PANDURANG GANPATI CHAUGULE versus VISHWASRAO PATIL MURGUD SAHAKARI BANK LIMITED on 5 May 2020

APANDURANG GANPATI CHAUGULE

v.

VISHWASRAO PATIL MURGUD SAHAKARI BANK LIMITED

(Civil Appeal No.5674 of 2009)

B

MAY 05, 2020

[ARUN MISHRA, INDIRA BANERJEE, VINEET SARAN,M. R. SHAH AND ANIRUDDHA BOSE, JJ.]

Constitution of India – Seventh Schedule – List I, Entry 45;List II, Entry 32 – Power of the Parliament to legislate – ApplicabilityCof SARFAESI Act, 2002 to co-operative banks – Held: Co-operativebanks registered under the State legislation and multi-State levelco-operative societies registered under MSCS Act w.r.t ‘banking’are governed by the legislation relatable to Entry 45, List I, SeventhSchedule – Co-operative banks run by co-operative societiesDregistered under the State legislation w.r.t the aspects of‘incorporation, regulation and winding up’, in particular, w.r.t thematters outside the purview of Entry 45, List I, Seventh Schedule,are governed by the said legislation relatable to Entry 32, List II,Seventh Schedule – Co-operative banks involved in activities relatedto banking are covered within the meaning of ‘Banking Company’Edefined u/s.5(c) r/w s.56(a) of the 1949 Act, a legislation relatableto Entry 45, List I – Co-operative banks cannot carry on any activitywithout compliance of said Act and any other legislation applicableto such banks relatable to ‘Banking’ in Entry 45, List I and the RBIAct relatable to Entry 38, List I, Seventh Schedule – Co-operativeFbanks under the State legislation and multi-State co-operative banksare ‘banks’ u/s.2(1)(c), SARFAESI Act – Recovery is an essentialpart of banking; as such, the recovery procedure prescribed u/s.13 of the said Act, a legislation relatable to Entry 45, List I, SeventhSchedule, is applicable – Parliament has legislative competence u/Entry 45, List I, Seventh Schedule to provide additional proceduresGfor recovery u/s.13 SARFAESI Act, with respect to co-operative banks– s.2(1)(c)(iva), SARFAESI Act adding “ex abundanti cautela”, ‘amulti-State co-operative bank’ and notification dtd. 28.01.03 issuedwith respect to the co-operative banks registered under the Statelegislation are not ultra vires – Securitisation and Reconstruction H

PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

of Financial Assets and Enforcement of Security Interest Act, 2002– ss.2(c), (d), 2(1)(c)(iva), 2(1)(c)(v), 2(1)(d), 13 – Multi-State Co-operative Societies Act, 2002 – ss.3(f), 84 –Banking RegulationAct, 1949 – Part II, V – ss.5(b), (c), 5A, 6, 11, 18, 19, 22, 23,35A(1)(c), 56(a)-(c), (e) – Interpretation of Statutes – Doctrine ofPith and Substance; Incorporation by reference – Recovery of Debtsand Bankruptcy Act, 1993 – Doctrine of Colourable Legislation –Banking Laws [Application of Cooperative Societies Act, 1965 (ActNo.23 of 1965)] – Reserve Bank of India Act, 1934 – ss.2(bii),2(biii), 2(biv), 2(ciii), 2(civ) – National Bank for Agriculture andRural Development Act, 1981 – State Bank of India Act, 1955 –Banking Companies Act, 1949 – Transfer of Property Act, 1882.

Banking Regulation Act, 1949 – ss.5(b), (c), 6, 56(a) – Held:s.6 is not a provision of the conferral of the status of the bankingcompany – Definitions of ‘banking’ and ‘banking company’ arecontained in s.5(b) & 5(c) respectively, and when reading withs.56(a), it means co-operative banks also – Co-operative bank fallswithin the definition of s.5(c), and its activity is of banking, and inaddition a co-operative bank may engage in any of the business asenumerated in s.6.

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 co-operative societies – Art.243ZI provides that the legislature of aState may, by law, make provisions with respect to ‘incorporation,regulation and winding up’ of co-operative societies – Art.243ZLdeals with supersession and suspension of the board and interimmanagement – Constitutional provision itself makes distinctionbetween a co-operative bank and other co-operative societies andapplied law enacted u/Entry 45, List I, Seventh Schedule – It set atrest any controversy concerning the applicability of the Act 1949 tobanks run by co-operative societies – It also makes it clear thatsuch banks are governed by Entry 45, List I, Seventh Schedule –Banking Regulation Act, 1949.

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 – ss.2(1)(c), (d) – Held:Term ‘bank’ has been defined in s.2(1)(c) to mean ‘bankingcompany’, a corresponding new bank, a subsidiary bank or a multi- AB

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AState co-operative bank or such other bank which the CentralGovernment may by notification specify for the Act – Term ‘bankingcompany’ u/s.2(d) shall have the meaning assigned to it in s.5(c)1949 Act – Thus, the definition of ‘banking company’ standsincorporated in s.2(1)(d), SARFAESI Act – Banking Regulation Act,1949 – s.5(c).B

Answering the reference, the Court

HELD: 1.1 The bank ordinarily means any establishmentwhich carries the business of banking. The expression ‘bank’has been defined in several enactments. Banks can be of differentCkinds such as Co-operative Bank, Collecting Bank, CommercialBank, 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, PayorBank, Savings and Loan Bank, Saving Bank. The expressionD‘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 haveconfined the meaning of ‘banking’ to a particular definition, asgiven in the BR Act, 1949. The word ‘banking’ has beenEincorporated in Entry 45 of List I. The decision in RustomCavasjee Cooper vividly leaves no room for doubt that bankingdone by the co-operative bank is covered within the ambit ofEntry 45 of List I. The decision in Gannon Dunkerley & Co.,(Madras) Ltd. stands neutralised by introduction of ArticleF366(29A) of the Constitution of India and the meaning of the saidterm has been redefined. Entries have to be given full effect inpith and substance considering forms of business of co-operativebanks performing the activities of banking under a licence. Thesame is covered within the purview of Entry 45 of List I. Section6 deals with the forms of business in which banking companiesGmay engage. There cannot be any form of activity/business ofbanking without there being an entity. Section 6 is not a provisionof the conferral of the status of the banking company. Thedefinitions of ‘banking’ and ‘banking company’ are contained inSection 5(b) and 5(c) of the BR Act, 1949 respectively, and whenHreading with Section 56(a), it means co-operative banks also. The PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

co-operative bank falls within the definition of Section 5(c), andits activity is of banking, and in addition to the business of banking,a co-operative bank may engage in any of the business asenumerated in Section 6. [Paras 41, 44][1103-B-D; 1104-A-B]

Rustom Cavasjee Cooper v. Union of India(1970) 1SCC 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 anybanking institution and the Parliament can enact a law under Entry45 of List I as the activity of banking done by co-operative banksis within the purview of Entry 45 of List I. Obviously, it is open tothe Parliament to provide the remedy for recovery under Section13 of the SARFAESI Act. Co-operative bank’s entire operationand activity of banking are governed by a law enacted under Entry45 of List I, i.e., the BR Act, 1949, and the RBI Act under Entry38 of List I. ‘Incorporation, regulation and winding up’ of the co-operative societies are covered under Entry 32 of List II of theSeventh 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 ofList II. However, banking activity of such co-operative societies/banks shall be governed by Entry 45 of List I. The said banksare governed and regulated by legislation related to Entry 45 ofList I, the BR Act, 1949 as well as the Reserve Bank of India Actunder Entry 38 of List I. In the matter of licencing and doingbusiness, a deep and pervasive control is carved out under theprovisions of the BR Act, 1949 and banking activity done by anyentity, primary credit societies, is a bank and is required to submitthe accounts to the Reserve Bank of India, and there is completecontrol under the aforesaid Act. For activity of banking, thesebanks are governed by the legislation under Entry 45 of List I.Thus, recovery being an essential part of the banking, no conflicthas been created by providing additional procedures underSection 13 of the SARFAESI Act. It is open to the bank to adopta procedure which it may so choose. When banking in pith and

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Asubstance is covered under Entry 45 of List I, even incidentaltrenching upon the field reserved for State under Entry 32 ListII is permissible. There can be various aspects of an activity.The co-operative societies may be formed under the provisionsof the State Co-operative Acts. The State law provides for‘incorporation, regulation and winding up’ under Entry 32 of ListBII, a membership registration, and other matters can be governedby Entry 32 of List II, and, at the same time, the aspects relatingto the banking, licensing, accounts, etc. can be covered underEntry 45 List I. The legislation and entries are to be consideredin pith and substance is the settled principles of law, and incidentalCtrenching is permissible. Thus, section 2(c)(iv)(a) of theSARFAESI Act and the notification dated 28.2.2003 cannot besaid to be ultra vires. They are within the ken of Entry 45 List I ofthe Seventh Schedule to the Constitution of India.[Paras 48, 58 -60][1107-E-F; 1130-D-G; 1131-G]

D3. The aforesaid conclusion finds support by theConstitutional provisions inserted by way of the Constitution(Ninety Seventh Amendment) Act, 2011. Article 43B has beenadded 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 andEwinding up’ of co-operative societies. The Ninety SeventhAmendment also incorporated Article 243ZL dealing withsupersession and suspension of the board and interimmanagement. The third proviso to Article 243ZL(1) clarifies that

in case of a co-operative society carrying on the business ofFbanking, the provisions of the BR Act, 1949 shall also applybesides the State Act. The fourth proviso to clause (1) of Article243ZL also contains an exception with respect to multi-State co-operative society carrying on the business of banking, theprovisions of this clause shall have the effect as if for the words‘six months’, had been substituted by words ‘one year.’ Thus,Gthe constitutional provision itself makes a distinction between aco-operative bank and other co-operative societies and appliedlaw enacted under Entry 45 of List I of the Seventh Schedule. Itset at rest any controversy concerning the applicability of theBR Act, 1949 to banks run by co-operative societies. It alsoH

makes it clear that such banks are governed by Entry 45 of ListI 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) tomean ‘banking company’, a corresponding new bank, a subsidiarybank or a multi-State co-operative bank or such other bank whichthe Central Government may by notification specify for the Act.The term ‘banking company’ under Section 2(d) shall have themeaning assigned to it in Section 5(c) of the BR Act, 1949. Thus,the definition of ‘banking company’ stands incorporated in Section2(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.23of 1965, w.e.f. 1.3.1966. On that date, Section 56(a) became partof the statute. Section 5(c) of the BR Act, 1949 defines ‘bankingcompany’ means any company which transacts the business ofbanking. By virtue of Section 56(a), a reference to a ‘bankingcompany’ or ‘the company’ or ‘such company’ shall be construedas references to a co-operative bank for the application of theAct to the co-operative banks. Section 5(c) was not amended,and other provisions were also not amended where they wereplaced. However, amendments were incorporated by a differentChapter V by way of various provisions incorporated in Section56 as it was necessary to retain certain provisions in the existingform as they applied to other banks and companies consideringthat the amendments and certain modifications which werenecessary and were extensively required. The provisions inamended form in their application to the co-operative banks wereseparately provided. When the BR Act, 1949 was applied to theco-operative bank, all the provisions under the Act concerning‘incorporation, regulation and winding up’ were omitted insofaras the Act of 1949 is applied to co-operative banks, though theycontinue to exist in the Act for other entities but not concerningco-operative banks. It was mentioned in the advice given to thePresident under Article 117 that these matters were specificallynot covered under Entry 45 of List I of the Seventh Schedule andformed the subject-matter of Entry 32 of List II. Thus, when theprovisions of the Act of 1949 are applied to a co-operative bank,the definition of ‘banking company’ has to be read to include aco-operative bank. Section 56(a) becomes part of Section 5(c), A

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Aalthough it is located in a separate place. As only Part V of theAct applies to the co-operative banks, Section 56(a) amends thedefinition of the ‘banking company,’ and it becomes an integralpart of Section 5(c), as the full effect is required to be given. Thepresent one is a case of incorporation by reference in the sameAct by a subsequent amendment in the application to co-operativeBbanks. When the provisions of Section 5(c) are applied to the co-operative banks, the co-operative banks have to be read as partand parcel of said definition as mandated statutorily. In case acompany is not taken as a reference to the co-operative societies/banks in Section 5(c), several problems as to the interpretationCof Section 56 would arise. It would have become necessary toamend all the provisions wherever words ‘banking company’ occurin the BR Act, 1949 in the application to co-operative banks. Inorder 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’ orD‘the company’ or ‘such company’ as references to a co-operativebank. If the definition in Section 5(c) and interpretation clauseare not read as incorporated and having been amended, theinterpretation clause and the entire amendment of Part V willbecome unworkable. It was not practical to amend the entire ActEof 1949 as it dealt with ‘incorporation, regulation and winding up’of other entities relatable to List I, as such the provisions wererequired to be retained, and such matters concerning co-operativesocieties/banks, relatable subject-matter under Entry 32 of ListI of the Seventh Schedule of the Constitution of India, were to beexcluded. As various provisions were to be omitted in theirFapplication to the co-operative societies and other provisionswere to apply in a modified form, the amendments were made inthe provisions in their application to the co-operative banks byproviding a separate Chapter. Thus, it was not considerednecessary nor would have been appropriate to amend theGdefinition of Section 5(c) where it existed, in fact it was soamended in Section 56(a). Entire Chapter V was enactedconcerning the application of the Act to the co-operative banksand has to be given full effect. Merely because the procedure forrecovery of dues is provided in the Co-operative Societies Act,could not have come in the way of interpretation of that expressionH

‘co-operative bank’ which was included in the definition andinterpretation clause of Section 5 of the BR Act, 1949. It wasopen to the Parliament to deal with the subject of ‘banking’ inEntry 45 of List I and this Court in Greater Bombay Coop. BankLtd. itself opined that the BR Act, 1949 applies to co-operativebanks which is the enactment related to Entry 45 of List I andthird proviso to Article 243-ZL(1) of the Constitution of Indiaalso provides that the BR Act shall also apply. Thus, theParliament considered it appropriate to provide additional remedyfor speedy recovery which is an alternative even if there is anincidental encroachment on the field reserved for the State underEntry 32 of List II, as in pith and substance, the ‘banking’ is partof Entry 45 of List I and recovery procedure is covered withinthe ken of Entry 45 of List I. Thus, considering the Doctrine ofPith and Substance and incorporation by amendment made, co-operative banks are included in the definition of ‘bank’ and‘banking company’ under Section 2(1)(c) and 2(1)(d) of theSARFAESI Act. [Paras 71, 72 & 79][1139-F-H; 1140-A-F; 1142-D-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 SCR823 – referred to.

4.2 The co-operative banks, which are governed by the BRAct, 1949, are involved in banking activities within the meaningof 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 moneyis limited to members, they cannot be said to be out of the purviewof banking. They perform commercial functions. A society shallreceive deposits and loans from members and other persons.They give loans also, and it is their primary function. Thus, theyare 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 bankingregulated by the law enacted within the relatable Entry 45 of ListI, there is no reason as to why the Parliament lacked thecompetence to enact the SARFAESI Act and to provide aprocedure for the speedy recovery of dues. The SARFAESI Act

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Aalso covers the activities undertaken by the co-operative banks.The co-operative banks are doing banking business under Section5(b) of the BR Act, 1949, and the exclusion of the co-operativesocieties from Entry 43 of List I, does not have any bearingregarding the interpretation of Entry 45 of List I. Even assumingfor the time being that definition of ‘bank’ in Section 5(c) of theBBR Act, 1949 did not cover the co-operative banks; theexpression ‘bank’ has been defined in the SARFAESI Act underSection 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 notifyingC‘co-operative bank’ as the ‘bank’ is covered by Entry 45 of List Ias they are regulated by the BR Act, 1949, and the RBI Act. Forthe ‘banking’ activity under Entry 45 of List I, the Parliamenthad the power to enact such a provision defining ‘bank’ toauthorise and prescribe the recovery procedure for such a bankas provided in Section 13 of the SARFAESI Act; However, co-Doperative societies/banks stand included by incorporation inSection 5(1)(c) of the BR Act and the notification was issued exabundanti cautela. By virtue of Section 56(a), co-operative banks,as defined in Section 56(cci) of the BR Act, 1949, are included inSection 5(1)(c). Similarly, multi-State co-operative banks wereEalso covered. The earlier procedure for recovery of dues wasdifferently provided for general banks and the co-operative banksthrough the Civil Court or Tribunal. In the SARFAESI Act, aprocedure has been prescribed under Section 13 without theintervention of the court/tribunal to keep pace with the time.Thus, the malady of inordinate delay with which the order of civilFcourt suffered as well as of the co-operative tribunals or summaryprocedure under the Co-operative Societies Act, was sought tobe redressed. Apart from that, it is permissible for the Parliamentto enact the law to provide recovery procedures for bank duesthat have been done by providing speedy recovery of securedGinterest without intervention of the court/tribunal. [Paras 85-87][1154-F-H; 1155-A-F]

5.2 ‘Banking’ relating to co-operatives can be includedwithin the purview of Entry 45 of List I, and it cannot be said tobe over inclusion to cover provisions of recovery by co-operativeHbanks in the SARFAESI Act. It cannot be said to be over-inclusion PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

on the anvil of the principles laid down by this Court. The provisionin 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 orover-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 Statelegislation and multi-State level co-operative societies registeredunder the MSCS Act, 2002 with respect to ‘banking’ are governedby the legislation relatable to Entry 45 of List I of the SeventhSchedule of the Constitution of India.

(b) The co-operative banks run by the co-operativesocieties registered under the State legislation with respect tothe aspects of ‘incorporation, regulation and winding up’, inparticular, with respect to the matters which are outside thepurview of Entry 45 of List I of the Seventh Schedule of theConstitution of India, are governed by the said legislationrelatable to Entry 32 of List II of the Seventh Schedule of theConstitution of India.

(2) The co-operative banks involved in the activities relatedto banking are covered within the meaning of ‘Banking Company’defined under Section 5(c) read with Section 56(a) of the BankingRegulation Act, 1949, which is a legislation relatable to Entry 45of List I. It governs the aspect of ‘banking’ of co-operative banksrun by the co-operative societies. The co-operative banks cannotcarry on any activity without compliance of the provisions of theBanking Regulation Act, 1949 and any other legislation applicableto such banks relatable to ‘Banking’ in Entry 45 of List I and theRBI Act relatable to Entry 38 of List I of the Seventh Schedule ofthe Constitution of India.

(3) (a) The co-operative banks under the State legislationand multi-State co-operative banks are ‘banks’ under section2(1)(c) of Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act, 2002. The recovery isan essential part of banking; as such, the recovery procedureprescribed undersection 13 of the SARFAESI Act, a legislation

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Arelatable to Entry 45 List I of the Seventh Schedule to theConstitution of India, is applicable.

(3) (b) The Parliament has legislative competence underEntry 45 of List I of the Seventh Schedule of the Constitution ofIndia to provide additional procedures for recovery under sectionB13 of the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act, 2002 with respect toco-operative banks. The provisions of Section 2(1)(c)(iva), ofSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, adding “ex abundanticautela”, ‘a multi-State co-operative bank’ is not ultra vires asCwell as the notification dated 28.1.2003 issued with respect tothe 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; DalcoEngineering Private Limited v. Satish PrabhakarPadhye and Ors.(2010) 4 SCC 378 : [2010] 4 SCR 15– distinguished.

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Virendra Pal Singh and Ors. v. District AssistantRegistrar, Cooperative Societies, Etah, and Anr.(1980)4 SCC 109 – held inapplicable.

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Hindustan Lever and Anr. v. State of Maharashtra andAnr. (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 RamSharma and Ors. v. State of Rajasthan and Ors. (1974)2 SCC 301;UCO Bank and Anr. v. Dipak Debbarmaand Ors.(2017) 2 SCC 585 : [2016] 11 SCR 723; StateBank of India v. Santosh Gupta and Anr.(2017) 2 SCC538 : [2016] 9 SCR 985; Calcutta Gas Company(Proprietary) Ltd. v. State of West Bengal and Ors.AIR1962 SC 1044 : [1962] 3 Suppl. SCR 1; Central Bankof India v. State of Kerala and Ors. (2009) 4 SCC 94 :[2009] 3 SCR 735; State of W.B. v. Kesoram IndustriesLtd. and Ors.(2004) 10 SCC 201 : [2004] 1 SCR 564;Mary Roy, etc. v. State of Kerala and Ors.(1986) 2SCC 209 : [1986] 1 SCR 371; U.P. Avas Evam Vikas F

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PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

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 SCC306 : [1999] 2 SCR 589; Ram Sarup and Ors. v. Munshiand Ors.AIR 1963 SC 553 : [1963] 3 SCR 858; SomaSuresh Kumar v. Government of Andhra Pradesh andOrs.(2013) 10 SCC 677 : [2013] 10 SCR 328; K.K.Baskaran v. State Represented by its Secretary, TamilNadu, and Ors.(2011) 3 SCC 793 : [2011] 3 SCR 527;M/s. Ujagar Prints and Ors. (II) v. Union of India andOrs. (1989) 3 SCC 488 : [1988] 3 Suppl. SCR 770;Keshavlal Khemchand and Sons Private Limited andOrs. v. Union of India and Ors.(2015) 4 SCC 770 :[2015] 2 SCR 51; Jayant Verma and Ors. v. Union ofIndia 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 SCR16; State of Gujarat and Anr. v. Shri Ambica Mills Ltd.,Ahmedabad, and Anr.(1974) 4 SCC 656 : [1974] 3SCR 760; Girnar Traders (3) v. State of Maharashtraand Ors.(2011) 3 SCC 1 : [2011] 3 SCR 1; State ofTamil 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 Indiaand 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 Indiaand Anr. v. Delhi High Court Bar Association and Ors.(2002) 4 SCC 275 : [2002] 2 SCR 450; NarendraKantilal Shah v. Joint Registrar, Co-operative SocietiesAIR 2004 Bom 166; Rama Steel v. Union of India(2007) 6 Mah. L.J. 387; Neel Oil Industries v. Unionof India AIR 2015 Gujarat 171; Mahaluxmi Bank Ltd.v. Registrar of Companies, West BengalAIR 1961Calcutta 666; ICICI Bank Limited v. Official Liquidator A

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[2020] 5 S.C.R.

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[2020] 5 S.C.R.

Aof APS Star Industries Limited and Ors. (2010) 10 SCC1 : [2010] 12 SCR 644; Diamond Sugar Mills Ltd. andAnr. v. State of Uttar Pradesh and Anr. AIR 1961 SC652 : [1961] 3 SCR 242; I.T.C. Ltd. v. AgricultureProduce Market Committee and Ors.(2002) 9 SCC 232: [2002] 1 SCR 441; Hinsa Virodhak Sangh v. MirzapurBMoti Kuresh Jamat and Ors. (2008) 5 SCC 33 : [2008]4 SCR 1020;K. C. Gajapati Narayan Deo and Ors. v.State of OrissaAIR 1953 SC 375 : [1954] SCR 1;ApexCooperative Bank of Urban Bank of Maharashtra &Goa Ltd. v. Maharashtra State Cooperative Bank Ltd.Cand Ors.(2003) 11 SCC 66 : [2003] 4 Suppl. SCR1071; Daman Singh and Ors. v. State of Punjab andOrs.(1985) 2 SCC 670 : [1985] 3 SCR 580; IqbalNaseer 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 ShamraoDVithal Co-operative Bank Ltd., Mumbai, and Anr. v.M/s. Star Glass Works, Mumbai and Ors. AIR 2003Bom 205; State of A.P. and Ors. v. Mcdowell & Co.and Ors.(1996) 3 SCC 709 : [1996] 3 SCR 721; DewanBahadur Seth Gopal Das Mohta v. Union of India andEOrs.[1955] 1 SCR 773; Khyerbari Tea Co. Ltd. andOrs. v. State of Assam[1964] 5 SCR 975; Belsund SugarCo. Ltd.v. State of Bihar(1999) 9 SCC 620 : [1999] 1Suppl. SCR 146;Sant Sadhu Singh v. State of PunjabAIR 1970 P&H 528; Nagpur District CentralCooperative Bank Ltd. v. Divisional Joint Registrar,FCooperative SocietiesAIR 1971 Bom 365 –referred to.

Justice G.P. Singh- ‘Principles of StatutoryInterpretation’12[th] Edition 2010 Pages 318-320 –referred to.

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

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

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Case Law Reference

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[2007] 4 SCR 823[1983] 3 SCR 438[1993] 1 SCR 832[2002] 2 SCR 450[1970] 3 SCR 530[2010] 12 SCR 644[1959] SCR 379[1961] 3 SCR 242[2002] 1 SCR 441[2008] 4 SCR 1020[1954] SCR 1[2003] 4 Suppl. SCR 1071(1980) 4 SCC 109[1981] 3 SCR 864[1985] 3 SCR 580[2010] 4 SCR 15(2006) 2 SCC 241[2003] 5 Suppl. SCR 685[1976] 1 SCR 552[1974] 2 SCC 301[1996] 3 SCR 721[1955] 1 SCR 773[1964] 5 SCR 975[2016] 11 SCR 723[2016] 9 SCR 985[1999] 1 Suppl. SCR 146[1962] 3 Suppl. SCR 1

referred toPara 1referred toPara 1referred toPara 1referred toPara 1BfollowedPara 9(a)referred toPara 9(b)referred toPara 9(b)Creferred toPara 9(b)referred toPara 9(h)referred toPara 9(i)referred toPara 9(j)Dreferred toPara 9(k)held inapplicablePara 9(k)distinguishedPara 9(k)referred toPara 9(k)EdistinguishedPara 9(k)referred toPara 10relied onPara 17(a)relied onPara 17(a)Frelied onPara 17(a)referred toPara 17(d)referred toPara 18referred toPara 18Grelied onPara 49relied onPara 50referred toPara 52relied onPara 53H

[2020] 5 S.C.R.

From the Judgment and Order dated 13.08.2008 of the High CourtFof Judicature at Bombay in First Appeal No. 1481 of 2008.

With

Civil Appeal Nos. 5684, 5682, 5681, 5675 of 2009, 10871, 4391,7410 of 2010, 2384, 2385, 2386, 2387-2390, 2391-92, 2393-2394, 2395,2396-2397, 2398, 2399, 2400, 2401, 2402, 2403, 2404, 2405, 2406 of 2020,GC.C. No. 7586 of 2014, W.P. (C) Nos. 318 of 2010, 41, 220, 293, 306,338, 375 of 2011, 122, 199, 250, 291, 386, 487, 537, 554 of 2012, 36, 146,138, 179, 192, 191, 112, 111, 151, 175, 181, 201, 233, 236, 238, 253, 250,248, 271, 265, 270, 279, 266, 280, 284, 353, 469, 452, 588, 758, 762, 761,800, 753, 819, 922, 1007, 1037, 1044, 1043, 1045 of 2013, 5, 10, 40, 142,H169, 168, 352, 408, 420, 421, 492, 712, 714, 795, 754, 827, 849, 838, 1020

PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

of 2014, 26, 86 of 2015, 1035, 1232, 1355, 1331, 1339, 1353 of 2019, 31,62, 72, 134, 207, 271, 289, 292, 373 of 2020.

Tushar Mehta, SG, Jayant Muthraj, Jaideep Gupta, ShekharNaphade, Vijay Hansaria, Vinay Navare, Ritin Rai, Sr. Advs., MaheshAgarwal, Ankur Saigal, Vikrant Pachnanda, Utkarsh Pratap, E.C.Agrawala, Devansh A. Mohta, Shishir Deshpande, Amit Yadav, NilakantaNayak, Ms. Sujata Kurdukar, Mrigank Prabhakar, Ms. Sakshi Banga,Gautam Prabhakar, Gaurav Nair, Ms. Sanika Mehra, Ms. PranatiBhatnagar, Kritya Sinha, Varun Singh, Vikas Mehta, Apoorv Khator,Rajat Sehgal, Satpal Singh, Ms. Seema Thapliyal, Jaimon Andrews,K. Prajagopal, Piyo Harold Jaimon, Sandeep Thakur, Naresh Kumar,Zaid Ali Subzposh, Tamim Qadri, Lakshmi Raman Singh, Vineet Bhagat,Nikhil Goel, S.K. Kulkarni, M. Gireesh Kumar, Ankur S. Kulkarni,M.P. Vinod, Atul Shankar Vinod, Dileep Pillai, Ajay Kumar Jain, SajithP., Kannan Gopal Vinod, Chinmoy Khaladkar, Sanjay Kharde,Ms. Chandan Ramamurthi, Pradhuman Gohil, Mrs. Taruna Singh,Ms. Ranu Purohit, Ms. Tanya Srivastava, Ms. Charu Mathur, YadavNarender Singh, Ms. E.R. Sumathy, Sarad Kumar Singhania,Ms. Vanshaja Shukla, Rameshwar Prasad Goyal, H. Chandra Sekhar,Mrs. Rekha Chandra Shekhar, Karri Venkata Reddy, Chirag M. Shroff,Ms. Yashika Verma, Ms. Abhilasha Bharti, M.A. Chinnasamy, ArvindGupta, Sandeep Kumar Singh, Anil Kumar Sahu, Prakash Gautam, SujeetKumar, J.N. Pathak, Sunil Kumar Pandey, Amol NirmalkumarSuryawanshi, S. Sada Siva Reddy, Karri Venkata Reddy, S. Usha Reddy,Santosh Krishnan, Ms. Rakhi Ray, Abhay Kumar, M.J. Paul, Renjith B.,Lakshmi N. Kaimal, Jayakrishnan U., Mahendra Kumawat, Subodh S.Patil, Ms. Supriya Patil, Ajay Kumar Singh, Garvesh Kabra, Mrs. PoojaKabra, Ms. Nikita Kabra, Harshvardhan Jha, Anup Lohiya, AdarshUpadhyay, Abhishek Chaudhary, Anurag Kishore, Mridula Kanti Sinha,S.K. Rajora, Ms. Mamta Upadhyaya, Kusum Chaudhary, AtulBabasaheb Dakh, Mrs. Pragya Baghel, Ajay Majithia, Satyajit A. Desai,Ms. Anagha S. Desai, Bankey Bihari Sharma, Rabin Majumder, AbhishekAgarwal, A. Venayagam Balan, Gaurav Agrawal, Bharat L. Gandhi,Mrs. Vithika Garg, Ms. Vidushi Garg, Ms. Karishma Singhal, Ms. GarimaPrashad, Suresh Chandra Tripathy, Anirudh Sanganeria, KarunakarMahalik, B. Vishwanath Bhandarkar, Sarbendra Kumar, UpendraNarayan Mishra, Durga Dutt, Prakash Sharma, Dilip Annasaheb Taur,Rajul Shrivastav, Mohit D. Ram, Ms. Monisha Handa, Sachin Kaushal,Bhagirath N. Patel, Rajat Nair, Ms. Swati Ghildiyal, Akshay Amritanshu A

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SUPREME COURT REPORTS

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SUPREME COURT REPORTS

AA.K. Sharma, Shubham Saurav, Ms. Vanshaja Shukla, KuldeepS. Parihar, H.S. Parihar, Ms. Ikshita Parihar, Shivaji M. Jadhav, NicholasChoudhary, Aditya P. Khanna, Aditya S. Jadhav, Shiv Ram Pandey,S. Lakshmi Iyer, Ms. Aishwarya Dash, Chinmoy Khaladkar, (forM/s. S.M. Jadhav and Company), Rutwik Panda, Ms. Nikhar Berry,Ms. Anshu Malik, M.Y. Deshmukh, Ms. Manjeet Kirpal, Avanish Pandey,BMs. Sneha Kalita, Gwen Karthika, Ms. Abha R. Sharma, P.S. Sudheer,Rishi Maheshwari, Mrs. Mayuri Nayyar Chawla, Ms. Anne Mathew,Bharat Sood, Ms. Shruti Jose, Amar Dave, Vishwas K. Shah, MassomK. Shah, Anup Jain, Udit Gupta, Pulkit Tare, Ashok Panigarhi, ApoorvKurup, Ms. Upama Bhattacharjee, Ms. Nidhi Mittal, Mrs. Anil Katiyar,CPratap Venugopal, Ms. Surekha Raman, Ms. Ayushi Gaur, Akhil AbrahamRoy, Vijay Valsan, (for M/s. K.J, John and Co.), A.N. Arora, PiyushSharma, M.T. George, Mrs. Susy Abraham, Johns George, AniruddhaP. Mayee, A. Rajarajan, Ms. N. Annapoorani, D. Bharat Kumar, PrasannaKumar Parhi, Tadimalla Bhaskar Gowtham, Aman Shukla, D.V. RaghuVamsu, Siddhartha Sinha, Hathindra Manda, Abhijit Sengupta, Anil KumarDMishra, Ms. Praveena Gautam, Pawan Shukla, Ms. Sweety Pandey,Raja Ram, M. Khairati, Irshad Ahmad, Aniruddha Joshi, RajeevMaheshwaranand Roy, Gunjan Kumar, P. Srinivasan, Navjeet Giri, RajeevK. Panday, V.N. Raghupathy, Manendra Pal Gupta, S.N. Bhat,Ms. Hemantika Wahi, Chinmoy Khaladkar, Ms. Neha Sharma,EDeeptakriti Verma, Rajiv Shankar Dwivedi, Ms. Anuradha Mutatkar,Ms. Usha Singh, Ms. Nidhi Saini, Siddharth Mittal, Arun Aggarwal, AnkurPrakash, Praveen Chaturvedi, Dr. Lalit Bhasin, Ms. Nina Gupta,Ms. Palak Chadha, Ms. Ruchika Joshi, P.V. Yogeswaran, Ms. AshaGopalan Nair, Sudhanshu S. Choudhari, Rameshwar Prasad Goyal,Debmalya Banerjee, Kartik Bhatnagar, Rohan Sharma, A.S. Aman,FUjjwal Singh, Vandaan Wanchoo (for M/s. Karanjawala & Co.), SoumyajitPani, Chittaranjan Singh (for Vinodh Kanna B.,), A. Venayagam Balan,P.I. Jose, Prashant K. Sharma, Jenis Francis, Ravi Sagar, AnupamMishra, Hari Kumar V., Siddhesh Kotwal, Ms. Bansuri Swaraj, NirnimeshDube, Ms. Astha Sharma, Ms. Arshiya Ghose, Divyansh Tiwari,GMs. Ana Upadhyay, Rajesh Mahale, Arjun Krishnan, Ankur Singh,Shourya Bari, Aaditya A. Pande, Chander Shekhar Ashri,Chandrashekhar A. Chakalabbi, Awanish Kumar, S.K. Pandey, AnshulRai (for M/s. Dharmaprabhas Law Associates), B.K. Pal, G. Prakash,Jishnu M.L., Mrs. Priyanka Prakash, Mrs. Beena Prakash, P.V. Dinesh,Uday B. Dube, Y. Raja Gopala Rao, Ms. Vismai Rao, Sanjeev Kumar,H

PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATILMURGUD SAHAKARI BANK LIMITED

Pankaj Tikde, Sanjay Kumar, H.K. Naik, Rajnish K., Awanish Kumar,Ajay Amritraj, Arvind Kr. Sharma, Aniteja Sharma, Raj Kishor Choudhary,Rohit K. Singh, Uday Tiwary, P.N. Razdan, Mirza Kayesh Begg,Ms. Anshruta Maheshwari, Ms. Usha Nandini. V, Bineesh Karat, BijuP. Raman, M.S. Vishnu Sankar, Ms. Athira G. Nair, Sonal Jain, KumarShashank, Ms. Rukhmini Bobde, Aviral Kapoor, Ms. Shagufa Salim,Nivesh Kumar, Ms. Riya Dhingra, Satyavir Yadav, Vishal Prasad, AnilNag, Arjun Vinod Bobde, Ms Richa Relhan, Sathak Bhatia,S. Bushra Kazim, Rajat Joseph, Suresh Dutt Dobhal, Anil Kumar Sangal,Harish Pandey, Ms. Pratibha Jain, Vijay Kumar, Dharmendra KumarSinha, Shashibhushan P. Adgaonkar, Rahul Chitnis, Sachin Patil, T.L.V.Rama Chari, Hitesh Kumar Sharma, Akhileshwar Jha, T. Ramamurty,Ms. Sushma Suri, Shreekant N. Terdal, Tanvir Nayar, Praful Sinha, ManojKr. Mishra, M/s. Udit Kishan Associates, Advs. for the appearing parties.

