Closely Held Company and Widely Held Company

 

Closely Held Company

What is a 'Closely Held Corporation?

A closely held corporation is any company that has only a limited number of shareholders; its stock is publicly traded on occasion but not on a regular basis. These entities differ from privately owned firms that issue stock that is not publicly traded. Those who own shares of closely held corporations should consult a financial planner with expertise in the tax and estate ramifications that come with this type of stock.

 

Widely Held Company

Section 2(18) of The Income Tax Act, 1961

(18) "company in which the public are substantially interested"—a company is said to be a company in which the public are substantially interested—

(a)  if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank ; or

(aa)  if it is a company which is registered under section 25 of the Companies Act,[1] 1956 (1 of 1956) ; or

(ab)  if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested :

Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ; or

(ac) if it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society ; or

(ad) if it is a company, wherein shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more co-operative societies ;

(b)  if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :—

(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ;

(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by—

(a)  the Government, or

(b)  a corporation established by a Central, State or Provincial Act, or

(c)  any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.

Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words "not less than fifty per cent", the words "not less than forty per cent" had been substituted ;

 

Advantages of Closely held company

Ownership transfers are restricted

One of the special features of a closely held corporation is a restriction on ownership transfers. A closely held corporation, be definition can’t go public. That is to say, shareholders are not allowed to sell their shares on a stock exchange. This type of restriction on the transferability of ownership makes the closely held corporation particularly useful for family businesses and estate planning. 

 

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[1] Section 25 in The Companies Act, 1956

25. Power to dispense with" Limited" in name of charitable or other company.

(1) Where it is proved to the satisfaction of the Central Government that an association-

(a) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and

(b) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may, by licence, direct that the association may be registered as a company with limited liability, without the addition to its name of the word" Limited" or the words" Private Limited".

(2) The association may thereupon be registered accordingly; and on registration shall enjoy all the privileges, and (subject to the provisions of this section) be subject to all the obligations, of limited companies.

(3) Where it is proved to the satisfaction of the Central Government-

(a) that the objects of a company registered under this Act as a limited company are restricted to those specified in clause (a) of sub- section (1); and

(b) that by its constitution the company is required to apply its profits, if any, or other income in promoting its objects and is prohibited from paying any dividend to its members,

the Central Government may, by licence, authorise the company by a special resolution to change its name, including or consisting of the omission of the word" Limited" or the words" Private Limited"; and section 23 shall apply to a change of name under this sub- section as it applies to a change of name under section 21.

(4) A firm may be a member of any association or company licensed under this section, but on the dissolution of the firm, its membership of the association or company shall cease.

(5) A licence may be granted by the Central Government under this section on such conditions and subject to such regulations as it thinks fit, and those conditions and regulations shall be binding on the body to which the licence is granted, and where the grant is under sub- section (1), shall, if the Central Government so directs, be inserted in the memorandum, or in the articles, or partly in the one and partly in the other.

(6) ¹ It shall not be necessary for a body to which a licence is so granted to use the word" Limited" or the words" Private Limited" as any part of its name and, unless its articles otherwise provide, such body shall, if the Central Government by general or special. order so directs and to the extent specified in the direction, be exempt from such of the provisions of this Act as may be specified therein.]

(7) The licence may at any time be revoked by the Central Gov- ernment, and upon revocation, the Registrar shall enter the word" Limited" or the words" Private Limited" at the end of the name upon the register of the body to which it was granted; and the body shall cease to enjoy the exemption granted by this section: Provided that, before a licence is so revoked, the Central Government shall give notice in writing of its intention to the body, and shall afford it an opportunity of being heard in opposition to the revocation.

(8) ² (a) A body in respect of which a licence under this section is in force shall not alter the provisions of its memorandum with respect to its objects except with the previous approval of the Central Government signified in writing.

(b) The Central Government may revoke the licence of such a body if it contravenes the provisions of clause (a).

1. Subs. by Act 65 of 1960 s. 9, for sub- section (6).

2. Subs. by s. 9, ibid., for sub- section (8).

(c) In according the approval referred to in clause (a), the Central Government may vary the licence by making it subject to such conditions and regulations as that Government thinks fit, in lieu of, or in addition to, the conditions and regulations, if any, to which the licence was formerly subject.

