet has become an inseparable component of human life. It is bringing the world closer. Social media is a very active and fast-moving area. A large amount of content is being generated every day in the form of text, social media posts, blogs, images, videos, etc.
Artificial intelligence (AI) is a field of computer science that helps study intelligent machines. It is an emerging field of technology. The term “Artificial Intelligence” is used for the intelligence of machines or software. AI relates to the development of computer systems that can perform tasks which are normally practised by humans, such as learning, problem solving, understanding languages, etc. AI helps implement novel concepts and unique solutions to resolve complex challenges. Some of the common applications used in day-to-day life are Google search, Google Assistant, Self-driven Cars, Chat GPT, etc.
Content moderation : lesser-known aspect of AI
People are embracing AI generated content available on various forums for efficiency, accuracy, and domain enhancement in various fields. With the amount of user generated content (USG) uploaded on on-line platforms, it has become impossible to identify and remove the inappropriate content with the help of human moderators. Human moderators are struggling with manual content moderation. Content moderation by AI can reduce this burden with efficient, repeatable, and reliable solutions.
AI is mainly used where automation is necessary to avoid repetitive work. This is achieved through a variety of techniques, such as machine learning (ML), deep learning, and natural language processing (NLP).
Machine learning (ML): Machine learning is a key component of data science. Algorithms are trained to make projections from available data. The projections are further used to improve the performance of machine learning algorithms. From the content moderation perspective, machine learning algorithms identify and isolate potentially harmful content and eventually remove it in accordance with the set standards and guidelines of the platform.
Deep learning: Deep machine learning is also known as supervised learning. It can use unstructured data like text or images in their raw form. It can auto-determine the set of features to differentiate various categories of data from one another.
Natural language processing (NLP): NLP is a part of AI that helps machines identify and interpret natural language. It can perform repetitive tasks automatically. Speech recognition, chatbots, and analysis of sentiment from natural language inputs are some of the real-life applications of NLP.
The internet is a double-edged sword. It has become a battleground for harmful and inappropriate content. Social media is a very active and fast-moving area. AI based content moderation is an effective way to keep platforms free from inappropriate content. AI content moderation tools can review, filter and flag content that violates the guidelines of the forum. A vast amount of on-line content, like hate speech and sexual abuse material, poses a big threat to maintaining healthy and safe on-line environments. AI content moderation can delete such objectionable material and maintain harmony on the platform.
Process of content moderation
Following is the process that is usually followed for content moderation.
Uploading content: The process starts when users upload content on websites or various social media platforms. The content may be in the form of text messages, images, videos, etc.
Analysing content: AI algorithms analyse uploaded content using “machine learning” techniques and natural language processing.
Inappropriate content identification: If the uploaded content is harmful, it is flagged out and forwarded to human moderators for further action.
Role of human moderators: Once the content is flagged out and forwarded to human moderators, they analyse it carefully from the legal aspect and check whether it violates guidelines of the forum. The content is further approved or rejected as per standard guidelines.
Improvement in AI algorithms: Machine algorithms learn feedback provided by human moderators for further accuracy in identifying malicious content in future. Thus, by using learning techniques, human moderators can improve algorithm performance in future.
Types of content moderation
Various ways of content moderation are as follows:
Pre-moderation: The content is reviewed and approved prior to publishing. This ensures that quality content is posted on the website. However, it might not be cost effective.
Post-moderation: In post-moderation, revisions are made to the content after posting it on the platform. This method is not so effective as there are chances that users can use inappropriate content prior to its removal from the website.
Reactive moderation: Reactive moderation is carried out in response to a complaint by a user regarding inappropriate content.
Proactive moderation: It uses machine algorithms and detects harmful and offensive content before publishing it on the platform. This establishes a positive user experience as it deletes problematic content prior to posting on platforms.
Hybrid moderation: Hybrid moderation ensures inclusive coverage of proactive and reactive methods, which helps in saving time.