The Judgment of the Court was delivered by ARUN MISHRA, J.

The Judgment of the Court was delivered by ARUN MISHRA, J.

1. The matters have been referred in view of conflicting decisionsin Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. andOrs.[1], Delhi Cloth & General Mills Co. Ltd. v. Union of India andOrs.[2], T. Velayudhan Achari and Anr. v. Union of India and Ors.[3],and Union of India and Anr. v. Delhi High Court Bar Associationand Ors.[4]. The question relates to the scope of the legislative field coveredby Entry 45 of List I viz. ‘Banking’ and Entry 32 of List II of the SeventhSchedule of the Constitution of India, consequentially power of theParliament to legislate. The moot question is the applicability of theSecuritisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002 (for short, ‘the SARFAESI Act’) to theco-operative banks.

2. The Parliament’s competence to amend Section 2(c) of theSARFAESI Act by adding sub-clause ‘(iva) - a multi-State co-operativebank’ has also been questioned. The issue arises whether the definitionof ‘banking company’ contained in Section 5(c) of the Banking RegulationAct, 1949 (for short, ‘the BR Act, 1949’) covers co-operative banksregistered under the State law and also multi-State co-operative societies 1 (2007) 6 SCC 2362 (1983) 4 SCC 1663 (1993) 2 SCC 5824 (2002) 4 SCC 275

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Aunder the Multi-State Co-operative Societies Act, 2002 (for short, ‘theMSCS Act’). Consequently, (i) whether co-operative banks at State andmulti-State level are co-operative banks within the purview of theSARFAESI Act ? and (ii) whether provisions of the SARFAESI Actapply to the co-operative banks registered under the MSCS Act ?B3.Section 56(c)(i)(cci) is contained in Part V of the BR Act,1949, and was brought into force on 1.3.1966. It defines ‘co-operativebank’ to mean a ‘state co-operative bank,’ a ‘central co-operative bank,’and a ‘primary co-operative bank.’ By the notification issued in 2003,the co-operative bank was brought within the class of banks entitled toseek recourse to the provisions of the SARFAESI Act. SectionC2(1)(c)(iva) was inserted into the SARFAESI Act, w.e.f. 15.1.2013.Before that, the co-operative bank and the multi-State co-operative banktook recourse to the SARFAESI Act under the notification issued in2003.

4. Writ petitions were filed questioning vires of the notificationDdated 28.1.2003 issued under Section 2(1)(c)(v) of the SARFAESI Actand the insertion of Section 2(1)(c)(iva) to the SARFAESI Act in 2013.The backdrop history of litigation indicates that in Narendra KantilalShah v. Joint Registrar, Co-operative Societies[5], a Full Bench of theBombay High Court opined that term ‘banking company’ also meansEco-operative bank within the meaning of Section 2(d) of the RDB Act,1993. Hence, with effect from the date of constitution of Debts RecoveryTribunal under RDB Act, 1993, the courts and authorities under theMaharashtra Co-operative Societies Act, 1960, as also the MSCS Actwould cease to have jurisdiction to entertain the applications submittedby the co-operative banks for recovery of their dues. The decision inFNarendra Kantilal Shah (supra) was set aside by this Court in GreaterBombay Coop. Bank Ltd. (supra). This Court opined that theco-operative banks established under the Maharashtra Co-operativeSocieties Act, 1960 and Andhra Pradesh Co-operative Societies Act,1964, transacting the business of banking do not fall within the meaningGof ‘banking company’ as defined in Section 5(c) of the BR Act, 1949.Therefore, the provisions of the Recovery of Debts Due to Banks andFinancial Institutions Act, 1993, now renamed as The Recovery of Debtsand Bankruptcy Act, 1993 (for short, ‘the RDB Act, 1993’), by invokingthe doctrine of incorporation do not apply to the recovery of dues by H5 AIR 2004 Bom 166

co-operative banks from their members. The field of co-operative societiescannot be said to have been covered by the Central legislation byreference to Entry 45 of List I of the Seventh Schedule of the Constitutionof India. Co-operative banks constituted under the Co-operative SocietiesActs enacted by the respective States would be covered by ‘co-operativesocieties’ by Entry 32 of List II of the Seventh Schedule of the Constitutionof India. In the year 2004, the Banking Regulation (Amendment) andMiscellaneous Provisions Act, 2004, was passed by the Union of India,amending various provisions contained in the BR Act, 1949retrospectively, w.e.f. 1.3.1966. On the same anvil, the question posed iswhether provisions can be applied to recovery provisions carved out inthe SARFAESI Act.

5. Writ Petition No.2672 of 2007 was filed by Khaja Industries,challenging the invocation of the SARFAESI Act by Jalgaon PeoplesCo-operative Bank. The Bombay High Court dismissed the same. Therecourse to the proceedings under the SARFAESI Act was upheld. InRama Steel v. Union of India[6], the decision in Khaja Industries wasfollowed. Against the decision of Bombay High Court, appeals havebeen filed.

6. On 13.8.2008, Pandurang Ganpati Chougule – appellant,questioned the action of Vishwasrao Patil Murgud Sahakari Bank Limitedunder the SARFAESI Act before the Civil Judge in Spl. Civil Suit No.226of 2007. Deciding the preliminary issue, the Trial Court held that it didnot have the jurisdiction to decide the suit. The first appeal preferredwas dismissed. Against that, the appeal has been preferred before thisCourt. A separate writ petition under Article 32 of the Constitution ofIndia has also been filed, questioning the invocation of the SARFAESIAct by issuing notices under Section 13 by co-operative banks. Duringthe pendency of the matters, the Central Government brought into forcethe Enforcement of Security Deposit and Debts Law (Amendment) Act,2012 (Act 1 of 2013), amending the definition of Section 2(1)(c) of theSARFAESI Act; the amendment has also been questioned in the writpetition filed in this Court.

7. In Administrator, Shri Dhakari Group Co-operative CottonSeal & Ors. v. Union of India, (Special Civil Application No. 930 of2001), the Gujarat High Court struck down the notification dated 28.1.2003,relying upon Greater Bombay Coop. Bank Ltd. (supra), same has also 6 (2007) 6 Mah. L.J. 387

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Abeen questioned in the appeal. Later on, Gujarat High Court in Neel OilIndustries v. Union of India[7], rejected the challenge to the Constitutionalvalidity of clause (iva) ‘multi-State co-operative bank’ inserted by wayof Amendment Act, 2013.

8. On 30.7.2015, the matter was referred to a larger Bench. AfterBthat, on 26.2.2016, a three-Judge Bench referred the matter to a largerBench, due to conflicting decisions mentioned earlier of the three-JudgeBench of this Court.

ARGUMENTS:

9. Shri Devansh A. Mohta, learned counsel appearing on behalfCof the appellants, raised the following arguments:

(a) The scope of banking under Entry 45 of List I is to beinterpreted in light of the definition of expression ‘banking’ in terms ofSection 5(b) of the BR Act, 1949. He has referred to Rustom CavasjeeCooper v. Union of India[8] in which this Court held that ‘banking’ underDEntry 45 did not include ‘banker’ or ‘bank.’ Banking is an activity. Entrypertains to the activity of banking alone. Section 5(b) read with Section6(1) of the BR Act, 1949, recognizes two kinds of activities that a bankmay undertake: (1) the banking business, i.e., ‘core banking business’;and (2) any other business as provided in Section 6(1). He has alsoEreferred to the decision in Mahaluxmi Bank Ltd. v. Registrar ofCompanies, West Bengal[9 ]in which the court considered the meaningof ‘banking,’ and held that the essence of banking was the relationshipbrought into existence, i.e., the core of banking.

(b) As to the scope of Entry 45 List I, he has further referred toFthe decision in ICICI Bank Limited v. Official Liquidator of APS StarIndustries Limited and Ors.[10], wherein it was emphasised that even ifa company was doing different businesses in addition to clause (a) to (o)of Section 6(1), it would remain a banking company as long as it wasperforming the core banking functions under Section 5(b). The corebanking function is the sine qua non for being regulated by the BR Act,G1949. Therefore, ‘banking’ in Entry 45 of List I is essentially meant to beconfined to ‘core banking business’. At the time when the Constitution 7 AIR 2015 Gujarat 1718 (1970) 1 SCC 2489 AIR 1961 Calcutta 666H10 (2010) 10 SCC 1

of India was promulgated, a well-defined and well-established meaningof the expression ‘banking’ prevailed in the form of the definition of‘banking’ under Section 5(b) of the BR Act, 1949. The same expressionwas borrowed by the Framers of the Constitution of India, and samemeaning was to be given to the expression ‘banking’ in the Entry asdefined in the BR Act, 1949 as observed by this Court in The State ofMadras v. Gannon Dunkerley & Co., (Madras) Ltd.[11 ]and DiamondSugar Mills Ltd. and Anr. v. State of Uttar Pradesh and Anr.[12].

(c) There is a difference between ‘entity’ and ‘activity’. Section6(1) and 6(2) of the BR Act, 1949, enable only a banking entity to performcertain additional business/functions. The performance of additionalbusiness/functions does not confer any status of a banking companyupon such an entity. He also referred to Sections 32 and 33 of the StateBank of India Act, 1955 (for short, ‘the SBI Act’). Section 32 recognisesthat the State Bank of India can carry ‘agency business’ on behalf ofReserve Bank of India, that is not a banking business performed by theState Bank of India as apparent from the perusal of Section 33, whichcategorically enables the State Bank of India to carry on banking businessunder Section 5(b) and other forms of business under Section 6(1) of theBR Act, 1949. Thus, it was submitted that every activity performed by abank is not a banking activity.

(d) That Entry 43 of List I of the Seventh Schedule of theConstitution of India confers upon the Parliament the competence topass law pertaining to ‘incorporation, regulation and winding up’ of atrading corporation, more particularly a banking corporation. However,‘co-operative societies’ are expressly excluded from the purview of theParliament’s competence being a State subject under Entry 32 of ListII. He argued that the legislative history of the BR Act, 1949, made adifference between ‘entity’ and ‘activity.’ The expression ‘banking’ wasdefined in Chapter X-A of the Companies Act (VII of 1913). Sections277F to 277N were inserted vide Amendment Act No. 22 of 1936. Afterthat, the BR Act, 1949, was enforced, providing a comprehensivedefinition of ‘banking’ to bring within its scope all institutions which receivedeposits repayable on demand or otherwise for lending or investment.At that time, the relevant entries of the Government of India Act, 1935,which dealt with the subject of banking as well as trading corporation, 11 AIR 1958 SC 560

12 AIR 1961 SC 652

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Awere in List I (Federal Legislative List). Entry 38 and Entry 33 were inrelation to ‘banking’ and ‘corporation’ respectively. In the Constitutionof India, Entry 38 and Entry 33 have been substituted. Entry 38 issubstituted as Entry 45 of List I and Entry 33 has been bifurcated intoEntry 43, and 44 of List I. Until 1965 before the amendment was insertedin the BR Act, 1949, it dealt with ‘banking companies.’ The wordB‘companies’ was omitted in the year 1965. The function of the StateBank of India was governed by a separate statute such as the StateBank of India Act, 1955. In the year 1965, the Central Governmentpassed the Banking Laws [Application of Cooperative Societies Act,1965 (Act No.23 of 1965)]. He has referred to the Statement of ObjectsCand Reasons, which brings out that the BR Act, 1949, was only to regulatethe banking business relatable to Entry 45 and not to regulate theco-operative societies.

(e) Section 2(10) of the Maharashtra Co-operative Societies Act,1960, is related to the management and business of co-operative societies.DUnder Section 91 of the Maharashtra Act, any dispute touching theconstitution, management or business is required to be referred to aco-operative court.

(f) Similarly, Section 3(f) of the MSCS Act defines ‘co-operativebank’ to mean a multi-State co-operative society, which undertakes theEbanking business. Under Section 84(2) of the MSCS Act, a dispute canbe raised. The power of Parliament is confined to specific provisions ofthe BR Act, 1949 (a legislation referable to Entry 45 of List I), and theReserve Bank of India Act (a legislation referable to Entry 38 of List I).The Parliament lacks legislative competence to regulate any otherbusiness, function, or facets of co-operative societies. It could haveFextended the provisions of said Act only. The Parliament cannot regulatethese co-operative societies like a company performing banking functionsor a banking corporation.

(g) The object of the SARFAESI Act is to regulate securitisationand reconstruction of financial assets and enforcement of securityGinterests. The business of securitisation is not a banking business. UnderSection 2(1)(l)of the SARFAESI Act, a ‘financial asset’ means debt orreceivable and includes inter alia any financial asset. Section 2(1)(ha)defines ‘debt’ to mean the same as defined in clause (g) of Section 2 ofthe RDB Act, 1993. Financial assistance to members is another form ofHbusiness that is not a banking business. Therefore, an attempt to regulate the assets of a co-operative bank by bringing them within the purview ofthe SARFAESI Act is contrary to the original intent of the extendingprovisions of the BR Act, 1949 and that would amount to exercisingcontrol over the entities which are beyond the purview of competenceof Parliament.

(h) The Parliament lacks legislative competence to regulatefinancial assets related to the non-banking activity of a co-operativesociety as they are expressly excluded from the purview of Entry 43 ofList I. The regulation cannot be based upon an interpretation of onlyEntry 45 without any regard to Entry 43. The legislative action would beinconsistent with the limitation inherent in the federal scheme ofdistribution of legislative powers between the Union and the State. Itwould amount to regulation of co-operative society which subject matteris covered under Entry 32 of List II and also confer upon them a statusof a banking corporation or a banking company. It would render an entityfalling under Entry 32 of List II subject to the control of the Parliament,which would be contrary not only to the text but also to the constitutionalintendment as opined in I.T.C. Ltd. v. Agriculture Produce MarketCommittee and Ors.[13]

(i) Notification No.105(E) dated 28.1.2003 is ultra vires as theParliament has included only two classes of entities, i.e., banking companyand banking corporation within its purview. The definition of ‘bank’ underSection 2(1)(c)(v) means ‘such other bank which the Central Governmentmay by notification, specify for this Act.’ The power of the CentralGovernment is confined to the entity of the kind referred under Clauses(i) to (iv) and not beyond that, i.e., a banking company or a bankingcorporation only and not co-operative societies/banks. The co-operativebank is neither a banking company nor a banking corporation; thus, itfalls outside the purview of Section 2(1)(c)(v) of the SARFAESI Act.The notification is ultra vires and violative of not only the parent statutebut also the Constitution of India. For this purpose, learned counsel reliedupon Hinsa Virodhak Sangh v. Mirzapur Moti Kuresh Jamat andOrs.[14]. Recovery of debts due is essential for the bank, i.e., entity andnot for the banking business, i.e., activity. In Greater Bombay Coop.Bank Ltd. (supra), the argument based upon the banking business of theco-operative bank to be covered by Entry 45, was rejected. Therefore, 13 (2002) 9 SCC 232

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Arecovery of dues was held to be outside the purview of Entry 45 of ListI. The Central legislation seeking to regulate banks can only bring withinits purview entities falling in Entry 43, i.e., banking corporation and bankingcompanies. Thus, the Parliament is not competent to enact a lawconcerning the subject matter of Entry 32 of List II.

B(j) The amendment incorporated is a colourable exercise. Thenotification dated 28.1.2003 is ultra vires in view of the decisions inK.C. Gajapati Narayan Deo and Ors. v. State of Orissa[15 ]and Stateof Tamil Nadu and Ors. v. K. Shyam Sunder and Ors[16]. Once entitiesare excluded by Entry 43, the Union of India cannot control it by anindirect method. The Multi-State Co-operative Bank is a primaryCco-operative bank that is, in turn, a co-operative society. In ApexCooperative Bank of Urban Bank of Maharashtra & Goa Ltd. v.Maharashtra State Cooperative Bank Ltd. and Ors.[17], it was observedthat co-operative societies are in the purview of the State List.

(k) The MSCS Act is relatable to Entry 44. This Court is notDrequired to pronounce upon the validity of the said Act. The source oflegislative authority to regulate such banks would be Entry 43. The purposeof Act No.23 of 1965 was to regulate the banking business of certainco-operative societies. They do not cease to be co-operative societiesas held in Virendra Pal Singh and Ors. v. District Assistant Registrar,ECooperative Societies, Etah, and Anr.[18]. There is a difference in theEntries 43, 44 and 32 as held in S.S. Dhanoa v. Municipal Corporation,Delhi and Ors.[19], Daman Singh and Ors. v. State of Punjab andOrs.[20], and Dalco Engineering Private Limited v. Satish PrabhakarPadhye and Ors.[21]. The decision in Greater Bombay Coop. BankLtd. (supra) laid down the law correctly.F

(l) There has to be harmonious construction of the Entries inList I and List II. Any argument of alarm relating to an adverse effecton the banking sector would be of no consequence or relevance to thequestion of construction of the constitutional entry as held in I.T.C. Ltd.(supra).

G15 AIR 1953 SC 37516 (2011) 8 SCC 73717 (2003) 11 SCC 6618 (1980) 4 SCC 10919 (1981) 3 SCC 43120 (1985) 2 SCC 670H21 (2010) 4 SCC 378

10. Shri Vijay Kumar, learned counsel appearing on behalf ofpetitioners, submitted that Parliament is not competent to enact lawsconcerning co-operative societies/banks. Banking business for aco-operative society is merely an incidental/ancillary business. A co-operative society doing business remains a co-operative society and iscovered under Entry 32 of List II. He has placed reliance on IqbalNaseer Usmani v. Central Bank of India and Ors.[22]. There is completemechanism provided under the State Co-operative Societies Acts andMSCS Act; thus, the amendment to the SARFAESI Act and thenotification deserve to be struck down.

11. Shri Vishwas Shah, learned counsel appearing on behalf ofappellants, has argued that it is not necessary to question the 1965Amendment made to the BR Act, 1949. The validity of the notificationand the provisions of the SARFAESI Act have to be tested on theirown. The co-operative banks differ from other banks. Entities arebasically co-operative societies, and it incidentally trenches on banking.The dominant legislation on the subject is State legislation under Entry32. The co-operative banks are different from banking companies to theextent that they advance loans to their members only. The bankingcompanies/corporations deal with the public. The co-operative banks donot carry the business as defined in the BR Act, 1949. The Doctrine ofPith and Substance has to be applied, co-operative society engaged inbanking does not cease to be a co-operative society. In Entry 45 of ListI, ‘banking’ does not include co-operative banks. He relied upon GannonDunkerley & Co. (Madras) Ltd. (supra) and I.T.C. Ltd. (supra).

12. Shri Satpal Singh, learned counsel, has re-emphasised thatamendment made by inserting the definition of ‘multi-State co-operativebank’ is colourable legislation and deserves to be struck down. TheCo-operative Acts are comprehensive. The meaning of the expression‘bank’ could not have been enlarged.

13. Per contra, Shri Shekhar Naphade, learned senior counsel,appearing on behalf of Cosmos Bank, raised the following arguments:

(a) Section 2(1)(c) of the SARFAESI Act defines ‘bank’ to mean‘banking company’ as defined in Section 5(c) of the BR Act, 1949. Thus,the definition of ‘bank’ contained in Section 5(c) of the BR Act, 1949stands incorporated in Section 2(d) of the SARFAESI Act, that came 22 (2006) 2 SCC 241

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Ainto existence on 21.6.2002; hence, it is necessary to examine Section5(c) of the BR Act, 1949, as it stood on 21.6.2002. It is covered by wayof incorporation, w.e.f. 1.3.1966. Section 56(a) became part of Statutesince 1.3.1966, the reference to a ‘banking company’ or a ‘company’shall be construed as a reference to a co-operative bank. Section 56(a)becomes part of Section 5(c) of the BR Act, 1949, and stands incorporatedBin Section 5(c) of the BR Act, 1949. Thus, a reference to the bankingcompany has to be read as a reference to the co-operative bank.

(b) Section 56(a) becomes part of Section 5(c) of the BR Act,1949. Although Section 56(a) is located in a separate place, its impact onSection 5(c) results in a co-operative bank both on State level as well asCmulti-State level becoming part of a banking company. Therefore, theSARFAESI Act covers in its purview co-operative banks andmulti-State co-operative banks.

(c) The insertion of a ‘multi-State co-operative bank’ in Section2(1)(c)(iva) is ex majori cautela as multi-State co-operative bank comesDunder the ambit of ‘banking company’ mentioned in Section 2(1)(c) andas defined in Section 2(d) of the SARFAESI Act. In Daman Singh(supra), this Court held that expression ‘corporation’ occurring underArticle 31A(1)(3) of the Constitution of India is required to be given abroad interpretation and takes within its compass a registeredEco-operative society.

(d) He relied on The Majoor Sahakari Bank Ltd. v. N.N.Majmudar and Anr.[23 ]in which the Bombay High Court observed thatco-operative society doing business of banking is a company. The questionmentioned above arose as the Government of Bombay issued aFnotification and directed that all the provisions of the Bombay IndustrialDisputes Act shall apply to the business of banking companies registeredunder any of the enactments relating to the companies for the time beingin force.

(e) Article 246 distributes legislative powers between the UnionGand the State regarding three lists in the Seventh Schedule. Under Article246(1), the Parliament has exclusive power to make laws in respect of97 matters enumerated in List I notwithstanding anything contained inclauses (2) and (3). As per Article 246(3), the State legislature haslegislative powers to make laws with respect to 66 matters enumerated H23 AIR 1957 Bom 36

in List II. The exclusive power of the State legislature to legislate withrespect to any of the matters enumerated in List II has to be exercisedsubject to Article 246(1), i.e., the exclusive power of the Parliament tolegislate concerning matters enumerated in List I. As a consequence ifthere is a conflict in an Entry in List I and an Entry in List II, which is notcapable of reconciliation, the power of Parliament to legislate concerningmatters enumerated in List I must supersede pro tanto the power of theState legislature. Both the Parliament and the State legislatures haveconcurrent power of legislation for 47 matters enumerated in List III.

(f) Reliance has been placed on Virendra Pal Singh (supra), inwhich the Court examined the powers of the State legislature relating tothe service conditions of employees. The Court held that the Statelegislature was competent to legislate concerning employees of the bank.This Court did not deal with the banking business of the co-operativesocieties. He argued that regulating the non-banking affairs of societyand regulating the banking business of society are two different things.Entry 32 of List II deals with regulation of non-banking affairs of theco-operative society, on the other hand, Entry 45 of List I deals withbanking; hence, any legislation dealing with regulation of banking will betraceable to Entry 45 of List I and only the Parliament will be competentto legislate. The SARFAESI Act does not deal with incorporation,regulation, and winding up of the corporation, company, or co-operativesocieties. It does not regulate the working of a corporation, company, orco-operative society. It only provides for the recovery of dues of banks,including co-operative banks, the procedure for recovery, the authoritycompetent to recover the loan, and the judicial forum to deal with disputesarising out of recovery. Thus, the Act does not touch upon Entry 32 ofList II. The decision in Greater Bombay Coop. Bank Ltd. (supra)requires reconsideration and clarification. There is no in-depthconsideration of its provisions and, more particularly, Section 56 of theBR Act, 1949.

(g) The ratio of the judgment is material. The obiter relates to thefinding of court on an issue that arises in the matter but is not required tobe decided for the final decision of the case. Thus, the finding of anissue is considered as an obiter. In contrast to ratio and obiter, the opinionof the court on an issue that does not arise is a casual or passingobservation. The question in Greater Bombay Coop. Bank Ltd. (supra)was whether the court and authorities constituted under the State

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ACo-operative Societies Act and the MSCS Act continue to havejurisdiction to consider applications/disputes submitted before them byState level and multi-State co-operative banks for recovery of debts dueto them. The question was of the applicability of the RDB Act, 1993 todebts due to co-operative banks constituted under the MCS Act, 1960,the MSCS Act, and the APCS Act, 1964. The question whether theBState legislature was competent to legislate law concerning co-operativesocieties transacting business of banking in the light of Entry 32 of ListII of the Seventh Schedule, did not arise in the matter; hence, anyobservation made by this Court, concerning the said issue, cannot beconsidered as the ratio of the judgment in Greater Bombay Coop. BankCLtd. (supra).

(h) He relied upon the decision of a Division Bench of the BombayHigh Court in The Shamrao Vithal Co-operative Bank Ltd., Mumbai,and Anr. v. M/s. Star Glass Works, Mumbai and Ors.[24] in whichmeaning of incorporation by reference was considered. The same hasDto be taken to a logical end. The Parliament has provided an additionalremedy to co-operative banks to recover their dues by recourse to theCo-operative Societies Act. The Court did not consider the said aspectin Greater Bombay Coop. Bank Ltd. (supra). The distinction betweenco-operative banks serving the members and the corporate bank doingcommercial transactions would make no difference. The activity remainsEbanking merely by the fact that co-operative banks are co-operativesocieties doing banking business; it does not make the banking activitycarried out by them incidental one. It remains their activity. It wasobserved that the definition of ‘banking company’ in Section 5(c) hadnot been altered by Act No.23 of 1965. The incorporation, by reference,Fhas the effect of changing the definition of ‘banking company.’ Even ifin the RDB Act, 1993, the co-operative bank is not included right fromthe beginning, nothing came in the way of Parliament to enact a law thatprovides for an additional remedy to co-operative banks.

14. Shri Jaideep Gupta, learned senior counsel appearing on behalfGof the Reserve Bank of India, raised the following arguments:

(a) The matter is covered by Entry 45 of List I of the SeventhSchedule of the Constitution of India. For the very reason, the Parliamenthas the right to legislate in respect of the banking business as defined inSection 5(b) of the BR Act, 1949.H24 AIR 2003 Bom 205

(b) Banking operations would inter alia include accepting of loansand deposits, the grant of loans and recovery of debts due to the bank.There can be little doubt that the Parliament can enact a law about theconduct of the business by a bank. Recovery of dues is an essentialfunction of a banking institution. Entry 45 of List I would mean legislationregarding all aspects of banking, including ancillary or subsidiary mattersrelating to that. The SARFAESI Act falls within the ambit of Entry 45 ofList I.

(c) The Parliament can enact a law in respect of matters containedin Entry 45 of List I, even if the bank in question is a co-operative society.Entry 45 of List I makes no difference whether an entity carrying businessof banking is a company or statutory corporation or a co-operative society.

(d) The 1965 amendment to the BR Act, 1949, brought within itsken co-operative banks, is not under challenge and has never beensuccessfully questioned. The Parliament has the power to legislateconcerning matters referred to in the SARFAESI Act under Entry 45 ofList I, even if the entity which carries out the activity of banking, is aco-operative society. It is permissible for the Parliament to includemulti-State co-operative banks within the definition of ‘bank.’ Similarly,the Government could have notified co-operative banks under the purviewof Section 2(1)(c)(v) of the SARFAESI Act, more so, in view of thedefinition in clause (cci) of Section 56 of the BR Act, 1949.

(e) The argument of the appellant that Section 2(1)(c) of theSARFAESI Act refers to an entity and not the activity, therefore, itcannot be justified under Entry 45 of List I, is misconceived. Section2(1)(c) is only a definition provision. The subject matter of legislation issecuritisation, reconstruction of financial assets and enforcement ofsecurity interest of banks or financial institutions. The subject matter oflegislation is not based on the entity.

(f) The SARFAESI Act is not a legislation relating to incorporation,regulation, and winding up of the co-operative societies or multi-Stateco-operative society engaged in banking. The same is traceable to Entry45 of List I, i.e., the activity of banking.

(g) The Statement of Objects and Reasons of the SARFAESIAct indicates that it relates to the business of banking and mattersincidental to it. It confers the power upon the bank and financial institutionsto take possession of security and sell them to overcome the slow pacing A

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Aof recovery of default loans and mounting levels of non-performing assetsof banks and financial institutions. It was based on the recommendationof the Narasimham Committee I and II and the Andhyarujina Committeeformed by the Central Government to examine the banking sectorreforms. The legislation in question, thus, relates to the business ofbanking.B

(h) The argument of the appellant that ‘such other banks’ cannotinclude co-operative banks, is also without basis, and the Parliament hasthe power to legislate. Certain observations made in Greater BombayCoop. Bank Ltd. (supra) are incorrect and required to be overruled.The questions which arose in the said case were different.C

15. Shri Vijay Hansaria, learned senior counsel appearing on behalfof Maharashtra State Co-operative Bank, reiterated the aforesaidarguments and additionally urged that the Maharashtra State Co-operativeBank has 41 branches in the State of Maharashtra. As on 31.3.2015, ithad deposits of Rs.9,992 crores and has granted loans and advances toDthe extent of Rs.12,006 crores and has working capital to the extent ofRs.20,947 crores. There are total 2115 members including 1818co-operative institutions, 296 individuals and individual societies and 1State Government and the number of total shares held by them is45,67,280 (35,66,104 are held by co-operative institutions, 1176 are heldEby individuals and individual societies, and 10,00,000 are held by theState Government). The MSC Bank advances various terms loans andworking capital loans to co-operative processing units like Sugar Factories,Private Sugar Mills, Spinning Mills, Oil Mills, Marketing Co-operatives,Educational Institutions, and other co-operative Industrial Units. It is theapex institution of all District Central Co-operative Banks, UrbanFCo-operative Banks, and Primary Agricultural Co-operative Societies.It has a network of co-operative banks and the agricultural co-operativesocieties in the State of Maharashtra on 31.3.2015 as under:

He further pointed out that out of 31 District Co-operative Banks,30 primarily cater to the financial needs of the agriculture sector. MSCBank provides re-finance facilities to the District Central Co-operativeBank, and it also takes care of the financial needs of the non-farmingH

sector by providing re-finance facilities to the District Co-operative Banksunder the NABARD’s general re-finance to enable them to help ruralartisans and small-scale industries. It has also introduced the crop loansystem in the State in association with District Co-operative Banks. Thus,the notification issued and the amendment are appropriate, more so, inlight of the amendment incorporated in 1965. The matter is coveredunder Entry 45 of List I of the Seventh Schedule.