(d) Where the alteration proposed in the provisions of the memorandum of a body under this sub- section is with respect to the objects of the body so far as may be required to enable it to do any of the things specified in clauses (a) to (g) of sub- section (1) of section 17, the provisions of this sub- section shall be in addition to, and not in derogation of, the provisions of that section.]

(9) Upon the revocation of a licence granted under this section to a body the name of which contains the words" Chamber of Commerce", that body shall, within a period of three months from the date of revocation or such longer period as the Central Government may think fit to allow, change its name to a name which does not contain those words; and-

(a) the notice to be given under the proviso to sub- section (7) to that body shall include a statement of the effect of the foregoing provisions of this sub- section; and

(b) section 23 shall apply to a change of name under this sub- section as it applies to a change of name under section 21.

(10) If the body makes default in complying with the requirements of sub- section (9), it shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues. Articles of Association.

 

 SEDITION

The first case in India that arose under the section is what is known as the Bangobasi case (Queen-Emprees v. Jogendra Chunder Bose I.L.R. (1892) Cal. 35which was tried by a Jury before Sir Comer Petheram, C.J. while charging the jury, the learned Chief Justice explained the law to the jury in these terms :

"Disaffection means a feeling contrary to affection, in other words, dislike or hatred. Disapprobation means simply disapproval. It is quite possible to disapprove of a men's sentiments or action and yet to like him. The meaning of the two words is so distinct that I feel it hardly necessary to tell you that the contention of Mr. Jackson cannot be sustained. If a person uses either spoken or written words calculated to create in the minds of the persons to whom they are addressed a disposition not to obey the lawful authority of the Government, or to subvert or resist that authority, if and when occasion should arise, and if he does so with the intention of creating such a disposition in his bearers or readers, he will be guilty of the offence of attempting to excite disaffection within the meaning of the section though no disturbance is brought about by his words or any feeling of disaffection, in fact, produced by them. It is sufficient for the purposes of the section that the words used are calculated to excite feelings of ill-will against the Government and to hold it up to the hatred and contempt of the people, and that they were used with the intention to create such feeling."

13. The next case is the celebrated case of Queen-Empress v. Balgangadhar Tilak I.L.R. (1898) 22 Bom. 112 which came before the Bombay High Court. The case was tried by a jury before Strachey, J. The learned judge, in the course of his charge to the jury, explain the law to them in these terms :

"The offence as defined by the first clause is exciting or attempting to excite feelings of disaffection to the Government. What are "feelings of disaffection" ? I agree with Sir Comer Petheram in the Bangobasi case that disaffection means simply the absence of affection. It means hatred, enmity dislike, hostility, contempt and every from of ill-will to the Government. "Disloyalty" is perhaps the best general term, comprehending every possible form of bad feeling to the Government. That is what the law means by the disaffection which a man must not excite or attempt to excite; he must not make or try to make others feel enmity of any kind towards the Government. You will observe that the amount or intensity of the disaffection is absolutely immaterial except perhaps in dealing with the question of punishment; if a man excites or attempts to excite feelings of disaffection, great or small, he is guilty under the section. In the next place, it is absolutely immaterial whether any feelings of disaffection have been excited or not by the publication in question. It is true that there is before you a charge against each prisoner that he has actually excited feelings of disaffection to the Government. If you are satisfied that he has done so, you will, of course, find him guilty. But if you should hold that that charge is not made out, and that no one is proved to have been excited to entertain feelings of disaffection to the Government by reading these articles, still that alone would not justify you in acquitting the prisoners. For each of them is charged not only with exciting feelings of disaffection, but also with attempting to excite such feelings. You will observe that the section places on absolutely the same footing the successful exciting of feelings of disaffection and the unsuccessful attempt to excite them, so that, if you find that either of the prisoners has tried to excite such feeling in others, you must convict him even if there is nothing to show that he succeeded. Again, it is important that you should fully realise another point. The offence consists in exciting or attempting to excite in others certain bad feeling towards the Government. It is not the exciting or attempting to excite in others certain bad feeling towards the Government. It is not the exciting or attempting to excite mutiny or rebellion, or any sort of actual disturbance, great or small. Whether any disturbance or outbreak was caused by these articles, is absolutely immaterial. If the accused intended by the articles to excite rebellion or disturbance, his act would doubtless fall within section 124A, and would probably fall within other sections of the Penal Code. But even if he neither excited nor intended to excite any rebellion or outbreak or forcible resistance to the authority of the Government, still if he tried to excite feelings of enmity to the Government, that is sufficient to make him guilty under the section. I am aware that some distinguished persons have thought that there can be no offence against the section unless the accused either counsels or suggests rebellion or forcible resistance to the Government. In my opinion, that view is absolutely opposed to the express words of the section itself, which as plainly as possible makes the exciting or attempting to excite certain feelings, and not the inducing or attempting to induce to any course of action such as rebellion or forcible resistance, the test of guilt. I can only account for such a view by attributing it to a complete misreading of the explanation attached to the section, and to a misapplication of the explanation beyond its true scope."

