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Case Name : U.A. Lathif MLA Vs State of Kerala (Kerala High Court)
Appeal Number : WP(C) No. 28650 of 2021
Date of Judgement/Order : 27/10/2023
Related Assessment Year :

U.A. Lathif MLA Vs State of Kerala (Kerala High Court)

Kerala High Court held that the provisions i.e. Sections 14A & 74H of the Kerala Co-operative Societies Act, 1969 not relating to any aspect of banking are within the legislative competence of the State Legislature.

Facts- The present writ petition has been filed by the former President and Vice President of the erstwhile Malappuram District Co-operative Bank and other 93 individuals stated to be Presidents of Primary Agricultural Credit Societies and Urban Cooperative Banks which were members of the Malappuram District Co-operative Bank. They challenge the constitutional validity of Section 14A of the Kerala Co-operative Societies Act, 1969 as also the provisions of Section 74H of the 1969 Act as amended by the Kerala Co-operative Societies (Amendment) Act, 2021.

Consequently, there is also a challenge to the order passed by the Registrar of Co-operative Societies in terms of the provisions contained in Section 74H of the 1969 Act amalgamating the Malappuram District Co-operative Bank with the Kerala State Co-operative Bank.

Conclusion- Held that when Co-operative Societies are engaged in the business of banking, they should be subjected to the control of the Reserve Bank of India under the Banking Regulation Act, 1949. As already noticed, the amended provisions of Section 3 of the Banking Regulation Act, 1949, 1949 read with the provisions of Section 56 of the said Act, make it clear that most of the provisions of the Banking Regulation Act, 1949 will apply to Co-operative Banks subject to the modifications specified in Section 56.

The provisions in Part IIA and other enabling provisions of the Banking Regulation Act, 1949 providing for control over management and all other powers of the Banking Regulation Act, 1949 permitting the Reserve Bank to intervene the affairs of a banking company would extend to Co-operative Banks and this was a sufficient safeguard to ensure that Co-operative Banks engaged in banking activity are subject to the overall control of the Reserve Bank of India.

Held that the impugned provisions, namely Sections 14A & 74H of the 1969 Act, do not relate to any aspect of banking, and, therefore, the impugned provisions are within the legislative competence of the State Legislature. Thus, a declaration that Sections 14A and 74-H of the Kerala Co-operative Societies Act, 1969, are unconstitutional and beyond the legislative competence of the State Legislature cannot be granted. These writ petitions fail, and they are accordingly dismissed.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

W.P.(C) N0s.28650/2021, 173/2023 and 4215/2023 have been filed by the former President and Vice President of the erstwhile Malappuram District Co-operative Bank while W.P.(C)No.12/2023 has been filed by 93 individuals stated to be Presidents of Primary Agricultural Credit Societies and Urban Co­operative Banks which were members of the Malappuram District Co­operative Bank. They challenge the constitutional validity of Section 14A of the Kerala Co-operative Societies Act, 1969 (hereinafter referred to as the 1969 Act), which was incorporated by the Kerala Co-operative Societies Amendment Act, 2019 (Act 1 of 2019) as also the provisions of Section 74H of the 1969 Act as amended by the Kerala Co-operative Societies (Amendment) Act, 2021. Consequently, there is also a challenge to the order passed by the Registrar of Co-operative Societies in terms of the provisions contained in Section 74H of the 1969 Act amalgamating the Malappuram District Co­operative Bank with the Kerala State Co-operative Bank. The grounds taken and the reliefs sought in all these writ petitions are almost identical, and they can be conveniently disposed of by common judgment. It is submitted at the Bar that W.P.(C)No.4215/2023 can be taken as the lead case. The exhibits referred to in this judgment are as they are marked in W.P.(C)No.4215/2023 unless indicated otherwise.

2. The petitioners contend that the impugned provisions are unconstitutional and beyond the legislative competence of the State Legislature. It is submitted that the provisions of the Banking Regulation Act, 1949, which apply in entirety to Co-operative Banks, after the amendment of the Banking Regulation Act, 1949, with effect from 26.6.2020, have brought Co-operative Banks under the umbrella of the Reserve Bank of India and the provisions of the Banking Regulation Act, 1949. Therefore, it is submitted that any provision providing for the amalgamation of a Co-operative Bank with another Co-operative Bank should be in tune with the provisions for amalgamation of banking companies under the provisions of the Banking Regulation Act, 1949. In other words, it is the case of the petitioners that ‘banking’ is exclusively a subject in List-1 of the Seventh Schedule of the Constitution of India, and therefore, the State Legislature was denuded of the power to make any provision for amalgamation of a Co-operative Bank with another Co-operative Bank by providing for a procedure distinct from the procedure contemplated by the Banking Regulation Act, 1949.

