Pandurang Ganpati Chaugule vs Vishwasrao Patil Murgud Sahakari Bank Limited

Constitution (Ninety Seventh Amendment) Act, 2011 – Arts. 43B, 243ZI, 243ZL, 243ZL(1); and Entry 45, List I, Seventh Schedule – Held: Art. 43B was added concerning the management of cooperative societies – Art.243ZI provides that the legislature of a State may, by law, make provisions with respect to ‘incorporation, regulation and winding up’ of co-operative societies – Art.243ZL deals with supersession and suspension of the board and interim management – Constitutional provision itself makes distinction between a co-operative bank and other co-operative societies and applied law enacted u/Entry 45, List I, Seventh Schedule – It set at rest any controversy concerning the applicability of the Act 1949 to banks run by co-operative societies – It also makes it clear that such banks are governed by Entry 45, List I, Seventh Schedule – Banking Regulation Act, 1949.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – ss.2(1)(c), (d) – Held: Term ‘bank’ has been defined in s.2(1)(c) to mean ‘banking company’, a corresponding new bank, a subsidiary bank or a multi-State co-operative bank or such other bank which the Central Government may by notification specify for the Act – Term ‘banking company’ u/s.2(d) shall have the meaning assigned to it in s.5(c) 1949 Act – Thus, the definition of ‘banking company’ stands incorporated in s.2(1)(d), SARFAESI Act – Banking Regulation Act, 1949 – s.5(c).

Answering the reference, the Court

HELD: 1.1 The bank ordinarily means any establishment which carries the business of banking. The expression ‘bank’ has been defined in several enactments. Banks can be of different kinds such as Co-operative Bank, Collecting Bank, Commercial Bank, Correspondent Bank, Custodian Bank, Depository Bank, Drawee Bank, Federal Home Loan Bank, Federal Land Bank, Intermediary Bank, Investment Bank, Mutual Savings Bank, Nationalised Banks, Negotiable Bank, Non-Member Bank, Payor Bank, Savings and Loan Bank, Saving Bank. The expression ‘bank’ has been defined in various enactments relating to it. [Para 34][1087-F; 1088-D-F]

1.2 The framers of the Constitution cannot be said to have confined the meaning of ‘banking’ to a particular definition, as given in the BR Act, 1949. The word ‘banking’ has been incorporated in Entry 45 of List I. The decision in Rustom Cavasjee Cooper vividly leaves no room for doubt that banking done by the co-operative bank is covered within the ambit of Entry 45 of List I. The decision in Gannon Dunkerley & Co., (Madras) Ltd. stands neutralised by introduction of Article 366(29A) of the Constitution of India and the meaning of the said term has been redefined. Entries have to be given full effect in pith and substance considering forms of business of co-operative banks performing the activities of banking under a licence. The same is covered within the purview of Entry 45 of List I. Section

6 deals with the forms of business in which banking companies may engage. There cannot be any form of activity/business of banking without there being an entity. Section 6 is not a provision of the conferral of the status of the banking company. The definitions of ‘banking’ and ‘banking company’ are contained in Section 5(b) and 5(c) of the BR Act, 1949 respectively, and when reading with Section 56(a), it means co-operative banks also. The co-operative bank falls within the definition of Section 5(c), and its activity is of banking, and in addition to the business of banking, a co-operative bank may engage in any of the business as enumerated in Section 6. [Paras 41, 44][1103-B-D; 1104-A-B] Rustom Cavasjee Cooper v. Union of India (1970) 1 SCC 248 : [1970] 3 SCR 530 – followed.

The State of Madras v. Gannon Dunkerley & Co., (Madras) Ltd. AIR 1958 SC 560 : [1959] SCR 379 – referred to.