14. The long quotation has become necessary in view of what followed later, namely, that this statement of the law by the learned judge came in for a great deal of comment and judicial notice. We have omitted the charge to the jury relating to the explanation to s. 124A because that explanation has not yielded place to three separate explanations in view of judicial opinions expressed later. The jury, by a majority of six to three, found Shri Balgangadhar Tilak guilty. Subsequently, he, on conviction, applied under clause 41 of the Letters Patent for leave to appeal to the Privy Council. The application was heard by a Full Bench consisting of Farran, C.J. Candy and Strachey, JJ. It was contended before the High Court at the leave stage, inter alia, that the sanction given by the Government was not sufficient in law in that it had not set out the particulars of the offending articles, and, secondly, that the judge misdirected the jury as to the meaning of the word "disaffection" insofar as he said that it might be equivalent to "absence of affection". With regard to the second point, which is only relevant point before us; the Full Bench expressed itself to the following effect :

"The other ground upon which Mr. Russell has asked as to certify that this is a fit case to be sent to Her Majesty in Council is that there has been a misdirection, and he based his argument on one major and two minor grounds. The major ground was that the section cannot be said to have been contravened unless there is a direct incitement to stir up disorder or rebellion. That appears to us to be going much beyond the words of the section, and we need not say more upon that ground. The first of the minor points is that Mr. Justice Strachey in summing up the case to the jury stated that disaffection meant the "absence of affection". But although if that phrase has stood alone it might have misled the jury, yet taken in connection with the context we think it is impossible that the jury could have been misled by it. That expression was used in connection with the law as led down by Sir Comer Petheram, in Calcutta in the Bangobashi case. There the Chief Justice instead of using the words "absence of affection" used the words "contrary to affection". If the words "contrary to affection" had been used instead of "absence of affection" in this case there can be no doubt that the summing up would have been absolutely correct in this particular. But taken in connection with the context it is clear that by the words "absence of affection" the learned Judge did not mean the negation of affection but some active sentiment on the other side. Therefore on that point we consider that we cannot certify that this is a fit case for appeal."

In this connection is must be remembered that it is not alleged that there has been a miscarriage of Justice."

15. After making those observations, the Full Bench refused the application for leave. The case was then taken to Her Majesty in Council, by way of application for special leave to appeal to the Judicial Committee. Before their Lordships of the Privy Council, Asquith, Q.C. assisted by counsel of great experience and eminence like Mayne, W. C. Bonnerjee and others, contended that there was a misdirection as to the meaning of section 124A of the Penal Code in that offence had been defined in terms to wide to the effect that "disaffection" meant simply "absence of affection" and that it comprehended every possible form of bad feeling to the Government. In this connection reference was made to the observations of Petheram, C.J. in Queen-Empress v. Jogender Bose I.L.R. (1892) Cal. 35. It was also contended that the appellant's comments had not exceeded what in England would be considered within the functions of a Public journalist and that the misdirection complained of was of the greatest importance not merely to the affected person but to the whole of the Indian Press and also to all her Majesty's subjects; and that it injuriously affected the liberty of the press and the right free speech in public meetings. But in spite of the strong appeal made on behalf of the petitioner for special leave, the Lord Chancellor, delivering the opinion of the Judicial Committee, while dismissing the application, observed that taking in view of the whole of the summing up they did not see any reason to dissent from it, and that keeping in view the rules which Their Lordships observed in the matter of granting leave to appeal in criminal cases, they did not think that the case raised questions which deserve further consideration by the Privy Council. (vide Gangadhar Tilak v. Queen Empress) I.L.R. (1897) IndAp 1.