16. On behalf of the Indian Banks Association, Shri P.V.Yogeswaran learned counsel, supported the arguments raised on behalfof the Banks. He further argued that the enactment of the SARFAESIAct is with in the legislative competence of the Parliament. It does notdeprive borrowers’ right to challenge the action under Section 13 of theSARFAESI Act as well as under the Maharashtra Co-operative SocietiesAct and is not violative of Article 14. It only provided an additional remedy.This Court upheld the validity of Sections 13 and 17 of the SARFAESIAct. The Parliament can legislate concerning co-operative banks withinthe purview of Entry 45 of List I.

17. Shri Vinay Navre, learned senior counsel appearing on behalfof Co-operative Banks, vehemently argued that:

(a) The expression ‘incorporation, regulation and winding up’ inEntries 43 and 44 of List I and Entry 32 of List II refers only toorganisational aspects of the corporations. It does not have any bearingon the business/transactional aspects. He has relied upon decisions inHindustan Lever and Anr. v. State of Maharashtra and Anr.[25], KeralaState Electricity Board v. Indian Aluminium Co. Ltd.[26 ]and Sita RamSharma and Ors. v. State of Rajasthan and Ors.[27]. The framers ofthe Constitution deliberately did not define many terms used in the Listsin the Seventh Schedule. Wherever it was required, they defined suchterms. Some of the subjects enumerated in Lists of the Seventh Scheduleare defined in Article 366 of the Constitution, for instance, AgriculturalIncome (List I, Entry 82), Corporation Tax (List I, Entry 85), Debt(List II, Entry 42), Pension (List I, Entry 71) and (List II, Entry 42). Theframers of the Constitution avoided defining the term ‘banking’ in Article366. The intention was not to restrict its meaning. For certain Entries,the framers of the Constitution specified the meaning, such as in Entry71 of List I and Entries 5, 8, 13, 17, 18 of List II.

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A(b) There was a purpose for the framers not to define as an Entryhas to be given meaning as per changes in society, science, and technology.When the American Constitution was framed more than 200 years beforethe Indian Constitution, space science and technology were unknown tothe human. The Entry ‘defence’ in the Union List was interpreted toinclude even space science and technology. He argued that the internetBwas unknown in 1950. Today Entry 31 of List I of the VII Schedule ofthe Constitution of India can include the internet. The courts interpretedan Entry taking into account the changing perspectives of the time,retaining the substance.

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(c) The term ‘banking’ as understood in 1950 was too narrow,Cand after 70 years, the banking industry has undergone significantchanges. Today it includes portfolio management, underwriting of shares,and investment banking. There are grey areas like credit card companies,i.e., VISA or American Express. The definition in the BR Act, 1949,cannot be used to restrict the scope of the term ‘banking’ in Entry 45 ofDList I.

(d) If the argument of the appellants that co-operative banks arenot covered by Entry 45 of List I is accepted, the consequences will bedisastrous. Entire Part V of the BR Act, 1949, would becomeunconstitutional. The Parliament can amend Section 84 of the MSCSEAct, and it could enact the SARFAESI Act. Similarly, power can beprovided to recover dues under the SARFAESI Act also. The argumentraised on behalf of appellants as to ‘occupied field’ cannot be acceptedas the question of ‘occupied field’ is germane concerning the ConcurrentList as held in State of A.P. and Ors. v. Mcdowell & Co. and Ors.[28].The recovery of dues is an essential function of a bank. The argumentFto the contrary cannot be accepted. The purpose of the SARFAESI Actis the enforcement of security interests. The consequence thereof is arecovery, which is an incidental one.

(e) The SARFAESI Act is for enforcement of security, and it isreferable to Entry 6 of List III also, more so, because of the provisionsGcontained in Sections 69 and 69A of the Transfer of Property Act, 1882.Section 13 or other provisions of the SARFAESI Act do not interferewith the legislative field occupied by Entry 32 of List II. The MaharashtraCo-operative Societies Act, 1960, provides two remedies to theco-operative banks for recovery of their dues. Section 91 is akin to a H28 (1996) 3 SCC 709

civil suit, and Section 101 provides a summary procedure for issuance ofa revenue recovery certificate. The SARFAESI Act does not take awaythe remedies of the co-operative banks under Section 91 or 101 of thesaid Act; it provides additional remedy under Section 13 to co-operativebanks to recover the dues and enforce security interest. It is a classiccase of co-operative/collaborative federalism.

18. Shri Abhijet Sengupta, learned counsel appearing on behalf ofJana Seva Sahakari Bank Ltd., urged that petition under Article 32 ofthe Constitution cannot be said to be maintainable, given the decisions inDewan Bahadur Seth Gopal Das Mohta v. Union of India and Ors.[29],and Khyerbari Tea Co. Ltd. and Ors. v. State of Assam[30]. Entry 45 ofList I and Entry 32 of List II are to be read harmoniously.

19. Following questions arise for consideration:

(1) Whether ‘co-operative banks’, which are co-operative societiesalso, are governed by Entry 45 of List I or by Entry 32 of List II of theSeventh Schedule of the Constitution of India, and to what extent?

(2) Whether ‘banking company’ as defined in Section 5(c) of theBR Act, 1949 covers co-operative banks registered under the StateCo-operative Laws and also multi-State co-operative societies?

(3) (a) Whether co-operative banks both at the State level andmulti-State level are ‘banks’ for applicability of the SARFAESI Act?

(3) (b) Whether provisions of Section 2(c) (iva) of the SARFAESIAct on account of inclusion of multi-State co-operative banks andnotification dated 28.1.2003 notifying cooperative banks in the State areultra vires?

IN REFERENCE QUESTION NO.1:

20. In order to appreciate the rival submissions, we have to considerEntries 43, 44 and 45 of List I and Entry 32 of List II of the SeventhSchedule of the Constitution of India. The Entries are reproducedhereunder:

“43. Incorporation, regulation and winding up of tradingcorporations, including banking, insurance and financialcorporations but not including co-operative societies.

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A44. Incorporation, regulation and winding up of corporations,whether trading or not, with objects not confined to one State, butnot including universities.

45. Banking.

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32. Incorporation, regulation and winding up of corporation, otherthan those specified in List I, and universities; unincorporatedtrading, literary, scientific, religious and other societies andassociations; co-operative societies.”

C21.In the BR Act, 1949, ‘banking’ has been defined under Section5(b) thus:

“5. Interpretation. — In this Act, unless there is anythingrepugnant in the subject or context,—

(b) “banking” means the accepting, for the purpose of lendingDor investment, of deposits of money from the public, repayable on demandor otherwise, and withdrawable by cheque, draft, order or otherwise;”

22. Under Section 5(c) of the BR Act, 1949, the term ‘bankingcompany’ has been defined thus:

“5. Interpretation.— In this Act, unless there is anythingErepugnant in the subject or context,—

(c) “banking company” means any company which transacts thebusiness of banking in India; Explanation.— Any company which is engaged in theFmanufacture of goods or carries on any trade and which acceptsdeposits of money from the public merely for the purpose offinancing its business as such manufacturer or trader shall not bedeemed to transact the business of banking within the meaning ofthis clause;”

G23.Section 6 in Part II of the BR Act, 1949 deals with forms ofbusiness in which banking companies may engage, is extracted hereunder:

“6. Forms of business in which banking companies mayengage.— (1) In addition to the business of banking, a bankingcompany may engage in any one or more of the following formsof business, namely:—

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(a) the borrowing, raising, or taking up of money; the lending oradvancing of money either upon or without security; the drawing,making, accepting; discounting, buying, selling collecting anddealing in bills of exchange, hoondees, promissory notes, coupons,drafts, bills of lading, railway receipts, warrants, debentures,certificates, scrips and other instruments, and securities whethertransferable or negotiable or not; the granting and issuing of lettersof credit, traveller’s cheques and circular notes; the buying, sellingand dealing in bullion and specie; the buying and selling of foreignexchange including foreign bank notes; the acquiring, holding,issuing on commission, underwriting and dealing in stock, funds,shares, debentures, debenture stock, bonds, obligations, securitiesand investments of all kinds; the purchasing and selling of bonds,scrips or other forms of securities on behalf of constituents orothers, the negotiating of loans and advances; the receiving of allkinds of bonds, scrips or valuables on deposits or for safe custodyor otherwise; the providing of safe deposit vaults: the collectingand transmitting of money and securities; (b) acting as agents for any Government or local authority or anyother person or persons; the carrying on of agency business ofany description including the clearing and forwarding of goods,giving of receipts and discharges and otherwise acting as anattorney on behalf of customers, but excluding the business of amanaging agent or secretary and treasurer of a company;

(c) contracting for public and private loans and negotiating andissuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participatingin managing and carrying out of any issue, public or private, ofState, municipal or other loans or of shares, stock, debentures, ordebenture stock of any company, corporation or association andthe lending of money for the purpose of any such issue;

(e) carrying on and transacting every kind of guarantee andindemnity business; (f) managing, selling and realising and property which may comeinto the possession of the company in satisfaction or partsatisfaction of any of its claims; (g) acquiring and holding and generally dealing with any propertyor any right, title or interest in any such property which may form

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Athe security or part of the security for any loans or advances orwhich may be connected with any such security; (h) undertaking and executing trusts;

(i) undertaking the administration of estates as executor, trusteeor otherwise;B

(j) establishing and supporting or aiding in the establishment andsupport of associations, institutions, funds, trusts and conveniencescalculated to benefit employees or ex-employees of the companyor the dependents or connections of such persons; grantingpensions and allowances and making payments towards insurance;Csubscribing to or guaranteeing moneys for charitable or benevolentobjects or for any exhibition or for any public, general or usefulobject; (k) the acquisition, construction, maintenance and alteration ofany building or works necessary or convenient for the purposesof the company;D(l) selling, improving, managing, developing, exchanging, leasing,mortgaging, disposing of or turning into account or otherwisedealing with all or any part of the property and rights of thecompany; (m) acquiring and undertaking the whole or any part of the businessEof any person or company, when such business is of a natureenumerated or described in this sub-section; (n) doing all such other things as are incidental or conducive tothe promotion or advancement of the business of the company; (o) any other form of business which the Central GovernmentFmay, by notification in the Official Gazette, specify as a form ofbusiness in which it is lawful for a banking company to engage.

(2) No banking company shall engage in any form of businessother than those referred to in sub-section (1).”

24. Initially, the provisions of the BR Act, 1949, applied only toGbanking companies. The provisions of the BR Act, 1949, were extendedto co-operative banks by Act No.23 of 1965, w.e.f. 1.3.1966. EarlierSection 56 was repealed by Act No.36 of 1957, w.e.f. 17.9.1957. BillNo.85 of 1964 was introduced in Parliament on 17.12.1964 to amendthe Reserve Bank of India Act, 1934 and the Banking Companies Act,1949 to regulate the banking business of certain co-operative societiesHand for matters connected in addition to that.

25. Before we come to the amendments made, it is necessary toconsider the Statement of Objects and Reasons. It was considerednecessary to extend provisions of the BR Act, 1949 to State co-operativebanks, the central co-operative banks, and, more importantly, to primarynon-agriculture credit societies, which were relatable to banking. TheStatement of Objects and Reasons is extracted hereunder:

“STATEMENT OF OBJECTS OF REASONS

The provisions of the Banking Companies Act, 1949 are not nowapplicable to or in relation to co-operative banks. The depositsand working funds of co-operative banks are now so large thatthe extension of the more important provisions of the BankingCompanies Act, 1949 (and of certain other allied provisions of theReserve Bank of India, Act, 1934) to these banks will be in thepublic interest. The Bill seeks accordingly to extend to the Stateco-operative banks, the central co-operative banks and the moreimportant primary non-agricultural co-operative banks certainprovisions of the existing Central laws which are relatable to“banking”.

2. The notes on clauses explain in detail the various provisions ofthe Bill.” (emphasis supplied)

The President’s recommendation under Article 117 of theConstitution contained in appended Notes on clauses is also significant.The State or apex co-operative banks, all central co-operative banks,and primary non-agricultural credit societies, which have paid-up capitaland reserves of a nominal value of Rs.1 lakh or more, were to be deemedto be co-operative banks. Consequential change in the qualifications ofdirectors was proposed to be made. Clause 6 provided to keep reserveat 3 per cent for apex co-operative banks. It was proposed to controlco-operative banks effectively under the provisions of the Reserve Bankof India Act and Banking Companies Act. It would not be necessary tomake separate provisions concerning them, as such the BankingCompanies Act was to be renamed as Banking Regulation Act, and itwould not be confined any longer to companies incorporated under theCompanies Act carrying on the business of banking.

26. What is of utmost significance is that extensive amendmentsand omissions of several provisions of the BR Act, 1949 becamenecessary concerning matters covered under Entry 32 of List II; as

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Asuch various amendments were separately reflected in a separate chapter,amendments were incorporated under various provisions of the Act inParts IIA, III and IIIA. The provisions relatable directly or indirectly toincorporation, management and winding up of co-operative banks wereproposed to be omitted as these Parts or provisions were not in pith andsubstance within the scope of any entry in the Central or ConcurrentBList of subjects in the Seventh Schedule of the Constitution of India.Following is the relevant extract of the Notes appended to President’srecommendation under Article 117 of the Constitution of India:

“According to the scheme of control as it is envisaged in theReserve Bank of India Act and in the Banking Companies Act,(a) all the State or apex co-operative banks, (b) all centralco-operative banks and (c) such of the primary non-agriculturalcredit societies, including in particular urban co-operative banks,as have paid-up capital and reserves of a nominal value of Rs. 1lakh or more, will be deemed to be co-operative banks. Thedefinition of the expression “co-operative bank” will exclude (a)all primary agricultural credit societies, whatever the nominal valueof their paid-up capital may be, (b) primary non-agricultural creditsocieties with paid-up capital and reserves of a nominal value ofless than rupees one lakh, even though they may be acceptingdeposits from non-members and (c) all other co-operative societieswhich do not obtain, or may hereafter cease to obtain, depositsfrom non-members.

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Clauses 8 and 9 provide for the modification of the definition of(a) financial institutions and (b) non-banking insitutions for thepurposes of Chapter IIIB of the Reserve Bank of India Act. It isproposed that (a) all co-operative banks, (b) all agricultural creditsocieties and (c) all primary non-agricultural credit societies whichare not co-operative banks should be excluded from the scope ofthe statutory provisions relating to the Reserve Bank’s controlover the loan investment or other allied policies of financial andnon-banking institutions. Co-operative banks will be effectivelycontrolled in accordance with other provisions which are beingmade for this purpose in the Reserve Bank of IndiaAct and theBanking CompaniesAct and it will not, therefore, be necessary tomake any separate provision in regard to them. Agricultural creditsocieties have been excluded generally from the scope of thevarious provisions of the present Bill. The working funds andturnover of primary non-agricultural credit societies which arenot co-operative banks are relatively insignificant, with the result F

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that the trouble or expense involved in controlling their loans oradvances or investment policies may not be worthwhile.

Clauses 10 and 11.— Chapter III provides for the amendmentsnecessary to Banking Companies Act. Clauses 10 and 11 seek toalter the description of this Act and to make certain consequentialchanges in the long title and the preamble. The Act, it is proposed,should be known in future as the Banking Regulation Act, 1949.This will be appropriate, as its application will not be confined anylonger to companies incorporated under the Companies Act andcarrying on the business of banking.

Parts IIA, III and IlIA and such of the provisions in the otherParts of theAct as are relatable either directly or indirectly to theincorporation, management and winding up of co-operative banksare proposed to be omitted, as these Parts or provisions are not inpith and substance within the scope of any entry in the Central orConcurrent List of subjects in the Seventh Schedule to theConstitution.”

(emphasis supplied)

The provisions of Bankers’ Books Evidence Act, 1891 were alsoproposed to be suitably modified to apply to the co-operative banksthus:

“The provisions of the Bankers’ Books Evidence Act, 1891 andthe Banking Companies (Legal Practitioners’ Clients’ Accounts)Act, 1949 are proposed to be modified suitably, so that the specialprocedure as to evidence or the protection in respect of certainaccounts may be extended to or be available in future in relationto co-operative banks [clause (zk)].

The Third Schedule as proposed to be amended provides for theprescribed Forms in which the ba1ance-sheets and profit and lossaccounts of co-operative banks will have to be maintained. TheForms may, if necessary, be modified in future in the light of furtherexperience and in accordance with the procedure which is alreadyprescribed in the Act for this purpose.”

The co-operative banks were also required to submit the balancesheet and profit and loss account to the Reserve Bank of India.

27. Various amendments were carried out in the Reserve Bankof India Act to make it applicable to the co-operative banks. The ‘centralco-operative bank’ was defined by substituting clause (bi) to Section 2

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Aof the Reserve Bank of India Act, 1934. Similarly, ‘co-operative bank’,‘co-operative credit society’ and ‘co-operative society’ were defined bysubstituting Section 2(bii), Section 2(biii) and Section 2(biv) respectively.The relevant definitions as inserted in the Reserve Bank of India Act,1934 are extracted hereunder:B“(bi) “central co-operative bank” means the principal co-operative “(bi) “central co-operative bank” means the principal co-operativesociety in a district in a State, the primary object of which is thefinancing of other co-operative societies in that district:

Provided that in addition to such principal society in a district orwhere there is no such principal society in a district, the StateCGovernment may declare any one or more co-operative societiescarrying on the business of financing other co-operative societiesin that district to be a central co-operative bank or banks withinthe meaning of this definition; (bii) “co-operative bank” means a State co-operative bank, aDcentral co-operative bank and a primary co-operative bank; (biii) “co-operative credit society” means a co-operative society,the primary object of which is to provide financial accommodationto its members and includes a co-operative land mortgage bank:

(biv) “co-operative society” means a society registered, or deemedEto be registered, under the Co-operative Societies Act, 1912 orany other law relating to co-operative societies for the time beingin force in any State;”

The ‘primary co-operative bank’ has been defined in Section 2(ciii),and ‘primary credit society’ has been defined in Section 2(civ). TheFdefinitions are extracted hereunder:

“(ciii) “primary co-operative bank” means a co-operative society,other than a primary agricultural credit society,—

(1) the primary object or principal business of which is thetransaction of banking business; G

(2) the paid-up share capital and reserves of which are not lessthan one lakh of rupees; and

(3) the bye-laws of which do not permit admission of any otherco-operative society as a member; H(civ) “primary credit society” means a co-operative society, otherthan a primary agricultural credit society,—

(1) the primary object or principal business of which is thetransaction of banking business;

(2) the paid-up share capital and reserves of which are less thanone lakh of rupees; and

(3) the bye-laws of which do not permit admission of any otherco-operative society as a member; Explanation.— If any dispute arises to the primary object orprincipal business of any co-operative society referred to in thisclause or clause (cii) or clause (ciii), a determination thereof bythe Bank shall be final.’;”

Other corresponding changes were brought in the provisions toapply the Reserve Bank of India Act to co-operative banks.

(a) Various amendments have been carried out in the BankingCompanies Act, 1949, it was renamed as the BR Act, 1949. The ‘primaryagricultural credit society’ was excluded from the purview of the ReserveBank of India Act and the BR Act, 1949. Co-operative land mortgagebanks and any other co-operative society except in the manner and tothe extent specified in Part V were also excluded. Section 3 of the BRAct, 1949 was substituted as under:

“3. Nothing in this Act shall apply to-

(a) a primary agricultural credit society; (b) a co-operative land mortgage bank; and

(c) any other co-operative society, except in the manner and tothe extent specified in Part V.”

(b) As it became necessary to apply certain provisions of the BRAct, 1949 to the co-operative banks in the modified form without insertingthe amendments/omissions in the various provisions, as that would havemade the understanding of provisions a little complicated. Entireamendments made which applied to or about the co-operative societiesconcerning co-operative banks were specified in Section 56, Chapter V,though they had the effect of amending the main provisions of the Actwherever they occurred.

(c) It was provided by Section 56(a) of the BR Act, 1949 thatthroughout the Act, unless the context otherwise requires, references toa banking company or the company or such company shall be construed A

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Aas references to a co-operative bank. Section 56(a)(i) and (ii) is extractedhereunder:

“56. The provisions of this Act, as in force for the time being, shallapply to, or in relation to, co-operative societies as they apply to,or in relation to banking companies subject to the followingBmodifications, namely:—

(a) Throughout this Act, unless the context otherwise requires,—

(i) references to a “banking company” or, “the company” or “suchcompany” shall be construed as references to a co-operativebank, C

(ii) references to “commencement of this Act” shall be construedas references to commencement of the Banking Laws(Application to Co-operative Societies) Act, 1964"

By virtue of Section 56(b) in Section 2, the words and figures ‘theDCompanies Act, 1956’ were omitted. After clause (cc) in Section 5definition of ‘central co-operative banks’ in clause (ccc) was added asunder:

“(ccc) “central co-operative bank”, “co-operative bank”,“co-operative society”, “director”, “primary agricultural creditsociety”, “primary co-operative bank”, “primary credit society”Eand “State co-operative bank” shall have the meanings respectivelyassigned to them in the Reserve Bank of India Act, 1934.”

(d) Section 5A was modified concerning the co-operative banks.Section 5A provided that the provisions of Part V shall prevail andoverride bye-laws of a co-operative society or any agreement executedFby it, whether the same be registered, executed or passed, before orafter the commencement of the Banking Laws (Application toCo-operative Societies) Act, 1964. Section 5A is extracted hereunder:

“5A. (1) The provisions of this Part shall have effect,notwithstanding anything to the contrary contained in the bye-Glaws of a co-operative society, or in any agreement executed byit, or in any resolution passed by it in general meeting, or by itsBoard of directors or other body entrusted with the managementof its affairs, whether the same be registered, executed or passed,as the case may be, before or after the commencement of theHBanking Laws (Application to Co-operative Societies) Act, 1964.

(2) Any provision contained in the bye-laws, agreement orresolution aforesaid shall, to the extent to which it is repugnant tothe provisions of this Part, become or be void, as the case maybe.”;”

(e) By virtue of provisions contained in Section 56(e) in Part V ofthe BR Act, 1949 so far as it extends to co-operative society/banks, themodification has been made in Section 6(1)(b) to the extent ‘but excludingthe business of a managing agent or secretary and treasurer of thecompany’ shall be omitted. In clause (d) after the word ‘company,’ thewords ‘or co-operative society’ shall be inserted.

(f) In Section 6(1) in clause (d), the words ‘co-operative society’were inserted after the word ‘company.’ For co-operative society to benamed as a co-operative bank, the following section was substituted:

“7. (1) No co-operative society other than a co- operative bankshall use as part of its name any of the words “bank”, “banker” or“banking” and no co-operative society shall carry on the businessof banking in India unless it uses as part of its name at least one ofsuch words.

(2) Nothing in this section shall apply to- (a) a primary credit society, or (b) a co-operative society formed for the protection of themutual interests of co-operative banks or co-operative landmortgage banks.;”

(emphasis supplied)

(g) Section 11 was substituted in application to co-operative banks.The relevant portion of Section 11(1) is extracted hereunder:

“11. (1) Notwithstanding any law relating to co-operative societiesfor the time being in force, no co-operative bank shall commenceor carry on the business of banking in India unless the aggregatevalue of its paid-up capital and reserves is not less than one lakhof rupees:”

(h) Section 18 was substituted, which provided for maintainingcash reserve. Every co-operative bank not being a State co-operativebank included in the Second Schedule to the Reserve Bank of India Act,1934, shall maintain in India by way of cash reserve of 3 per cent of theamount. The relevant portion of Section 18 is extracted hereunder:

“18. Every co-operative bank, not being a State co-operative bank·for the time being included in the Second Schedule to the Reserve A

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ABank of India Act, 1934, shall maintain in India, by way of cashreserve with itself or in current account opened with the ReserveBank or the State Bank of India or the State co-operative bank ofthe State concerned or with any other bank notified by the CentralGovernment in this behalf or, in the case of a primary co-operativebank, with the central co-operative bank of the district concernedBor partly in cash with itself and partly in such account or accounts,a sum equivalent to at least three per cent of the total of its timeand demand liabilities in India and shall submit to the ReserveBank before the 15th day of every month a return showing theamount so held on Friday of each week of the preceding monthCwith particulars of its time and demand liabilities in India on eachsuch Friday, or, if any such Friday is a public holiday under theNegotiable Instruments Act, 1881, at the close of business on thepreceding working day.”

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(i) Section 19 was substituted concerning the application to theDco-operative societies. The relevant portion of Section 19 is as under:

“19. No co-operative bank shall hold shares in any otherco-operative society except to such extent and subject to suchconditions as the Reserve Bank may specify in that behalf: ...”

The restriction was imposed under Section 19 on holding sharesin other co-operative societies except as provided by the Reserve BankEof India.

(j) Section 22 of the BR Act, 1949, as amended in its applicationwith respect to the co-operative banks, provides that no co-operativesociety shall carry on banking business in India unless it is a primarycredit society or a co-operative bank and holds a licence issued in thatFbehalf by the Reserve Bank. Thus, it was necessary that only primarycredit society could involve in the banking business in India and to hold alicence from the Reserve Bank of India. The provisions of sub-Sections(1) and (2) of Section 22 were also substituted in their application to theco-operative bank as under:

G“(0) in section 22,—

(i) for sub-sections (1) and (2), the following sub-sections shall besubstituted, namely:- “(1) Save as hereinafter provided, no co-operative society shallcarry on banking business in India unless—

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(a) it is a primary co-operative society, or

(b) it is a co-operative bank and holds a licence issued in thatbehalf by the Reserve Bank, subject to such conditions, if any, asthe Reserve Bank may deem fit to impose:

Provided that nothing in this sub-section shall apply to a co-operativesociety, not being a primary credit society or a co-operative bankcarrying on banking business at the commencement of the BankingLaws (Application to Co-operative Societies) Act, 1964, for aperiod of one year from such commencement.

(2) Every co-operative society carrying on business as aco-operative bank at the commencement of the Banking Laws(Application to Cooperative Societies) Act, 1964, shall before theexpiry of three months from such commencement, every primarycredit society which becomes a primary co-operative bank aftersuch commencement shall before the expiry of three months fromthe date on which it so becomes a primary co-operative bank andevery co-operative society other than a primary credit societyshall before commencing banking business in India, apply in writingto the Reserve Bank for a licence under this section:

Provided that nothing in clause (b) of sub-section (1) shall bedeemed to prohibit a co-operative society carrying on business asa co-operative bank at the commencement of the Banking Laws(Application to Co-operative Societies) Act, 1964, and a primarycredit society which becomes a primary co-operative bank aftersuch commencement, from carrying on banking business until it isgranted a licence in pursuance of this section or is by notice inwriting informed by the Reserve Bank that a licence cannot begranted to it.;”

(emphasis supplied)

(k) The embargo has also been created by sub-Section (1) ofSection 23, to open a new place of business insofar as it applies to theco-operative banks thus:

“(1) Without obtaining the prior permission of the Reserve Bank,no co-operative bank shall open a new place of business or changeotherwise than within the same city, town or village, the locationof an existing place of business:”

It has been made necessary by substituting Sections 29 and 30for every co-operative bank to submit accounts and balance sheets to

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Athe Reserve Bank of India. Reserve Bank of India has also been givenpower under Section 35 to inspect primary co-operative banks. In Section35A(1)(c), after the words ‘banking company’, the words ‘bankingbusiness of any co-operative bank’ has been substituted. Forms havealso been prescribed for submitting balance sheet, property, and assets,and profit and loss account.B

Thus, it is apparent that deep and pervasive control by the ReserveBank of India is provided on primary credit society, which is involved inbanking. As per the provisions of the BR Act, 1949, no business can bedone by any co-operative society without obtaining a licence from theReserve Bank of India. The very existence of the co-operative banks isCdependent and is governed by the Reserve Bank of India Act as well asthe BR Act, 1949. The aforesaid legislations are under Entry 38 andEntry 45, respectively, of List I of the Constitution of India.

28. Before proceeding further, it is necessary to consider theprovisions contained in the SARFAESI Act. The SARFAESI Act hasDbeen enacted to regulate securitisation and reconstruction of financialassets and enforcement of security interest and for matters connectedtherewith and incidental to that. It was considered that banks do nothave the power to take possession of the property and sell them. Thelegal system related to commercial transactions has not kept pace withthe changing commercial practices and financial sector reforms. TheErelevant portion of the Statement of Objects and Reasons of theSARFAESI Act is extracted hereunder:

“STATEMENT OF OBJECTS AND REASONS

“STATEMENT OF OBJECTS AND REASONS

The financial sector has been one of the key drivers in India’sefforts to achieve success in rapidly developing its economy. WhileFthe banking industry in India is progressively complying with theinternational prudential norms and accounting practices there arecertain areas in which the banking and financial sector do nothave a level playing field as compared to other participants in thefinancial markets in the world. There is no legal provision forGfacilitating securitisation of financial assets of banks and financialinstitutions. Further, unlike international banks, the banks andfinancial institutions in India do not have power to take possessionof securities and sell them. Our existing legal framework relatingto commercial transactions has not kept pace with the changingcommercial practices and financial sector reforms. This hasHresulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions.Narasimham Committee I and II and Andhyarujina Committeeconstituted by the Central Government for the purpose ofexamining banking sector reforms have considered the need forchanges in the legal system in respect of these areas. TheseCommittees, inter alia, have suggested enactment of a newlegislation for securitisation and empowering banks and financialinstitutions to take possession of the securities and to sell themwithout the intervention of the court. Acting on these suggestions,the Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Ordinance, 2002 waspromulgated on the 21st June, 2002 to regulate securitisation andreconstruction of financial assets and enforcement of securityinterest and for matters connected therewith or incidental thereto.The provisions of the Ordinance would enable banks and financialinstitutions to realise long-term assets, manage problem of liquidity,asset liability mismatches and improve recovery by exercisingpowers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery orreconstruction.

2. It is now proposed to replace the Ordinance by a Bill, which,inter alia, contains provisions of the Ordinance to provide for—

(g) defining ‘security interest’ as any type of security includingmortgage and charge on immovable properties given for duerepayment of any financial assistance given by any bank orfinancial institution; (h) empowering banks and financial institutions to take possessionof securities given for financial assistance and sell or lease thesame or take over management in the event of default, i.e.classification of the borrower’s account as non-performing assetin accordance with the directions given or guidelines issued bythe Reserve Bank of India from time to time;”

29. Under Section 13 of the SARFAESI Act, it is open to theBank to enforce the security interest without intervention of the court ortribunal in accordance with the provisions of the Act, and the appeal toDebts Recovery Tribunal is provided. The Appellate Tribunal has beendefined to mean Debts Recovery Appellate Tribunal, and the right toappeal/application against the action has been provided in Section 17 tothe Debts Recovery Tribunal. Thus, Debts Recovery Tribunal is constitutedunder the RDB Act, 1993.