2. Recovery of dues would be an essential function of any banking institution and the Parliament can enact a law under Entry

45 of List I as the activity of banking done by co-operative banks is within the purview of Entry 45 of List I. Obviously, it is open to the Parliament to provide the remedy for recovery under Section

13 of the SARFAESI Act. Co-operative bank’s entire operation and activity of banking are governed by a law enacted under Entry

45 of List I, i.e., the BR Act, 1949, and the RBI Act under Entry

38 of List I. ‘Incorporation, regulation and winding up’ of the cooperative societies are covered under Entry 32 of List II of the Seventh Schedule of the Constitution of India, whereas ‘banking’ is covered by Entry 45 of List I. Thus, aspect of ‘incorporation, regulation and winding up’ would be covered under Entry 32 of List II. However, banking activity of such co-operative societies/banks shall be governed by Entry 45 of List I. The said banks are governed and regulated by legislation related to Entry 45 of List I, the BR Act, 1949 as well as the Reserve Bank of India Act under Entry 38 of List I. In the matter of licencing and doing business, a deep and pervasive control is carved out under the provisions of the BR Act, 1949 and banking activity done by any entity, primary credit societies, is a bank and is required to submit the accounts to the Reserve Bank of India, and there is complete control under the aforesaid Act. For activity of banking, these banks are governed by the legislation under Entry 45 of List I. Thus, recovery being an essential part of the banking, no conflict has been created by providing additional procedures under Section 13 of the SARFAESI Act. It is open to the bank to adopt a procedure which it may so choose. When banking in pith and substance is covered under Entry 45 of List I, even incidental trenching upon the field reserved for State under Entry 32 List II is permissible. There can be various aspects of an activity. The co-operative societies may be formed under the provisions of the State Co-operative Acts. The State law provides for ‘incorporation, regulation and winding up’ under Entry 32 of List II, a membership registration, and other matters can be governed by Entry 32 of List II, and, at the same time, the aspects relating to the banking, licensing, accounts, etc. can be covered under Entry 45 List I. The legislation and entries are to be considered in pith and substance is the settled principles of law, and incidental trenching is permissible. Thus, section 2(c)(iv)(a) of the SARFAESI Act and the notification dated 28.2.2003 cannot be said to be ultra vires. They are within the ken of Entry 45 List I of the Seventh Schedule to the Constitution of India. [Paras 48, 58 -60][1107-E-F; 1130-D-G; 1131-G]

3. The aforesaid conclusion finds support by the Constitutional provisions inserted by way of the Constitution (Ninety Seventh Amendment) Act, 2011. Article 43B has been added concerning the management of co-operative societies. Article 243ZI provides that the legislature of a State may, by law, make provisions with respect to ‘incorporation, regulation and winding up’ of co-operative societies. The Ninety Seventh Amendment also incorporated Article 243ZL dealing with supersession and suspension of the board and interim management. The third proviso to Article 243ZL(1) clarifies that in case of a co-operative society carrying on the business of banking, the provisions of the BR Act, 1949 shall also apply besides the State Act. The fourth proviso to clause (1) of Article 243ZL also contains an exception with respect to multi-State cooperative society carrying on the business of banking, the provisions of this clause shall have the effect as if for the words ‘six months’, had been substituted by words ‘one year.’ Thus, the constitutional provision itself makes a distinction between a co-operative bank and other co-operative societies and applied law enacted under Entry 45 of List I of the Seventh Schedule. It set at rest any controversy concerning the applicability of the BR Act, 1949 to banks run by co-operative societies. It also makes it clear that such banks are governed by Entry 45 of List I of the Seventh Schedule. [Paras 61-63][1132-A-B; 1133-F-G]