3. George Poonthottam, the learned senior counsel appearing for the petitioners in all these cases on the instructions of Smt.Nisha George would, with reference to the provisions of the 1969 Act and the Kerala Co­operative Societies Rules, 1969 (hereinafter referred to as the 1969 Rules), submit that the provision for merger/amalgamation of a Co-operative Society registered under the provisions of the 1969 Act was provided for under Section 14 of the 1969 Act and Rule 13 of the 1969 Rules. It is submitted that to overcome the procedure contemplated by Section 14 of the 1969 Act and Rule 13 of the 1969 Rules, the 1969 Act was amended in 2019 by incorporating Section 14A, which provided for a procedure distinct from the procedure contemplated by Section 14 in as much as Section 14A only required a simple majority of the concerned District Co-operative Bank which would take forward its process of amalgamation with the Kerala State Co­operative Bank. It is pointed out that the provisions of Section 14 contemplated a two-thirds majority. It is submitted that in the case of the Malappuram District Co-operative Bank, two general body meetings were held after the incorporation of Section 14A of the 1969 Act, as above. However, the proposal for amalgamation was defeated by a two-thirds majority, and therefore, even a simple majority contemplated by the provisions of Section 14A could not be achieved. It is submitted that Chapter XC was also incorporated in the 1969 Act by the very same amendment Act, and Section 74H (which is the only provision in Chapter XC) provided for a different procedure for the merger of District Co-operative Banks with the Kerala State Co-operative Bank. It is submitted that Section 74H, as originally incorporated, contemplated that the merger of a District Co­operative Bank with the Kerala State Co-operative Bank will take place after resolution is passed as provided for in Section 14A. It is submitted that the Malappuram District Co-operative Bank is covered under the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (hereinafter referred to as the DICGC Act) and thus guaranteed to its depositors protection as contemplated by the provisions of the said Act in respect of deposits maintained by customers. It is submitted that the DICGC Act contains a specific provision that protection under the provisions of the Act will extend to a bank only if the incorporating law includes a provision where the merger/amalgamation of a bank to which such protection is extended will be made only with the sanction in writing of the Reserve Bank of India. It is submitted that to extend the benefit of the provisions of the DICGC Act to Co-operative Banks incorporated under the 1969 Act, Section 74A was incorporated in the 1969 Act with effect from 13.3.1974 making it clear that notwithstanding any other provision contained in the 1969 Act, an order for merger/amalgamation, winding up or re-construction or order sanctioning scheme of compromise or arrangement of an insured Co­operative Bank shall be made only with the previous sanction in writing of the Reserve Bank of India. It is submitted that, after the incorporation of Section 74H, the provisions of Section 74A have been given go bye and sub-section 18 of Section 74H provides that in the case of the merger of District Co-operative Banks with the Kerala State Co-operative Bank, the provisions of Section 74H will apply as the said provision will have overriding effect on all other provisions of the 1969 Act. It is submitted that 13 District Co-operative Banks passed resolutions while under administratorship for the merger of the District Co-operative Banks with the Kerala State Co-operative Bank, and following this, all other District Co-operative Banks except the Malappuram District Co-operative Bank were merged with the Kerala State Co-operative Bank. It is submitted that since a resolution as contemplated by Section 14A of the 1969 Act could not be passed in respect of the Malappuram District Co­operative Bank, Section 74H was again amended by the Kerala Co-operative Societies (Amendment) Act, 2021 by incorporating the following provisions in Section 74H:-

9. Amendment of section 74H.—In section 74H of the principal Act.—

(i) in sub-section (1) the following clauses shall be added at the end, namely:—

“(a) if the general body of a District Co-operative Bank has not passed the resolution under section 14A, the Registrar may, after consulting Reserve Bank of India, order merger of such District Co-operative Bank with Kerala State Co-operative Bank, on public interest. No order shall be passed under this clause unless,—

(i) a copy of the proposed order of merger has been sent to the member society or member societies concerned by registered post and published the same in two vernacular dailies having wide circulation in the district in which the society situates, for their objections or suggestions;