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A30.What is of significance is the definitions of ‘bank’ and ‘banking’which have been provided in the SARFAESI Act in Section 2(1)(c) and2(1)(d) respectively thus:

“2. Definitions.—(1) In this Act, unless the context otherwiserequires,—

(c) “bank” means—

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(i) a banking company; or

(ii) a corresponding new bank; or

(iii) the State Bank of India; or

(iv) a subsidiary bank; or

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(iva) a multi-State co-operative bank; or

(v) such other bank which the Central Government may, bynotification, specify for the purposes of this Act;***

(d) “banking company” shall have the meaning assigned to it inDclause (c) of section 5 of the Banking Regulation Act, 1949 (10 of1949);”

31. In exercise of power conferred under Section 2(1)(c)(v) ofthe SARFAESI Act, a notification was issued by the Ministry of Financeand Company Affairs on 28.1.2003 specifying co-operative banks asEdefined in clause (cci) of Section 5 of the BR Act, 1949 for the purposeof the SARFAESI Act. Following notification was issued:

“S.O.105 (E).— In exercise of the powers conferred under item(v) of clause (c) of Sub-section (1) of Section 2 of the Securitisationand Reconstruction of Financial Assets and Enforcement ofFSecurity Interest Act, 2002 (54 of 2002), the Central Governmenthereby specifies “Co-operative Bank” as defined in clause (cci)of Section 5 of the Banking Regulation Act 1949 (10 of 1949) as‘bank’ for the purpose of the Securitization and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act, 2002(54 of 2002).”G

32. In Section 2(1)(c) of the SARFAESI Act, further amendmentshave been made by incorporating a ‘multi-State co-operative bank,’ w.e.f.15.1.2013 by way of Enforcement of Security Interest and Recovery ofDebts Laws (Amendment) Act, 2012 (No.1 of 2013). Other provisionsof the SARFAESI Act were also amended. A similar amendment wasH

made to the RDB Act, 1993, in Section 2(d) by inserting clause (vi) ‘amulti-State co-operative bank.’ Section 2(d) is extracted hereunder:

“2. Definitions.—In this Act, unless the context otherwiserequires,—

(d) “bank” means—

(i) a banking company;

(ii) a corresponding new bank;

(iii) State Bank of India;

(iv) a subsidiary bank; or

(v) a Regional Rural Bank;

(vi) a multi-State-co-operative bank;”

33. We have to examine the legislative competence of theParliament with respect to co-operative banks within the State as theMSCS Act, 2002 is enacted in exercise of power under Entry 44 List Iof the Seventh Schedule of the Constitution of India. The legislativecompetence of Parliament regarding the MSCS Act, 2002 is not in issue.

MEANING OF ‘BANKING’

34. The main issue is as to the meaning of ‘banking’ used in Entry45 of List I of the Seventh Schedule of the Constitution of India. It isnecessary to understand the meaning of ‘bank’ and ‘banking.’ Beforethe Constitution was promulgated, banking was dealt with by the erstwhileBanking Companies Act, 1949. Upon its extension to co-operative banksrun by co-operative societies, it was renamed as the BR Act, 1949.Before we consider the definition of ‘banking’ under the BR Act, 1949,it is necessary to understand the meaning of ‘bank’ and ‘banking.’ Thebank ordinarily means any establishment which carries the business ofbanking. The expression ‘bank’ has been defined in several enactments.In Concise Oxford English Dictionary, ‘bank’ has been defined thus:

“bank • n. 1 a financial establishment that uses money depositedby customers for investment, pays it out when required, makesloan at interest, and exchanges currency.”

In Concise Oxford English Dictionary, the word ‘banking’ hasbeen defined thus:

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A“banking • n. the business conducted or services offered by abank.”

In Black’s Law Dictionary, Ninth Edition ‘banking’ means thebusiness carried on by or with a bank. ‘Bank’ is defined thus:

“bank. (15c) 1. A financial establishment for the deposit, loan,exchange, or issue of money and for the transmission of funds;esp., a member of the Federal Reserve System. • Under securitieslaw, a bank includes any financial institution, whether or notincorporated, doing business under federal or state law, if asubstantial portion of the institution’s business consists of receivingdeposits or exercising fiduciary powers similar to those permittedto national banks and if the institution is supervised and examinedby a state or federal banking authority; or a receiver, conservator,or other liquidating agent of any of the above institutions. 15USCA§ 78c(a)(6). [Cases: Banks and Banking 2, 232, 289, 359.].

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D2. The office in which such an establishment conductstransactions.”

Banks can be of different kinds such as Co-operative Bank,Collecting Bank, Commercial Bank, Correspondent Bank, CustodianBank, Depository Bank, Drawee Bank, Federal Home Loan Bank,EFederal Land Bank, Intermediary Bank, Investment Bank, MutualSavings Bank, Nationalised Banks, Negotiable Bank, Non-Member Bank,Payor Bank, Savings and Loan Bank, Saving Bank.

The expression ‘bank’ has been defined in various enactmentsrelating to it.

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F35.The ‘Reserve Bank’ has been defined in Section 5(l) to meanReserve Bank of India constituted under Section 3 of the Reserve Bankof India Act, 1934 (2 of 1934). Section 5(ha) defines the ‘National Bank’to mean the National Bank for Agriculture and Rural Developmentestablished under Section 3 of the National Bank for Agriculture andRural Development Act, 1981. The ‘State Bank of India’ is defined inGSection 5(nc) to mean the State Bank of India constituted under Section3 of the State Bank of India Act, 1955 (23 of 1955).

36. The term ‘banking’ used in Entry 45 List I, came up forconsideration in Rustom Cavasjee Cooper (supra), in which 11-JudgeBench of this Court considered the question of ‘banking’ and observed:H

“27. The argument raised by Mr. Setalvad, intervening on behalfof the State of Maharashtra and the State of Jammu and Kashmir,that the Parliament is competent to enact Act 22 of 1969, becausethe subject-matter of the Act is “with respect to” regulation oftrading corporations and matters subsidiary and incidental thereto,and on that account is covered in its entirety by Entries 43 and 44of List I of the Seventh Schedule, cannot be upheld. Entry 43deals with incorporation, regulation and winding up of tradingcorporations including banking companies. Law regulating thebusiness of a corporation is not a law with respect to regulation ofa corporation. In List I entries expressly relating to trade andcommerce are Entries 41 and 42. Again several entries in List Irelate to activities commercial in character. Entry 45 “Banking”;Entry 46 “Bills of exchange, cheques, promissory notes and otherlike instruments”; Entry 47 “Insurance”; Entry 48 “StockExchanges and future markets”; Entry 49 “Patents, inventionsand designs”. There are several entries relating to activitiescommercial as well as non-commercial in List II — Entry 21“Fisheries”; Entry 24 “Industries XXX” ; Entry 25 “Gas and Gasworks”; Entry 26 “Trade and commerce”; Entry 30 “Money-lending and money-lenders”; Entry 31 “Inns and Inn-keeping”;Entry 33 “Theatres and dramatic performances, cinemas etc.”.We are unable to accede to the argument that the State Legislaturesare competent to legislate in respect of the subject-matter of thoseentries only when the commercial activities are carried on byindividuals and not when they are carried on by corporations.

31. The expression “banking” is not defined in any Indian statuteexcept in the Banking Regulation Act, 1949. It may be recalledthat by Section 5(b) of that Act “banking” means “the acceptingfor the purpose of lending or investment of deposits of moneyfrom the public repayable on demand or otherwise, andwithdrawable by cheque, draft or otherwise”. The definition didnot include other commercial activities which a banking institutionmay engage in.

32. In support of his contention Mr. Palkhivala relied upon theobservation of Lord Porter in Commonwealth of Australia v.Bank of New South Wales, LR (1950) AC 235 that bankingconsists of the creation and transfer of credit, the making of loans,

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purchase and disposal of investments and other kindredtransactions; and upon the statement in Halsbury’s Laws ofEngland, 3rd Edn., Vol. 2, Article 270 at pp. 150 and 151 that:

“A ‘banker’ is an individual partnership or corporation, whosesole or predominating business is banking, that is the receipt ofmoney on current or deposit account and the payment ofcheques drawn by and the collection of cheques paid by acustomer.”

and in the footnote (g) at p. 151 that:

“Numerous other functions are undertaken at the presentday by banks such as the payment of domiciled bills, custody ofvaluables, discounting bills, executor and trustee business, or actingin relation to stock exchange transactions, and banks have functionsunder certain financial legislation, X XX.”

These functions are not strictly banking business.

33. The Attorney-General said that the expression “banking” inEntry 45, List I means all forms of business which since theintroduction of western methods of banking in India, bankinginstitutions have been carrying on in addition to banking as definedin Section 5(b) of the Banking Regulation Act, and on that accountall forms of business described in Section 6(1) of the BankingRegulation Act in clauses (a) to (n) are, if carried on in addition tothe “hard-core of banking” banking and the Parliament iscompetent to legislate in respect of that business under Entry 45,List I. In support of his contention that apart from the business ofaccepting money from the public for lending or investment, andwithdrawable by cheque, draft or otherwise, banking includes manyallied business activities which banking institutions were engagedin, the Attorney-General invited our attention to clause 21 of theCharter of the Bank of Bengal (Act 6 of 1839); Section 27 of Act4 of 1862; to Sections 36 and 37 of the Presidency Banks Act 11of 1876; to Section 91(15) of the British North America Act; toPaget’s Law of Banking, 7th Edn., at p. 5; to the Standard Formof Memorandum of Association of a Banking Company in Palmer’sCompany Precedents Form 138; and to the Statement of Objects and Reasons in support of the Bill which was enacted as theIndian Companies (Amendment) Act, 1936.

34. The Charter of the Bank of Bengal, the Presidency BanksAct 4 of 1862, Ch. X-A of the Indian Companies Act, 1913, asincorporated by the Indian Companies (Amendment) Act, 1936,merely described the business which a banking institution couldcarry on. It was not intended thereby to include those activitieswithin the expression “banking”. The Acts enacted after theBanking Regulation Act, 1949, also support that inference. UnderSection 33 of the State Bank of India Act, 1955, the State Bank isentitled to carry on diverse business activities beside banking.Similarly the Banks subsidiary to the State Bank were by Section36 of Act 38 of 1959 to act as agents of the State Bank, and alsoto carry on and transact business of banking as defined in Section5(b) of the Banking Regulation Act, 1949, and were alsocompetent to engage in such one or more other forms of businessspecified in Section 6(1) of that Act. These provisions do not aidin construing the Entry “Banking” in Entry 45, List I.

35. In modern times in India as elsewhere, to attract business,banking establishments render, and compete in rendering, a varietyof miscellaneous services for their constituents. If the test fordetermining what “banking” means in the constitutional entry isany commercial activity which bankers at a given time engage in,great obscurity will be introduced in the content of that expression.The coverage of constitutional entry in a Federal Constitution whichcarves out a field of legislation must depend upon a moresatisfactory basis.

36. The legislative entry in List I of the Seventh Schedule is“Banking” and not “Banker” or “Banks”. To include within theconnotation of the expression “Banking” in Entry 45, List I, powerto legislate in respect of all commercial activities which a bankerby the custom of bankers or authority of law engages in, wouldresult in re-writing the Constitution. Investment of power to legislateon a designated topic covers all matters incidental to the topic. Alegislative entry being expressed in a broad designation indicatingthe contour of plenary power must receive a meaning conduciveto the widest amplitude, subject however to limitations inherent inthe federal scheme which distributes legislative power between AB

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the Union and the constituent units. The field of “banking” cannotbe extended to include trading activities which not being incidentalto banking encroach upon the substance of the entry “trade andcommerce” in List II.

148. Counsel for the petitioner contended that the word “banking”would have the same meaning as the definition of “banking”occurring in Section 5(b) of the Banking Regulation Act of 1949hereinafter referred to for the sake of brevity as the 1949 Act.This contention was amplified to exclude four types of businessfrom the banking business and therefore the Act of 1969 was saidto be not within the legislative competence of Banking under Entry45 in List I. These four types of business are: (1) the receiving ofscrips or other valuables on deposit or for safe custody and providingof safe deposit vaults, (2) agency business, (3) business ofguarantee, giving of indemnity and underwriting and (4) businessof acting as executors and trustees. “Banking” was defined forthe first time in the 1949 Act as meaning the acceptance for thepurpose of lending or investments of deposits of money from thepublic repayable on demand or otherwise and withdrawable bycheque, draft or otherwise. In England there is no statutorydefinition of banking but the Courts have evolved a meaning andprinciple as to what the legitimate business of a bank is.

152. Keeping valuables for safe custody, the providing of safedeposit vaults occur in clause (a) of Section 6(1) along with varioustypes of business like borrowing, raising or taking up of money, orlending or advancing of money. It will appear from clause (n) ofSection 6(1) of the 1949 Act that in addition to the forms of businessmentioned in clauses (a) to (m) a banking company may engagein “doing all such other things as are incidental or conducive to thepromotion or advancement of the business of the company”. Thewords “other things” appearing in clause (n) after enumeration ofthe various types of business in clauses (a) to (m) point to oneinescapable conclusion that the businesses mentioned in clauses(a) to (m) are all incidental or conducive to the promotion oradvancement of the business of the company. Therefore thesebusinesses are not only legitimate businesses of the banks butthese also come within the normal business activities of commercialbanks of repute. Entry 45 in List I of the 7th Schedule of the

Constitution, namely, “banking” will therefore have the widemeaning to include all legitimate businesses of a banking companyreferred to in Section 5(b) as well as in Section 6(1) of the 1949Act. The contention on behalf of the petitioner that the four disputedbusinesses are not banking businesses is not supportable either onlogic or on principle when businesses mentioned in the sub-clausesof Section 6(1) of the 1949 Act are recognised to be legitimatebusiness activities of a banking company by statute and practiceand usage fully supports that view.

158. It was suggested by counsel for the petitioner that by bankingbusiness is meant only the hard core of banking as defined inSection 5(b) of the 1949Act. It is unthinkable that the business ofbanks is only confined to that aspect and not to the various formsof business mentioned in Section 6(1) of the 1949Act. Receivingvaluables on deposit or for safe custody and providing for safecustody vaults which are contemplated in clause (a) of Section6(1) of the 1949 Act cannot be dissociated from other forms ofunchallenged business of a bank mentioned in that clause becauseany such severance would be illogical particularly when depositfor safe custody and safe deposit vaults are mentioned in the longcatalouge of businesses in clause (a). The agency business whichis mentioned in clause (b) of Section 6(1) is one of the recognisedforms of business of commercial banks with regard to mercantiletransactions and payment or collection of price. Agency is afterall a comprehensive word to describe the relationship ofappointment of the bank as the constituent’s representative. Theforms of agency transactions may be varied. It may be acting ascollecting agent or disbursing agent or as depository of parties.The categories of agency can be multiplied in terms of transactions.That is why the business of agency mentioned in clause (b) isfirst in the general form of acting as an agent for any Governmentor local authority, secondly carrying on of agency business of anydescription including the clearing and forwarding of goods andthirdly acting as attorney on behalf of the customers. The businessof guarantee is in the modern commercial word practicallyindissolubly connected with a bank and forms a part of the businessof the bank. It is almost common place for Courts to insist onbank guarantee in regard to furnishing of security. There may beso many instances of guarantee. As to the business of trusteeship A

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and executorship it may be said that this is the wish of the settlerwho happens to be a constituent of the bank appointing the bankas executor or trustee because of the utmost faith and confidencethat the constituent has in the solvency and stability of the bankand also to preserve the continuity of the trustee or the executorirrespective of any change by reason of death or any otherincapacity. It is needless to state that these four disputed forms ofbusiness all spring out of the relation between the bank on the onehand and the customer on the other and the bank earns commissionon these transactions or charges fees for the services rendered.Although trust accounts may be kept in a separate account allmoneys arising out of the trust money go to the general pool ofthe bank and the bank utilises the money and very often trustmoneys may be kept in fixed deposit with the trustee bank andexpenses on account of the trust are met out of the general fundsof the trustee bank. Payments to beneficiaries are made bycrediting the beneficiaries accounts in the trustee bank and if theyare not constituents other modes of payment through other banksare adopted. The position of the banks as executor is similar tothat of a trustee. Whatever moneys the bank may spend arerecouped by the bank out of the accounts of the trust estate.

160. There are various provisions in the 1949 Act to indicate thata banking company cannot carry on business of a managing agentor Secretary and treasurer of a company and that it cannot acquire,construct, maintain, alter any building or works other than thosenecessary or convenient for the purpose of the company. Abanking company cannot acquire or undertake the whole or anyportion of any business unless such business is of one of thoseenumerated in Section 6(1) of the 1949 Act. A bank cannot dealin buying or selling or bartering of goods except in connectionwith certain purposes related to some of the businessesenumerated in the aforesaid Section 6(1). These provisions alsoestablish that businesses mentioned in Section 6 of the 1949 Actare incidental and conducive to banking business. A bank cannotemploy any person whose remuneration is in the form of acommission or a share in the profits of the banking company orwhose remuneration is in the opinion of the Reserve Bankexcessive. One of the most important provisions is Section 35 ofthe 1949 Act, which states that the Reserve Bank at any time may and on being directed so to do by the Central Governmentcause an inspection to be made by one or more of its officers ofthe books of account and to report to the Central Government onany inspection and the Central Government thereafter if it is ofopinion after considering the report that the affairs of the bankingcompany are being conducted to the detriment of the interests ofits depositors, may prohibit the banking company from receivingfresh deposits or direct the Reserve Bank to apply under Section38 for the winding up of the banking company. Another importantprovision in the 1949 Act, is found in Section 27 which providesfor monthly returns in the prescribed form and manner showingassets and liabilities. The power of the Reserve Bank underSections 27 and 35 of the 1949 Act relates to the affairs of thebanking company which comprehend the various forms of businessof the bank mentioned in Section 6 of the 1949 Act. Then againSection 29 of the 1949 Act contemplates accounts relating toaccounts of all business transacted by the bank. Section 35-A ofthe 1949 Act confers power on the Reserve Bank to give directionswith regard to the affairs of a bank. These provisions indicatebeyond any measure of doubt that all forms of business mentionedin Section 6(1) of the 1949 Act are lawful, legitimate businessesof a bank as these have grown along with increase of trade andcommerce. The word “banking” has never had any static meaningand the only meaning will be the common understanding of menand the established practice in relation to banking. That is why allthese disputed forms of business come within the legitimatebusiness of a bank.”

(emphasis supplied)

The submission raised by the petitioner that banking business meantonly the hardcore of banking, was not accepted. It was held that theword ‘banking’ has never had any static meaning, and the only meaningwill be the common understanding of men and the established practiceabout banking. Various forms of business come within the legitimatebusiness of a bank.

37. It was argued on behalf of appellants that the BR Act, 1949recognises two categories of finance activity which a bank may undertakesuch as (1) the banking business under Section 5(b), i.e., core bankingbusiness; and (2) any other business as provided in Section 6(1). For the

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Apurpose, reliance has been placed on Rustom Cavasjee Cooper (supra).The decision of the High Court of Calcutta in Mahaluxmi Bank Ltd.(supra), is pressed into service, wherein it was held:

“5. After this an application was made to this Court for sanctionof the special resolution effecting the said alterations. The Courtdirected certain advertisements to issue and also directed serviceof the usual notices as required by Sec.17 of the Companies Act,1956. The Registrar of Joint Stock Companies filed an affidavit-in-opposition and at the hearing opposed the application but nocreditor or share-holder of the company opposed the application.P. B. Mukharji, J., before whom the application was heard, gaveeffect to the contentions raised by the Registrar and dismissedthe application. In dismissing the application the learned Judgemade inter alia the following observations in his judgment:

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“At the outset it must be said that it is a curious application. Ifthe object is “to lend money to such person or persons or firmsand at such terms as may seem expedient,” then it may amountDto some kind of a banking in disguise. It is quite true that underthe Banking Companies Act, banking’ is defined to mean theacceptance, “for the purpose of lending or investment of depositsof money from the public, repayable on demand or otherwise,and withdrawable by cheque, draft, order or otherwise.” With alittle clever manipulation, the petitioner might go on doing theEbanking business under the proposed amendment although byallowing such amendment it will put on the garb of a non-bankingcompany.”

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It has been argued that these observations of the learned Judgeare due to a misconception of the true nature and character of abanking business. Reliance is placed by the learned counsel forFthe appellant company on the definition of the word ‘banking’ asgiven in Sec.5 (1)(b) of the Banking Companies Act, 1949, whichis as follows:

“‘Banking’ means the accepting, for the purpose of lending orinvestment, of deposits of money from the public, repayable onGdemand or otherwise, and withdrawable by cheque, draft, orderor otherwise.”

Now this definition makes it clear that receiving money on depositfrom customers and honouring their cheques is the essentialcharacteristic of banking. The money deposited by the customerscan be utilised by the banker for lending it or for investing it butthe bank also undertakes the obligation to repay the deposit ondemand or otherwise and the mode by which the withdrawal of H

the deposit can be effected is by the issue of cheques, drafts,orders or otherwise, that is, by like methods.

6. In Hart’s Law of Banking, a banker or bank is defined as onewho, in the ordinary course of his business, receives money whichhe pays by honouring the cheques of persons from or on whoseaccount he receives it. Sir John Paget in his book on Banking haspointed out that “no person or body corporate or otherwise can bea banker who does not (1) take deposit accounts, (2) take currentaccounts, (3) issue and pay cheques, and (4) collect chequescrossed and uncrossed for his customers.” Sheldon in his book onthe Practice and Law of Banking, seventh edition at page 183,formulates the following definition of a banker.

“A person cannot claim to be carrying on the business of bankingunless he receives money or instruments representing money oncurrent account, honours cheques drawn thereon, and collectsthe proceeds of cheques which his customers place into his handsfor collection.’’

In the case of Re Bottomgate Industrial Co-operative Society,(1891) 65 LT 712 at p. 714, Smith, J. defines the business ofbankers thus:

“The principal part of the business of a banker is receiving moneyon deposit, allowing the same to be drawn against as and whenthe depositor desires, and paying interest on the amounts standingon deposit.’’

7. Then Sec.6 (1) of the Banking Companies Act, 1949, providesthat in addition to the business of banking, a banking companymay engage in any one or more of the different kinds of businessspecified in the various sub-clauses of sub-sec. (1) of Sec. 6.This indicates that the main or real business of a banking companyis as stated in Sec. 5 (1)(b) of the Act but banking companiesusually carry on and are permitted to carry on other kinds ofbusiness which are auxiliary or incidental to the main business.Sub-section (2) of Sec. 6 Iays down that no banking companyshall engage in any form of business other than those referred toin sub-section (1). So the banking company is expressly prohibitedfrom carrying on any kind of incidental or allied business otherthan those enumerated in sub-clauses (a) to (o) of sub-section (1)of Sec. 6 of the Act. Thus it is abundantly clear that the essenceof banking is the relationship which is brought into existence atthe time of the deposit; that is the core of banking. It is true thatthe business of banking covers every possible phase or combinationof deposit, custody, investment, loan, exchange, issue and A

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transmission of money, creation and transfer of credit and otherkindred activities but if the essential characteristic of banking,namely, the power to receive deposits from the public which arerepayable in the manner indicated in Sec. 5 (1) (b) of the BankingCompanies Act is absent and merely the power of granting loansis retained and exercised that, in my view, does not make thecompany a banking company. Lending of money may be one phaseof a banking business but it is not the main phase or thedistinguishing phase. In the case of Bank of Commerce Ltd. v.Kunja Behari Kar, 1944 FCR 370: (AIR 1945 FC 2) it was arguedbefore the Federal Court that Bengal Money Lenders’ Act, 1940,was a legislation which fell within the item of banking in entriesNos. 33 and 38 of List 1 of Schedule VII of the Government ofIndia Act, 1935 inasmuch as lending money to customers oradvancing money on promissory notes is a principal part of thebanking business and the case of Tennant v. Union Bank ofCanada, 1894 AC 31 was referred to, but the Federal Court didnot accept the contention. It was pointed out that money lendingby a bank qua bank might make such money lending part of abanking business but not otherwise (per Spens, C. J. at page 389).”

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38. The decision in ICICI Bank Ltd. (supra) has been relied uponin which the Court emphasised that even if different businesses underclause (a) to (o) of section 6(1) are shut down, the company would stillEbe a banking company as long as it is performing the core bankingfunctions under Section 5(b). The Court observed:

“37. The point we are trying to make is that apart from theprincipal business of accepting deposits and lending the said 1949Act leaves ample scope for the banking companies to ventureinto new businesses subject to such businesses being subject tothe control of the regulator viz. RBI. In other words, the 1949 Actallows banking companies to undertake activities and businessesas long as they do not attract prohibitions and restrictions likethose contained in Sections 8 and 9. In this connection we need toemphasise that Section 6(1)(n) enables a banking company to doall things as are incidental or conducive to promotion oradvancement of the business of the company. Section 6(1) enablesbanking companies to carry on different types of businesses. UnderSection 6(1), these different types of businesses are in addition tobusiness of banking viz. core banking. The importance of the words F

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“in addition to” in Section 6(1) is that even if different businessesunder clauses (a) to (o) are shut down, the company would stillbe a banking company as long as it is in the core banking ofaccepting deposits and lending so that its main income is from thespread or what is called as “interest income”. Thus, we maybroadly categorise the functions of the banking company into twoparts viz. core banking of accepting deposits and lending andmiscellaneous functions and services. Section 6 of the BR Act,1949 provides for the form of business in which banking companiesmay engage. Thus, RBI is empowered to enact a policy whichwould enable banking companies to engage in activities in additionto core banking and in the process it defines as to what constitutes“banking business”.”

39. Learned counsel urged that performing core banking functionis the sine qua non for being regulated by the BR Act, 1949. The BRAct, 1949 applies to a primary credit society which has been broughtwithin its purview, leaving out primary agricultural credit society and aco-operative land mortgage bank. The business of banking cannot becarried out in India as per Section 22 of the BR Act, 1949 as applicableto the co-operative banks/societies, unless it is a primary credit society,and it is a co-operative bank and holds a licence issued by the ReserveBank of India. It is not in dispute that all co-operative banks run bycooperative societies hold the licence, and all co-operative banks aredoing the business within the purview of the BR Act, 1949. We areunable to accept the submission that banking under Entry 45 of List Idoes not cover ‘co-operative banks’. The activity of the co-operativebank is covered under Section 5(1)(b). A similar submission was notaccepted in Rustom Cavasjee Cooper (supra). No doubt about it thatevery commercial activity cannot be brought within the scope of ‘banking’in Entry 45 of List I. ‘Banking’ itself has a wide meaning, and the activityof co-operative banks is definitely, beyond an iota of doubt, covered byEntry 45 of List I.

40. It was argued on behalf of appellants that banking’s legalterm ‘nomen juris’ is defined under Section 5(b) of the BR Act, 1949.When the Constitution was being drafted, the definition of ‘banking’ inthe said Act prevailed. The makers of the Constitution adopted the sameexpression. Thus, intent bore the precise and definite meaning it had inlaw and, therefore, must be construed having regard to its known legal

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Aimport. For this purpose, reference has been made to the observationsmade by this Court in Gannon Dunkerley& Co., (Madras) Ltd. (supra),in which it was held:

“(36) The principle of these decisions is that when, after theenactment of a legislation, new facts and situations arise whichcould not have been in its contemplation, the statutory provisionscould properly be applied to them if the words thereof are in abroad sense capable of containing them. In that situation, “it isnot,” as observed by Lord Wright in 1936 AC 578 (H), “that themeaning of the words changes, but the changing circumstancesillustrate and illuminate the full import of that meaning”. Thequestion then would be not what the framers understood by thosewords, but whether those words are broad enough to include thenew facts. Clearly, this principle has no application to the presentcase. Sales tax was not a subject which came into vogue afterthe Government of India Act, 1935. It was known to the framersof that statute and they made express provision for it under Entry48. Then it becomes merely a question of interpreting the words,and on the principle, already stated, that words having knownlegal import should be construed in the sense which they had atthe time of the enactment, the expression “sale of goods” must beconstrued in the sense which it has in the Sale of Goods Act.

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(37) A contention was also urged on behalf of the respondentsthat even assuming that the expression “sale of goods” in Entry48 could be construed as having the wider sense sought to begiven to it by the appellant and that the provisions of the MadrasGeneral Sales Tax Act imposing a tax on construction contractscould be sustained as within that entry in that sense, the impugnedprovisions would still be bad under S. 107 of the Government ofIndia Act, and the decision in Dukhineswar Sarkar v. CommercialTax Officer, (S) AIR 1957 Cal 283 (Z19) was relied on in supportof this contention. Section 107, so far as is material, runs as follows:

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S. 107 — (1) “If any provision of a Provincial law is repugnant toany provision of a Dominion law which the Dominion Legislatureis competent to enact or to any provision of an existing law withrespect to one of the matters enumerated in the ConcurrentLegislative List, then, subject to the provisions of this section, theDominion law, whether passed before or after the Provincial law,or, as the case may be, the existing law, shall prevail and theProvincial law shall, to the extent of the repugnancy, be void.

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(2) Where a Provincial law with respect to one of the mattersenumerated in the Concurrent Legislative List contains anyprovision repugnant to the provisions of an earlier Dominion lawor an existing law with respect to that matter, then, if the Provinciallaw, having been reserved for the consideration of the Governor-General has received the assent of the Governor-General, theProvincial law shall in that Province prevail, but nevertheless theDominion Legislature may at any time enact further legislationwith respect to the same matter.”

Now, the argument is that the definition of “sale” given in theMadras General Sales Tax Act is in conflict with that given in theSale of Goods Act, 1930, that the sale of goods is a matter fallingwithin Entry 10 of the Concurrent List, and that, in consequence,as the Madras General Sales Tax (Amendment) Act, 1947, (Mad.25 of 1947) under which the impugned provisions had beenenacted, had not been reserved for the assent of the Governor-General as provided in S. 107 (2). Its provisions are bad to theextent that they are repugnant to the definition of “sale” in theSale of Goods Act, 1930. The short answer to this contention isthat the Madras General Sales Tax Act is a law relating not tosale of goods but to tax on sale of goods, and that it is not one ofthe matters enumerated in the Concurrent List or over which theDominion legislature is competent to enact a law, but is a matterwithin the exclusive competence of the Province under Entry 48in List II. The only question that can arise with reference to sucha law is whether it is within the purview of that Entry. If it is, noquestion of repugnancy under S. 107 can arise. The decision in(S) AIR 1957 Cal 283 (Z19) on this point cannot be accepted assound.”

In Diamond Sugar Mills Ltd. (supra), it was held:

“(10) In considering the meaning of the words “local area” inentry 52 we have, on the one hand to bear in mind the salutaryrule that words conferring the right of legislation should beinterpreted liberally and the powers conferred should be given thewidest amplitude; on the other hand we have to guard ourselvesagainst extending the meaning of the words beyond theirreasonable connotation, in an anxiety to preserve the power ofthe legislature. In Re the Central Provinces & Berar Sales of A

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Motor Spirit and Lubricants Taxation Act, 1938, 1939 FCR 18 atp. 37: (AIR 1939 FC 1 at p. 4) Sir Maurice Gwyer, C.J., observed:“I conceive that a broad and liberal spirit should inspire thosewhose duty it is to interpret it; but I do not imply by this that theyare free to stretch or pervert the language of the enactment in theinterests of any legal or constitutional theory, or even for thepurpose of correcting any supposed errors.”

Again, in Navinchandra Mafatlal v. Commissioner of Income Tax,Bombay City, 1955 1 SCR 829: ( (S) AIR 1955 SC 58) Das, J. (ashe then was) delivering the judgment of this Court observed: —

“………. The cardinal rule of interpretation however, is that wordsshould be read in their ordinary, natural and grammatical meaningsubject to this rider that in construing words in a constitutionalenactment conferring legislative power the most liberalconstruction should be put upon the words so that the same mayhave effect in their widest amplitude.”

(25) It is true that when words and phrases previously interpretedby the courts are used by the Legislature in a later enactmentreplacing the previous statute, there is a presumption that theLegislature intended to convey by their use the same meaningwhich the courts had already given to them. This presumptioncan however only be used as an aid to the interpretation of thelater statute and should not be considered to be conclusive. AsMr. Justice Frankfurter observed in Federal CommunicationCommissioner v. Columbia Broadcasting System of California,(1940) 311 U.S. 132 when considering this doctrine, the persuasionthat lies behind the doctrine is merely one factor in the total effortto give fair meaning to language. The presumption will be strongwhere the words of the previous statute have received a settledmeaning by a series of decisions in the different courts of thecountry; and particularly strong when such interpretation has beenmade or affirmed by the highest court in the land. We think itreasonable to say however that the presumption will naturally bemuch weaker when the interpretation was given in one solitarycase and was not tested in appeal. After giving carefulconsideration to the view taken by the learned Judge of theAllahabad High Court in ILR (1942) All 302: (AIR 1942 All 156)(supra) about the meaning of the words “local area” & properweight to the rule of interpretation mentioned above, we are of opinion that the Constitution makers did not use the words “localarea” in the meaning which the learned Judge attached to it. Weare of opinion that the proper meaning to be attached to the words“local area” in Entry 52 of the Constitution, (when the area is apart of the State imposing the law) is an area administered by alocal body like a municipality, a district board, a local board, aunion board, a Panchayat or the like. The premises of a factory istherefore not a “local area”.