Uses of AI in content moderation
AI content moderation is performed using modern artificial intelligence technology. It can be used for multiple purposes, such as:
Creating a safe and positive on-line environment: AI can efficiently identify and remove a variety of harmful content, which helps to create a safe and positive online environment for users.
Quick analysis of data: AI can accelerate the moderation process by quickly analysing large amounts of content. It helps human moderators focus on the on-line material, which requires immediate attention.
Tailoring moderation process: AI can help in adjusting content moderation as per the guidelines set by the respective forums / platforms.
Ensuring consistency in content moderation: AI algorithms learn and improve accuracy by identifying harmful as well as biassed content. This brings consistency in content moderation across the respective platforms.
Confirming diversity and inclusion: The detection of biassed content helps AI create an environment where all voices are heard and respected.
Benefits of AI in content moderation
AI powered content moderation is a powerful tool that helps platforms manage biassed and harmful content effectively. AI algorithms are programmed in such a way that they strictly follow pre-defined guidelines. This maintains consistency in the content moderation.
Platform reputation: Using AI moderation tools, platforms can be more vigilant about content published. This will help them retain their users.
Joyful experience: AI algorithms can single out images, video clips, and articles with inappropriate content and give safe and enjoyable experiences to the audience.
Scalability: AI content moderation is a fast, accurate and cost-effective technology. It can analyse data much faster than human moderators. It is a preferred choice for large database platforms. In this way, community guidelines are adhered to.
Round the clock monitoring: AI can constantly monitor the content. This helps reduce the workload of human moderators.
Social media analysis: AI can identify, isolate, and delete inappropriate content and user interactions on social media.
AI can help limit the use of the following:
Hate speech: AI can find and delete text for keywords and phrases to identify potential hateful language, racial discrimination, and child abuse.
Terrorism: Human moderation is based on individual experiences and ideologies, which could possibly lead to personal biases. AI can auto filter and flag out content that promotes terrorism in an unbiased manner.
Misleading information: Promoting misinformation related to violence, or unlawful activities can be controlled by AI content moderation.
Malware and phishing links: AI can identify suspicious websites and links associated with harmful content.
Types of AI-powered content moderation tools
Different types of AI-powered content moderation tools are:
Text analysis tools: These tools can be used to identify harmful content in text, such as hate speech, spam, and sexually explicit content.
Image analysis tools: These tools can be used to identify harmful content in images, such as nudity, violence, and child sexual abuse imagery.
Video analysis tools: These tools can be used to identify harmful content in videos, such as hate speech, violence, and child sexual abuse imagery.
Potential challenges in AI content moderation
AI content moderation is helpful in controlling the appearance of inappropriate material on social media platforms.
Bias: AI algorithms could possibly be trained to remove content or suppress certain views. This would lead to unfair suppression or removal of specific content. Thus, limiting free speech.
Over-censorship: AI may project legitimate content as harmful by setting certain algorithms; this would lead to unnecessary censorship and suppression of creative content.
Threat to online security: Malicious actors can manipulate and misuse AI systems to spread misinformation. This would pose a threat to online security.
Deep fakes: Online content may be in various formats, like images, videos, audio, and memes. Deep fakes pose a great challenge as fake but convincing images, audio, and videos are created using machine learning.
AI hallucinations: AI hallucinations occur when an AI model generates false information but presents it as if it were correct. AI hallucinations spread biases and can misguide people with factually incorrect information.
Less transparency: The internal workings of AI moderation systems are complex. AI moderation systems make it difficult for users to understand and challenge biassed decisions. This can lead to frustration and distrust in the moderation process.
Job displacement: AI may replace human moderators. This would lead to job losses in the content moderation field.