(ii) the Registrar shall consider the objections/suggestions, if any, received from the society or societies concerned or from any member or creditor of such society or societies within such period, being not less than fifteen days from the date of posting of the proposed order of merger, as may be specified by the Registrar in this behalf;

(b) the Registrar may after considering the objections/suggestions referred to in sub-clause (ii) of clause(a), make such modifications, in the proposed order as he may deem fit and the order shall contain such incidental, consequential and supplemental provisions as the Registrar may deem necessary, to give effect to the same;

(c) a member or creditor who has objected the proposed order under clause (b) shall have the option of withdrawing his share and/or deposits or close loans, as the case may be, on application, which shall be made to the society, to which its share, deposit or outstanding loan stands allocated, within a period of thirty days from such order;

(d) on merger all other relevant provisions in this chapter shall apply mutatis mutandis to the entities merged under clause (a).”.

(ii) after sub-section (1) following sub-section shall be added, namely:—

“(1A) On and from the date of the passing of the order of merger by the Registrar under sub-section (1)(a), all the assets and liabilities of the District Co-operative Bank as it stood immediately before the order of merger shall, without any further act, instrument or deed, stand transferred to and vested in the Kerala State Co-operative Bank.”.

It is submitted that, thereafter, Ext.P2 proceedings were issued by the Registrar of Co-operative Societies by inviting objections, if any, to the proposed merger of the Malappuram District Co-operative Bank with the Kerala State Co-operative Bank and without paying any heed to the provisions of the Banking Regulation Act, 1949 and completely overlooking the provisions of the DICGC Act, 1961 and the provisions of Section 74A of the 1969 Act, Ext.P6 order was issued merging the Malappuram District Co­operative Bank with Kerala State Co-operative Bank. The learned counsel referred to the provisions of the Banking Regulation Act, 1949, Entries 43 & 45 of List-I and Entry 32 of List-II of the Seventh Schedule of the Constitution of India to contend that Sections 14A and 74H are clearly unconstitutional and beyond the legislative competence of the State Legislature. The learned counsel placed significant emphasis on the judgment of the Constitution of Bench of the Supreme Court in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited, (2020) 9 SCC 215 in support of his contention that even though the power to make law regulating the incorporation, regulation and winding up of Co­operative Societies is with the State Legislature, in terms of Entry 32 of List-II of the Seventh Schedule of the Constitution of India, when such Co­operative Society engages in banking activity, any order regarding its winding up, amalgamation, reconstruction (including division or re-organization) or an order sanctioning a scheme of compromise or arrangement of such bank can be made only with the permission in writing of the Reserve Bank of India and following the provisions of the Banking Regulation Act, 1949. It is submitted that a Co-operative bank would squarely be subject to the law made by Parliament (Section 44A of the Banking Regulation Act, 1949) regulating the mode of amalgamation (including division or re-organization) in view of the provisions of Section 3 of that Act, as amended w.e.f 26.6.2020.