41. In our opinion, the framers of the Constitution cannot be saidto have confined the meaning of ‘banking’ to a particular definition, asgiven in the BR Act, 1949. The word ‘banking’ has been incorporated inEntry 45 of List I. The decision in Rustom Cavasjee Cooper (supra)vividly leaves no room for doubt that banking done by the co-operativebank is covered within the ambit of Entry 45 of List I. The decision inGannon Dunkerley & Co., (Madras) Ltd. (supra) stands neutralisedby introduction of Article 366(29A) of the Constitution of India and themeaning of the said term has been redefined. Entries have to be givenfull effect in pith and substance considering forms of business ofco-operative banks performing the activities of banking under a licence.The same is covered within the purview of Entry 45 of List I.

42. On the strength of Sections 32 and 33 of the State Bank ofIndia Act, 1955, learned counsel on behalf of appellants argued thatSection 32 recognises that State Bank of India can carry on ‘agencybusiness’ on behalf of Reserve Bank of India. Section 33 enables theState Bank of India to carry on banking business under Section 5(b) andother forms of business under Section 6(1) of the BR Act, 1949. Theargument is of no avail. The State Bank of India Act, 1955, is independentand is not co-related with the co-operative banks, and the State Bank ofIndia has been established as a corporation under the Act. Thus, theprovision is of no help to take home the submission espoused on behalfof appellants to take them out of the purview of Entry 45 of List I.

43. Learned Counsel on behalf of appellants argued that there isa difference between entity and activity. On a plain reading of Section6(1) of the BR Act, 1949, it becomes evident that there is a distinctionbetween the business of banking and entity that performs the bankingfunctions. Section 6(1) and 6(2) enable only an entity to perform certainadditional business functions. It does not confer any such status uponsuch an entity.

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A44.In our opinion, Section 6 deals with the forms of business inwhich banking companies may engage. There cannot be any form ofactivity/business of banking without there being an entity. Section 6 isnot a provision of the conferral of the status of the banking company.The definitions of ‘banking’ and ‘banking company’ are contained inSection 5(b) and 5(c) of the BR Act, 1949 respectively, and when readingBwith Section 56(a), it means co-operative banks also. The co-operativebank 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 mayengage in any of the business as enumerated in Section 6.

EFFECTOFENTRIES 43 AND 45 OFLISTI AND ENTRY32COF LIST II OF THE SEVENTH SCHEDULE OF THECONSTITUTION OF INDIA

45. Entry 43 of List I of the Seventh Schedule of the Constitutionof India has been pressed into service on behalf of appellants. It confersupon the Parliament the competence to pass the law pertaining toD‘incorporation, regulation and winding up’ of the trading corporation, moreparticularly, a banking corporation. However, co-operative societies areexpressly excluded from the purview of the Parliament’s competence.No doubt about it that in Entry 43 of List I ‘incorporation, regulation andwinding up’ of the co-operative societies have been kept out of theEpurview of the Union List by specifically excluding the co-operativesocieties, otherwise, they would have been included for ‘incorporation,regulation and winding up’ in Entry 43 of List I. The terms “incorporation,regulation and winding up of co-operative societies” were reserved asState subjects under Entry 32 of List II, it was so omitted from List 43 ofList I. But the exclusion from Entry 43 of List I taking out ‘incorporation,Fregulation and winding up’ of co-operative societies out of the purviewof the Parliament, does not advance the cause of the co-operative banks.As a corollary to the aforesaid submission, it was also urged that thebanking company was defined and governed by Sections 277F to Section277N under Chapter X-A of the Companies Act (VII of 1913). It wasGinserted vide Amendment Act No.22 of 1936. On 10.3.1949, the BankingCompanies Act, 1949, was enforced. The primary objective of the BankingCompanies Act, 1949, was to provide a comprehensive definition of‘banking’ to bring within its scope all the institutions which receive depositsrepayable on demand or otherwise for lending or investment. At therelevant time, the Government of India Act, 1935, which dealt with the H

subject of ‘banking’ as well as ‘trading corporation,’ was in List I (FederalLegislative List), thus:

“Entry 38 in relation to “banking”: “Banking,” that is to say, theconduct of banking business by corporations other thancorporations owned and controlled by a federated state and carryingon business only within that State.

Entry 33 in relation to corporation: “Corporations,” that is to say,the incorporation, regulation, and winding-up of trading corporations,including banking, insurance, and financial corporations, but notincluding corporations owned or controlled by a Federated Stateand carrying on business only within that State or co-operativesocieties, and of corporations, whether trading or not, with objectsnot confined to one unit (but not including Universities).”

Entry 38 of the Government of India Act was re-enacted as‘banking’ in Entry 45 of List I, while Entry 33 was bifurcated inEntries 43 and 44. Learned Counsel further argued that up to1965, the primary entity which was regulated by the Parliamentwas a company that found a place in Entry 43. Thus, both in itsfunction, i.e., banking and as an entity, fell in List I (banking underEntry 45 and company under Entry 43). Therefore, it was withinthe control of the Parliament. Up to 1965, Banking CompaniesAct, 1949, only dealt with a juristic entity called banking companies.Then from the Preamble, the word “company” was omitted. Thebanking corporation was governed by the State Bank of IndiaAct, 1955. Thus, the question of regulating the banking businessof an entity outside the purview of List I never arose. In 1965, theGovernment enacted Banking Laws (Application to Co-operativeSocieties Act, 1965 (Act No.23 of 1965) and extended theprovisions of Banking Companies Act, 1949, and Reserve Bankof India Act to co-operative banks. Thus, learned counsel urgedthat the Statement of Objects and Reasons of the said AmendmentAct was only to regulate relatable Entry 45 and not to regulatethe co-operative societies. The provisions relatable either directlyor indirectly to ‘incorporation, management and winding up’ ofco-operative banks were omitted as they were not covered underEntry 45 of List I.

46. Shri Devansh A. Mohta, learned counsel, further argued thatSection 2(10) of the Maharashtra Co-operative Societies Act, 1960 hasdefined ‘co-operative bank’ thus:

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A“Section 2 - Definitions

In this Act, unless the context otherwise requires, —

(10) “co-operative bank” means a society which is doing thebusiness of banking as defined in clause (b) of sub-section (1) ofsection 5 of the Banking Companies Act, 1949 and includes anyBsociety which is functioning or is to function as a Co-operativeAgriculture and Rural Multipurpose Development Bank underChapter XI;”

Under Section 91 of the Maharashtra Act, any dispute relating toconstitution, management or business is required to be referred to aCco-operative court. Similarly, Section 2(f) of the Multi-State Co-operativeSociety Act defines ‘co-operative bank’ to mean multi-State co-operativesociety, which undertakes the banking business. Under Section 84(2), aclaim for any debt or demand due shall be deemed to be a dispute touchingthe constitution, management, or business of a multi-State co-operativeDsociety. The Parliament has extended specific provisions of the BR Act,1949, and the Reserve Bank of India Act, 1934, which legislations arerelatable to Entry 45 of List I and Entry 38 of List I, respectively. TheParliament lacks legislative competence to regulate any other business,function, or facet of co-operative societies. It could not have provided arecovery procedure as that is within the domain of the State legislature.EWe cannot accept the aforesaid submission raised by the learned Counsel.

47. In Delhi High Court Bar Association (supra), this Court inthe context of the RDB Act, 1993 held that Parliament has the legislativecompetence to enact the Act. ‘Banking’ in Entry 45 of List I wouldcomprehend legislation in respect of matters ancillary or subsidiary to it.FThe Parliament can enact a law regarding the conduct of the bankingbusiness, which includes recovery of banks’ dues, and for that purpose,set up the adjudicatory body like the Banking Tribunal is permissible.Thus, the establishment of Debts Recovery Tribunal under the RDBAct, 1993, was upheld. The Court opined:

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G“14. The Delhi High Court and the Guwahati High Court haveheld that the source of the power of Parliament to enact a law relating tothe establishment of the Debts Recovery Tribunal is Entry 11-A of ListIII which pertains to “administration of justice; constitution andorganisation of all courts, except the Supreme Court and the HighCourts”. In our opinion, Entry 45 of List I would cover the types ofHlegislation now enacted. Entry 45 of List I relates to “banking”. Banking operations would, inter alia, include accepting of loans and deposits,granting of loans and recovery of the debts due to the bank. There canbe little doubt that under Entry 45 of List I, it is Parliament alone whichcan enact a law with regard to the conduct of business by the banks.Recovery of dues is an essential function of any banking institution. Inexercise of its legislative power relating to banking, Parliament can providethe mechanism by which monies due to the banks and financial institutionscan be recovered. The Tribunals have been set up in regard to the debtsdue to the banks. The special machinery of a Tribunal which has beenconstituted as per the preamble of the Act, “for expeditious adjudicationand recovery of debts due to banks and financial institutions and formatters connected therewith or incidental thereto” would squarely fallwithin the ambit of Entry 45 of List I. As none of the items in the lists areto be read in a narrow or restricted sense, the term “banking” in Entry45 would mean legislation regarding all aspects of banking includingancillary or subsidiary matters relating to banking. Setting up of anadjudicatory body like the Banking Tribunal relating to transactions inwhich banks and financial institutions are concerned would clearly fallunder Entry 45 of List I giving Parliament specific power to legislate inrelation thereto.”

48. In view of the aforesaid discussion, we are of the opinion thatrecovery of dues would be an essential function of any banking institutionand the Parliament can enact a law under Entry 45 of List I as theactivity of banking done by co-operative banks is within the purview ofEntry 45 of List I. Obviously, it is open to the Parliament to provide theremedy for recovery under Section 13 of the SARFAESI Act.Co-operative bank’s entire operation and activity of banking are governedby a law enacted under Entry 45 of List I, i.e., the BR Act, 1949, and theRBI Act under Entry 38 of List I.

49. In UCO Bank and Anr. v. Dipak Debbarma and Ors.[31], thequestion arose under the SARFAESI Act vis-a-vis the provisions ofSection 187 of Tripura Land Revenue and Land Reforms Act, 1960 asunder the Tripura Act there was a legislative embargo on the sale ofmortgaged properties by the bank to any person who is not a member ofa Scheduled Tribe. The auction purchasers in the case were not membersof the Scheduled Tribe. This Court observed that provisions of theSARFAESI Act enable the bank to take possession of any property AB

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Awhere a security interest has been created in its favour and sell suchproperty to any person to realise dues. This Court observed that theParliament enacted the law traceable to Entry 45 dealing exclusivelywith activities relating to the sale of secured assets, which being Centrallegislation would prevail, thus:

B“15. In the present case the conflict between the Central and theState Act is on account of an apparent overstepping by theprovisions of the State Act dealing with land reform into an areaof banking covered by the Central Act. The test, therefore, wouldbe to find out as to which is the dominant legislation having regardthe area of encroachment.

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18. The 2002 Act is relatable to the entry of banking which isincluded in List I of the Seventh Schedule. Sale of mortgagedproperty by a bank is an inseparable and integral part of the businessof banking. The object of the State Act, as already noted, is anattempt to consolidate the land revenue law in the State and alsoDto provide measures of agrarian reforms. The field ofencroachment made by the State Legislature is in the area ofbanking. So long there did not exist any parallel Central Act dealingwith sale of secured assets and referable to Entry 45 of List I, theState Act, including Section 187, operated validly. However, theEmoment Parliament stepped in by enacting such a law traceableto Entry 45 and dealing exclusively with activities relating to saleof secured assets, the State law, to the extent that it is inconsistentwith the 2002 Act, must give way. The dominant legislation beingthe Parliamentary legislation, the provisions of the Tripura Act,1960, pro tanto, (Section 187) would be invalid. It is the provisionsFof the 2002 Act, which do not contain any embargo on the categoryof persons to whom mortgaged property can be sold by the bankfor realisation of its dues that will prevail over the provisionscontained in Section 187 of the Tripura Act, 1960.”

50. In State Bank of India v. Santosh Gupta and Anr.[32], theGquestion arose concerning the rights of banks to enforce security interestsoutside the court’s process by acting under Section 13 of the SARFAESIAct and its applicability to the State of Jammu and Kashmir. The recoveryof debts and adjudicatory mechanisms provided in the SARFAESI Act, H32 (2017) 2 SCC 538

therefore, it comes within the purview of subject ‘banking’ in Entry 45of List I of the Seventh Schedule. The Presidential order under Article370 empowered the Parliament to legislate on the Seventh ScheduleList I Entry 45 read with Entry 95 in respect of the State of Jammu andKashmir. The SARFAESI Act can be validly applied to the State ofJammu and Kashmir even if Section 140 of the Transfer of PropertyAct of J&K, 1920, conflicts with the SARFAESI Act. Thus, the transferof property by way of sale or assignment is only one of the several waysfor recovery of debts and, thus, the SARFAESI Act as a whole cannotbe said to be in pith and substance an Act relatable to the subject oftransfer of property. The sale and mortgage of property for recoveringloans/debts is also an integral part of ‘banking’. The setting up of anadjudicatory body like the banking tribunal would also fall under Entry45 of List I of the Seventh Schedule. Thus, State law can operate ifthere is no Central law regarding the same. The State law cannot encroachupon the Central law by operation of the principle of repugnancy if thereis a Central law. The Parliament is qualified with exclusive power tomake law concerning banking. It is not possible to dissect the provisionsof the SARFAESI Act and attach them to different entries under differentlists. In pith and substance, the SARFAESI Act does not deal with thetransfer of property in Entry 6 of List III of the Seventh Schedule butdeals with the recovery of debt owing to banks and financial institutions.It was observed:

“30. When it came to SARFAESI itself, this Court has held inCentral Bank of India v. State of Kerala, (2009) 4 SCC 94:(SCC p. 116, para 36)

“36. Undisputedly, the DRT Act and the Securitisation Acthave been enacted by Parliament under Schedule VII List IEntry 45 whereas the Bombay and Kerala Acts have beenenacted by the State Legislatures concerned under ScheduleVII List II Entry 54. To put it differently, two sets of legislationshave been enacted with reference to entries in different lists inthe Seventh Schedule. Therefore, Article 254 cannot be invokedper se for striking down State legislations on the ground thatthe same are in conflict with the Central legislations. That apart,as will be seen hereafter, there is no ostensible overlappingbetween two sets of legislations. Therefore, even if theobservations contained in Kesoram Industries case, (2004)

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10 SSC 201, are treated as law declared under Article 141 ofthe Constitution, the State legislations cannot be struck downon the ground that the same are in conflict with Centrallegislations.”

34. A judgment of the Privy Council in Attorney General forCanada v. Attorney General for the Province of Quebec, 1947AC 33 (PC) also throws some light on what is the correct meaningto be given to the expression “banking”. A Quebec Statute deemedas vacant property, without an owner, (which will now belong toHis Majesty) all deposits or credits in credit institutions and otherestablishments which received funds or securities on deposit wherefor 30 years or more such deposits or credits are not the subjectof any operation or claim by the persons entitled thereto. In anappeal from the Court of King’s Bench of the Province of Quebec,the Bank of Montreal argued that the State Act was beyond thepowers of the Quebec Legislature as “banking” was one of thesubjects allotted exclusively to Parliament of Canada. Lord Porter,in an illuminating judgment, posed the question and answered itthus: (AC p. 44)

“Is then, the repayment of deposits to depositors or theirsuccessors-in-title under the law as existing a part of thebusiness of banking or necessarily incidental thereto, or is itprimarily concerned with property and civil rights or incidentalto those subjects? Their Lordships cannot but think that thereceipt of deposits and the repayment of the sums deposited tothe depositors or their successors as defined above is anessential part of the business of banking.”

In this view of the matter, the Privy Council further held: (AC p.

“… In their view, a Provincial Legislature enters on the fieldof banking when it interferes with the right of depositors toreceive payment of their deposits, as in their view it would if itconfiscated loans made by a bank to its customers. Both are ina sense matters of property and civil rights, but in essencethey are included within the category of banking.”

37. Applying the doctrine of pith and substance to SARFAESI, itis clear that in pith and substance the entire Act is referable to

Entry 45 List I read with Entry 95 List I in that it deals withrecovery of debts due to banks and financial institutions, inter aliathrough facilitating securitisation and reconstruction of financialassets of banks and financial institutions, and sets up a machineryin order to enforce the provisions of the Act. In pith and substance,SARFAESI does not deal with “transfer of property”. In fact,insofar as banks and financial institutions are concerned, it dealswith recovery of debts owing to such banks and financial institutionsand certain measures which can be taken outside of the courtprocess to enforce such recovery. Under Section 13(4) ofSARFAESI, apart from recourse to taking possession of securedassets of the borrower and assigning or selling them in order torealise their debts, the banks can also take over the managementof the business of the borrower, and/or appoint any person asmanager to manage secured assets, the possession of which hasbeen taken over by the secured creditor. Banks as securedcreditors may also require at any time by notice in writing, anyperson who has acquired any of the secured assets from theborrower and from whom money is due or payable to the borrower,to pay the secured creditor so much of the money as is sufficientto pay the secured debt. It is thus clear that the transfer of property,by way of sale or assignment, is only one of several measures ofrecovery of a secured debt owing to a bank and this being thecase, it is clear that SARFAESI, as a whole, cannot possibly besaid to be in pith and substance, an Act relatable to the subject-matter “transfer of property”.

51. In Delhi Cloth & General Mills Co. Ltd.(supra), the questioncame up for consideration concerning legislation whether it falls withinone entry or the other. However, some portion of the subject-matter ofthe legislation incidentally trenched upon and might enter a field underanother list; then, it must be held to be valid in its entirety, even though itmight incidentally trench on matters which are beyond its competence.It was observed:

“33. Mr. O.P. Malhotra raised a contention as to the legislativecompetence of the Parliament to enact Section 58-A and theDeposits Rules enacted in exercise of the power conferred bySection 58-A read with Section 642 of the Companies Act, 1956.This is only to be mentioned to be rejected. Mr. Malhotra urged

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that when a company invites and accepts deposits, there comesinto existence a lender-borrower relationship between the depositorand the company, and therefore the legislation dealing with thesubject squarely falls under Entry 30 of the State List, ‘moneylending and moneylenders’. If this submission were to carryconviction, every depositor in the bank would be a moneylenderand the transaction would be one of moneylending. Is the bankingindustry to be covered under Entry 30? On the other hand, Entry45 in Union List is a specific Entry ‘Banking’ and therefore anylegislation relating to banking would be referable to Entry 45 inthe Union List. Entry 43 in the Union List is: “Incorporation,regulation and winding up of trading corporations, including banking,insurance and financial corporations but not including cooperativesocieties”. Entry 44 refers to “incorporation, regulation, andwinding up of corporation whether trading or not when businessis not confined to one State but not including universities”.Obviously the power to legislate about the companies is referableto Entry 44 when the objects of the company are not confined toone State and irrespective of the fact whether it is trading or not.When a law is impugned on the ground that it is ultra vires thepowers of the legislature which enacted it, what has to beascertained is the true character of the legislation. To do that onemust have regard to the enactment as a whole, to its objects andto the scope and effect of its provisions (see A.S. Krishna v.State of Madras, 1957 SCR 399, 410). To resolve the controversyif it becomes necessary to ascertain to which entry in the threeLists, the legislation is referable, the court has evolved the doctrineof pith and substance. If in pith and substance, the legislation fallswithin one entry or the other but some portion of the subject-matter of the legislation incidentally trenches upon and might entera field under another List, then it must be held to be valid in itsentirety, even though it might incidentally trench on matters whichare beyond its competence (see Ishwari Khaetan Sugar Mills(P) Ltd. v. State of U.P., (1980) 3 SCR 331, 343, Union of IndiaV.H.S. Dhillon, (1972) 2 SCR 33, Kerala State Electricity Boardv. Indian Aluminium Company, (1976) 1 SCR 552 and State ofKarnataka v. Ranganatha Reddy, (1978) 1 SCR 641). Applyingthis doctrine of pith and substance, Section 58-A which isincorporated in the Companies Act is referable to Entries 43 and

44 in the Union List and the enactment viewed as a whole cannotbe said to be legislation on moneylenders and moneylending orbeing referable to Entry 30 in the State List. Undoubtedly, thereforeParliament had the legislative competence to enact Section58-A.”

52. Reliance has also been placed on the decision of a ConstitutionBench in I.T.C. Ltd. (supra). The question involved in the said case wasto the applicability and validity of Bihar Agricultural Produce MarketsAct, 1960 and the Karnataka Agricultural Produce Marketing (Regulation)Act, 1966, to the extent these State legislations deal with the sale oftobacco in market areas with particular reference to the levy thereuponof market fee after enactment of Tobacco Board Act, 1975 -parliamentary legislation. The scope of Entry 52 in the Union List of theSeventh Schedule of the Constitution of India with particular referenceto the meaning of the expression ‘Industries’ as also in Entry 24 in theState List of the Seventh Schedule of the Constitution came up forconsideration. The Court relied on the decision of Constitution Bench inBelsund Sugar Co. Ltd.v. State of Bihar[33], in which it was held thatmerely because the industry is controlled by a declaration under Section2 of the IDR Act enacted by Entry 52 of the Union List, the StateLegislature would not be denied of its power to regulate the products ofsuch industry by the exercise of its legislative power under the StateList. The Court ultimately held that State Legislation and the TobaccoBoard Act, 1975 to the extent they relate to the sale of tobacco in marketareas, cannot co-exist. The State legislatures were competent to passlegislation concerning such goods. In I.T.C. Ltd. (supra), it was observed:

“87. Further, in Belsund Sugar Co., (1999) 9 SCC 620, theConstitution Bench cited with approval the decision in SIEL case,(1998) 7 SCC 26 and reiterated that merely because the industryis controlled by a declaration under Section 2 of the IDR Actenacted by Entry 52 of the Union List, the State Legislature wouldnot be denied of its power to regulate the products of such anindustry by exercise of its legislative power under the State List.It would be useful to extract para 119 of Belsund Sugar Co.case, (1999) 9 SCC 620, as under: (SCC pp. 670-71)

“119. However, so far as the IDR Act is concerned, it isenacted under Entry 52 of the First Schedule which deals with 33 (1999) 9 SCC 620

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industries in general. Simultaneously in the State List itself thereis Entry 24 which deals with industries subject to the provisionsof Entries 7 and 52 of List I. Consequently, the products ofsuch controlled industries would necessarily not begoverned by the sweep of the general legislation pertainingto such industries as per Entry 52 of the Union List. Theaforesaid Constitution Bench judgment was not concernedwith any State legislation enacted under Entry 24. On thecontrary, it dealt with legislation of the Union Parliamentunder Entry 54 of the Union List read with Entry 23 of theState List. The scheme of the aforesaid legislative entriesis entirely different from the scheme of Entry 52 of List Iread with Entry 24 of List II with which we are concerned.On a conjoint reading of the aforesaid two entries, therefore,the ratio of the decision of the Constitution Bench in theaforesaid case cannot be effectively pressed into service byShri Ranjit Kumar for supporting his contention. In thiscontention, we may usefully refer to a decision of this Court inSIEL Ltd., (1998) 7 SCC 26, where one of us, Sujata V.Manohar, J. was a Member. It has rightly distinguished theratio of the Constitution Bench decision in the case of HingirRampur Coal Co. Ltd., AIR 1961 SC 459 and taken the viewthat merely because an industry is controlled by a declarationunder Section 2 of the IDR Act enacted by Entry 52 of theUnion List, the State Legislature would not be denied of itspowers to regulate the products of such an industry by exerciseof its legislative powers under Entry 24 of the State List. Inthat case the question was whether the U.P. Sheera NiyantranAdhiniyam, 1964 could be said to be repugnant to the Molasses(Control) Order issued by the Central Government underSection 18-G of the IDR Act imposing restrictions on the saleof molasses and fixing the maximum price of molasses.Answering the question in the negative, it was held that theterm ‘industry’ in Entry 24 would not take within its ambittrade and commerce or production, supply and distributionof goods which are within the province of Entries 26 and27 of List II. Similarly, Entry 52 in List I which deals withindustry also would not cover trade and commerce in, orproduction, supply and distribution of, the products of those industries which fall under Entry 52 of List I. For theindustries falling in Entry 52 of List I, these subjects are carvedout and expressly put in Entry 33 of List III. It was also heldthat since the Molasses (Control) Order of 1961 passed by theCentral Government in exercise of powers conferred by Section18-G was not extended at any point of time to the State ofU.P. or the State of Bihar, the question of repugnancy betweenthe Molasses Control Order, 1961 and the U.P. SheeraNiyantran Adhiniyam, 1964 does not arise. Consequently, itmust be held that in the absence of a statutory orderpromulgated under Section 18-G of the IDR Act, it cannot besaid that the field for regulation of sale and purchase of productsof the flour industry like atta, maida, suji, bran, etc. wouldremain outside the domain of the State Legislature.”

93. That the legislative power of Parliament in certain areas isparamount under the Constitution is not in dispute. What is indispute is the limits of those areas as judicially defined. Broadlyspeaking, parliamentary paramountcy is provided for under Articles246 and 254 of the Constitution. The first three clauses of Article246 of the Constitution relate to the demarcation of legislativepowers between Parliament and the State Legislatures. Underclause (1), notwithstanding anything contained in clauses (2) and(3), Parliament has been given the exclusive power to make lawswith respect to any of the matters enumerated in List I or theUnion List in the Seventh Schedule. Clause (2) empowersParliament, and the State Legislatures subject to the power ofParliament under clause (1), to make laws with respect to any ofthe matters enumerated in List III in the Seventh Scheduledescribed in the Constitution as the “Concurrent List”notwithstanding anything contained in clause (3). Under clause(3) the State Legislatures have been given exclusive powers tomake laws in respect of matters enumerated in List II in theSeventh Schedule described as the “State List” but subject toclauses (1) and (2). The three lists while enumerating in detail thelegislative subjects carefully distribute the areas of legislativeauthority between Parliament (List I) and the State (List II). Thesupremacy of Parliament has been provided for by the nonobstante clause in Article 246(1) and the words “subject to” inArticles 246(2) and (3). Therefore, under Article 246(1) if any of

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the entries in the three lists overlap, the entry in List I will prevail(M.P.V. Sundararamier & Co. v. State of A.P., AIR 1958 SC468). Additionally some of the entries in the State List have beenmade expressly subject to the power of Parliament to legislateeither under List I or under List III. Entries in the lists of theSeventh Schedule have been liberally interpreted, neverthelesscourts have been wary of upsetting this balance by a process ofinterpretation so as to deprive any entry of its content and reduceit to “useless lumber” (Calcutta Gas Co. (Proprietary) Ltd. v.State of W.B., AIR 1962 SC 1044). The use of the word “exclusive”in clause (3) denotes that within the legislative fields contained inList II, the State Legislatures exercise authority as plenary andample as Parliament.

“276. The fact that under the scheme of our Constitution,greater power is conferred upon the Centre vis-à-vis the Statesdoes not mean that States are mere appendages of the Centre.Within the sphere allotted to them, States are supreme. The Centrecannot tamper with their powers. More particularly, the courtsshould not adopt an approach, an interpretation, which has theeffect of or tends to have the effect of whittling down the powersreserved to the States.”

126. To sum up: the word “industry” for the purposes of Entry 52of List I has been firmly confined by Tika Ramji, AIR 1956 SC676 to the process of manufacture or production only. Subsequentdecisions including those of other Constitution Benches havereaffirmed that Tika Ramji case, AIR 1956 SC 676 authoritativelydefined the word “industry” — to mean the process ofmanufacture or production and that it does not include the rawmaterials used in the industry or the distribution of the products ofthe industry. Given the constitutional framework, and the weightof judicial authority it is not possible to accept an argumentcanvassing a wider meaning of the word “industry”. Whateverthe word may mean in any other context, it must be understood inthe constitutional context as meaning “manufacture or production”.

130. It was held that: (AIR pp. 94-95, para 10)

“Market no doubt ordinarily means a place wherebusiness is being transacted. That was probably all that it meant

at a time when trade was not developed and when transactionstook place at specified places. But with the development ofcommerce, bargains came to be concluded more often thannot through correspondence and the connotation of the word‘market’ underwent a corresponding expansion. In modernparlance the word ‘market’ has come to mean business aswell as the place where business is carried on.”

163. As noticed earlier the majority view in ITC case, 1985 SuppSCC 476 has been upheld in the judgment of Brother Pattanaik,on slightly different reasoning and the decisions of this Court inM.A. Tulloch, AIR 1964 SC 1284 and Baijnath Kadio, (1969) 3SCC 838 dealing with legislation on mining and relied upon in themajority judgment of ITC case, 1985 Supp SCC 476 have beenfound to be not relevant for the decision. It is true, while legislatingon any subject covered under an entry of any list, there can alwaysbe a possibility of entrenching upon or touching the field oflegislation of another entry of the same list or another list formatters which may be incidental or ancillary thereto. In sucheventuality, inter alia, a broad and liberal interpretation of an entryin the list may certainly be required. An absolute or watertightcompartmentalization of heads of subject for legislation may notbe possible but at the same time entrenching into the field ofanother entry cannot mean its total sweeping off even though itmay be in the exclusive list of heads of subjects for legislation bythe other legislature. As in the present case the relevant heads ofsubject in List II, other than Entry 24, cannot be made to practicallydisappear from List II and assumed to have crossed over in totalityto List I by virtue of declaration of the tobacco industry underEntry 52 of List I, in the guise of touching or entrenching upon thesubjects of List II.”

53. In Calcutta Gas Company (Proprietary) Ltd. v. State ofWest Bengal and Ors.[34], a Constitution Bench of this Court consideredthe meaning of ‘industry’ in Entry 52 of List I and Entries 24 and 25 ofList II and observed that having regard to the principles, while giving themost extensive scope to both the entries, the interpretation whichharmonizes has to be adopted. It was held:

“9. With this background let us construe the aforesaid entries.There are three possible constructions, namely, (1) Entry 24 of A

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AList II, which provides for industries generally, covers the industrialaspect of gas and gas-works leaving Entry 25 to provide for otheraspects of gas and gas-works; (2) Entry 24 provides generally forindustries, and Entry 25 carves out of it the specific industry ofgas and gas-works, with the result that the industry of gas andgas-works is excluded from Entry 24; and (3) the industry of gasBand gas-works falls under both the entries, that is, there is a realoverlapping of the said entries. Having regard to the aforesaidprinciple, while giving the widest scope to both the entries, weshall adopt the interpretation which reconciles and harmonizesthem.”C54.In Central Bank of India v. State of Kerala and Ors.[35], thequestion came up for consideration concerning Entry 45 of List I andEntry 54 of List II. The question arose whether Section 38-C of theBombay Sales Tax Act, 1959 and Section 26-B of the Kerala GeneralSales Tax Act, 1963 and similar provisions contained in other StateDlegislation by which a first charge was created on the property of thedealer or such other person, who was liable to pay sales tax, wereinconsistent with the provisions contained in the RDB Act, 1993 and theSARFAESI Act and whether central legislations would have primacyover the state legislations. It was observed:

E“92. An analysis of the above noted provisions makes it clear thatthe primary object of the DRT Act was to facilitate creation ofspecial machinery for speedy recovery of the dues of banks andfinancial institutions. This is the reason why the DRT Act not onlyprovides for establishment of the Tribunals and the AppellateTribunals with the jurisdiction, powers and authority to makeFsummary adjudication of applications made by banks or financialinstitutions and specifies the modes of recovery of the amountdetermined by the Tribunal or the Appellate Tribunal but also barsthe jurisdiction of all courts except the Supreme Court and theHigh Courts in relation to the matters specified in Section 17. TheGTribunals and the Appellate Tribunals have also been freed fromthe shackles of procedure contained in the Code of CivilProcedure. To put it differently, the DRT Act has not only broughtinto existence special procedural mechanism for speedy recovery 34 AIR 1962 SC 1044H35 (2009) 4 SCC 94

of the dues of banks and financial institutions, but also madeprovision for ensuring that defaulting borrowers are not able toinvoke the jurisdiction of civil courts for frustrating the proceedingsinitiated by the banks and financial institutions.

93. The enactment of the Securitisation Act can be treated asone of the most radical legislative measures taken by theGovernment for ensuring that dues of secured creditors includingbanks, financial institutions are recovered from the defaultingborrowers without any obstruction. For the first time, the securedcreditors have been empowered to take measures for recoveryof their dues without the intervention of the courts or tribunals.

110. The DRT Act facilitated establishment of two-tier system oftribunals. The tribunals established at the first level have beenvested with the jurisdiction, powers and authority to summarilyadjudicate the claims of banks and financial institutions in the matterof recovery of their dues without being bogged down by thetechnicalities of the Code of Civil Procedure. The SecuritisationAct drastically changed the scenario inasmuch as it enabled banks,financial institutions and other secured creditors to recover theirdues without intervention of the courts or tribunals. TheSecuritisation Act also made provision for registration and regulationof securitisation/reconstruction companies, securitisation offinancial assets of banks and financial institutions and other relatedprovisions.