What everyone should know about AI content moderation
Content moderation is challenging. It is not always possible to moderate content in such a way that all the stakeholders are happy. AI is not a perfect solution to content moderation, although it is a powerful tool. The role of human moderators is crucial to ensuring fairness and perfection. Platforms should be more vigilant about checking how their AI moderation systems work. They should take ownership of their decisions. Users should have the right to appeal and challenge AI-based decisions. Content moderation technology is evolving every day. Developing an effective content moderation system needs time, financial allocation, and talented/skilled developers. Due to constant improvements in the field, it is necessary that organisations keep a cordial and collaborative approach to managing malicious content. Proactive measures and periodical audits of posted content are necessary to reduce the risk of bias in AI algorithms. The balance between efficiency and fairness in content moderation can be maintained with the strengths of AI and human supervision. To ensure that technology is used for content moderation ethically and responsibly, it is necessary to use calibrated data sets and set guidelines and government . regulations for avoiding abuse of technology. AI technologies can be used to encourage positive engagement and discourage users from posting potentially harmful content.
Conclusion
The Internet is connecting humans with informative material, entertainment, and communities across the world. Harmful content posted on various platforms is posing a threat to our safety, security, and stability. The rising wave of artificial intelligence is giving us hope to fight against these vulnerabilities. It’s the duty of all humans to make positive use of this modern technology and make this world a better place to live.
This article was written by Anjali Sinha and updated by Kaustubh Phalke. The article explores the essentials of Section 162 CrPCand how the statements recorded under it can be used for what purposes in detail. As we dive into the article, we go through a brief introduction of the provision and then the meaning of this provision that makes the article more comprehensive and easy for the readers, followed by its essential, objective, importance, and the admissibility of the statements as evidence in an inquiry or trial given to the police officer during the course of the investigation. Further, after discussing all the important points of this provision, the article concludes with judicial precedents.
Table of Contents
Introduction
Section 162 of the Criminal Procedure Code,1973 (CrPC) falls under Chapter XII CrPC, 1973, which ranges from Section 154 to 176. It deals with the powers of police officers to investigate and provide information to the police.
Section 162 of the CrPC deals with the statements given by the accused to the police not to be signed and the use of these statements further during the trial. As per the provision, the statements made in front of the police are not admissible as evidence except for the purpose of contradiction.
Statements given by the accused to the police are recorded under Section 161 of the CrPC and cannot be used as substantial evidence either in favour of the accused or against him or her as per Section 162 of the CrPC. Such claims are solely valid for evaluating the credibility of the prosecution witnesses. A statement made during a police investigation cannot be the subject of cross-examination unless the person has already testified for the prosecution in court and his statement is introduced as evidence to refute that witness or to highlight an error in his earlier statement.
In the recent case of Munna Pandey v. the State of Bihar (2023), the Apex Court stated that Section 162 of the CrPC does not put a bar on the court from looking into the documents or put questions suo moto to contradict them. The Supreme Court stated that “there is, in our opinion, nothing in Section 162 of the CrPC that prevents a trial judge from looking into the papers of the chargesheet suo motu and himself using the statement of a person examined by the police recorded therein.”
The provision was introduced with the objective of maintaining transparency and preventing any coercion of the accused during the police investigation.
Section 162 CrPC
The provision talks about the statements made to the police not to be signed by the maker and the use of these statements as evidence.
Subsection (1) of the provision prohibits the investigating officer from taking the signatures of the witnesses and accused on the statement, which is reduced to writing and given in front of the police. These statements are recorded under Section 161, which states the examination of witnesses by the police, mentioned under Section 160, which states the police officer’s power to require the attendance of witnesses. Such statements are not used for any purpose during the investigation or trial.
As per the provision, the following records are considered inadmissible in the courts:
Any statement or record that constitutes a part of a police diary.
Any part of such a statement of record.
The proviso to subsection (1) states that such statements made by the witness can be used for the following purposes:
By the accused for contradicting the prosecution witness.