16. Before noticing the further changes in the Statute, it is necessary to refer to the Full Bench decision of the Allahabad High Court in Queen Empress v. Amba Prasad MANU/UP/0084/1897 : I.L.R. (1898) All. 55. In that case, Edge, C.J., who delivered the judgment of the Court, made copious quotations from the judgments of the Calcutta and the Bombay High Courts in the cases above referred to. While generally adopting the reasons for the decisions in the aforesaid two cases, the learned Chief Justice observed that a man may be guilty of the offence defined in s. 124A of attempting to excite feelings of disaffection against the Government established by law in British India, although in particular article or speech he may insist upon the desirability or expediency of obeying and supporting the Government. He also made reference to the decision of Bombay High Court in the Satara I.L.R. (1898) 22 Bom. 452 case. In that case a Full Bench, consisting of Farran, C.J., and Parsons and Ranade, JJ. had laid down that the word "disaffection" in the section is used in a special sense as meaning political alienation or discontent or disloyalty to the Government or existing authority. They also held that the meaning of word "disaffection" in the main portion of the section was not varied by the explanation. Parsons, J., held that the word "disaffection" could not be construed as meaning "absence of or contrary of affection or love'. Ranade J., interpreted the word "disaffection" not as meaning mere absence or negation of love or good will but a positive feeling of aversion, which is akin to ill will, a definite insubordination of authority or seeking to alienate the people and weaken the bond of allegiance, a feeling which tends to bring the Government into hatred and discontent, by imputing base and corrupt motives to it. The learned Chief Justice of the Allahabad High Court observed that if those remarks were meant to be in any sense different from the construction placed upon the section by Strachey, J., which was approved, as aforesaid, by the Judicial Committee of the Privy Council, the later observations of the Bombay High Court could not be treated as authoritative. As the accused in the Allahabad case had pleaded guilty and the appeal was more or less on the question of sentence, it was not necessary for their Lordships to examine in detail the implications of the section, though they expressed their general agreement with the view of the Calcutta and the Bombay High Courts in the first two cases, referred to above.

This statement of the law is derived mainly from the address to the Jury by Fitzerald, J., in the case of Reg v. Alexander Martin Sullivan (1868) 11 CCLC 44. In the course of his address to the Jury the learned Judge observed as follows :

"Sedition is a crime against society, nearly allied to that of treason, and it frequently precedes treason by a short interval. Sedition in itself is comprehensive term, and it embraces all those practices, whether by word deed or writing, which are calculated to disturb the tranquility of the State, and lead ignorant persons to endeavour to subvert the Government and the laws of the empire. The objects of sedition generally are to induce discontent and insurrection and stir up opposition to the Government, and bring the administration of justice into contempt; and the very tendency of sedition is to incite the people to insurrection and rebellion. Sedition has been described as disloyalty in action and the law considers as sedition all those practices which have for their object to excite discontent or dissatisfaction, to create public disturbance, or to lead to civil war; to bring into hatred or contempt the Sovereign or the Government, the laws or constitution of the realm, and generally all endeavours to promote public disorder."

23. That the law has not changed during the course of the centuries is also apparent from the following statement of the law by Coleridge, J., in the course of his summing up to the Jury in the case of Rex. v. Aldred (1909) 22 CCLC 1 :

"Nothing is clearer than the law on this head - namely, that whoever by language, either written or spoken incites or encourages other to use physical force or violence in some public matter connected with the State, is guilty of publishing a seditions libel. The word "sedition" in its ordinary natural signification denotes a tumult, an insurrection, a popular commotion, or an uproar; it implies violence or lawlessness in some form........"