116. The non obstante clauses contained in Section 34(1) of theDRT Act and Section 35 of the Securitisation Act give overridingeffect to the provisions of those Acts only if there is anythinginconsistent contained in any other law or instrument having effectby virtue of any other law. In other words, if there is no provisionin the other enactments which are inconsistent with the DRT Actor the Securitisation Act, the provisions contained in those Actscannot override other legislations. Section 38-C of the BombayAct and Section 26-B of the Kerala Act also contain non obstanteclauses and give statutory recognition to the priority of the State’scharge over other debts, which was recognised by Indian HighCourts even before 1950. In other words, these sections and similarprovisions contained in other State legislations not only create firstcharge on the property of the dealer or any other person liable to A

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Apay sales tax, etc. but also give them overriding effect over otherlaws.”

This Court found no conflict in the provisions of the Central Actand that of the State.

55. Learned counsel on behalf of appellants relying on the decisionsBin S.S. Dhanoa, Daman Singh, and Dalco Engineering PrivateLimited (supra), argued that the Parliament was conscious of thedistinction between a corporation falling under Entries 43 and 44 ofList I and a co-operative society falling under Entry 32 of List II. In S.S.Dhanoa (supra), this Court considered the distinction betweenCcorporation created by law and a body or society created by an act ofindividual in accordance with provisions of the statute and observed:

“8. A corporation is an artificial being created by law having alegal entity entirely separate and distinct from the individuals whocompose it with the capacity of continuous existence andDsuccession, notwithstanding changes in its membership. In addition,it possesses the capacity as such legal entity of taking, holdingand conveying property, entering into contracts, suing and beingsued, and exercising such other powers and privileges as may beconferred on it by the law of its creation just as a natural personmay. The following definition of corporation was given by ChiefEJustice Marshall in the celebrated Dartmouth College case, 4Wheat 518, 636: 4 L Ed 629 (1819):

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“A corporation is an artificial being, invisible, intangible,and existing only in contemplation of law. Being the merecreature of law, it possesses only those properties which thecharter of its creation confers upon it, either expressly or asincidental to its very existence. These are such as are supposedbest calculated to effect the object for which it was created.Among the most important are immortality, and, if the expressionmay be allowed, individuality; properties, by which a perpetualsuccession of many persons are considered as the same, andmay act as a single individual. They enable a corporation tomanage its own affairs, and to hold property, without theperplexing intricacies, the hazardous and endless necessity, ofperpetual conveyances for the purpose of transmitting it fromhand to hand. It is chiefly for the purpose of clothing bodies of F

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men, in succession, with these qualities and capacities, thatcorporations were invented, and are in use. By these means, aperpetual succession of individuals are capable of acting forthe promotion of the particular object, like one immortal being.”

The term ‘corporation’ is, therefore, wide enough to include privatecorporations. But, in the context of clause Twelfth of Section 21of the Indian Penal Code, the expression ‘corporation’ must begiven a narrow legal connotation.

9. Corporation, in its widest sense, may mean any association ofindividuals entitled to act as an individual. But that certainly is notthe sense in which it is used here. Corporation established by orunder an Act of Legislature can only mean a body corporate whichowes its existence, and not merely its corporate status, to the Act.For example, a Municipality, a Zilla Parishad or a Gram Panchayatowes its existence and status to an Act of Legislature. On theother hand, an association of persons constituting themselves intoa company under the Companies Act or a society under theSocieties Registration Act owes its existence not to the Act ofLegislature but to acts of parties though, it may owe its status asa body corporate to an Act of Legislature.”

In Daman Singh (supra), a Constitution Bench of this Courtconsidered Entry 43 of List I and Entry 32 of List II of the SeventhSchedule of the Constitution of India and observed:

“5. What is a corporation? In Halsbury’s Laws of England, FourthEdition, Volume 9, Paragraph 1201, it is said,

A corporation may be defined as a body of persons (inthe case of a corporation aggregate) or an office (in the caseof a corporation sole) which is recognised by the law as havinga personality which is distinct from the separate personalitiesof the members of the body or the personality of the individualholder for the time being of the office in question.

A corporation aggregate has been defined in paragraph 1204 as, [A] collection of individuals united into one body undera special denomination, having perpetual succession under anartificial form, and vested by the policy of the law with thecapacity of acting in several respects as an individual, particularly A

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of taking and granting property, of contracting obligations andof suing and being sued, of enjoying privileges and immunitiesin common and of exercising a variety of political rights, moreor less extensive, according to the design of its institution, orthe powers conferred upon it, either at the time of its creationor at any subsequent period of its existence.

This Court in Board of Trustees, Ayurvedic and Unani TibiaCollege, Delhi v. State of Delhi, 1962 Supp 1 SCR 156 wasrequired to answer the question whether the Board of trusteeswhich was originally registered under the Societies RegistrationAct, 1860 and a new Board of trustees which was incorporatedby an Act of the legislature called the Tibbia College Act, 1952 bywhich the old Board was dissolved and a new Board constitutedwere corporations. The Court held that the old Board was not butthe new Board was. Posing the question what is a corporation,the Court answered it with the statements contained in Halsbury’sLaws of England already extracted by us and added, A corporation aggregate has therefore only one capacity,namely, its corporate capacity. A corporation aggregate maybe a trading corporation or a non-trading corporation. The usualexamples of a trading corporation are (1) charter companies,(2) companies incorporated by special Acts of Parliament, (3)companies registered under the Companies Act, etc.Non-trading corporations are illustrated by (1) municipalcorporations, (2) district boards, (3) benevolent institutions, (4)universities etc. An essential element in the legal conceptionof a corporation is that its identity is continuous, that is, that theoriginal member or members and his or their successors areone. In law the individual corporators, or members, of which itis composed are something wholly different from thecorporation itself; for a corporation is a legal persona just asmuch as an individual. Thus, it has been held that a name isessential to a corporation; that a corporation aggregate can, asa general rule, only act or express its will by deed under itscommon seal; that at the present day in England a corporationis created by one or other of two methods, namely, by RoyalCharter of incorporation from the Crown or by the authority ofParliament that is to say, by or by virtue of statute. There is authority of long standing for saying that the essence of acorporation consists in (1) lawful authority of incorporation,(2) the persons to be incorporated, (3) a name by which thepersons are incorporated, (4) a place, and (5) words sufficientin law to show incorporation. No particular words are necessaryfor the creation of a corporation; any expression showing anintention to incorporate will be sufficient.

The Court then noticed the various provisions of the SocietiesRegistration Act, 1860 which according to them contained nosufficient words to indicate an intention to incorporate but on thecontrary contained provisions showing that there was an absenceof such intention. Therefore, they observed, “We have, therefore,come to the conclusion that the provisions aforesaid do notestablish the main essential characteristic of a corporationaggregate, namely, that of an intention to incorporate the society”.Considering next the question whether the new Board was acorporation, the Court had no difficulty in answering the questionwith reference to sub-section (2) of Section 3 which stated thatthe Board shall be a body corporate having perpetual successionand common seal and shall by the said name sue and be sued.The Court observed, “Sub-section (2) of Section 3 says in expressterms that the new Board constituted under the impugned Act isgiven a corporate status; in other words, the new Board is acorporation in the full sense of the term”.

6. We have already extracted Section 30 of the Punjab Act whichconfers on every registered cooperative society the status of abody corporate having perpetual succession and a common seal,with power to hold property, enter into contracts, institute anddefend suits and other legal proceedings and to do all thingsnecessary for the purposes for which it is constituted. Therecannot, therefore, be the slightest doubt that a cooperative societyis a corporation as commonly understood. Does the scheme ofthe Constitution make any difference? We apprehend not.

7. … According to Mr. Ramamurthi the express exclusion ofcooperative societies in Entry 43 of List I and the express inclusionof cooperative societies in Entry 32 of List II separately and apartfrom but along with corporations other than those specified in ListI and universities, clearly indicated that the constitutional scheme

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1124SUPREME COURT REPORTS

Awas designed to treat cooperative societies as institutions distinctfrom corporations. On the other hand one would think that thevery mention of cooperative societies both in Entry 43 of List Iand Entry 32 of List II along with other corporations gave anindication that the Constitution makers were of the view thatcooperative societies were of the same genus as other corporationsBand all were corporations. In fact the very express exclusion ofcooperative societies from Entry 43 of List I is indicative of theview that but for such exclusion, cooperative societies would becomprehended within the meaning of expression “corporations”.”

In Dalco Engineering Private Limited (supra), the Court followedCthe decision in S.S. Dhanoa (supra) and opined that there is a differencebetween a corporation established by law and established under the law.However, the question involved in the instant case is different.

56. In Hindustan Lever (supra), question was considered, whetherthere was an encroachment on the field of the Parliament reserved underDEntry 43 of List I of the Seventh Schedule of the Constitution of India,which empowers the Union Government to make law relating to‘incorporation, regulation and winding up of trading corporations includingbanks, insurance, and finance corporations’. It was held that the levy ofstamp duty and prescribing rate of stamp duty on such documents is aEdifferent aspect. The Bombay Stamp Act does not provide for‘incorporation, regulation and winding up of corporations’. The Courtheld:

“42. It was next contended that provisions of Section 2(g)(iv)read with Section 34 of the Bombay Stamp Act which provideFthat an instrument not duly stamped would be inadmissible inevidence are repugnant to Section 394 of the Companies Act andthat the State legislation cannot prevail over the provisions of theCompanies Act. It was also contended that in the guise of stampduty the State Legislature is in reality imposing a tax on theamalgamation of companies and has therefore encroached on theGfield of Parliament under Entry 43 List I of the Constitution. Wedo not find any substance in this submission as well. Stamp duty islevied on the instrument and the measure is the valuation of theproperty transferred. There is no question of encroachment onthe field of Parliament under Entry 43 List I of the ConstitutionHwhich empowers the Union to make laws re: incorporation, regulation and winding up of trading corporations including banks,insurance and finance corporations but not including cooperativesocieties. The follow-up legislation under Entry 43 List I is totallydifferent from the levy of stamp duty and of prescribing rate ofstamp duty on such documents. The Bombay Stamp Act does notprovide for any legislation with regard to incorporation, regulationand winding up of corporations. It only levies the stamp duty andprescribes the rate of stamp duty in respect of documents bycompromise or arrangement.”

57. In Kerala State Electricity Board (supra), a ConstitutionBench, while considering the Doctrine of Pith and Substance anddominant purpose, opined:

“5. In view of the provisions of Article 254, the power ofParliament to legislate in regard to matters in List III, which aredealt with by clause (2), is supreme the Parliament has exclusivepower to legislate with respect to matters in List 1. The StateLegislature has exclusive power to legislate with respect to mattersin List II. But this is subject to the provisions of clause (1) [leavingout for the moment the reference to clause (2)]. The power ofParliament to legislate with respect to matters included in List I issupreme notwithstanding anything contained in clause (3) [againleaving out of consideration the provisions of clause (2)]. No whatis the meaning of the words “notwithstanding” in clause (1) and“subject to” in clause (3)? They mean that where an entry is ingeneral terms in List II and part of that entry is in specific, termsin List I, the entry in List I takes effect notwithstanding the entryin List II. This is also on the principle that the “special” excludesthe “general” and the general entry in List II is subject to thespecial entry in List 1. For instance, though house accommodationand rent control might fall within either the State list or theconcurrent list, Entry 3 in List I of Seventh Schedule carves outthe subject of rent control and house accommodation inCantonments from the general subject of house accommodationand rent control (see Indu Bhusan v. Sundari Devi, (1970) 1SCR 443). Furthermore, the word “notwithstanding” in clause (1)also means that if it is not possible to reconcile the two entries theentry in List I will prevail. But before that happens attempt shouldbe made to decide in which list a particular legislation falls. For

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deciding under which entry a particular legislation falls the theoryof “pith and substance” has been evolved by the courts. If in pithand substance a legislation falls within one list or the other butsome portion of the subject-matter of that legislation incidentallytrenches upon and might come to fall under another list, the Actas a whole would be valid notwithstanding such incidentaltrenching. These principles have been laid down in a number ofdecisions.

16. It would be obvious that one part of the Act does deal withthe constitution of the Board, the incorporation of the Board andthe regulation of its activities. But the main purpose of the Act isfor rationalising the production and supply of electricity. Theregulation contemplated in Entries 43 and 44 is not regulation ofthe business of production, distribution and supply of electricity ofthe corporation. As the 1910 and 1948 Acts together form acomplete code, with respect to Entry 38 in List 111 the Board isonly an instrument fashioned for carrying out this object. Theprovision regarding the incorporation and regulation of theElectricity Board should be taken to be only incidental to theprovision regarding production, supply and distribution of electricity.

18. In Ramtanu Housing Society v. Maharashtra, (1970) 1 SCC248, this Court had dealt with the Maharashtra IndustrialDevelopment Act, 1961 and the question whether the MaharashtraDevelopment Corporation formed under the Act was a tradingcorporation. In holding that the legislation fell under Entry 24 ofthe State list and not under Entry 43 of the Union list this Courtobserved: [SCC pp. 324, 325, 326, 327-328, paras 3, 4, 8, 11 & 15]

The Act is one to make a special provision for securingthe orderly establishment in industrial areas and industrial estatesof industries in the State of Maharashtra, and to assist generallyin the organisation thereof, and for that purpose to establish anIndustrial Development Corporation, and for purposesconnected with the matters aforesaid.

The corporation is established for the purpose of securingand assisting the rapid and orderly establishment andorganisation of industries in industrial areas and industrial estatesin the State of Maharashtra.

Broadly stated the functions and powers of thecorporation are to develop industrial areas and industrial estatesby providing amenities of road, supply of water or electricity,street lighting, drainage … or otherwise transfer any propertyheld by the corporation on such conditions as may be deemedproper by the corporation ....

The principal functions of the corporation in regard tothe establishment, growth and development of industries in theState are first to establish and manage industrial estates atselected places and secondly to develop industrial areas selectedby the State Government. When industrial areas are selectedthe necessity of acquisition of land in those areas is apparent.The Act, therefore, contemplates that the State Governmentmay acquire land by publishing a notice specifying the particularpurpose for which such land is required .... Where the landhas been acquired for the corporation or any local authority,the State Governmentshall, after it has taken possession of theland, transfer the land to the corporation or that local authority....

It is in the background of the purposes of the Act and powers andfunctions of the corporation that the real and true character of thelegislation will be determined .... Industries come within Entry 24of the State list. The establishment, growth and development ofindustries in the State of Maharashtra does not fall within Entry 7and Entry 52 of the Union list. Establishment, growth anddevelopment of industries in the State is within the State list ofindustries .... Acquisition or requisition of land falls under Entry42 of the concurrent list. In order to achieve growth of industriesit is necessary not only to acquire land but also to implement thepurposes of the Act. The corporation is therefore established forcarrying out the purposes of the Act, The pith and substance ofthe Act is establishment, growth and organisation of industries,acquisition of land in that behalf and carrying out the purposes ofthe Act by setting up the corporation as one of the limbs or agenciesof the Government. The powers and functions of the corporationshow in no uncertain terms that these are all in aid of the principaland predominant purpose of establishment, growth and

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establishment of industries. The corporation is established for thatpurpose .... We, therefore, hold that the Act is a valid piece oflegislation.

19. In the present case the incorporation of the State ElectricityBoards is merely for the rationalisation of the production and supplyof electricity, for taking measures conducive to electricaldevelopment and for all matters incidental thereto. Theincorporation of the Electricity Boards being incidental to therationalisation of the production and supply of electricity and forbeing conducive to electrical development, the 1948 Act in pithand substance should be deemed to be one falling under Entry 38of List III. Furthermore, Electricity Boards are not tradingcorporations. They are public service corporations. They have tofunction without any profit motive. Their duty is to promotecoordinated development of the generation, supply and distributionof electricity in the most efficient and economical manner withparticular reference to such development in areas not for the timebeing served or adequately served by any licensee (Section 18).The only injunction is that as far as practicable they shall notcarry on their operations at a loss (Section 59). They get subventionsfrom the State Governments (Section 63). In the discharge oftheir functions they are guided by directions on questions of policygiven by State Governments (Section 78-A). There are noshareholders and there is no distribution of profits. This is anotherreason why the 1948 Act cannot be said to fall under Entry 43 ofList I.

20. The question, therefore, is whether the impugned legislationfalls under Entry 38 of List III or Entries 26 and 27 of List II andif the former, whether it is repugnant to the existing law on thesubject, that is, the 1910 and 1948 Acts and if that were so, whetherthat repugnancy has been cured by Presidential assent?

21. Even assuming that part of the 1948 Act is legislation withrespect to incorporation and regulation of a trading corporation,falling under Entry 43 of List I of Schedule VII, the rest of it willfall under Entry 38 of List III. That part of the Act relating to theregulation of the activities regarding production and distribution ofelectricity would, as we have shown, fall under the entry“Electricity”. The Kerala Act has nothing to do with the incorporation and regulation of the Electricity Board and, therefore,it can only relate to Entry 38 of List III, if at all.”

It was held that repugnancy could only arise if both the legislationsof Parliament and State fell within List III.

58. In Sita Ram Sharma and Ors. (supra) the question concerningEntry 43 of List I and Entries 35 and 42 of List III was considered. Itwas held:

“9. The main argument is that the subject-matter of Section 4falls within Item 43 of List I of the Seventh Schedule to theConstitution. So the State Legislature could not enact Section 4.The rival contention of Dr. L.M. Singhvi, Advocate-General ofRajasthan, is that the subject-matter of Section 4 in its true natureand character falls within Items 35 and 42 of List III of the SeventhSchedule to the Constitution.

10. Item 43 of List I reads: “Incorporation, regulation and windingup of trading corporation, including banking, insurance and financialcorporation but not including cooperative societies.” Item 35 ofList III reads: “Mechanically propelled vehicles including theprinciples on which taxes on such vehicles are to be levied.” Item42 of List III reads: “Acquisition and requisitioning of property.”

15. It is not disputed by the appellant that the subject-matter ofChapter IV-A falls within Items 35 and 42 of List III. It wouldaccordingly follow that Section 68-A the definition clause, also isa law with respect to those very items. Section 4 of the Ordinancedeclares that any scheme prepared and published underSection 68-C by the General Manager of State TransportUndertaking shall be deemed to have been prepared or publishedby the State Transport Undertaking. It also provides that thescheme shall not be questioned in any court or before any authoritymerely on the ground that the same has been prepared or publishedby the General Manager. It may be observed that Section 4 makesno amendment in the Road Transport Corporation Act. It doesnot directly affect the power of the Road Transport Corporationunder Section 19(2)(c) of the said Act. It has attempted to inserta new Section 68-CC in Chapter IV-A of the Motor Vehicles Act.By this new section it has validated the scheme prepared andpublished by the General Manager of a State TransportUndertaking as defined in Section 68-C.

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A16. We have little doubt in our mind that the subject-matter ofSection 4 clearly falls within Items 35 and 42 of List III and notwithin Item 43 of List I. The subject-matter is the conferment ofpower of acquisition of a road transport undertaking by the GeneralManager of the StateTransport Undertaking. It has direct concernwith acquisition. It has no concern with incorporation, regulationBand winding up of trading corporations. The constitutionality ofthe law is to be determined by its real subject-matter and not bythe incidental effect which it may have on any topic of legislationin List I. (See Prafulla Kumar Mukherjee v. Bank of CommerceLtd., 1947 FCR 28: AIR 1947 PC 60: 74 IA and Kannan DevanCHills Produce Company Ltd. v. State of Kerala, (1973) 1 SCR356).”

(emphasis supplied)

(emphasis supplied)

It is apparent that ‘incorporation, regulation and winding up’ ofthe co-operative societies are covered under Entry 32 of List II of theDSeventh Schedule of the Constitution of India, whereas ‘banking’ iscovered by Entry 45 of List I. Thus, aspect of ‘incorporation, regulationand winding up’ would be covered under Entry 32 of List II. However,banking activity of such co-operative societies/banks shall be governedby Entry 45 of List I. The said banks are governed and regulated byElegislation related to Entry 45 of List I, the BR Act, 1949 as well as theReserve Bank of India Act under Entry 38 of List I. In the matter oflicencing and doing business, a deep and pervasive control is carved outunder the provisions of the BR Act, 1949 and banking activity done byany entity, primary credit societies, is a bank and is required to submitthe accounts to the Reserve Bank of India, and there is complete controlFunder the aforesaid Act. For activity of banking, these banks are governedby the legislation under Entry 45 of List I. Thus, recovery being an essentialpart of the banking, no conflict has been created by providing additionalprocedures under Section 13 of the SARFAESI Act. It is open to thebank to adopt a procedure which it may so choose. When banking in pithGand substance is covered under Entry 45 of List I, even incidentaltrenching upon the field reserved for State under Entry 32 List II ispermissible.

59. There can be various aspects of an activity. The co-operativesocieties may be formed under the provisions of the State Co-operativeHActs. The State law provides for ‘incorporation, regulation and winding up’ under Entry 32 of List II, a membership registration, and other matterscan be governed by Entry 32 of List II, and, at the same time, the aspectsrelating to the banking, licensing, accounts, etc. can be covered underEntry 45 List I.

60. In State of W.B. v. Kesoram Industries Ltd. and Ors.[36], aConstitution Bench considered the aspects’ theory and considered thefield of taxation under Lists I and II and opined that there might beoverlapping in fact, but there would be no overlapping in law. Simplybecause the methodology or mechanism adopted for assessment andquantification is similar, the two taxes cannot be said to be overlapping.It was held that Entries 52, 53, and 54 are not heads of taxation. Thefield of taxation is covered by Entries 49 and 50 of List II. It was heldthat the same transaction might involve two or more taxable events in itsdifferent aspects.Merely because the aspects overlap, such overlappingdoes not detract from the distinctiveness of the aspects. There was noquestion of conflict solely on account of two aspects of the sametransaction being utilized by two legislatures for two levies. The Courtheld:

“141. As held in Goodricke Group Ltd., 1995 Supp (1) SCC 707which we have held as correctly decided, this Court has noted theprinciple of law well established by several decisions that themeasure of tax is not determinative of its essential character. Thesame transaction may involve two or more taxable events in itsdifferent aspects. Merely because the aspects overlap, suchoverlapping does not detract from the distinctiveness of the aspects.In our opinion, there is no question of conflict solely on account oftwo aspects of the same transaction being utilised by twolegislatures for two levies both of which may be taxes or fees orone of which may be a tax and the other a fee falling within twofields of legislation respectively available to the two.”

The legislation and entries are to be considered in pith andsubstance is the settled principles of law, and incidental trenching ispermissible. Thus, we are of the opinion that section 2(c)(iv)(a) of theSARFAESI Act and the notification dated 28.2.2003 cannot be said tobe ultra vires. They are within the ken of Entry 45 List I of the SeventhSchedule to the Constitution of India.

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AEFFECT OF CONSTITUTIONAL PROVISIONS

61. Our aforesaid conclusion finds support by the Constitutionalprovisions inserted by way of the Constitution (Ninety SeventhAmendment) Act, 2011. Article 43B has been added concerning themanagement of co-operative societies. Article 43B is extracted hereunder:

B

“43B. Promotion of co-operative societies.— The State shallendeavour to promote voluntary formation, autonomousfunctioning, democratic control and professional management ofco-operative societies.”

62. Article 243ZI provides that the legislature of a State may, byClaw, make provisions with respect to ‘incorporation, regulation and windingup’ of co-operative societies. Article 243ZI is extracted hereunder:

“243ZI. Incorporation of co-operative societies. — Subject to theprovisions of this Part, the Legislature of a State may, by law,make provisions with respect to the incorporation, regulation andDwinding up of co-operative societies based on the principles ofvoluntary formation, democratic member-control, member-economic participation and autonomous functioning.”

63. The Ninety Seventh Amendment also incorporated Article243ZL dealing with supersession and suspension of the board and interimEmanagement. Article 243ZL is extracted hereunder:

“243ZL.—Supersession and suspension of board and interimmanagement.— (1) Notwithstanding anything contained in anylaw for the time being in force, no board shall be superseded orkept under suspension for a period exceeding six months:

FProvided that the board may be superseded or kept undersuspension in case—

(i) of its persistent default; or

(ii) of negligence in the performance of its duties; or G(iii) the board has committed any act prejudicial to the interests ofthe co-operative society or its members; or

(iv) there is stalemate in the constitution or functions of the board;or H

(v) the authority or body as provided by the Legislature of a State,by law, under clause (2) of article 243ZK, has failed to conductelections in accordance with the provisions of the State Act:

Provided further that the board of any such co-operative societyshall not be superseded or kept under suspension where there isno Government shareholding or loan or financial assistance orany guarantee by the Government:

Provided also that in case of a co-operative society carrying onthe business of banking, the provisions of the Banking RegulationAct, 1949 shall also apply:

Provided also that in case of a co-operative society, other than amulti-State co-operative society, carrying on the business ofbanking, the provisions of this clause shall have the effect as if forthe words “six months”, the words “one year” had been substituted.

(2) In case of supersession of a board, the administrator appointedto manage the affairs of such co-operative society shall arrangefor conduct of elections within the period specified in clause (1)and handover the management to be elected board.

(3) The Legislature of a State may, by law, make provisions forthe conditions of service of the administrator.”

(emphasis supplied)

The third proviso to Article 243ZL(1) clarifies that in case of aco-operative society carrying on the business of banking, the provisionsof the BR Act, 1949 shall also apply besides the State Act. The fourthproviso to clause (1) of Article 243ZL also contains an exception withrespect to multi-State co-operative society carrying on the business ofbanking, the provisions of this clause shall have the effect as if for thewords ‘six months’, had been substituted by words ‘one year.’ Thus, theconstitutional provision itself makes a distinction between a co-operativebank and other co-operative societies and applied law enacted underEntry 45 of List I of the Seventh Schedule. It set at rest any controversyconcerning the applicability of the BR Act, 1949 to banks run byco-operative societies. It also makes it clear that such banks are governedby Entry 45 of List I of the Seventh Schedule.

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A64.A three-Judge Bench decision in Greater Bombay Coop. BankLtd. (supra) is heavily relied upon by the appellants, and due to conflictnoted by a three-Judge Bench, the matter has been referred. In GreaterBombay Coop. Bank Ltd. (supra) the question arose whetherco-operative banks constituted under the Co-operative Societies Actwould have the right to recover the amount from debtors under the Co-Boperative Societies Act, or they could proceed under the RDB Act, 1993,and whether pending proceedings were to be transferred to the DebtRelief Tribunal. In other words, whether the tribunals and the authoritiesconstituted under the Maharashtra Co-operative Societies Act, 1960 andthe Multi-State Co-operative Societies Act, 2002, continue to haveCjurisdiction to entertain applications/disputes submitted before them bythe co-operative banks incorporated under the 1960 Act and 2002 Actfor recovery of debts after the establishment of a Debts RecoveryTribunal under the RDB Act, 1993.The High Court opined that after theestablishment of Debts Recovery Tribunal under the 1993 Act, the courtsand authorities under the 1960 Act as well as the 2002 Act would ceaseDto have jurisdiction to entertain the applications submitted by theco-operative banks for recovery of their dues. However, at the sametime, the High Court upheld the competence of the State legislature toenact the Maharashtra Co-operative Societies Act, 1960.

65. In another matter, namely A.P. State Coop. Bank v. SamudraEShrimp (P) Ltd., the High Court of Andhra Pradesh, struck down Sections61 and 71 of the APCS Act, 1964 on the ground of constitutionalincompetence. It was held that subject matter was excluded from theState legislative field in Entry 32 of List II of the Seventh Schedule, andthe recovery of monies fell within the core and substantive area of bankingFin Entry 45 of List I of the Seventh Schedule of the Constitution. Aco-operative bank, as defined in Section 56(cci) of the BR Act, 1949, isa bank and a banking company within the meaning of Section 2 (d) &(e) of the RDB Act, 1993. The Debts Recovery Tribunal constitutedunder the Act of 1993 had exclusive jurisdiction.

G66.In Greater Bombay Coop. Bank Ltd. (supra) as to the scopeof Entries 43, 44 and 45 of List I and Entry 32 of List II of the SeventhSchedule of the Constitution of India, it was observed:

“88. Entry 43 of List I speaks of banking, insurance and financialcorporations, etc. but expressly excludes cooperative societiesfrom its ambit. The constitutional intendment seems to be that theH

cooperative movement was to be left to the States to promoteand legislate upon and the banking activities of cooperative societieswere also not to be touched unless Parliament considered itimperative. The BR Act deals with the regulation of the bankingbusiness. There is no provision whatsoever relating to proceedingsfor recovery by any bank of its dues. Recovery was initiallygoverned by the Code of Civil Procedure by way of civil suits andafter the RDB Act came into force, the recovery of the dues ofthe banks and financial institutions was by filing applications tothe Tribunal. The Tribunal has been established with the sole objectto provide speedy remedy for recovery of debts of the banks andfinancial institutions since there has been considerable difficultiesexperienced therefor from normal remedy of civil court.

89. In R.C. Cooper v. Union of India, (1970) 1 SCC 248, thisCourt observed that power to legislate for setting up corporationsto carry on banking and other business and to acquire, hold anddispose of property and to provide for administration of thecorporations is conferred upon Parliament by Entries 43, 44 and45 of the Constitution. Therefore, the express exclusion ofcooperative societies in Entry 43 of List I and the express inclusionof cooperative societies in Entry 32 of List II separately and apartfrom but along with corporations other than those specified inList I and universities, clearly indicated that the constitutionalscheme was designed to treat cooperative societies as institutionsdistinct from corporations. Cooperative societies, incorporation,regulation and winding up are State subjects in the ambit of Entry32 of List II of the Seventh Schedule to the Constitution of India.Cooperatives form a specie of genus “corporation” and as suchcooperative societies with objects not confined to one State areread in with the Union List as provided in Entry 44 of List I of theSeventh Schedule of the Constitution; the MSCS Act, 2002 governssuch multi-State cooperatives. Hence, the cooperative banksperforming functions for the public with a limited commercialfunction as opposed to corporate banks cannot be covered byEntry 45 of List I dealing with “banking”. The subject ofcooperative societies is not included in the Union List rather it iscovered under Entry 32 of List II of the Seventh Scheduleappended to the Constitution.”

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AThe Court distinguished the decision in Delhi High Court BarAssociation (supra) thus:

“95. Union of India v. Delhi High Court Bar Assn., (2002) 4SCC 275, relied upon on behalf of the respondents in support ofthe judgments and orders of the High Court of Bombay and theBHigh Court of Andhra Pradesh, does not consider the issue ofcooperative banks’ adjudication and recovery provisions underEntry 32 of List II. The Court was only considering Entry 45,List I vis-à-vis Entry II-A, List III “administration of justice”. Assuch, the decision of this case is of no assistance or of help to theproposition of law involved in the present cases.”

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67. In Greater Bombay Coop. Bank Ltd. (supra), the Court reliedupon the decisions in Sant Sadhu Singh v. State of Punjab[37], andNagpur District Central Cooperative Bank Ltd. v. Divisional JointRegistrar, Cooperative Societies[38]. In Sant Sadhu Singh (supra), theamendment made to the Punjab Co-operative Societies Act, 1961, whichDcurtailed the rights and powers of the shareholders in managing theco-operative society, was under challenge. Thus, the question involvedwas related to the management aspect of the bank governed by theCo-operative Societies Act for which State had the exclusive legislativecompetence under Entry 32 of List II. Whereas in Nagpur DistrictECentral Cooperative Bank Ltd. (supra), the question arose whetherRegistrar had the power under Section 78 of the MaharashtraCo-operative Societies Act to issue show cause notice to any committeeof the society or any member of such committee including the Directorsin respect of any default or negligence in the performance of the dutiesimposed on it or him by the Act or the rule or the bye-laws and power ofFthe Registrar to remove the Committee or the members thereof if anysuch action is called for. The argument was rejected that the co-operativesocieties indulged in the banking business, hence, the State did not havethe legislative competence under Entry 32 of List II, and only theParliament had the legislative competence under Entry 45 of List I. TheGquestion involved as to management was clearly covered under Entry32 of List II. It was with respect to incorporation, management, andwinding up of a society. Thus, both the abovementioned decisions couldnot be said to be applicable with regard to the aspect of banking and H

37 AIR 1970 P&H 528

38 AIR 1971 Bom 365

were wrongly relied upon while forming an opinion in Greater BombayCoop. Bank Ltd. (supra).

68. At the same time, we are unable to accept the argument raisedon behalf of the respondents. The SARFAESI Act is relatable to Entry6 of List III considering the provisions contained in Sections 69 and 69Aof the Transfer of Property Act, 1882. We are of the opinion that itrelates to Entry 45 of List I of the Seventh Schedule of the Constitutionof India.