By the prosecution for the purpose of contradicting the prosecution witness. This can be done with the prior permission of the court. This is done in the manner provided by Section 145 of the Indian Evidence Act of 1872 (hereinafter referred to as the IEA).
Re-examination of the witness whose previous statement is used.
Subsection (2) of the provision states that, as per Section 27 of the IEA, any information given by a person in police custody that reveals some material fact is admissible in court.
The statement can be used if it is a dying declaration. Section 32 of the IEA deals with the Dying Declaration. A dying declaration is a statement made by the victim explaining the cause of death or any other material information.
The explanation of this provision states that any omission to state any material fact or circumstance that is relevant and significant in front of the police on being tested by the court if it is found to be a material omission, then it will be considered a contradiction.
Essentials of Section 162 CrPC
As per the author’s own analysis pertaining to the current provision, the essentials of this provision are as follows:
Subsection (1) of Section 162 CrPC
As per Subsection (1), the essentials of this provision are that it covers the statements made during the course of the investigation. Investigation as per Section 2(h) CrPC refers to all the proceedings conducted by the police officer to collect the evidence associated with the crime. The investigation starts with identifying the nature of the crime, i.e., cognisable or non-cognisable, and ends with the final report under Section 173 CrPC.
The statements must be reduced in writing.
Statements must be in accordance with Chapter XII of CrPC, which reads as information to the police and their powers to investigate.
The statements must be given to the police officer.
Such statements should not be signed by the person making them.
Such statements may not be used for the purpose of providing evidence during the inquiry or trial.
The statements must be related to the offence under investigation when such statements were made.
Proviso to Subsection (1) of Section 162 CrPC
The person whose statements are recorded in Subsection (1) shall be called a witness for the prosecution in such an inquiry or trial.
Any part of his statement, if duly proved, may be used by the accused to contradict such a witness as per Section 145 of the IEA.
Such statements can be used by the prosecution only if permitted by the court.
Any part of such a statement can be used in re-examination as well as for explaining any matter referred to in his cross-examination.
Subsection (2) of Section 162 CrPC
It outlines exceptions to the provision. Section 27 IEA, which states about the discovery of some material fact, and Section 32 IEA, which states about the dying declaration.
Explanation of Subsection (2)
Any omission that is of significance in the context pertaining to the matter in question will be considered a contradiction. Any omission that amounts to a contradiction will be considered as a question of fact.
Objective of Section 162 CrPC
The provision has been added to the law for the benefit of the accused. The statements given during the investigation in front of the police may have been obtained by coercion or force; hence, they are considered inadmissible as evidence in court.
In the case of Tehsildar Singh v. The State of Uttar Pradesh (1959), the Apex Court stated that it is assumed that the statements given to the police during the investigation were not made under circumstances that were reliable.
This provision protects the rights of individuals by preventing the misuse of statements by the police.
Admissibility of statement given to police as evidence
The statements given to the police cannot be used for any purpose, as per the provision. The statements given to the police are neither given on oath nor tested through cross-examination; hence, they are not admissible as evidence in the courts. Whereas if the person is called as a witness during the trial and gives statements to the police, his statements can be used for the purpose of contradiction and to prove any material omission.
It is assumed that the police cannot be trusted to record the statements transparently, and they can be biassed as well. It is a notable fact here, as also stated in the case of the State of U.P. v. M.K.Anthony (1985), that the provision does not make the statement inadmissible just because it was signed by the maker of the statement in front of the police officer during the investigation. Instead, the statement made in front of the police and signed by the maker cannot be used as evidence or for any other purpose during an inquiry or trial.
The statements can be used for any other proceeding. The statements can be used even during the inquiry or trial, but for any other offence that was under investigation when such a statement was made.
Use of statements for contradiction
Contradiction can be understood as if a witness testifies before the court that some fact existed without stating the same in the statements given to the police. The fact that is revealed in front of the court without revealing it prior in front of the police cannot be considered a substantive piece of evidence directly. Hence, the statements given in front of the police can be used for corroboration and contradiction.