 

doctrine of proportionality

Doctrine of Proportionality

The classical definition of proportionality has been given by none other than Lord Diplock when his Lordship rather ponderously stated “you must not use a steam hammer to crack a nut if a nut cracker would do”[1] Thus proportionality broadly requires that government action must be no more intrusive than is necessary to meet an important public purpose.[2]

British Model

The British model as expounded by Lord Stynn in R v. Secretary of State for the Home Department exparte Daly[3] finds its origin in the judgment of the Privy Council in de Freitas v. Permanent Secretary of Ministry of Agriculture, Fisheries, Land and Housing.[4] In that case, Lord Clyde while deciding an appeal from Antigua and Barbuda, used South African and Canadian jurisprudence to formulate a three stage test for proportionality review. A decision is proportionate if :

I. The legislative (or executive) objective is sufficiently important to justify limiting a fundamental right.

II. The measures designed to meet the legislative (or executive) objective are rationally connected to it.

III. The means used to impair the right or freedoms are no more than necessary to accomplish the objective.[5]

European Model

The very concept of proportionality originated in nineteenth century Prussia35. This nineteenth century Prussian concept prescribed various tests. Those were accepted by the European Court of Justice in R v. Minister of Agriculture, Fisheries and Food, ex parte Federation Europeenne de la Sante Animale (FEDESA).[6] Based on this case Julian Rivers outlines a four stage test as:

1. Legitimacy: Does the act (decision, rule policy etc) under review pursue a legitimate general aim in the context of the right in question?

2. Suitability: Is the act capable of achieving that aim?

3. Necessity: Is the act the least intrusive means of achieving the desired level of realisation of the aim?

4. Fair balance or proportionality in narrow sense: Does that act represent a net gain, when the reduction in enjoyment of rights is weighted against the level of realisation of the aim?[7]

Indian model

Supreme Court in Omkumar v. Union of India.[8] It was in this case that the Supreme Court accepted the application of proportionality doctrine in India. However, strangely enough the Supreme Court in this case suddenly discovered that Indian courts had ever since 1950 regularly applied the doctrine of proportionality while dealing with the validity of legislative actions in relation to legislations infringing the fundamental freedom enumerated in Article 19 (1) of the Constitution of India. According to the Supreme Court the Indian courts had in the past in numerous occasions the opportunity to consider whether the restrictions were disproportionate to the situation and were not the least restrictive of the choices.[9] The same is the position with respect to legislations that impinge Article 14 (as discriminatory), and Article 21 of the Constitution of India[10]

 Santosh Kumar Satishbhushan Bariyar V. State of Maharashtra AND State of Maharashtra V. Sanjeevkumar Mahendraprasad Roy and Anr.  (2009)6SCC498

155. The Canadian Charter of Rights makes provision for the limitation of rights through a general clause. Section 1 of the Charter permits such reasonable limitations on Charter rights "as can be demonstrably justified in a free and democratic society". In R. v. Oakes (1986) 1 S.C.R. 103 it was held that in order to effect a limitation, there has to exist a sufficient objective to warrant the limitation of the right in question. There should also be proportionality between the limitation and such objective. In a frequently- cited passage, Dickson, J. described the components of proportionality as follows:

There are, in my view, three important components of a proportionality test. First, the measures adopted must be carefully designed to achieve the objective in question. They must not be arbitrary, unfair or based on irrational considerations. In short, they must be rationally connected to the objective. Secondly, the means, even if rationally connected to the objective in the first sense, should impair 'as little as possible' the right or freedom in question: R v. Big M Drug Mart Limited (supra).

Thirdly, there must be a proportionality between the effects of the measures which are responsible for limiting the charter right of freedom, and the objective which has been identified as of 'sufficient importance'.