69. Learned Counsel for the appellants has also placed relianceon Virendra Pal Singh (supra), in which the provisions relating to therecruitment, emoluments, terms, and conditions of service, includingdisciplinary control of employees working in the co-operative societiesinvolved in the banking were considered. Thus, the question ofmanagement/regulation of the co-operative societies was involved. Theaspect of the banking business of the co-operative banks was not involved.A question was raised as to the legislative competence of the State toenact. In that context, the Court held that, in pith and substance, the U.P.Co-operative Societies Act dealt with incorporation, management andwinding up and that if it incidentally trenches upon banking, would nottake the legislation beyond the competence of the State Legislature.For the proper financing and effective functioning of co-operativesocieties, there must also be co-operative societies that do bankingbusiness to facilitate the working of other co-operative societies merelybecause they do banking business, they do not cease to be co-operativesocieties. It was opined:

“10. We do not think it necessary to refer to the abundance ofauthority on the question as to how to determine whether alegislation falls under an entry in one list or another entry in anotherlist. Long ago in Prafulla Kumar Mukherjee v. Bank ofCommerce Ltd., 74 IA 23, the Privy Council was confronted withthe question whether the Bengal Money-Lenders Act fell withinEntry 27 in List II of the Seventh Schedule to the Government ofIndia Act, 1935, which was “money-lending”, in respect of whichthe provincial legislature was competent to legislate, or whether itfell within Entries 28 and 38 in List I which were “promissorynotes” and “banking” which were within the competence of theCentral Legislature. The argument was that the Bengal Money-Lenders Act was beyond the competence of the provincial A

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legislature insofar as it dealt with promissory notes and the businessof banking. The Privy Council upheld the vires of the whole of theAct because it dealt, in pith and substance, with money-lending.They observed:

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Subjects must still overlap, and where they do the questionmust be asked what in pith and substance is the effect of theenactment of which complaint is made, and in what list is itstrue nature and character to be found. If these questions couldnot be asked, much beneficent legislation would be stifled atbirth, and many of the subjects entrusted to provincial legislationcould never effectively be dealt with.

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Examining the provisions of the U.P. Cooperative Societies Act inthe light of the observations of the Privy Council we do not havethe slightest doubt that in pith and substance the Act deals with“cooperative societies”. That it trenches upon banking incidentallydoes not take it beyond the competence of the State Legislature.DIt is obvious that for the proper financing and effective functioningof cooperative societies there must also be cooperative societieswhich do banking business to facilitate the working of othercooperative societies. Merely because they do banking businesssuch cooperative societies do not cease to be cooperative societies,Ewhen otherwise they are registered under the CooperativeSocieties Act and are subject to the duties, liabilities and controlof the provisions of the Cooperative Societies Act. We do notthink that the question deserves any more consideration and, we,therefore, hold that the U.P. Cooperative Societies Act was withinthe competence of the State Legislature. This was also the viewFtaken in Nagpur District Central Cooperative Bank Ltd. v.Divisional Joint Registrar, Cooperative Societies, AIR 1971Bom 365 and Sant Sadhu Singh v. State of Punjab, AIR 1970P & H 528.”

In the aforesaid decision, it was held that under the U.P.GCo-operative Societies Act, the State was competent under Entry 32 ofList II to deal with incorporation, regulation and winding up of co-operativebanks. However, the main aspect of the activity of the co-operativebank relating to banking was covered by the BR Act, 1949, and theReserve Bank of India Act, which legislations are related to Entries 45Hand 38 of List I of the Seventh Schedule. The aspects of ‘incorporation, regulation and winding up’ are covered under Entry 32 of List II of theSeventh Schedule. In our opinion, the activity of banking by such bankersis covered by Entry 45 of List I considering the Doctrine of Pith andSubstance, and also considering the incidental encroachment on the fieldreserved for State is permissible.

70. The concept of regulating non-banking affairs of society andregulating the banking business of society are two different aspects andare covered under different Entries, i.e., Entry 32 of List II and Entry 45of List I, respectively. The law dealing with regulation of banking istraceable to Entry 45 of List I and only the Parliament is competent tolegislate. The Parliament has enacted the SARFAESI Act. It does notintend to regulate the incorporation, regulation, or winding up of acorporation, company, or co-operative bank/co-operative society. Itprovides for recovery of dues to banks, including co-operative banks,which is an essential part of banking activity. The Act in no way trencheson the field reserved under Entry 32 of List II and is a piece of legislationtraceable to Entry 45 of List I. The decision in Virendra Pal Singh(supra) has been rendered regarding service regulations. It does notapply to the instant case concerning the regulation of ‘banking’ coveredunder Entry 45 of List I. The Court did not deal with the aspect of theregulation of banking in the said decision as it was not required to bedecided. Thus, the ratio of the decision operates in a different field.Moreover, the U.P. Co-operative Services Act was saved on the groundof incidental trenching on the subject of another list, i.e., Entry 45 List I,which is permissible.

IN REFERENCE QUESTION NO.2:

71. The next question is of the effect of Section 56(a) on thedefinition of ‘banking company’ as defined in Section 5(1)(b) of the BRAct, 1949. It is necessary to consider the definition of ‘banking’ ascontained in the SARFAESI Act. The term ‘bank’ has been defined inSection 2(1)(c) to mean ‘banking company’, a corresponding new bank,a subsidiary bank or a multi-State co-operative bank or such other bankwhich the Central Government may by notification specify for the Act.The term ‘banking company’ under Section 2(d) shall have the meaningassigned 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 theSARFAESI 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.

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A1.3.1966. On that date, Section 56(a) became part of the statute. Section5(c) of the BR Act, 1949 defines ‘banking company’ means any companywhich transacts the business of banking. By virtue of Section 56(a), areference to a ‘banking company’ or ‘the company’ or ‘such company’shall be construed as references to a co-operative bank for the applicationof the Act to the co-operative banks. Section 5(c) was not amended,Band other provisions were also not amended where they were placed.However, amendments were incorporated by a different Chapter V byway of various provisions incorporated in Section 56 as it was necessaryto retain certain provisions in the existing form as they applied to otherbanks and companies considering that the amendments and certainCmodifications which were necessary and were extensively required. Theprovisions in amended form in their application to the co-operative bankswere separately provided. When the BR Act, 1949 was applied to theco-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 toDexist in the Act for other entities but not concerning co-operative banks.It was mentioned in the advice given to the President under Article 117that these matters were specifically not covered under Entry 45 ofList I of the Seventh Schedule and formed the subject-matter of Entry32 of List II. Thus, when we apply the provisions of the Act of 1949 toEa co-operative bank, the definition of ‘banking company’ has to be readto include a co-operative bank. Section 56(a) becomes part of Section5(c), although it is located in a separate place. As only Part V of the Actapplies to the co-operative banks, Section 56(a) amends the definition ofthe ‘banking company,’ and it becomes an integral part of Section 5(c),as the full effect is required to be given.F72.The aspect of incorporation by reference of earlier Act intolater has been dealt with in the ‘Principles of Statutory Interpretation’,12[th] Edition 2010 by Justice G.P. Singh at pages 318-320 thus:

“Incorporation of an earlier Act into a later Act is a legislativeGdevice adopted for the sake of convenience in order to avoidverbatim reproduction of the provisions of the earlierAct into thelater.[39 ]When an earlier Act or certain of its provisions areincorporated by reference into a later Act, the provisions so 39 Mary Roy v. State of Kerala, (1986) 2 SCC 209, p. 216 : AIR 1986 SC 1011; NagpurHImprovement Trust v. Amrik Singh, AIR 2002 SC 3499, p. 3512 : (2002) 7 SCC 657.

incorporated become part and parcel of the later Act as if theyhad been “bodily transposed into it”.[40] The effect of incorporationis admirably stated by LORD ESHER, M.R.: “If a subsequentAct brings into itself by reference some of the clauses of a formerAct, the legal effect of that, as has often been held, is to writethose sections into the newAct as if they had been actually writtenin it with the pen, or printed in it.”[41] The result is to constitute thelater Act along with the incorporated provisions of the earlier Act,an independent legislation which is not modified or repealed by amodification or repeal of the earlier Act.[42] As observed by BRETT,J.: “Where a statute is incorporated, by reference, into a secondstatute, the repeal of the first statute by a third does not affect thesecond.”[43] To the same effect is the statement by SIR GEORGELOWNDES: “It seems to be no less logical to hold that wherecertain provisions from an existing Act have been incorporatedinto subsequent Act, no addition to the former Act, which is notexpressly made applicable to the subsequent Act, can be deemedto be incorporated in it, at all events if it is possible for thesubsequent Act to function, effectually without the addition.[44]

40 Ramsarup v. Munshi, AIR 1963 SC 553, p. 558 : 1963 (3) SCR 858 ; NagpurImprovement Trust v. Amrik Singh, AIR 2002 SC 3499, p. 3512 : (2002) 7 SCC 657.41 Re, Wood’s Estate, Ex parte, Works and Buildings Commrs., (1886) 31 Ch D 607, p.615; Ram Kripal Bhagat v. State of Bihar, AIR 1970 SC 951, p. 957 : (1969) 3 SCC 471;Bolani Ores Ltd. v. State of Orissa, AIR 1975 SC 17, p. 29 : 1975 (2) SCR 138 : (1974)2 SCC 777 ; Mahindra and Mahindra Ltd. v. Union of India, AIR 1979 SC 798, pp. 810,811 : (1979) 2 SCC 529 ; Onkarlal Nandlal v. State of Rajasthan, (1985) 4 SCC 404, p.415 : AIR 1986 SC 2146; Surana Steels Pvt. Ltd. v. Dy. Commissioner of Income-tax,AIR 1999 SC 1455, p. 1459 : (1999) 4 SCC 306 (p. 233 of 7th edition of this book isapprovingly quoted).

42 Narottamdas v. State of M.P., AIR 1964 SC 1667, p. 1670 : (1964) 7 SCR 820; BolaniOres Ltd. v. State of Orissa, supra; Mahindra and Mahindra Ltd. v. Union of India,supra; Nagpur Improvement Trust v. Amrik Singh, supra ; Sneh Enterprises v. Commr.of Customs, (2006) 7 SCC 714 (para 13) : (2006) 8 JT 587 : (2006) 7 SLT 615 (passagefrom 10th edition of this book is approvingly quoted).

43 Clarke v. Bradlaugh, (1881) 8 QBD 63, p. 69; referred to in Ramsarup v. Munshi, AIR1963 SC 553, p. 558 : (1963) 3 SCR 858; Collector of Customs, Madras v. NathelalSampathu Chetty, AIR 1962 SC 316, p. 334 : (1962) 3 SCR 786. See further JethanandBetab v. State of Delhi, AIR 1960 SC 89, pp. 91, 92 : (1960) 1 SCR 755; Bolani OresLtd. v. State of Orissa, supra; Mahindra and Mahindra Ltd. v. Union of India, supra;Nagpur Improvement Trust v. Amrik Singh, supra.

44 Secretary of State v. Hindustan Co-operative Insurance Society Ltd., AIR 1931 PC149, p. 152. Referred to in Chairman of the Municipal Commrs. of Howrah v. ShalimarWood Products (Private) Ltd., AIR 1962 SC 1691, p. 1694 : 1963 (1) SCR 47; Bolani A

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AOrdinarily if an Act is incorporated in a later Act, the intention isto incorporate the earlier Act, with all the amendments made in itup to the date of incorporation.[45] The rule that the repeal oramendment of the Act which is incorporated by reference in alater Act is not applicable for purposes of the later Act is subjectto qualifications and exceptions.[46] A distinction is in this contextBdrawn between incorporation and mere reference of an earlierAct into a later Act.[47] Further, a distinction is also drawn whenwhat is referred to is not an earlier Act or any provision from itbut law on a subject in general.[48] There is, however, no controversyon the point that when any Act or rules are adopted in any laterCAct or rules, such adoption normally whether by incorporation ormere reference takes in all the amendments in the earlier Act orrules till the date of adoption.[49]

The present one is a case of incorporation by reference in thesame Act by a subsequent amendment in the application to co-operativeDbanks. When we apply the provisions of Section 5(c) to the co-operativebanks, we have to read the co-operative banks as part and parcel of saiddefinition as mandated statutorily. In case a company is not taken as areference to the co-operative societies/banks in Section 5(c), severalproblems as to the interpretation of Section 56 would arise. It wouldhave become necessary to amend all the provisions wherever wordsE‘banking company’ occur in the BR Act, 1949 in the application to co-operative banks.

73. With respect to legislative device of incorporation by referencein Mary Roy, etc. v. State of Kerala and Ors.[50], the Court held:

F“7. … The legislative device of incorporation by reference is awell-known device where the legislature instead of repeating the Ores Ltd. v. State of Orissa, AIR 1975 SC 17, p. 29 : 1974 (2) SCC 777 ; Mahindra andMahindra Ltd. v. Union of India, AIR 1979 SC 798, pp. 810, 811 : (1979) 2 SCC 529.45 State of Maharashtra v. Madhavrao Damodar Patil, AIR 1968 SC 1395, p. 1400 :1968 (3) SCR 712.G46 See text and notes 9-41, pp. 324-332.

47 See text and notes 14-21, pp. 326-328.

48 See text and notes 10-13, pp. 325, 326.

49 Rajasthan State Road Transport Corporation Jaipur v. Poonam Pahwa, AIR 1997 SC2951, p. 2957 : 1997 (6) SCC 100. Also see text and note 80, supra.

[For convenience, citations have been renumbered.]H50 AIR 1986 SC 1011: (1986) 2 SCC 209

provisions of a particular statute in another statute incorporatessuch provisions in the latter statute by reference to the earlierstatute. It is a legislative device adopted for the sake of conveniencein order to avoid verbatim reproduction of the provisions of anearlier statute in a later statute. But when the legislature intendsto adopt this legislative device the language used by it is entirelydistinct and different from the one employed in S.29 sub-sec.(2)of the Indian Succession Act, 1925. The opening part of S.29 sub-sec. (2) is intended to be a qualificatory or excepting provisionand not a provision for incorporation by reference. We have nohesitation in rejecting this contention urged on behalf of therespondents.”

74. In U.P. Avas Evam Vikas Parishad v. Jainul Islam andAnr.[51], it was observed:

“The determination if a legislation was by way of incorporation orreference is more a matter of construction by the Courts keepingin view the language employed by the Act, the purpose of referringor incorporating provision of an existing Act and the effect of it onthe day-to-day working. Reason for it is the Courts prime duty toassume that any law made by the Legislature is enacted to servepublic interest.”

75. In Portsmouth Corporation v. Smith[52], it was opined:

“Where a single section of an Act of Parliament is introducedinto another Act, I think, it must be read in the sense which itbore in the original Act from which it is taken, and thatconsequently it is perfectly legitimate to refer to all the rest ofthat Act in order to ascertain what the section meant, thoughthose other sections are not incorporated in the new Act.”

Lord Blackburn further observed thus:

“I do not mean that if there was in the original Act a sectionnot incorporated, which came by way of a proviso or exceptionon that which is incorporated, that should be referred to, but allothers, including the interpretation clause, if there be one, maybe referred to. It is dangerous mode of draftsmanship toincorporate a section from a former Act, for unless the 51AIR 1998 SC 1028

52 (1885) 10 AC 364

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draftsman has a much clearer recollection of the whole of theformer Act than can always be excepted, there is great riskthat something may be expressed which was not intended.””

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76. In Surana Steels Pvt. Ltd. v. Dy. Commissioner of IncomeTax and Ors.[53], it was held that provision is bodily listed and standsBincorporated and plain rule of interpretation to be applied:

“12. Once we have ascertained the object behind the legislationand held that the provisions of Section 205 quoted hereinabovestand bodily lifted and incorporated into the body of Section 115Jof the Income Tax Act, all that we have to do is to read theCprovisions plainly and apply rules of interpretation if any ambiguitysurvives. Section 205(1) first proviso Clause (b), of the CompaniesAct brings out the unabsorbed portion of the amount of depreciationalready provided for computing the loss for the year. The words“the amount provided for depreciation” and “arrived at in bothcases after providing for depreciation” make it abundantly clearDthat in this clause “loss” refers to the amount of loss arrived atafter taking into account the amount of depreciation provided inthe profit and loss account.”

(emphasis supplied)

E77.In Secretary of State v. Hindustan Cooperative InsuranceSociety Ltd.[54], the Privy Council held:

“..........In this country it is accepted that where a statute isincorporated by reference into a second statute, the repeal of thefirst statute does not affect the second: see the cases collected inF“Craies on Statute Law”. This doctrine finds expression in acommon form section which regularly appears in the Amendingand Repealing Acts which are passed from time to time in India.The section runs.

“The repeal by this Act of any enactment shall not affect anyAct in which such enactment has been applied, incorporatedGor referred to;”

The independent existence of the two Acts is thereforerecognized, despite the death of the parent Act, its offspring 53 (1999) 4 SCC 306H54 AIR 1931 PC 149

survives in the incorporating Act. Though no such saving clauseappears in the General Clauses Act, their lordships think thatthe principle involved is as applicable in India as it is in thiscountry.

It seems to be no less logical to hold that where certainprovisions from an existing Act have been incorporated into asubsequent Act which is not expressly made applicable to thesubsequent Act, can be deemed to be incorporated in it, at allevents if it is possible for the subsequent Act to functioneffectually without the addition.”

78. In Ram Sarup and Ors. v. Munshi and Ors.[55], it was opined:

“(11) The problem here raised is dependent upon the constructionwhich the several provisions which we have set out earlier wouldbear after the repeal of the Punjab Alienation of Land Act, 1900.One thing is clear and that is that the authority which enacted therepeal of the Punjab Alienation of Land Act did not consider thatPunjab Act 1 of 1913 had itself to be repealed. We shall nowconsider the effect of the repeal of the Punjab Alienation of LandAct with reference to each of the provisions:—

(1) Definition of ‘agricultural land’ under S. 3(1):

Where the provisions of an Act are incorporated byreference in a later Act the repeal of the earlier Act has, in general,no effect upon the construction or effect of the Act in which itsprovisions have been incorporated. The effect of incorporation isstated by Brett, L.J. in Clarke v Bradlugh, (1881) 8 QBD 63:

“Where a statute is incorporated, by reference, into a secondstatute the repeal of the first statute by a third does not affect thesecond.”

In the circumstances, therefore, the repeal of the Punjab Alienationof Land Act of 1900 has no effect on the continued operation ofthe Pre-emption Act and the expression ‘agricultural land’ in thelater Act has to be read as if the definition in the Alienation ofLand Act had been bodily transposed into it. Section 2 of thePunjab Alienation of Land Act, 1900, as amended by Act 1 of1907 defined ‘land’ as follows:

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A“The expression ‘land’ means land which is not occupied as thesite of any building in a town or village and is occupied or let foragricultural purposes or for purposes subservient to agriculture orfor pasture, and includes..................................................………………………..”

BIt is not in dispute that the land concerned in the claim for pre-emption made in the appeal satisfies this definition.”

79. It is apparent that in order to avoid verbatim reproduction ofthe earlier provisions, which did not apply to a co-operative bank, a devicewas carved out in Section 56(a) to read ‘company’ as ‘banking company’Cor ‘the company’ or ‘such company’ as references to a co-operativebank. If the definition in Section 5(c) and interpretation clause are notread as incorporated and having been amended, the interpretation clauseand the entire amendment of Part V will become unworkable. It wasnot 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 theDprovisions were required to be retained, and such matters concerningco-operative societies/banks, relatable subject-matter under Entry 32 ofList I of the Seventh Schedule of the Constitution of India, were to beexcluded. As various provisions were to be omitted in their application tothe co-operative societies and other provisions were to apply in a modifiedEform, the amendments were made in the provisions in their applicationto the co-operative banks by providing a separate Chapter. Thus, it wasnot considered necessary nor would have been appropriate to amendthe definition of Section 5(c) where it existed, in fact it was so amendedin Section 56(a). Entire Chapter V was enacted concerning theapplication of the Act to the co-operative banks and has to be given fullFeffect. Merely because the procedure for recovery of dues is providedin the Co-operative Societies Act, could not have come in the way ofinterpretation of that expression ‘co-operative bank’ which was includedin 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’Gin Entry 45 of List I and this Court in Greater Bombay Coop. BankLtd. (supra) itself opined that the BR Act, 1949 applies to co-operativebanks which is the enactment related to Entry 45 of List I and thirdproviso to Article 243-ZL(1) of the Constitution of India also providesthat the BR Act shall also apply. Thus, the Parliament considered itappropriate to provide additional remedy for speedy recovery which isH

an alternative even if there is an incidental encroachment on the fieldreserved 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 iscovered within the ken of Entry 45 of List I. Thus, considering theDoctrine of Pith and Substance and incorporation by amendment made,we are of the considered opinion that co-operative banks are included inthe definition of ‘bank’ and ‘banking company’ under Section 2(1)(c)and 2(1)(d) of the SARFAESI Act.

80. In Greater Bombay Coop. Bank Ltd. (supra) concerning theBR Act, 1949, it was held:

“39. Chapter V of the BR Act was inserted by Act 23 of 1965w.e.f. 1-3-1966. Section 56 of the Act provides that the provisionsof this Act, as in force for the time being, shall apply to, or inrelation to, banking companies subject to the followingmodifications, namely:

“56. (a) throughout this Act, unless the context otherwise,requires,—

(i) references to a ‘banking company’ or ‘the company’ or ‘suchcompany’ shall be construed as references to a cooperative bank;

(ii) **

The purpose and object of modifications were to regulate thefunctioning of the cooperative banks in the matter of their businessin banking. The provisions of Section 56 itself start with the usualphrase “unless the context otherwise requires” is to make theregulatory machinery provided by the BR Act to apply tocooperative banks also. The object was not to define a cooperativebank to mean a banking company, in terms of Section 5(c) of theBR Act. This is apparent from the fact that instead of amendingthe original clause (c) of Section 5 separate clause (cci) was addedto cover the “cooperative bank” to mean “a State cooperativebank, a Central cooperative bank and a primary cooperative bank”.In clause (ccv) “primary cooperative bank” means “a cooperativesociety, other than a primary agricultural credit society”. Theprimary object or principal business of the “cooperative bank”should be the transaction of banking business.

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40. The modifications given in clause (a) of Section 56 areapparently suitable to make the regulatory machinery provided bythe BR Act to apply to cooperative banks also in the process ofbringing the cooperative banks under the discipline of ReserveBank of India and other authorities. A cooperative bank shall beconstrued as a banking company in terms of Section 56 of theAct. This is because the various provisions for regulating thebanking companies were to be made applicable to cooperativebanks also. Accordingly, Section 56 brought cooperative bankswithin the machinery of the BR Act but did not amend or expandthe meaning of “banking company” under Section 5(c). On a plainreading of every clause of Section 56 of the BR Act, it becomesclear that what is contained therein is only for the purpose ofapplication of provisions that regulate banking companies tocooperative societies. According to the expression “cooperativesocieties” used in Section 56 means a “cooperative society”, theprimary object or principal business of which is the transaction ofbanking business. In other words, first it is a cooperative society,but carrying on banking business having the specified paid-up sharecapital. Other definitions also make it clear that the entities arebasically cooperative societies.”

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(a) Concerning the SARFAESI Act, following observations wereEmade:

“41. Parliament had enacted the Securitisation and Reconstructionof Financial Assets and Enforcement of Security Interest Act,2002 (“the Securitisation Act”) which shall be deemed to havecome into force on 21-6-2002. In Section 2(d) of the SecuritisationAct same meaning is given to the words “banking company” as isassigned to it in clause (e) of Section 5 of the BR Act. Again thedefinition of “banking company” was lifted from the BR Act butwhile defining “bank”, Parliament gave five meanings to it underSection 2(c) and one of which is “banking company”. The CentralGovernment is authorised by Section 2(c)(v) of the Act to specifyany other bank for the purpose of the Act. In exercise of thispower, the Central Government by notification dated 28-1-2003,has specified “cooperative bank” as defined in Section 5(cci) ofthe BR Act as a “bank” by lifting the definition of “cooperativebank” and “primary cooperative bank” respectively from Section F

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56, clauses 5(cci) and (ccv) of Part V. Parliament has thusconsistently made the meaning of “banking company” clearbeyond doubt to mean “a company engaged in banking, and not acooperative society engaged in banking” and in Act 23 of 1965,while amending the BR Act, it did not change the definition inSection 5(c) or even in Section 5(d) to include cooperative banks;on the other hand, it added a separate definition of “cooperativebank” in Section 5(cci) and “primary cooperative bank” in Section5(ccv) of Section 56 of Part V of the BR Act. Parliament whileenacting the Securitisation Act created a residuary power inSection 2(c)(v) to specify any other bank as a bank for the purposeof that Act and in fact did specify “cooperative banks” bynotification dated 28-1-2003.

42. The context of the interpretation clause plainly excludes theeffect of a reference to banking company being construed asreference to a cooperative bank for three reasons: firstly, Section 5is an interpretation clause; secondly, substitution of “cooperativebank” for “banking company” in the definition in Section 5(c)would result in an absurdity because then Section 5(c) would readthus: “cooperative bank” means any company, which transactsthe business of banking in India; thirdly, Section 56(c) does define“cooperative bank” separately by expressly deleting/insertingclause (cci) in Section 5. Parliament in its wisdom had not alteredor modified the definition of “banking company” in Section 5(c)of the BR Act by Act 23 of 1965.

43. As noticed above, “cooperative bank” was separately definedby the newly inserted clause (cci) and “primary cooperative bank”was similarly separately defined by clause (ccv). The meaning of“banking company” must, therefore, necessarily be strictly confinedto the words used in Section 5(c) of the BR Act. If the intentionof Parliament was to define the “cooperative bank” as “bankingcompany”, it would have been the easiest way for Parliament tosay that “banking company” shall mean “banking company” asdefined in Section 5(c) and shall include “cooperative bank” and“primary cooperative bank” as inserted in clauses (cci) and (ccv)in Section 5 of Act 23 of 1965.”

(b) Concerning incorporation by reference to Section 56 (a) ofthe BR Act, 1949, it was opined:

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“70. The dues of cooperatives and recovery proceedings inconnection therewith are covered by specific Acts, such as theMCS Act, 1960 and the APCS Act, 1964, which are comprehensiveand self-contained legislations. Similarly, for multi-Statecooperatives there is a specific enactment in the form of the MSCSAct, 2002 comprehensively providing the legal framework inrespect to issues pertaining to such cooperatives. Therefore, whenthere is an admittedly existing legal framework specifically dealingwith issues pertaining to cooperatives and especially when thecooperative banks are, in any case, not covered by the provisionsof the RDB Act specifically, there is no justification of coveringthe cooperative banks under the provisions of the RDB Act byinvoking the doctrine of incorporation.”

(c) Regarding the definition of ‘banking company’ in the BR Act,1949, it was observed:

“73. The RDB Act was passed in 1993 when Parliament hadbefore it the provisions of the BR Act as amended by Act 23 of1965 by addition of some more clauses in Section 56 of the Act.Parliament was fully aware that the provisions of the BR Actapply to cooperative societies as they apply to banking companies.Parliament was also aware that the definition of “bankingcompany” in Section 5(c) had not been altered by Act 23 of 1965and it was kept intact, and in fact additional definitions were addedby Section 56(c). “Cooperative bank” was separately defined bythe newly inserted clause (cci) and “primary cooperative bank”was similarly separately defined by clause (ccv). Parliament wassimply assigning a meaning to words; it was not incorporating oreven referring to the substantive provisions of the BR Act. Themeaning of “banking company” must, therefore, necessarily bestrictly confined to the words used in Section 5(c) of the BR Act.It would have been the easiest thing for Parliament to say that“banking company” shall mean “banking company” as defined inSection 5(c) and shall include “cooperative bank” as defined inSection 5(cci) and “primary cooperative bank” as defined inSection 5(ccv). However, Parliament did not do so. There wasthus a conscious exclusion and deliberate omission of cooperativebanks from the purview of the RDB Act. The reason for excludingcooperative banks seems to be that cooperative banks have comprehensive, self-contained and less expensive remediesavailable to them under the State Cooperative Societies Acts ofthe States concerned, while other banks and financial institutionsdid not have such speedy remedies and they had to file suits incivil courts.

80. As already pointed out, the RDB Act is consistent with thegeneral banks and their creditors/loanees while the MCS Act,1960, the APCS Act, 1964 and the MSCS Act, 2002 are concernedwith the regulation of societies only. The language of the sectionsin these enactments defining “banking company” is plain, clearand explicit. It does not admit any doubtful interpretation as theintention of the legislature is clear as aforesaid. It is well settledthat the language of the statutes is to be properly understood. Theusual presumption is that the legislature does not waste its wordsand it does not commit a mistake. It is presumed to know the law,judicial decisions and general principles of law. The elementaryrule of interpretation of the statute is that the words used in thesection must be given their plain grammatical meaning. Therefore,we cannot afford to add any words to read something into thesection, which the legislature had not intended.

81. Finally, it could not be said that amendments in Chapter V,Section 56 of the BR Act by Act 23 of 1965 inserting “cooperativebank” in clause (cci) and “primary cooperative bank” in clause(ccv) either expressly or by necessary intendment (sic make theRDB Act) apply to the cooperative banks transacting business ofbanking.”

(d) The questions were answered thus:

“97. For the reasons stated above and adopting pervasive andmeaningful interpretation of the provisions of the relevant statutesand Entries 43, 44 and 45 of List I and Entry 32 of List II of theSeventh Schedule of the Constitution, we answer the referenceas under:

“Cooperative banks” established under the MaharashtraCooperative Societies Act, 1960 (the MCS Act, 1960), the AndhraPradesh Cooperative Societies Act, 1964 (the APCS Act, 1964),and the Multi-State Cooperative Societies Act, 2002 (the MSCSAct, 2002) transacting the business of banking, do not fall within

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Athe meaning of “banking company” as defined in Section 5(c) ofthe Banking Regulation Act, 1949 (the BR Act). Therefore, theprovisions of the Recovery of Debts Due to Banks and FinancialInstitutions Act, 1993 (the RDB Act) by invoking the doctrine ofincorporation are not applicable to the recovery of dues by thecooperatives from their members.”B

No doubt about it that certain observations made in the aforesaiddecision support the case set up by the appellants.

81. Before we deal with the decision, in Greater Bombay Coop.Bank Ltd. (supra), it was noted that ‘co-operative bank’ was defined inCSection 56(cci) of the BR Act, 1949; thus, the object was not to defineco-operative bank to mean banking company; that is why the originalSection 5(c) was not amended. Another ground employed concerningthe definition of the ‘co-operative bank’ was that the modifications madeby way of Section 56 were apparently suitable to make the regulatorymachinery provided by the BR Act, 1949, to apply to co-operative banksDalso. It was opined that a co-operative bank to be construed as a bankingcompany in terms of Section 56 of the BR Act, 1949, because variousprovisions were made applicable to co-operative banks also. At the sametime, it was held that Section 56 brought co-operative banks within themachinery of the BR Act, 1949, but it did not amend or expand theEmeaning of ‘banking company’ under Section 5(c). It was furtherobserved that the entities doing banking are basically co-operativesocieties. Regarding the SARFAESI Act, it was observed in paragraph41 of the decision quoted above that meaning of ‘banking company’ is acompany engaged in banking and not a ‘co-operative society’ engagedin banking. The Parliament did not alter or modify the meaning of ‘bankingFcompany’ under Section 5(c) of the BR Act, 1949 by Act No.23 of1965. The meaning of ‘banking company’ has to be confined to thewords used in Section 5(c) of the BR Act, 1949. It was emphasised thatthere was already a procedure prescribed for recovery of dues by banksunder the Co-operative Societies Act. The RDB Act, 1993, refers to theGtransfer of ‘every suit or other proceeding pending before any court.’The word ‘court’ in the context of the RDB Act, 1993, signifies ‘civilcourt.’ It is clear that the Registrar or an officer designated by him or anarbitrator under Sections 61, 62, 70, and 71 of the Andhra PradeshCo-operative Societies Act, 1964 and under Section 91 and otherprovisions of Maharashtra Co-operative Societies Act, 1960 are not ‘civilH

courts.’ Thus, it was opined that the RDB Act, 1993 is consistent withthe general banks and their creditors/loaners where the MaharashtraCo-operative Societies Act, 1960; the Andhra Pradesh Co-operativeSocieties Act, 1964 and the MSCS Act are concerned with the regulationof co-operative societies only. Due to the amendments in Chapter V ofthe BR Act, 1949 inserting ‘co-operative bank’ in clause (cci) to Section56 and ‘primary co-operative bank’ in clause (ccv) to Section 56 it couldnot be said that RDB Act, 1993 applies to the co-operative bankstransacting the business of banking.