Omission of fact
An omission means to skip something or to slip on something. If a certain fact is testified in court during the examination in chief as per Section 137 of the IEA and the same is omitted in the statements given to the police during the investigation, it is considered a contradiction. The statements given to the police can be used to prove such an omission.
Such an omission should be material and significant in nature to be considered a contradiction.
In the case of Tehsildar Singh v. The State of Uttar Pradesh (1959), the Apex Court held that vital omissions that result in vital contradictions can be proved by cross-examination.
In the case of Ponnuswamy Chetty v. Emperor (1933), the question issue, in this case, was whether a statement made by a person to the police during an investigation under Section 162 CrPC could be used during the course of the inquiry to show the contradiction. The Madras High Court stated that the statements under this provision can be used for the purpose of contradiction only. If they are to be used for this purpose, then they must be duly proved and used in the manner laid down in Section 145 of the IEA. A bare omission cannot be considered a contradiction, and both are never identical. Contradiction means to speak against the statements given before. Silence cannot be considered a contradiction since it is not a word.
Further, in the case of State Rep. by Inspector of Police v. Saravanan (2008), it was observed that the contradictions/omissions must be of such nature that they materially affect the trial. Minor contradictions, inconsistencies, embellishments, or improvements that do not affect the core of the prosecution case should not be grounds to reject the evidence of the witness in its entirety.
Dying declaration
The dying declaration is the statement made by the victim to the police stating his cause of death or the person who is responsible for his death. The dying declaration works on the principle of ‘nemomoriturus prae-sumitur mentire’ which means a man will not meet his maker with a lie in his mouth. This is the reason why courts consider it as the sole basis for convicting the accused.
The dying declaration is mentioned in Section 32(1) of the IEA. The burden of proving the dying declaration is on the prosecution.
The dying declaration must be made by the deceased only. In the case ofSuchand Pal v. Phani Pal (2003), the Supreme Court held that the declaration made by the deceased cannot be called a dying declaration because it was not voluntary and answers were not given by the deceased.
In Sham Shankar Kankaria v. State of Maharashtra (2006) the Apex Court held that the person on the death bed will not lie and hence will be serene in nature. This was considered as a sufficient reason for truthfulness. Therefore, examining the dying declaration on oath or cross-examination is not necessary. Excluding the dying declaration from the evidence will lead to a miscarriage of justice, as the victim is often the only eyewitness to serious crimes.
Discovery of some material fact under Section 27 IEA
Section 27 of the IEA is also an exception to Section 162 CrPC, which states that admission of confession by the court results in the discovery of some material facts. In simple terms, any confession made by the accused in front of the police that reveals some material fact is admissible in the court of law, which is not otherwise admissible as per Section 162 CrPC.
This is also known as the doctrine of confirmation, which states that in order to make any statement admissible made by the accused in front of the police, every part of the statement should be necessarily confirmed by the subsequent events of discovery.
It reminds us of a popular saying that nothing is settled until it is settled right.
Importance of Section 162 CrPC
This provision holds great significance to meet the ends of justice and fair trial. This protects the rights of the accused. It is assumed that the statements recorded by the police can be obtained by coercion and threat and are not on oath; hence, they are inadmissible as evidence. This restriction on the use of the statements of the accused given to the police officer prevents the misuse of power by the police.
The statements recorded by the police are usually taken in a haphazard manner, i.e., between caution and confusion, which makes it difficult to rely on the statements for corroboration. As per the suggestions of the law commission, the statements cannot be used for corroboration but can be used for contradiction.
The statements given under this provision can be used if they are given by the prosecution witness. These can be used by the defence and by the prosecution if permitted by the court.
The statements made by the defence witness cannot be used to contradict him, as it would be improper to allow the opposite party to contradict the witness on the records prepared by them.