Bipin Synthetics Pvt. Ltd., a Company incorporated under the Companies Act, 1956 Vs. The State of Maharashtra, The Commisioner of Sales Tax and The Union of India (UOI) through the Joint Secretary, Ministry of Law, Justice and Company Affairs  2009(6)BomCR204

10. We may now consider the second contention based on discrimination. The law on the subject and some tests may be spelled out from the Judgment of the Supreme Court in Shashikant Laxman Kale and Anr. v. Union of India and Anr. : (1990) 4 SCC 366, which quoted from the Judgment in Re: the Special Courts Bill, 1978:

(a) The State, in the exercise of its governmental power, has of necessity to make laws operating differently on different groups or class of persons within its territory to attain particular ends n giving effect to its policies, and it must possess for that purpose large powers of distinguishing and classifying persons or things to be subjected to such laws.

(b) The constitutional command to the State to afford equal protection of its laws sets a goal not attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary.

(c) The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian Territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is substantially the same.

(d) The law can make and set apart the classes according to the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive.

(e) The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differential which distinguishes those that are grouped together from others and (2) that that differentia must have a rational relation to the object sought to be achieved by the Act.

(f) The differentia which is the basis of the classification and the object of the act are distinct things and what is necessary is that there must be a nexus between them. In short, while Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon person arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it does not forbid classification for the purpose of legislation, provided such classification is not arbitrary in the sense abovementioned.

(g) Classification necessarily implies the making of a distinction or discrimination between persons classified and those who are not members of that class. It is the essence of a classification that upon the class are cast duties and burdens different from those resting upon the general public. Indeed, the very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality.

Have the petitioners discharged the initial burden on them to prove that the classification is unreasonable and or has no nexus with the object sought to be achieved. Have the petitioners produced cogent material to show that the petitioners and others similarly situated have been subjected for discriminatory treatment and or hostile treatment. See Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar and Ors. AIR 1958 SC 538.

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[1] R v. Goldsmith (1983) 1 WLR 151, p. 155.

[2] For e.g., See John Adler, General Principles of Constitutional and Administrative law, (4th ed., 2002) p. 368.

[3] (2001) 3 All ER 433 (HL)

[4] (1999) 1 A.C. 69

[5] See Id., p 80

[6] (1991) 1 C.M.L.R. 507

[7] Julian Rivers, Proportionality and Variable Intensity of Review, (2006) 65 (1) C.L.J.174, p. 175

[8] AIR 2000 SC 3689

[9] Id., p. 3697

[10]Id., p.3698

Cause of action and territorial Jurisdiction

Cause of action and territorial Jurisdiction

Cause of action implies a right to use. The material facts which are imperative for the suitor to allege and prove constitute the cause of action.  Cause of action is not defined in any statute. It has however, been judicially interpreted inter alia to mean that every fact which would be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment of the Court. Negatively put it would mean that everything which, if not proved, gives the defendant an immediate right to judgment would be part of cause of action.  The import is beyond any doubt. For every action, there has to be a cause of action, if not, the plaint or the writ petition, as the case may be, shall be rejected summarily.

In ‘Kusum Ingots and Alloys Limited V. Union of India’ – 2004 (4) TMI 342 - SUPREME COURT OF INDIA  the High Court held that the facts pleaded in the writ petition must have some nexus in relation to the prayer to be granted and not those facts which has nothing to do with the prayer made therein.  Even a small part of cause of action if arose within the territorial jurisdiction of a High Court, the Court will have jurisdiction in the matter.

In ‘Sterling Agro Industries Limited V. Union of India’ – 2012 (6) TMI 76 - DELHI HIGH COURT - LB  held as following regarding to the cause of action-

• The sole cause of action emerges at the place or location where the tribunal/appellate authority/revisional authority is situate and the said High Court cannot decline to entertain the writ petition as that would amount to failure of the duty of the Court cannot be accepted inasmuch as such a finding totally based on the situs of the tribunal/appellate authority/revisional authority totally ignoring the concept of forum conveniens;
• Even a miniscule part of cause of action arises within the jurisdiction of the Court, a writ petition would be maintainable before the High Court;
• An order of the appellate authority constitutes a part of cause of action to make the writ petition maintainable in the High Court within whose jurisdiction the appellate authority is situated. Yet the same may not be the singular factor to compel the High Court to decide the matter on merits. The High Court may refuse to exercise its discretionary jurisdiction by invoking the doctrine of forum conveniens.