4.1 The term ‘bank’ has been defined in Section 2(1)(c) to mean ‘banking company’, a corresponding new bank, a subsidiary bank or a multi-State co-operative bank or such other bank which the Central Government may by notification specify for the Act. The term ‘banking company’ under Section 2(d) shall have the meaning assigned to it in Section 5(c) of the BR Act, 1949. Thus, the definition of ‘banking company’ stands incorporated in Section 2(1)(d) of the SARFAESI Act, which came into force on 21.6.2002. Section 56(a) was incorporated in the BR Act, 1949 by Act No.23 of 1965, w.e.f. 1.3.1966. On that date, Section 56(a) became part of the statute. Section 5(c) of the BR Act, 1949 defines ‘banking company’ means any company which transacts the business of banking. By virtue of Section 56(a), a reference to a ‘banking company’ or ‘the company’ or ‘such company’ shall be construed as references to a co-operative bank for the application of the Act to the co-operative banks. Section 5(c) was not amended, and other provisions were also not amended where they were placed. However, amendments were incorporated by a different Chapter V by way of various provisions incorporated in Section

56 as it was necessary to retain certain provisions in the existing form as they applied to other banks and companies considering that the amendments and certain modifications which were necessary and were extensively required. The provisions in amended form in their application to the co-operative banks were separately provided. When the BR Act, 1949 was applied to the co-operative bank, all the provisions under the Act concerning ‘incorporation, regulation and winding up’ were omitted insofar as the Act of 1949 is applied to co-operative banks, though they continue to exist in the Act for other entities but not concerning co-operative banks. It was mentioned in the advice given to the President under Article 117 that these matters were specifically not covered under Entry 45 of List I of the Seventh Schedule and formed the subject-matter of Entry 32 of List II. Thus, when the provisions of the Act of 1949 are applied to a co-operative bank, the definition of ‘banking company’ has to be read to include a co-operative bank. Section 56(a) becomes part of Section 5(c), although it is located in a separate place. As only Part V of the Act applies to the co-operative banks, Section 56(a) amends the definition of the ‘banking company,’ and it becomes an integral part of Section 5(c), as the full effect is required to be given. The present one is a case of incorporation by reference in the same Act by a subsequent amendment in the application to co-operative banks. When the provisions of Section 5(c) are applied to the cooperative banks, the co-operative banks have to be read as part and parcel of said definition as mandated statutorily. In case a company is not taken as a reference to the co-operative societies/banks in Section 5(c), several problems as to the interpretation of Section 56 would arise. It would have become necessary to amend all the provisions wherever words ‘banking company’ occur in the BR Act, 1949 in the application to co-operative banks. In order to avoid verbatim reproduction of the earlier provisions, which did not apply to a co-operative bank, a device was carved out in Section 56(a) to read ‘company’ as ‘banking company’ or ‘the company’ or ‘such company’ as references to a co-operative bank. If the definition in Section 5(c) and interpretation clause are not read as incorporated and having been amended, the interpretation clause and the entire amendment of Part V will become unworkable. It was not practical to amend the entire Act of 1949 as it dealt with ‘incorporation, regulation and winding up’ of other entities relatable to List I, as such the provisions were required to be retained, and such matters concerning co-operative societies/banks, relatable subject-matter under Entry 32 of List I of the Seventh Schedule of the Constitution of India, were to be excluded. As various provisions were to be omitted in their application to the co-operative societies and other provisions were to apply in a modified form, the amendments were made in the provisions in their application to the co-operative banks by providing a separate Chapter. Thus, it was not considered necessary nor would have been appropriate to amend the definition of Section 5(c) where it existed, in fact it was so amended in Section 56(a). Entire Chapter V was enacted concerning the application of the Act to the co-operative banks and has to be given full effect. Merely because the procedure for recovery of dues is provided in the Co-operative Societies Act, could not have come in the way of interpretation of that expression ‘co-operative bank’ which was included in the definition and interpretation clause of Section 5 of the BR Act, 1949. It was open to the Parliament to deal with the subject of ‘banking’ in Entry 45 of List I and this Court in Greater Bombay Coop. Bank Ltd. itself opined that the BR Act, 1949 applies to co-operative banks which is the enactment related to Entry 45 of List I and third proviso to Article 243-ZL(1) of the Constitution of India also provides that the BR Act shall also apply. Thus, the Parliament considered it appropriate to provide additional remedy for speedy recovery which is an alternative even if there is an incidental encroachment on the field reserved for the State under Entry 32 of List II, as in pith and substance, the ‘banking’ is part of Entry 45 of List I and recovery procedure is covered within the ken of Entry 45 of List I. Thus, considering the Doctrine of Pith and Substance and incorporation by amendment made, cooperative banks are included in the definition of ‘bank’ and ‘banking company’ under Section 2(1)(c) and 2(1)(d) of the SARFAESI Act. [Paras 71, 72 & 79][1139-F-H; 1140-A-F; 1142D-E; 1146-B-H; 1147-A-B] Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. and Ors. (2007) 6 SCC 236 : [2007] 4 SCR

823 – referred to.