In the case ofBaliram Tikaram Marathe vs. Emperor (1944), the Bombay High Court held that “the object of the section is to protect the accused both against overzealous police officers and untruthful witnesses.”
Procedure of recording contradictions in evidence
The procedure for the same is given under Rule 29 of Chapter VI of the Criminal Manual. The witness who made the statements under Section 161 CrPC is informed about the portion of the statement that is going to be used for contradiction. The witness is then questioned about such statements. If the witness admits that the statements were made by him in front of the police, then such admission requires no proof. But if the witness denies that the statements were not made by him then in such a case, contradiction comes into play. The court records such statements and gives the exhibit number thereon. This is how contradictions are taken on record. The investigating officer is then questioned about the statements made by the witness. If the investigating officer gives an affirmative answer, then the said contradiction is said to be proved.
Baliram Tikaram Marathe and Ors. v. Emperor (1944)
Facts of the case
This case is one of the very serious disorders that arise in maudha. The story begins on 13 August 1942, the day following the disturbances in Nagpur. The unlawful assembly consisted of people from Nagpur, Baroda, and Maudha. A meeting was held at Mauza Baroda, which lies between Nagpur and Maudha. This meeting was attended by some residents of the village and was addressed by Budhgir and Ramchandgir, Appellants in this Court, and one Sheluker Master. After instigating the people who attended the meeting by relating them to the disturbances in Nagpur. The next day, people from different cities gathered at Maganlal Bagdi’s bungalow. They issued out and cut some big trees on the roadside and laid them across the road that runs from Nagpur to Maudha, causing some damage to a culvert and the Kanhan bridge providing access to Maudha, in order to disturb the communication between Nagpur and Maudha.
The volunteers of ‘Nagar Saurakahak Dal’, which came into existence to relieve distress due to the widespread devastation caused by a flood, were instigated to burn the police station houses. Maganl Bagdi and some other members, who were the nucleus and motive force of this unlawful assembly, absconded. The trial proceeded jointly against the people from Maudha and Baroda and one man from Nagpur. An application was made on behalf of the accused, asking for copies of witness statements, which were reduced to writing by the police officer. The application was rejected, stating that no copies could be supplied except those of four witnesses whose statements appeared before the Special Judge, answering the requirements of Section 162, CrPC.
Issues in the case
The question involved in the instant case was whether there had been a fair trial or not.
Held
The High Court of Nagpur held that the statements recorded under Section 162 cannot be used for any other purpose except contradiction by the accused. The object of this provision was clarified, stating that the object of the section is to protect the accused both against overzealous police officers and untruthful witnesses. The appeals were dismissed.
Tehsildar Singh and Another v. The State of Uttar Pradesh (1959)
Facts of the case
The facts of the case are that Asa Ram and Bankey were two informers of the police who acted as information for Charna’s gang, which was a notorious gang responsible for murder and dacoities. Once, a music performance was performed in front of Ram Saroop’s house, which was attended by a large number of people including two police informers, Bankey and Asa Ram. The accused arrived with 15-20 people with the intention of killing these two informers and started firing, in which two persons were killed. Bharat Singh was one of the two dead and was misidentified by the accused as informer Asa Ram. The appellant in the instant case, along with seven other co-accused, was sent to trial.
The defence alleged that the prosecution had built up its case. The defendants contended that the police statements of the eyewitness did not mention the facts regarding the dead bodies and the presence of the gas lantern, and the defence counsel puts the following two questions with respect to these omissions to the first eyewitness produced:
“Did you state to the investigating officer that the gang rolled the dead bodies of Nathi, Saktu, and Bharat Singh and scrutinised them, and did you tell him that the face of Asa Ram resembled that of the deceased Bharat Singh?”
“Did you state to the investigating officer about the presence of the gas lantern?”
The session judge disallowed these questions and convicted the accused under Section 302 of the Indian Penal Code. The appeal was then made before the Supreme Court.