82. In Greater Bombay Coop. Bank Ltd. (supra), the provisionsof the BR Act, 1949 were simply noted; there was no in-depthconsideration of the various provisions and, more particularly of thosecontained in Section 56 of the Act. The main issue was whether thecourt had jurisdiction or Debts Recovery Tribunal to recover the amountfrom the debtor. In that connection, the question of application of RDBAct, 1993 to the co-operative societies constituted under MSCS Act aswell as State Co-operative Acts arose and also whether the Statelegislature was competent to enact legislation concerning co-operativesocieties incidentally transacting the business of banking in the light ofEntry 32 of List II. The findings were recorded on various aspects withwhich we are unable to agree. The discussion on various issues was notin-depth, could not be said to be binding. We have dealt with the variousquestions with the help of various decisions of this Court, and we findourselves unable to agree with the conclusions recorded therein. Theco-operative banks are doing the banking business, it could not be said tobe an incidental activity but main and only activity. We are unable tosubscribe to the view taken in Greater Bombay Coop. Bank Ltd. (supra)as the provisions were not correctly appreciated.

83. The reason is given in Greater Bombay Coop. Bank Ltd.(supra) that comprehensive machinery is provided in the State Act, couldnot have come in the way of Parliament enacting a law as to recoverywithin the purview of ‘banking’ in Entry 45 of List I as the same is itsessential part. Even incidental trenching upon other fields cannot invalidatelegislation. Equally futile is the argument that the Parliament did notamend Section 5(c) of the BR Act, 1949; in fact, the Parliament did sounder Section 56(a) concerning its application to co-operative banks. Alarge number of provisions added in Chapter V by way of amendingSection 56 cannot be ignored and set at naught. The extensive

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Aamendments made in Part V of the BR Act, 1949, have to be given fulleffect. In case co-operative banks are kept outside the purview of theBR Act, 1949, and other legislation under Entry 45 and RBI Act, nolicence can be granted, and they cannot do banking as that is notpermissible without compliance of various provisions as provided in theBR Act, 1949. They would have to close down and stop the businessBforthwith.

84. The co-operative banks, which are governed by the BR Act,1949, are involved in banking activities within the meaning of Section5(b) thereof. They accept money from the public, repayable on demandor otherwise and withdrawal by cheque, draft, order or otherwise. MerelyCby the fact that lending of money is limited to members, they cannot besaid to be out of the purview of banking. They perform commercialfunctions. A society shall receive deposits and loans from members andother persons. They give loans also, and it is their primary function.Thus, they are covered under ‘banking’ in Entry 45 of List I.

DIN REFERENCE QUESTION NOS. 3(a) AND 3(b)

DIN REFERENCE QUESTION NOS. 3(a) AND 3(b)

85. Learned Counsel appearing on behalf of appellants arguedthat securitisation is not a banking business. The SARFAESI Act is toregulate securitisation and reconstruction of financial assets. Emphasiswas laid on the financial assets and financial assistance. The definitionEof ‘debt’ in Section 2(1)(ha) of the SARFAESI Act is the same as definedin Section 2(g) of the RDB Act, 1993, the ‘debt’ is defined as any liabilitywhich is claimed as due during any business activity undertaken by thebank or the financial institution. In our opinion, the submission ignoresand overlooks the purpose of the SARFAESI Act, i.e., enforcement ofFsecurity interest, and that is precisely sought to be achieved bySection 13 without the intervention of the court. Since the activity of aco-operative bank is banking regulated by the law enacted within therelatable Entry 45 of List I, we find no reason as to why the Parliamentlacked the competence to enact the SARFAESI Act and to provide aprocedure for the speedy recovery of dues. The SARFAESI Act alsoGcovers the activities undertaken by the co-operative banks. The co-operative banks are doing banking business under Section 5(b) of theBR Act, 1949, and the exclusion of the co-operative societies from Entry43 of List I, does not have any bearing regarding the interpretation ofEntry 45 of List I.

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86. Even assuming for the time being that definition of ‘bank’ inSection 5(c) of the BR Act, 1949 did not cover the co-operative banks;the expression ‘bank’ has been defined in the SARFAESI Act underSection 2(1)(c), and the provisions contained in Section 2(1)(c)(v)authorises the Central Government to specify ‘such other bank’ for thatAct. Thus, the notification issued on 28.1.2003 notifying ‘co-operativebank’ as the ‘bank’ is covered by Entry 45 of List I as they are regulatedby the BR Act, 1949, and the RBI Act. For the ‘banking’ activity underEntry 45 of List I, the Parliament had the power to enact such a provisiondefining ‘bank’ to authorise and prescribe the recovery procedure forsuch a bank as provided in Section 13 of the SARFAESI Act; However,we are of the view that co-operative societies/banks stand included byincorporation in Section 5(1)(c) of the BR Act and the notification wasissued ex abundanti cautela. By virtue of Section 56(a), co-operativebanks, as defined in Section 56(cci) of the BR Act, 1949, are included inSection 5(1)(c). Similarly, multi-State co-operative banks were alsocovered.

87. The earlier procedure for recovery of dues was differentlyprovided for general banks and the co-operative banks through the CivilCourt or Tribunal. In the SARFAESI Act, a procedure has been prescribedunder Section 13 without the intervention of the court/tribunal to keeppace with the time. Thus, the malady of inordinate delay with which theorder of civil court suffered as well as of the co-operative tribunals orsummary procedure under the Co-operative Societies Act, was soughtto be redressed. Apart from that, it is permissible for the Parliament toenact the law to provide recovery procedures for bank dues that havebeen done by providing speedy recovery of secured interest withoutintervention of the court/tribunal.

88. In Soma Suresh Kumar v. Government of Andhra Pradeshand Ors.[56], it was observed that there were several occasions whenthe laws enacted by the State as well as by the banking regulation carvedout by Central Government acted in their field. This Court consideredthe Andhra Pradesh Protection of Depositors of Financial EstablishmentsAct, 1999, and the effects of the BR Act, 1949. It was held that ambit ofrespective Acts and field covered is required to be considered and itwas permissible for the State legislature also to enact the provisionsnotwithstanding the BR Act, 1949 with respect to the matters which A

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Awere not covered by the said Act to protect the interest of the investors.It was held that Andhra Pradesh Protection of Depositors of FinancialEstablishments Act, 1999, did not create any repugnancy to any Centrallaw. It was observed:

“6. Further, it is also pointed out that the Banking RegulationsBAct, enacted by the Central Government, to regulate the operationof banking companies or organisations, enables RBI to give licenceto banking companies to carry out the functions of the Bank. Itwas pointed out that it covered different areas which are notcommon to the area covered by the Andhra Act. Further, it waspointed out that both the Acts have applicability to different aspectsCof refund to the depositors. The Banking Regulations Act, it ispointed out, was enacted to regulate the functioning of the bankingcompanies, including Vasavi Cooperative Urban Bank Ltd. andthat the petitioners have approached this Court challenging thevalidity of the Act so as to wriggle out of the clutches of law.”D

89. In K.K. Baskaran v. State Represented by its Secretary,Tamil Nadu, and Ors.[57], the question arose concerning T.N. Protectionof Interests of Depositors (in Financial establishments) Act, 1997. Thesaid Act provided for a remedy to evils caused by fraudulent activities offinancial establishments for which no redressal mechanism was providedEin Central enactments. It was held that T.N. Protection of Interests ofDepositors (in Financial establishments) Act, 1997, did not entrench thefield occupied by Section 58-A of Companies Act, 1956 as the object ofthe 1997 Act was completely different. The Doctrine of Pith andSubstance and its effect on the overlapping of fields occupied by Centraland State Lists was considered. The relevant discussion is extractedFhereunder:

“18. It often happens that a legislation overlaps both List I as wellas List II of the Seventh Schedule. In such circumstances, thedoctrine of pith and substance is applied. We are of the opinionthat in pith and substance the impugned State Act is referable toGEntries 1, 30 and 31 of List II of the Seventh Schedule and notEntries 43, 44 and 45 of List I of the Seventh Schedule.

19. It is well settled that incidental trenching in exercise of ancillarypowers into a forbidden legislative territory is permissible vide the H57 (2011) 3 SCC 793

Constitution Bench decision of this Court in State of W.B. v.Kesoram Industries Ltd., (2004) 10 SCC 201 [vide SCC paras31(4), (5) & (6) and 129(5)]. Sharp and distinct lines of demarcationare not always possible and it is often impossible to prevent acertain amount of overlapping vide ITC Ltd. v. State of Karnataka,1985 Supp SCC 476 (SCC para 17). We have to look at thelegislation as a whole and there is a presumption that the legislaturedoes not exceed its constitutional limits.

21. The doctrine of pith and substance means that an enactmentwhich substantially falls within the powers expressly conferredby the Constitution upon a legislature which enacted it cannot beheld to be invalid merely because it incidentally encroaches onmatters assigned to another legislature. The Court must considerwhat constitutes in pith and substance the true subject-matter ofthe legislation. If on such examination it is found that the legislationis in substance one on a matter assigned to the legislature then itmust be held to be valid even though it incidentally trenches onmatters beyond its legislative competence, vide Union of Indiav. Shah Goverdhan L. Kabra Teachers’ College, (2002) 8 SCC228 (SCC para 7).

22. For applying the doctrine of pith and substance regard is to behad to the enactment as a whole, its main objects and the scopeand effect of its provisions vide Special Reference No. 1 of 2001,In re, (2004) 4 SCC 489 (SCC para 15). For this purpose thelanguage of the entries in the Seventh Schedule should be giventhe widest scope of which the meaning is fairly capable, videState of W.B. v. Kesoram Industries Ltd., (2004) 10 SCC 201,[SCC para 31(4)], Union of India v. Shah Goverdhan L. KabraTeachers’ College, (2002) 8 SCC 228 (SCC para 6) and ITCLtd. v. State of Karnataka, 1985 Supp SCC 476 (SCC para 17).”

90. In M/s. Ujagar Prints and Ors. (II) v. Union of India andOrs.[58], it was laid down that entries in the State legislature should beliberally construed and the Doctrine of Pith and Substance was consideredthus:

48. Entries to the legislative lists, it must be recalled, are not sourcesof the legislative power but are merely topics or fields of legislation 58 (1989) 3 SCC 488

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and must receive a liberal construction inspired by a broad andgenerous spirit and not in a narrow pedantic sense. The expression“with respect to” in Article 246 brings in the doctrine of “Pith andSubstance” in the understanding of the exertion of the legislativepower and wherever the question of legislative competence israised the test is whether the legislation, looked at as a whole, issubstantially “with respect to” the particular topic of legislation. Ifthe legislation has a substantial and not merely a remote connectionwith the entry, the matter may well be taken to be legislation onthe topic.”

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91. In Keshavlal Khemchand and Sons Private Limited andCOrs. v. Union of India and Ors.[59], the object of the SARFAESI Actwas explained thus:

“30. The person advancing the money is generally called a creditorand the person receiving the money is generally called a borrower.The most simple form of a loan transaction is a contract by whichthe borrower agrees to repay the amount borrowed on demandby the creditor with such interest as stipulated under the agreement.Such a loan transaction may be attended by any arrangement of asecurity like a mortgage or pledge, etc. depending upon theagreement of the parties.

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31. The Act provides for a mode of speedy recovery of the moniesdue from the borrowers to one class of creditors who are banksand financial institutions (creditors). Advances/Loans made bycreditors to businessmen and industrialists are generally notrepayable on demand but repayable in accordance with a fixedFtime schedule agreed upon by the parties known as “term loans”:

“Term loans.—A loan may be made for a specified period(a term loan). In such a case repayment is due at the end of thespecified period and, in the absence of any express provision orimplication to the contrary, no further demand for repayment isnecessary.”

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In other words, such loans are repayable in instalments over aperiod of time the terms of which are evidenced by a written H59 (2015) 4 SCC 770

agreement between the parties. A default in the repayment (interms of the agreed schedule) generally provides a cause of actionfor the creditor to initiate legal proceedings for the recovery ofthe entire amount due and outstanding from the borrower.Normally such term loans are also accompanied by some “securityinterest” in a “secured asset” of the borrower. Such a recovery isto be made normally by instituting a suit for recovery of theamounts by enforcing the “security interest”. The Recovery ofDebts Due to Banks and Financial Institutions Act, 1993 createdan exclusive forum for a speedy ascertainment of the amountsactually due from the defaulting borrower and also provided for amechanism for speedy recovery of the amounts so ascertainedfrom such borrowers.

32. Since such a system was also found to be inadequate for thespeedy recovery of the monies due from the borrowers to thecreditors, Parliament made the Act under which the process ofascertainment of the amounts due from a borrower by anindependent adjudicatory body is dispensed with. The securedcreditor is made the sole judge of the amount due and outstandingfrom a borrower subject to an appeal under Section 17 of the Act.Be that as it may, such an ascertainment of amount due andoutstanding is not the only criterion on the basis of which thesecured creditor is entitled to initiate proceedings underSection 13(4) of the Act, but the secured creditor is also requiredto classify the account of the borrower (asset of the creditor) asan NPA. Dehors the Act, when the borrower of a term loandefaults in the repayment, the creditor can initiate legal proceedingstraightaway for recovery of the amounts due and outstandingfrom the borrower. The Act places an additional legal obligationon the creditor to examine and decide whether the account of theborrower has become an NPA before initiating action under theAct.”

92. The Bombay High Court in The Majoor Sahakari BankLtd. (supra) considered the question whether co-operative societycarrying on the banking business, considering its activity, could be termedas industry to which Bombay Industrial Disputes Act would apply. Thoughco-operative society was doing the business of banking, it was submittedthat nonetheless, it was a co-operative society to which the provisions of A

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Athe Bombay Industrial Disputes Act could not apply. Considering theactivity and definition of the ‘company’ as defined in Halsbury’s Lawsof England as an association of a number of individuals formed with acommon purpose. The High Court opined that in the wide and properlegal sense, the petitioners were a company although they may chooseto call themselves a society or even if Co-Operative Societies Act requiresBthat they should call themselves a society. However, in the eye of thelaw, they are a company when they were doing the business of banking.Though registered as a co-operative society, the provisions of industriallaw were held to be applicable. The High Court also observed that therewas no special charm or magic in a company registered under theCCompanies Act or the Co-operative Societies Act as far as the result ofregistration is concerned. The High Court observed:

“(4) Now turning to the language of the notification what is urgedby Mr. Parpia is that the notification only contemplates the IndianCompanies Act and Acts similar to that Act. In our opinion, thereDis no reason why such a limited interpretation should be put uponthe general words used in the notification. If the intention of theState Government was, that the notification should only apply tothe companies registered under the Indian Companies Act or Actscorresponding to Indian Companies Act nothing was easier thanfor the Government to have stated so. If the intention was toEexclude the banking companies registered under the Co-operativeSocieties Act that also could have been set out in the notificationitself. Neither counsel has been able to draw our attention to anyIndian Legislation under which an association doing bankingbusiness can be registered other than the Indian Companies ActFand the Co-operative Societies Act. Therefore, nothing was simpleror easier than for the State Government to have stated “doingbusiness of Banking Companies registered under enactments otherthan the Co-operative Societies Act”. When a Court is calledupon to interpret a notification which is capable of more than onemeaning it is not amiss to consider the reason and principleGunderlying the notification. There is no reason or principle why aco-operative society doing banking business should be put on adifferent footing with regard to industrial law from other companiesdoing identical business. There is no reason why a co-operativebanking society should treat its employees otherwise than as laidHdown under the industrial law. If we were satisfied that there was H

some reason or principle which would lead us to put upon thisnotification the interpretation which Mr. Parpia suggests we mighthave put such an interpretation on the notification, but all theconsiderations are in favour of the interpretation suggested byMr. Rane. There is nothing in the notification which prevents usfrom giving the interpretation which we have ultimately decidedto give to this notification. Therefore, we are of the opinion thatthe petitioners are doing business of Banking and are registeredunder an enactment relating to companies, which is theCo-operative Societies Act. The learned Judge was right in takingthe view that he had jurisdiction to deal with the matter. The petitionfails and is dismissed with costs.”

93. In Jayant Verma and Ors. v. Union of India and Ors.[60], thequestion arose concerning the applicability of Section 21A of the B.R.Act, 1949. In that context, the provisions of the B.R. Act, 1949, wereconsidered and it was held that enactment to be relatable to Entry 45 ofList I and has to be given a wide meaning. It was observed:

“16. There can be no doubt that the Banking RegulationAct dealswith the subject “banking” insofar as it licenses banking companies,as defined, and cooperative banks, and seeks to regulate them.Section 21-A, though by way of amendment, is undoubtedly anintegral part of the aforesaid Act relating to the interdict on thereopening of loan transactions between a banking company andits debtor, on the ground that the rate of interest charged isexcessive. There can be no doubt that a law relating toindebtedness of a debtor to a banking company and the interdictagainst a court reopening any such transaction, on the ground thatinterest charged by the banking company is excessive, would relateto the business of banking. We must not forget that the entries inthe Lists to the Seventh Schedule have to be read in the widestpossible manner, and we have seen from the judgments quoted byus above that the expression “banking” contained in List I Entry45 is to be given a wide meaning. There can be no doubt that thestatute as a whole and the aforesaid section does fall within List IEntry 45.”

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94. In Federation of Hotel & Restaurant Association of India,etc. v. Union of India and Ors.[61], the question of overlapping of thelaw was considered with respect to a subject which might incidentallyaffect another subject in some way or the other and held that that is notthe same thing as the law being on the latter subject. The same transactionmay involve two or more taxable events in its different aspects.

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95. In Apex Cooperative Bank of Urban Bank of Maharashtra& Goa Ltd. (supra) the question arose concerning licensing ofco-operative societies by the Reserve Bank of India to carry on bankingbusiness under the provisions of the BR Act, 1949. It was held thatco-operative banks, which are not State co-operative banks or CentralCco-operative banks or primary co-operative banks as defined in Section56(cci) of B.R. Act, 1949, were not eligible for licensing. The grant oflicence by Reserve Bank of India to co-operative banks, which werenot registered under the Multi-State Co-operative Societies Act, 1984,was not justified. The powers of Reserve Bank of India under theDMulti-State Co-operative Societies Act were exercisable only for co-operative banks, not to any other co-operative societies not doing businessof banking. It was opined:

“25. Another aspect which must be noticed is that in theConstitution of India, the subject pertaining to co-operative societiesis in the State List i.e. Entry 32 of List II of Schedule VII. TheUnion List has Entry 44 of List I of Schedule VII which dealswith corporations. In this case we are not concerned with thevalidity of a Central legislation and thus do not deal with that aspect.For purpose of the judgment we will take it that a co-operativesociety with objects not confined to one State would fall withinthe term corporation, and thus a Central legislation may be saved.However, from the constitutional provisions it is clear that matterspertaining to co-operative societies are in the State List. Thusmany States have enacted laws relating to co-operative societies.We have not seen other Acts. However, as this case concerns asociety in Maharashtra, the Maharashtra Cooperative SocietiesAct was shown to us. Significantly, this law does not define aco-operative society. It did not need to, as a society registeredunder it would be automatically covered. The need to define aco-operative society arises only in a Central legislation which does E

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not cover all co-operative societies and thus needs to indicate towhich society it applies.”

96. In Bharat Coop. Bank (Mumbai) Ltd. v. Coop. BankEmployees Union[62], the question arose concerning the Industrial DisputesAct, 1947 and the B.R. Act, 1949. There was a reference inSection 2(bb) of Industrial Disputes Act, 1947, to the definition of ‘bankingcompany’ as defined in Section 5 of the B.R. Act, 1949. It was held thatsame was instance of legislation by incorporation and not legislation byreference. It was further opined that amendment to BR Act, 1949 afterSection 5 was incorporated in Section 2(bb), would not have any effecton the expression ‘banking company’. This Court further held that theI.D. Act was a complete and self-contained code in itself, and its workingwas not dependent on the BR Act, 1949.

97. In Reserve Bank of India v. M. Hanumaiah and Ors.[63], thequestion arose of supersession of the Committee of the management ofCo-operative Bank. There was a written requisition from the ReserveBank of India to the Registrar, Co-operative Societies, to supersede themanagement under Section 30(5) of the Karnataka Co-operativeSocieties Act, 1959. It was held that principles of natural justice werenot applicable, and the Committee of the management had no right ofhearing. Thus, there are various instances where the Central legislationhas controlled co-operative societies’ aspects relating to banking.

98. In State of Gujarat and Anr. v. Shri Ambica Mills Ltd.,Ahmedabad, and Anr.[64], the definition clause in a provision when it isunder inclusion and over-inclusive was considered, thus:

“54. A reasonable classification is one which includes all who aresimilarly situated and none who are not. The question then is:what does the phrase “similarly situated” mean? The answer tothe question is that we must look beyond the classification to thepurpose of the law. A reasonable classification is one whichincludes all persons who are similarly situated with respect to thepurpose of the law. The purpose of a law may be either theelimination of a public mischief or the achievement of some positivepublic good.

62 (2007) 4 SCC 685

63 (2008) 1 SCC 770

64 (1974) 4 SCC 656

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A55. A classification is under-inclusive when all who are includedin the class are tainted with the mischief but there are others alsotainted whom the classification does not include. In other words,a classification is bad as under-inclusive when a State benefits orburdens persons in a manner that furthers a legitimate purposebut does not confer the same benefit or place the same burden onBothers who are similarly situated. A classification is over-inclusivewhen it includes not only those who are similarly situated withrespect to the purpose but others who are not so situated as well.In other words, this type of classification imposes a burden upona wider range of individuals than are included in the class of thoseCattended with mischief at which the law aims. Herod ordering thedeath of all male children born on a particular day because one ofthem would some day bring about his downfall employed such aclassification.”

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99. In Girnar Traders (3) v. State of Maharashtra and Ors.[65],Dthe question of incorporation by reference and Doctrine of Pith andSubstance were considered thus:

“87. However, since this aspect was argued by the learned counselappearing for the parties at great length, we will proceed to discussthe merit or otherwise of this contention without prejudice to theEabove findings and as an alternative plea. These principles havebeen applied by the courts for a considerable period now. Whenthere is general reference in the Act in question to some earlierAct but there is no specific mention of the provisions of the formerAct, then it is clearly considered as legislation by reference. Inthe case of legislation by reference, the amending laws of theFformer Act would normally become applicable to the later Act;but, when the provisions of an Act are specifically referred andincorporated in the later statute, then those provisions alone areapplicable and the amending provisions of the former Act wouldnot become part of the later Act. This principle is generally calledGlegislation by incorporation. General reference, ordinarily, will implyexclusion of specific reference and this is precisely the fine lineof distinction between these two doctrines. Both are referentiallegislations, one merely by way of reference and the other byincorporation. It, normally, will depend on the language used in the later law and other relevant considerations. While the principleof legislation by incorporation has well-defined exceptions, thelaw enunciated as of now provides for no exceptions to the principleof legislation by reference. Furthermore, despite strict applicationof doctrine of incorporation, it may still not operate in certainlegislations and such legislation may fall within one of the statedexceptions.

88. In this regard, the judgment of this Court in M.V. Narasimhan,(1975) 2 SCC 377, can be usefully noticed where the Court afteranalysing various judgments, summed up the exceptions to thisrule as follows: (SCC p. 385, para 15)

“(a) where the subsequent Act and the previous Act aresupplemental to each other; (b) where the two Acts are in pari materia;

(c) where the amendment in the previous Act, if not importedinto the subsequent Act also, would render the subsequent Actwholly unworkable and ineffectual; and (d) where the amendment of the previous Act, either expresslyor by necessary intendment, applies the said provisions to thesubsequent Act.”

148. Having perused and analysed the various judgments cited atthe Bar we are of the considered view that this rule is bound tohave exceptions and it cannot be stated as an absolute propositionof law that wherever legislation by reference exists, subsequentamendments to the earlier law shall stand implanted into the laterlaw without analysing the impact of such incorporation on theobject and effectuality of the later law. The later law being theprincipal law, its object, legislative intent and effectiveimplementation shall always be of paramount consideration whiledetermining the compatibility of the amended prior law with thelater law as on relevant date.

173. The doctrine of pith and substance can be applied to examinethe validity or otherwise of a legislation for want of legislativecompetence as well as where two legislations are embodiedtogether for achieving the purpose of the principal Act. Keepingin view that we are construing a federal Constitution, distribution A

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of legislative powers between the Centre and the State is of greatsignificance. Serious attempt was made to convince the Courtthat the doctrine of pith and substance has a very restrictedapplication and it applies only to the cases where the court iscalled upon to examine the enactment to be ultra vires on accountof legislative incompetence.

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174. We are unable to persuade ourselves to accept thisproposition. The doctrine of pith and substance finds its originfrom the principle that it is necessary to examine the true natureand character of the legislation to know whether it falls in aforbidden sphere. This doctrine was first applied in India inPrafulla Kumar Mukherjee v. Bank of Commerce Ltd.,(1946-47) 74 IA 23 : AIR 1947 PC 60. The principle has beenapplied to the cases of alleged repugnancy and we see no reasonwhy its application cannot be extended even to the cases of presentkind which ultimately relates to statutory interpretation foundedon source of legislation.”

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100. We find that ‘banking’ relating to co-operatives can beincluded within the purview of Entry 45 of List I, and it cannot be said tobe over inclusion to cover provisions of recovery by co-operative banksin the SARFAESI Act. It cannot be said to be over-inclusion on the anvilEof the principles laid down by this Court.

101. Learned Counsel on behalf of appellants argued thatnotification dated 28.1.2003 is ultra vires and beyond the purview of theparent statute, i.e., the SARFAESI Act.The amendment is colourablelegislation, and it encroaches upon a field outside its scope and is also anFindirect method of achieving the result of bringing ‘co-operative banks’within the purview of the SARFAESI Act and RDB Act, 1993 and is anattempt to regulate entities expressly excluded by Entry 43 of List I.Reliance has been placed on K.C. Gajapati Narayan Deo (supra), inwhich it was held:

“(9) It may be made clear at the outset that the doctrine ofcolourable legislation does not involve any question of ‘bona fides’or ‘mala fides’ on the part of the legislature. The whole doctrineresolves itself into the question of competency of a particularlegislature to enact a particular law. If the legislature is competentto pass a particular law, the motives which impelled it to act are G

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really irrelevant. On the other hand, if the legislature lackscompetency, the question of motive does not arise at all. Whethera statute is constitutional or not is thus always a question of powerVide Cooley’s Constitutional Limitations, Vol. 1, p.379. A distinction,however, exists between a legislature which is legally omnipotentlike the British Parliament and the laws promulgated by whichcould not be challenged on the ground of incompetence, and alegislature which enjoys only a limited or a qualified jurisdiction.

If the Constitution of a State distributes the legislativepowers amongst different bodies, which have to act within theirrespective spheres marked out by specific legislative entries, or ifthere are limitations on the legislative authority in the shape offundamental rights, questions do arise as to whether the legislaturein a particular case has or has not, in respect to the subject-matterof the statute or in the method of enacting it, transgressed thelimits of its constitutional powers. Such transgression may be patent,manifest or direct, but it may also be disguised, covert and indirectand it is to this latter class of cases that the expression “colourablelegislation” has been applied in certain judicial pronouncements.The idea conveyed by the expression is that although apparentlya legislature in passing a statute purported to act within the limitsof its powers, yet in substance and in reality it transgressed thesepowers, the transgression being veiled by what appears, on properexamination, to be a mere pretence or disguise. As was said byDuff, J. in — ‘Attorney-General for Ontario v. ReciprocalInsurers’, 1924 A C 328 at p. 337 (B):

“Where the law making authority is of a limited or qualifiedcharacter it may be necessary to examine with some strictnessthe substance of the legislation for the purpose of determiningwhat is that the legislature is really doing.”

In other words, it is the substance of the Act that ismaterial and not merely the form or outward appearance, andif the subject-matter in substance is something which is beyondthe powers of that legislature to legislate upon, the form inwhich the law is clothed would not save it from condemnation.The legislature cannot violate the constitutional prohibitions byemploying an indirect method. In cases like these, the enquirymust always be as to the true nature and character of the

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Achallenged legislation and it is the result of such investigationand not the form alone that will determine as to whether or notit relates to a subject which is within the power of the legislativeauthority — ‘Vide 1924 A C 328 p. 337 (B)’. For the purposeof this investigation the court could certainly examine the effectof the legislation and take into consideration its object, purposeBor design — ‘Vide Attorney-General for Alberta v. Attorney-General for Canada’, 1939 A C 117 at p. 130 (C). But theseare only relevant for the purpose of ascertaining the truecharacter and substance of the enactment and the class ofsubjects of legislation to which it really belongs and not forCfinding out the motives which induced the legislature to exerciseits powers.

It is said by Lefroy in his well-known work on CanadianConstitution that even if the legislature avow on the face of anAct that it intends thereby to legislate in reference to a subjectDover which it has no jurisdiction, yet if the enacting clauses ofthe Act bring the legislation within its powers, the Act cannotbe considered ‘ultra vires’ See Lefroy on Canadian Constitutionpage 75.”

(emphasis supplied)

EBy applying the aforesaid principle, the provision in question/notification cannot be said to be colourable legislation.

102. In State of Tamil Nadu and Ors. v. K. Shyam Sunder andOrs.[66], the concept of colourable legislation was considered and it wasobserved that the doctrine of malafides does not involve any question ofFbonafide or malafide on the part of the legislature, and the Court isconcerned with a limited issue of competence of the particular legislatureto enact a particular law. The motive of the legislature while enacting alaw is inconsequential. It was observed:

“37. It has consistently been held by this Court that the doctrineGof mala fides does not involve any question of bona fide or malafide on the part of legislature as in such a case, the Court isconcerned to a limited issue of competence of the particularlegislature to enact a particular law. If the legislature is competentto pass a particular enactment, the motives which impelled it to an H66 (2011) 8 SCC 737

act are really irrelevant. On the other hand, if the legislature lackscompetence, the question of motive does not arrive at all. Therefore,whether a statute is constitutional or not is, thus, always a questionof power of the legislature to enact that statute. Motive of thelegislature while enacting a statute is inconsequential: “Malice ormotive is beside the point, and it is not permissible to suggestparliamentary incompetence on the score of mala fides.” Thelegislature, as a body, cannot be accused of having passed a lawfor an extraneous purpose. This kind of “transferred malice” isunknown in the field of legislation. (See K.C. Gajapati NarayanDeo v. State of Orissa, AIR 1953 SC 375, STO v. Ajit MillsLtd., (1977) 4 SCC 98, SCC p. 108, para 16, K. Nagaraj v. Stateof A.P., (1985) 1 SCC 523, Welfare Assn., A.R.P. v. Ranjit P.Gohil, (2003) 9 SCC 358 and State of Kerala v. Peoples Unionfor Civil Liberties, (2009) 8 SCC 46).”

We find that the SARFAESI Act qualifies the test of legislativecompetence, as well as the definition, cannot be said to be colourablepiece or over-inclusive or beyond the competence of the Parliament.

103. Resultantly, we answer the reference as under:

(1) (a) The co-operative banks registered under the State legislationand multi-State level co-operative societies registered under theMSCS Act, 2002 with respect to ‘banking’ are governed by thelegislation relatable to Entry 45 of List I of the Seventh Scheduleof the Constitution of India.

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

(2) The co-operative banks involved in the activities related tobanking are covered within the meaning of ‘Banking Company’defined under Section 5(c) read with Section 56(a) of the BankingRegulation Act, 1949,which is a legislation relatable to Entry 45 ofList I. It governs the aspect of ‘banking’ of co-operative banksrun by the co-operative societies. The co-operative banks cannot

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Acarry on any activity without compliance of the provisions of theBanking Regulation Act, 1949 and any other legislation applicableto such banks relatable to ‘Banking’ in Entry 45 of List I and theRBI Act relatable to Entry 38 of List I of the Seventh Schedule ofthe Constitution of India.

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

(3) (b) The Parliament has legislative competence under Entry 45of List I of the Seventh Schedule of the Constitution of India to provideadditional procedures for recovery under section 13 of the Securitisationand Reconstruction of Financial Assets and Enforcement of SecurityDInterest Act, 2002 with respect to co-operative banks. The provisions ofSection 2(1)(c)(iva), of Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act, 2002, adding “exabundanti cautela”,‘a multi-State co-operative bank’ is not ultra viresas well as the notification dated 28.1.2003 issued with respect to theEco-operative banks registered under the State legislation.

The civil appeals, writ petitions and the pending applications, ifany, are disposed of accordingly. No costs.

FDivya Pandey

Reference answered.

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