4.2 The co-operative banks, which are governed by the BR Act, 1949, are involved in banking activities within the meaning of Section 5(b) thereof. They accept money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking. They perform commercial functions. A society shall receive deposits and loans from members and other persons. They give loans also, and it is their primary function. Thus, they are covered under ‘banking’ in Entry 45 of List I. [Para 84] [1154-C-D]

5.1 Since the activity of a co-operative bank is banking regulated by the law enacted within the relatable Entry 45 of List I, there is no reason as to why the Parliament lacked the competence to enact the SARFAESI Act and to provide a procedure for the speedy recovery of dues. The SARFAESI Act also covers the activities undertaken by the co-operative banks. The co-operative banks are doing banking business under Section 5(b) of the BR Act, 1949, and the exclusion of the co-operative societies from Entry 43 of List I, does not have any bearing regarding the interpretation of Entry 45 of List I. Even assuming for the time being that definition of ‘bank’ in Section 5(c) of the BR Act, 1949 did not cover the co-operative banks; the expression ‘bank’ has been defined in the SARFAESI Act under Section 2(1)(c), and the provisions contained in Section 2(1)(c)(v) authorise the Central Government to specify ‘such other bank’ for that Act. Thus, the notification issued on 28.1.2003 notifying ‘co-operative bank’ as the ‘bank’ is covered by Entry 45 of List I as they are regulated by the BR Act, 1949, and the RBI Act. For the ‘banking’ activity under Entry 45 of List I, the Parliament had the power to enact such a provision defining ‘bank’ to authorise and prescribe the recovery procedure for such a bank as provided in Section 13 of the SARFAESI Act; However, cooperative societies/banks stand included by incorporation in Section 5(1)(c) of the BR Act and the notification was issued ex abundanti cautela. By virtue of Section 56(a), co-operative banks, as defined in Section 56(cci) of the BR Act, 1949, are included in Section 5(1)(c). Similarly, multi-State co-operative banks were also covered. The earlier procedure for recovery of dues was differently provided for general banks and the co-operative banks through the Civil Court or Tribunal. In the SARFAESI Act, a procedure has been prescribed under Section 13 without the intervention of the court/tribunal to keep pace with the time. Thus, the malady of inordinate delay with which the order of civil court suffered as well as of the co-operative tribunals or summary procedure under the Co-operative Societies Act, was sought to be redressed. Apart from that, it is permissible for the Parliament to enact the law to provide recovery procedures for bank dues that have been done by providing speedy recovery of secured interest without intervention of the court/tribunal. [Paras 8587][1154-F-H; 1155-A-F]

5.2 ‘Banking’ relating to co-operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co-operative banks in the SARFAESI Act. It cannot be said to be over-inclusion on the anvil of the principles laid down by this Court. The provision in question/notification cannot be said to be colourable legislation. The SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be colourable piece or over-inclusive or beyond the competence of the Parliament. [Paras 100, 102][1166-D-E; 1168-E; 1169-D]

6. Resultantly, the reference is answered as under: (1)(a) The co-operative banks registered under the State legislation and multi-State level co-operative societies registered under the MSCS Act, 2002 with respect to ‘banking’ are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India.

(b) The co-operative banks run by the co-operative societies registered under the State legislation with respect to the aspects of ‘incorporation, regulation and winding up’, in particular, with respect to the matters which are outside the purview of Entry 45 of List I of the Seventh Schedule of the Constitution of India, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution of India.