4. Sri. K. Gopalakrishna Kurup, the learned Advocate General and Sri. P.P. Thajudeen, the learned Special Government Pleader for the Co­operative Department, appear for the State of Kerala. Adv. P.C. Sasidharan appears for the Kerala State Co-operative Bank. The learned Advocate General commenced arguments by referring to the provisions of Section 74A of the 1969 Act. He submits that Section 74A applies to insured Co-operative banks. He submits that the term ‘insured Co-operative Banks’ means a bank insured under the DICGC Act. He submits that for insurance protection under the DICGC Act; it is a condition in the DICGC Act that the amalgamation of an insured bank with any other bank or entity can be made only with the sanction in writing of the Reserve Bank of India. He refers to the provisions of the DICGC Act to contend that the only possible consequence of not obtaining the permission of the Reserve Bank of India would be that the bank may lose the status of an insured Co-operative Bank. It is submitted that this is no ground to contend that any provision of the 1969 Act providing for the amalgamation of a District Co-operative Bank with the Kerala State Co-operative Bank without the sanction in writing of the Reserve Bank of India would be unconstitutional. The learned Advocate General would contend that the petitioners have no locus standi to file these writ petitions as they have no case that they have filed these Writ Petitions representing the member Societies of the erstwhile Malappuram District Co­operative Bank and no authorisation has been produced. It is submitted that the contention raised on behalf of the petitioners that after the amendment of the Banking Regulation Act, 1949, the amalgamation of a Co-operative Society constituted under the 1969 Act and engaged in the activity of banking can be made only with reference to the provisions contained in the Banking Regulation Act, 1949 cannot be sustained. He refers to Entry 43 of List-I of the Seventh Schedule of the Constitution of India to state that the said Entry relates to trading corporations, including banking, insurance and financial corporations, but excludes Co-operative Societies. He submits that though banking is exclusively a List -1 subject under Entry 45 of List-I, the power to make law regarding incorporation, regulation and winding up of Co­operative Societies would be within the competence of the State Legislature under Entry 32 of List-II. The learned Advocate General referred to the decision of the Supreme Court in Jilubhai Nanbhai Khachar and others v. State of Gujarat and another, 1995 Supp (1) SCC 596 to contend that Entries in the Seventh Schedule are not powers but fields of legislation. It is submitted that the said decision is the authority for the proposition that the language of the respective entries must be given the most comprehensive scope of their meaning, and each general word should extend to all ancillary and subsidiary matters which can fairly and reasonably be comprehended in it. It is submitted that when the vires of an enactment is impugned, there is a presumption of its constitutionality, and if there is any difficulty in ascertaining the limits of legislative power, the difficulty must be resolved as far as possible in favour of the legislature putting the most liberal construction upon the legislative entry so that it may have the widest amplitude. Reference is made in this regard to paragraph 7 of the aforesaid judgment. The learned Advocate General then referred to the judgment of this Court in Abdurahiman P and others v. State of Kerla and others, 2020 (1)KHC 507, where this Court had upheld the provisions of Section 2(ia) and Section 14A and Section 74H (as it stood before the 2021 amendment) of the 1969 Act. It is submitted that from paragraph 9 of the said judgment, it is clear that this Court had already considered the validity of Section 2(ia) of the 1969 Act. It is submitted that almost all the contentions taken on behalf of the petitioners in the present case had been considered by the Court and repelled in Abdurahiman P (supra). It is submitted that the amendments now under challenge in the present writ petitions were preceded by a series of ordinances as the matter could not be placed before the Legislature due to difficulties brought about by the COVID-19 pandemic. It is submitted that the amendments were challenged at the ordinance stage by filing W.P.(C)No.33596/2019 and connected cases. It is submitted that by judgment dated 28.4.2021 in W.P.(C)No.33596/2019 and connected cases, this Court had repelled the challenge to the constitutional validity of the ordinance considering each and every contention now raised in these writ petitions. It is submitted that the judgment in W.P.(C)No.33596/2019 and connected cases were challenged before a Division Bench by filing W.A.No.708/2021 and connected appeals. It is submitted that these writ appeals were disposed of by judgment dated 22.5.2022, leaving it open to the appellants to challenge the provisions of the amending Act as the ordinance which was under challenge in W.P.(C)No.33596/2019 and connected cases had by then been replaced by the amending Act. The learned Advocate General relied on the judgment of the Supreme Court in Jayant Verma and others v. Union of India and other, (2018) 4 SCC 743 to contend for the proposition that the provisions of the Banking Regulation Act, 1949, to the extent it encroaches into the fields exclusively reserved to the State Legislature in List-II, may be inoperative. The learned Advocate General then referred to the judgment of the Supreme Court in Ram Tawakya Singh v. State of Bihar and others, (2013) 16 SCC 206 to submit that the words ‘in consultation with the Reserve Bank of India’ occurring in Section 74H of the 1961 Act, after its amendment by the amendment Act 2021, does not mean concurrence. The learned Advocate General states that in paragraph 29 of the Ram Tawakya Singh (supra), the Supreme Court has considered the concept of consultation and has held that where the law requires an authority to take a decision in the matter in consultation with another, it only means that there must be a conference of two or more minds or impact of two or more minds in respect of a topic/subject. He lays emphasis on the last line in paragraph 29 of the judgment to contend that the ultimate decision is with the consultor though he will not generally be ignoring the advice of the consultee. The learned Advocate General points out that the amendments relied on by the petitioners in the Banking Regulation Act, 1949, came into force only on 1.4.2021 while the amendments to Section 74H came into force with effect from 11.4.2020.