Issues in the case
The question of the construction of Section 162 CrPC was raised in the appeal before the Hon’ble Apex Court.
Held
The Hon’ble Supreme Court held that a statement in writing made by a witness before a police officer in the course of an investigation can be used only to contradict his statement in the witness box and for no other purpose.
Statements that are not reduced to writing by the police officer cannot be used for contradiction. A statement that can be deemed to be part of an expressly recorded statement can be used for contradiction, not because it is an omission strictly so-called but because it is deemed to form part of the recorded statement.
The appeal was dismissed.
R M Malkani v. State of Maharashtra (1972)
Facts of the case
In the present case, Jagdishprasad Ramnarayan Khandelwal was diagnosed with acute appendicitis and hence was admitted to the nursing home of Dr. Adatia on 3 May 1964. After keeping the patient under observation for 24 hours, the condition of the patient became serious. The patient developed paralysis of the ileum. He was removed to Bombay Hospital on 10 May. 1964 to be under the treatment of Dr. Motwani. The patient died on 13 May 1964. The hospital issued a Death Intimation Card as “paralytic ileus and peritonitis following an operation for acute appendicitis”. The appellant allowed the disposal of the body without ordering a post-mortem. An inquest was already ordered from the police station for the same. It was the practice of the coroner’s court to send letters to professional people concerned with an inquest to get the explanation of the doctor who treated or operated on the patient. The appellant was ordered to call Mr. Adatia. Dr. Adatia was asked by the appellant to meet Dr. Motwani so that the latter could get in touch with the appellant to resolve the technical difficulties. The appellant asked for a sum of Rs. 20,000 from Dr. Adatia through Dr. Motwani and he refused to pay the same.
Dr. Motwani and Dr. Adatia decided to lodge a complaint with the Anti-Corruption Bureau on being harassed by the calls of the appellant. Mugwe and the Assistant Commissioner of Police, Sawant, attached tape recording equipment to Dr. Motwani’s phone and asked him to call the appellant. The conversation was recorded on the tape. Mugwe then opened an investigation. The appellant was charged under Sections 161, 385, and 420 read with Section 511 of the Indian Penal Code.
Issues in the case
The issue raised in the case was whether the tape-recorded conversation was admissible as evidence or not. The question was whether the recording was obtained in an illegal manner in contravention of Section 25 of the Indian Telegraph Act, 1885, and therefore the evidence was inadmissible.
Held
The Supreme Court held that there was no violation of Section 25 of the Indian Telegraph Act, hence the tape recording was admissible as evidence. The appellant’s conversation was free from any duress or compulsion. The attachment of any recording instrument was not known to the appellant. The statements were not directly made to the police officer hence, they cannot be considered as a bar under Section 162 of the CrPC.
Munna Pandey v. State of Bihar (2023)
Facts of the case
In the present case, the appellant was sentenced to death for committing the rape and murder of a 10-year-old girl. The accused and co-accused were charged under Sections 376(2)(g), 302 read with Section 34, 120B of the IPC and Section 4 of the POCSO Act. The co-accused raised the plea of being juvenile after the framing of charges. The case of the co-accused was referred to the juvenile justice board in Bhagalpur, and the trial court proceeded against the appellant only. The appellant, aggrieved with the judgement of the trial court, made the appeal to the High Court of Patna. The High Court of Patna dismissed the appeal and upheld the decision of the trial court. The appeal was then made before the Supreme Court.
Issues in the case
The issue in this case was that during the trial there were glaring contradictions between statements given by the witness to police during the initial investigation and their subsequent testimony in court.
Held
The Apex Court held that nothing in Section 162 CrPC bars the trial judge from taking suo moto action and looking into the papers of the charge sheet. He can use the statements given to the police for the purpose of contradiction when such a person gives evidence in favour of the state as a prosecution witness. The judge may himself do this or may makeover the statement to the lawyer of the accused for him to use it.