(2) The co-operative banks involved in the activities related to banking are covered within the meaning of ‘Banking Company’ defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of ‘banking’ of co-operative banks run by the co-operative societies. The co-operative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to ‘Banking’ in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.

(3)(a) The co-operative banks under the State legislation and multi-State co-operative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed undersection 13 of the SARFAESI Act, a legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.

(3)(b) The Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under section

13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with respect to co-operative banks. The provisions of Section 2(1)(c)(iva), of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, adding “ex abundanti cautela”, ‘a multi-State co-operative bank’ is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the co-operative banks registered under the State legislation. [Para 103][1169-D-H; 1170-A-E]

S.S. Dhanoa v. Municipal Corporation, Delhi and Ors. (1981) 3 SCC 431 : [1981] 3 SCR 864; Dalco

Engineering Private Limited v. Satish Prabhakar Padhye and Ors. (2010) 4 SCC 378 : [2010] 4 SCR 15 – distinguished.

Virendra Pal Singh and Ors. v. District Assistant Registrar, Cooperative Societies, Etah, and Anr. (1980)

4 SCC 109 – held inapplicable.

Hindustan Lever and Anr. v. State of Maharashtra and Anr. (2004) 9 SCC 438 : [2003] 5 Suppl. SCR 685; Kerala State Electricity Board v. Indian Aluminium Co. Ltd. (1976) 1 SCC 466 : [1976] 1 SCR 552; Sita Ram Sharma and Ors. v. State of Rajasthan and Ors. (1974)

2 SCC 301; UCO Bank and Anr. v. Dipak Debbarma and Ors. (2017) 2 SCC 585 : [2016] 11 SCR 723; State Bank of India v. Santosh Gupta and Anr. (2017) 2 SCC

538 : [2016] 9 SCR 985; Calcutta Gas Company

(Proprietary) Ltd. v. State of West Bengal and Ors. AIR 1962 SC 1044 : [1962] 3 Suppl. SCR 1; Central Bank of India v. State of Kerala and Ors. (2009) 4 SCC 94 : [2009] 3 SCR 735; State of W.B. v. Kesoram Industries Ltd. and Ors. (2004) 10 SCC 201 : [2004] 1 SCR 564; Mary Roy, etc. v. State of Kerala and Ors. (1986) 2 SCC 209 : [1986] 1 SCR 371; U.P. Avas Evam Vikas Parishad v. Jainul Islam and Anr. AIR 1998 SC 1028 : [1998] 1 SCR 254; Surana Steels Pvt. Ltd. v. Dy. Commissioner of Income Tax and Ors. (1999) 4 SCC

306 : [1999] 2 SCR 589; Ram Sarup and Ors. v. Munshi and Ors. AIR 1963 SC 553 : [1963] 3 SCR 858; Soma Suresh Kumar v. Government of Andhra Pradesh and Ors. (2013) 10 SCC 677 : [2013] 10 SCR 328; K.K. Baskaran v. State Represented by its Secretary, Tamil Nadu, and Ors. (2011) 3 SCC 793 : [2011] 3 SCR 527; M/s. Ujagar Prints and Ors. (II) v. Union of India and Ors. (1989) 3 SCC 488 : [1988] 3 Suppl. SCR 770; Keshavlal Khemchand and Sons Private Limited and Ors. v. Union of India and Ors. (2015) 4 SCC 770 : [2015] 2 SCR 51; Jayant Verma and Ors. v. Union of India and Ors. (2018) 4 SCC 743 : [2018] 2 SCR 679; Federation of Hotel & Restaurant Association of India, etc. v. Union of India and Ors. (1989) 3 SCC 634 : [1989] 2 SCR 918; Bharat Coop. Bank (Mumbai) Ltd. v. Coop. Bank Employees Union (2007) 4 SCC 685 : [2007] 4 SCR 347; Reserve Bank of India v. M. Hanumaiah and Ors. (2008) 1 SCC 770 : [2008] 1 SCR 16; State of Gujarat and Anr. v. Shri Ambica Mills Ltd., Ahmedabad, and Anr. (1974) 4 SCC 656 : [1974] 3 SCR 760; Girnar Traders (3) v. State of Maharashtra and Ors. (2011) 3 SCC 1 : [2011] 3 SCR 1; State of Tamil Nadu and Ors. v. K. Shyam Sunder and Ors. (2011) 8 SCC 737 : [2011] 11 SCR 1094 – relied on.