5. Sri. P. C. Sasidharan, the learned counsel appearing for the State Co-operative Bank, would endorse the arguments of the learned Advocate General and further contend that the provisions of Section 13C of DICGC Act, 1961 read with Section 2(gg) of the said Act would indicate that the only effect of not obtaining the sanction in writing of the Reserve Bank of India for the merger of the Malappuram District Co-operative Bank with the State Co­operative Bank would be that the Malappuram District C0-operative Bank may not be an eligible Co-operative Bank for the purposes of the DICGC Act, 1961.

6. Mrs. Sumathi Dandapani, the learned senior counsel appearing for the Reserve Bank of India, ably assisted by Adv. Vishnu Sharesh would refer to the counter affidavits filed in W.P.(C) No.4215/2023 to contend that the provisions of Section 3 of the Banking Regulation Act, 1949 read with provisions of Section 44A and the contents of Ext.R4(a) [letter dated 3.10.2018 granting in-principle approval for amalgamation of District Co­operative Banks with the State Co-operative Bank] would indicate that the process for amalgamation of the Malappuram District Co-operative Bank with the State Co-operative Bank is contrary to the provisions contained in the Banking Regulation Act, 1949. It is submitted that both the State Co-operative Bank and the Malappuram District Co-operative Bank are licensed under the Banking Regulation Act, 1949 and therefore, any order of amalgamation of the Malappuram District Co-operative Bank with the State Co-operative Bank could have only been in accordance with the provisions of the Banking Regulation Act, 1949 and the terms of the in-principle approval granted by the Reserve Bank of India. It is submitted that one of the conditions imposed by the Reserve Bank of India was clearance from the Deposit Interest Credit Guarantee Corporation. It is submitted that in respect of the merger of all other District Co-operative Banks with the State Co-operative Bank, the permission of the Deposit Interest Credit Guarantee Corporation was taken. The learned senior counsel refers extensively to Ext.R4(c) which are the terms of a circular issued by the Reserve Bank of India to all State and Central Co­operative Banks on 24.5.2021 containing guidelines for the merger of District Co-operative Banks with the State Co-operative Banks. It is submitted that the provisions of the said circular make it clear that the merger and amalgamation of a District Co-operative Bank with the State Co-operative Bank have to be sanctioned by the Reserve Bank of India in terms of the provisions contained in Section 44A read with Section 56 of the Banking Regulation Act, 1949. Reference is then made to Ext.R4(f) [letter dated 12.1.2023] produced along with the additional counter affidavit filed by the Reserve Bank of India to establish that even after the incorporation of Section 74H, the Registrar of Co-operative Societies had sought approval of the Reserve Bank of India for the merger of Malappuram District Co-operative Bank with the State Co-operative Bank. Reference is also made to Ext.R4(e) where the State Co-operative Bank had sought advice from the Reserve Bank of India regarding payment of DICGC premium. Reference is made to paragraphs 31 and 32 of the counter affidavit dated 28.5.2023 to state that the provisions of Section 44A of the Banking Regulation Act, 1949 would squarely apply to Co-operative Banks. The provisions of the DICGC Act, 1961 are referred to and it is pointed out that the provisions of the Act intend to provide protection to depositors of eligible banks and if the Malappuram District Co-operative Bank is not an eligible bank, the interest of depositors will be affected. It is submitted that in terms of Entry 43 of List-I, winding up, amalgamation etc. of banking companies is squarely within the competence of the Union Parliament and therefore, a Co-operative Society, which is a bank, can only be amalgamated in tune with the provisions contained in the Central legislation (Banking Regulation Act, 1949).

7. Having heard the learned senior counsel appearing for the petitioners, the learned Advocate General for the State, the learned senior counsel appearing for the Reserve Bank of India and the learned counsel appearing for the State Co-operative Bank, I am of the opinion that the following issues arise for determination in this case:-

i) Are the impugned provisions of the Kerala Co-operative Societies Act, 1969 liable to be struck down as being beyond the legislative competence of the State Legislature? And;

ii) What is the effect of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, on the provisions of Section 74H of the 1969 Act ? In other words, are the provisions of Section 74H inconsistent with the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and liable to be struck down on that ground?