In ‘Oil & Natural Gas Commission V. Utpal Kumar Basu & Others’ – 1994 (6) TMI 193 - SUPREME COURT, the Supreme Court held that mere sending of fax message from a particular place and the reply having received there from would not constitute a integral part of the cause of action.

In ‘National Textile Corporation Limited V. Haribox Swalram’ – 2004 (4) TMI 527 - SUPREME COURT it was held that mere fact that the writ petitioner carries on business at Calcutta or that the reply to the correspondence made by it was received at Calcutta is not an integral part of cause of action and, therefore, the Calcutta High Court had no jurisdiction to entertain the writ petition.

In ‘Magma Fincorp Limited V. Assistant Director, DGCEI’ – 2013 (8) TMI 749 - CALCUTTA HIGH COURT the petitioner is a non banking Finance Company. The petitioners have the several branches across the country for providing services coming under the category of banking and other financial services, business auxiliary services and business support services attracting the service tax.   Even a proceeding was initiated and demand was raised.  The petitioner filed appeal before Commissioner (Appeals). Subsequently the office of CAG issued a notice regarding the service tax audit for the various period ranging from 2006, 2007 till 2009, 2010. The Revenue again issued show cause notices to the petitioner on various other related issued and by an order dated 27.4.2014 the proceeding was dropped.

The Assistant Director, Director General of Central Excise Intelligence having its office at Kochi issued a summon dated 18.8.2012 and sought for the various information and documents pertaining to the financial year 2007, 2008, 2011 & 2012. Although the petitioner took the stand that they have been allotted centralized registration under the Kolkata Service Tax Commissionerate and the inquiry should be conducted by the Kolkata Zonal Unit but ultimately replied to the summons.  The documents are furnished in terms of the various notices and/or summons and the oral statements were also recorded by the officials of Kerala.  The petitioner challenged the same by means of a writ petition before Kolkata High Court.

The petitioner prayed before the High Court that direction against the respondent declaring that the inquiry initiated is illegal, bad in law and outcome of the arbitrary exercise of the power and without jurisdiction.  The Revenue contended that the Court is not having jurisdiction to entertain the petition.  The proceeding was initiated by Kochi Officers upon issuance of summons there from. Reply given to the said summons or the notices from the registered office cannot be taken as the accrual of cause of action.  Mere recording of the statement at the registered office by the Kochi Officers does not confer jurisdiction under Article 226 (2) of the Constitution of India.

The petitioner submitted the following before the High Court:

• The purported summons have been served at the registered office of the petitioner and the replies also made there from, it would therefore, be construed that a part of cause of action has arisen within the territorial jurisdiction of the Kolkata High Court;
• The statement of the officials of the petitioner has been recorded at the registered office, which is one of the constituents of the cause of action;
• If a fraction of cause of action accrues within the jurisdiction of the court, the court will have jurisdiction to entertain the writ petition;
• Any action constitutes an evil consequence at the place of business, it would give rise to a cause of action and therefore, the writ petition is maintainable.

The High Court did not find that mere issuance of notice or giving a reply would constitute a cause of action.  The other point raised by the petitioner is evil consequence at the place of the business of the petitioner at Kolkata by which the writ petition is maintainable.  The High Court held that the evil consequence as tried to be contended by the petitioner must relate to the infringement of the rights as guaranteed under Constitution of India.  No case of an infringement is made out in the writ petition. Rather it would appear from the pleadings made in the petition that the compliance to the summons and/or notices is made and the entire facts as pleaded in the writ petition would refer that the sheet anchor of the case founded on the action of Kerala Office to reopen the investigation which has already been concluded.

The High Court did not find that a slightest of the cause of action has arisen within the territorial jurisdiction of Kolkata High Court and therefore dismissed the writ petition for want to territorial jurisdiction.