Delhi Cloth & General Mills Co. Ltd. v. Union of India and Ors. (1983) 4 SCC 166 : [1983] 3 SCR 438; T. Velayudhan Achari and Anr. v. Union of India and Ors. (1993) 2 SCC 582 : [1993] 1 SCR 832; Union of India and Anr. v. Delhi High Court Bar Association and Ors. (2002) 4 SCC 275 : [2002] 2 SCR 450; Narendra Kantilal Shah v. Joint Registrar, Co-operative Societies AIR 2004 Bom 166; Rama Steel v. Union of India (2007) 6 Mah. L.J. 387; Neel Oil Industries v. Union of India AIR 2015 Gujarat 171; Mahaluxmi Bank Ltd. v. Registrar of Companies, West Bengal AIR 1961 Calcutta 666; ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited and Ors. (2010) 10 SCC

1 : [2010] 12 SCR 644; Diamond Sugar Mills Ltd. and Anr. v. State of Uttar Pradesh and Anr. AIR 1961 SC

652 : [1961] 3 SCR 242; I.T.C. Ltd. v. Agriculture Produce Market Committee and Ors. (2002) 9 SCC 232 : [2002] 1 SCR 441; Hinsa Virodhak Sangh v. Mirzapur Moti Kuresh Jamat and Ors. (2008) 5 SCC 33 : [2008]

4 SCR 1020; K. C. Gajapati Narayan Deo and Ors. v. State of Orissa AIR 1953 SC 375 : [1954] SCR 1; Apex Cooperative Bank of Urban Bank of Maharashtra & Goa Ltd. v. Maharashtra State Cooperative Bank Ltd. and Ors. (2003) 11 SCC 66 : [2003] 4 Suppl. SCR 1071; Daman Singh and Ors. v. State of Punjab and Ors. (1985) 2 SCC 670 : [1985] 3 SCR 580; Iqbal Naseer Usmani v. Central Bank of India and Ors. (2006)

2 SCC 241; The Majoor Sahakari Bank Ltd. v. N.N. Majmudar and Anr. AIR 1957 Bom 36; The Shamrao Vithal Co-operative Bank Ltd., Mumbai, and Anr. v. M/s. Star Glass Works, Mumbai and Ors. AIR 2003 Bom 205; State of A.P. and Ors. v. Mcdowell & Co. and Ors. (1996) 3 SCC 709 : [1996] 3 SCR 721; Dewan Bahadur Seth Gopal Das Mohta v. Union of India and Ors. [1955] 1 SCR 773; Khyerbari Tea Co. Ltd. and Ors. v. State of Assam [1964] 5 SCR 975; Belsund Sugar Co. Ltd.v. State of Bihar (1999) 9 SCC 620 : [1999] 1 Suppl. SCR 146; Sant Sadhu Singh v. State of Punjab AIR 1970 P&H 528; Nagpur District Central

Cooperative Bank Ltd. v. Divisional Joint Registrar, Cooperative Societies AIR 1971 Bom 365 –

referred to.

Justice G.P. Singh- ‘Principles of Statutory

Interpretation’ 12 th Edition 2010 Pages 318-320 – referred to.

Portsmouth Corporation v. Smith (1885) 10 AC 364; Secretary of State v. Hindustan Cooperative Insurance Society Ltd. AIR 1931 PC 149 – referred to.

Concise Oxford English Dictionary; Black’s Law Dictionary, Ninth Edition – referred to.