Re-issue No.1:-

8. A plenary legislation can be declared unconstitutional by the Supreme Court under Art.32 of the Constitution of India and by the High Courts under Art.226 of the Constitution of India only on the following grounds:-

i) Violation of the fundamental rights guaranteed under Part III of the Constitution of India;

ii) Lack of legislative competence;

iii) Violation of basic structure; and

iv) Manifest arbitrariness meaning “something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. – See Shayara Bano v. Union of India; (2017) 9 SCC 1

9. When the provisions of legislative enactment are questioned before the Court, the Court has to examine the matter with reference to the aforesaid grounds. The legislature is never before the Court. The counter-affidavits filed by the executive and other authorities do not represent the views of the legislature. They only represent the understanding of the executive or the authority regarding the law made by the Legislature. In Sanjeev Coke Manufacturing Company v. M/s. Bharat Coking Coal Limited and another, (1983) 1 SCC 147, it was held:-

“No one may speak for the Parliament and Parliament is never before the court. After Parliament has said what it intends to say, only the court may say what the Parliament meant to say. None else. Once a statute leaves Parliament House, the Court is the only authentic voice which may echo (interpret) the Parliament. This the court will do with reference to the language of the statute and other permissible aids. The executive Government may place before the court their understanding of what Parliament has said or intended to say or what they think was Parliament’s object and all the facts and circumstances which in their view led to the legislation. When they do so, they do not speak for Parliament. No Act of Parliament may be struck down because of the understanding or misunderstanding of parliamentary intention by the executive Government or because their (the Government’s) spokesmen do not bring out relevant circumstances but indulge in empty and self-defeating affidavits. They do not and they cannot bind Parliament. Validity of legislation is not to be judged merely by affidavits filed on behalf of the State, but by all the relevant circumstances which the court may ultimately find and more especially by what may be gathered from what the legislature has itself said.”

Therefore, it is not necessary to set out in any detail the views expressed by the State and the Reserve Bank of India through counter affidavits filed in this Court except to the extent they aid or assist this Court in considering the validity of the impugned legislation. As already noticed, the only ground raised in these writ petitions to challenge the constitutional validity of the impugned provisions of the 1969 Act is lack of legislative competence and it was argued with reference to Entry 45 of List-I of Seventh Schedule to the Constitution of India and with reference to the amendment made to Section 3 of the Banking Regulation Act, 1949, (in 2020) that Co-operative banks engaged in the business of banking and using the words ‘bank, banker and banking’ and acting as drawee of the cheques will squarely fall within the legislative control of law made under Entry 45 of List-I (the Banking Regulation Act, 1949) and any provision in the law made with reference to Entry 32 of List-II cannot, therefore, provide for the amalgamation of a Co­operative Bank contrary to and against the provisions contained in the Banking Regulation Act, 1949.

10. Entry 43 of List-I of the Seventh Schedule to the Constitution of India deals with the incorporation, regulation and winding up of Corporations including banking, insurance and financial corporations but not including Co-operative Societies. Entry 45 of List I deals with the subject of banking. A reading of the aforesaid two Entries of List-I would clearly suggest that matters relating to incorporation and regulation and winding up of all sorts of corporations including banking corporations and any law touching upon the aspect of banking would be exclusively subject to law made by Union Parliament. However, Entry 43 of List-I specifically excludes Co-operative Societies. Therefore, in respect of a banking company other than a Co-operative Society, the aspect of incorporation, regulation and winding up as well as any law regulating banking activities would both be subject to law made by Parliament with reference to Entries 43 and 45 of List-I. To take the example of the State Bank of India, the said bank is a banking company incorporated under the State Bank of India Act, 1955. It is a company engaged in the business of banking. Therefore, all matters relating to the incorporation, regulation and winding up of the State Bank of India as well as its banking activities would both be subject to laws made by the Union Parliament with reference to Entries 43 and 45 of List-I. In other words, the Banking Regulation Act, 1949 or any other law made by parliament could regulate the affairs of banking as well as aspects relating to incorporation, regulation and winding up of banking corporations with reference to Entries 43 and 45 of List-I. However, when it comes to a Co-operative Society engaging itself in the business of banking, the laws relating to incorporation, regulation and winding up of such Co-operative Societies would be subject only to laws made by the State Legislature with reference to Entry 32 of List-II. Entries 43 and 45 in List-I and Entry 32 in List-II are extracted hereunder:

Entry 43, List-I (Union List) Incorporation, regulation and winding up of trading corporations,including banking, insurance and financial corporations, but not including co-operative societies
Entry 45, List-I (Union List) Banking
Entry 32, List-II (State List) Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities; unincorporated trading, literary,scientific, religious and other societies and associations; co-operative societies.