The Apex Court set aside the case and sent it back to the High Court to reconsider the death reference.
Chapter XII, which earlier dealt with information to the police and their powers to investigate, will now be replaced by Chapter XIII, the Bharatiya Nagarik Suraksha Sanhita, 2023 (hereinafter referred to as BNSS). Section 162 CrPC will now be replaced by Section 181 BNSS. No changes have been made to the provision.
Conclusion
The procedure as laid down in the CrPC, which makes the statements given in front of the police during the course of the investigation inadmissible as evidence, is a deliberate step and necessary for the protection of the rights of the accused. The absence of this provision would have increased the scope of injustice for the accused and increased the misuse of power by the police officers. On the other hand, the exceptions such as using the statements for contradiction, dying declaration, etc. of this provision are equally important to uphold the principles of justice and hence cannot be overlooked.
Frequently Asked Questions (FAQs)
What is the difference between Section 161 and 162 CrPC?
Section 161 gives the police officer the power to examine and record the statements of any person who’s aware of the facts and circumstances of the case at hand. Whereas Section 162 puts a bar on the usage of statements recorded under Section 161. It states that the statements recorded by the police officer during the investigation cannot be used for any purpose except for the contradictions and omissions resulting in a contradiction.
What is the purpose of Section 162 CrPC?
The purpose of this provision is to put a bar on the use of the statements given to the police officer under Section 161 during the course of an investigation for the purpose of providing evidence during an inquiry or trial. The objective of this provision is to protect the rights of the accused.
Can the statements recorded by the police officer during the investigation be used for contradiction?
Yes, the statements recorded by the police officer during the course of the investigation can be used for the purpose of contradiction. Section 162 gives an exception for the use of the statements given during the course of the investigation for the purpose of contradiction. The prosecution shall obtain prior information from the court to use such statements for contradictions.
What is the significance of Section 162 CrPC?
This provision holds great significance to meet the ends of justice and a fair trial. This protects the rights of the accused. It is assumed that the statements recorded by the police can be obtained by coercion and threat and are not on oath; hence, are inadmissible as evidence.
What kind of omission is considered a contradiction under Section 162 of the CrPC?
The omission of material and significant nature are considered to be a contradiction. An omission means to skip something or to slip on something. If a certain fact is testified in court during the examination in chief as per Section 137 of the Indian Evidence Act and the same is omitted in the statements given to the police during the investigation, it is considered as a contradiction. The statements given to the police can be used to prove such an omission.
What are the exceptions under Section 162 CrPC?
The following are the exceptions under Section 162 CrPC:
Use of statements for contradiction.
To prove the omission of facts.
Dying declaration under Section 32 IEA.
Statements stating the discovery of some material fact under Section 27 IEA.
Is the inquest report covered under Section 162?
In Narpal Singh v. the State of Haryana,(1977), the Supreme Court ruled that statements made in inquest reports are also governed by Section 162 of the Evidence Act and are inadmissible in evidence if the signatories were not examined as witnesses. Section 174 ofthe CrPC deals with the inquest reports. Inquest reports are reports prepared by the police in the case of unnatural deaths or suspicious deaths. It provides preliminary information regarding the cause and circumstances that are relevant to the death. The objective of the inquest report is to investigate the reasons behind the unnatural death.
Is FIR covered within Section 162?
In the case of Arnab Ranjan Goswami v. Union of India (UOI) and Ors.,(2020), the Apex Court stated that all other information made orally or in writing after the commencement of the investigation into the cognisable offence disclosed from the facts mentioned in the first information report and entered in the station house diary by the police officer or such other cognisable offences as may come to his notice during the investigation will be statements falling under Section 162 of CrPC. No such information/statement can properly be treated as an FIR, and entered in the station house diary again, as it would in effect be a second FIR and the same cannot be in conformity with the scheme of the Code of Criminal Procedure.
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