Section 3 of the Banking Regulation Act, 1949 prior to the Banking Regulation (Amendment) Act, 2020 read as follows:-

“3. Act to apply to co-operative societies in certain cases

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 to the extent specified in Part V.”

Following the 2020 Amendment, Section 3 of the Banking Regulation Act, 1949, reads as follows:-

“3. Act not to apply to certain co-operative societies

Notwithstanding anything contained in the National Bank for Agricultural and Rural Development Act, 1981 (61 of 1981) this Act shall not apply to‑

(a) a primary agricultural credit society; or

(b) a co-operative society whose primary object and principal business is providing of long-term finance for agricultural development, if such society does not use as part of its name, or in connection with its business, the words “bank”, “banker” or “banking” and does not act as drawee of cheques.”

Therefore, the effect of the amendment is that while the provisions of the Banking Regulation Act, 1949 (before the amendment) were not applicable to the Primary Agricultural Societies or Co-operative Societies whose primary object and principal business is the provision of long-term finance for agricultural development and to any other Co-operative Society except to the manner and to the extent specified in Part V of the Banking Regulation Act, 1949, after the amendment, the Banking Regulation Act, 1949 does not apply to a Primary Agricultural Credit Society or a Co-operative Society whose primary object and principal business is the provision of long-term finance for agricultural development but it will apply if the Co-operative Society in question uses as part of its name or in connection with its business the words “bank”, banker” or “banking” and acts as a drawee of cheques. The primary contention raised for the petitioners is that following the 2020 Amendment to the Banking Regulation Act, 1949, the entire activity of a Co-operative Society which is a bank had come under the purview of the Banking Regulation Act, 1949 and therefore all provisions of the Banking Regulation Act, 1949 including the provisions requiring prior permission of the Reserve Bank of India before a Co-operative Bank is amalgamated with another Co-operative Bank will apply even if the bank in question is a bank constituted as a Co­operative Society under the law made by State Legislature with reference to Entry 32 of List-I. In the context of this submission, it may be useful to refer to the decision of a Division Bench of the Punjab and Haryana High Court in Sant Sadhu Singh and others v. State of Punjab and another, AIR 1970 P & H 528. In that case, the Court was concerned with a challenge to certain provisions of the Punjab Co-operative Societies (Amendment) Act, 1969 on the ground that the State Legislature did not have the competence to enact any law relating to Banking Corporations even if they were co-operative societies constituted under a law made by the state legislature. The findings in paragraphs 8 and 13 are relevant and they are extracted below:-

“8. Before proceeding to deal with the respective contentions of the learned counsel for the parties, it may be mentioned that any legislation regarding the banking business as such can only be undertaken under entry No. 45, List I, whereas regulation of Corporations doing Business of Banking falls under entry No. 43. But Co-operative Societies are excluded from this entry and have been put in entry No. 32, List II, Schedule VII. This is also evident from the Banking Companies Act, as amended up to date, and the Reserve Bank of India Act. The Co-operative Societies doing banking business are put on par so far as entry No. 45. List I is concerned, with other banking institutions. While construing entry No. 45, the Federal Court of India in Bank of Commerce, Ltd.. Khulna v. Nripendra Nath Datta, AIR 1945 FC 7, observed as follows :–

“On a reasonable construction, the entry must be limited to laws which affect the conduct of the business of banks qua banks.”

Their Lordships were considering entry No. 38. List I of the Government of India Act, 1935, which is in these terms: –

“Banking, that is to say, the conduct of banking business by corporations other than corporations owned or controlled by a Federated State and carrying on business only within that State.”

xxx xxx xxx

13. Keeping in view these principles, the meaning and scope of entry No. 43 has to be ascertained. The contention of the learned counsel for the petitioners is that the various provisions in the Ordinance, which has been replaced by the Amending Act, impinge on the business of banking inasmuch as the entire control of the management is more or less vested with the Registrar and the right of the shareholders to elect their representatives has been taken away. This is so. It is evident that entry No. 43 and entry No. 45 relate to different heads of legislation. Whereas entry No. 45 gives the power to the Central Legislature to legislate qua banking business, entry No. 43, on the other hand, gives power to the Central Legislature to legislate regarding corporations. It is immaterial whether those Corporations were doing the banking business or not. In other words, Central Legislature is competent to legislate with regard to Corporations engaged in the business of banking, in view of entry No. 43. List I. But so far as the Co-operative Societies are concerned, they were taken out of the ambit of entry No. 43 and put in entry No. 32, List II. The word ‘regulation’ in entry No. 43 is of a wide import and would include how a Cooperative Society is to work. In other words, it will include the constitution of a Co-operative Society and any matter relating to its constitution would naturally be the subiect-matter of legislation by the State Legislature. In a broad sense, the controlling of the working of a Society doing banking business will in some measure concern the business of banking and thus may bring it within the ambit of entry No. 45. List I. Thus there would be some overlapping. But in order to give a harmonious construction to both the entries, Nos. 43 and 44, it must be held that only business of banking as such falls within the ambit of entry No. 45; whereas the incorporation of the Corporations and other matters relating to them fall within the ambit of entry No. 43. Therefore, the constitution of the Societies and their working would have fallen within the ambit of entry No. 43 but for the fact that Co-operative Societies are excluded from its purview. The very fact that in entry No. 43, Corporations engaged in the business of banking are specifically mentioned, it clearly follows that Co­operative Societies doing that business were taken out of entry No. 43. List I, and deliberately put in entry No. 32, List II. In view of the clear wording of the two entries, I am unable to agree with the contention of the learned counsel for the petitioners, that the State Legislature has no jurisdiction to regulate the functioning of the Co-operative Societies engaged in the business of Banking.” (Emphasis supplied)

11. A similar question arose before the Bombay High Court in Nagpur District Central Co-op. Bank Ltd., Nagpur and another v. Divisional Joint Registrar, Co-operative Societies, Nagpur and another; AIR 1971 Bombay 365. There, certain notices issued to a Co­operative Society engaged in banking business under the provisions of Section 78 of the Maharashtra Co-operative Societies Act, 1960 were challenged on the ground that the notices were without jurisdiction, as a Co-operative Society engaged in the business of banking could be regulated only under the provisions of the Banking Regulation Act, 1949 and not by reference to the provisions in the Maharashtra Co-operative Societies Act. While rejecting this contention, it was held:

“9. It is contended that the matters regarding incorporation, regulation and winding up of banking societies registered under the Co-operative Societies Act would fall under Entry No. 43 and in any case under Entry 45 which has a very wide import and would, cover a very large field with respect to the business of banking and all matters ancillary to or incidental to the same. It is further urged that Entry No. 32 in List II empowers the State Legislature to make laws with respect to the co- operative societies excluding the societies doing business of banking. It is urged on the basis of art. 246 of the Constitution that if a particular topic or matter falls under List I in the Seventh Schedule, then the Parliament has the exclusive power to make laws with respect to that matter and the State is deprived of the power to make any law with respect to any matter enumerated in the List I. Under cl. (3) of art. 246 of the Constitution, the power of the State Legislature is subject to cls. (1) and (2) and if the power to legislate on a particular topic is to be found in List I, evidently the State Legislature would not be empowered to legislate on the very same topic and the law made by the Parliament will have to prevail. Of course, this presupposes that the subject is covered by the entries in List I. The learned counsel cited A.G. of Alberta v. A.G. of Canada , A.G. of Alberta v. A.G. of Canada , and State of Orissa v. M.A. Tulloch & Co. The first case dealt with British North America Act, 1867 and ss. 91 and 92(1) thereof. It was held that if a given subject-matter fell within any class of subjects enumerated in s. 91, it could not be treated as covered by any of those within s. 92. (Emphasis supplied)

xxx xxx xxx xxx

12. We are, therefore, in agreement with the learned counsel for the petitioners on the authority of this decision that if this subject with which we are dealing is covered by the entries in the List I and is thus within the exclusive powers of the Central Legislature, then whether the Central Legislature has occupied that field or not, the State Legislature would be denuded of the powers with respect to that subject and would not be competent to legislate on that topic. It is not necessary that the Central Legislature must have legislated on that subject so as to deprive the State Legislature of its powers to legislate on that topic provided that topic falls within List I.

13. We agree with the learned counsel for the petitioners that the entries in the list should be construed broadly and, not in a narrow pedantic sense. It cannot be disputed that the entries in the various Lists of the Seventh Schedule must be given widest possible interpretation. It also cannot be disputed that while making law under any entry in the Schedule it is competent to the Legislature to make all such incidental and ancillary provisions as may be necessary to effectuate the law. The Supreme Court has clearly laid down these propositions in Waverly Jute Mills v. Raymon & Co. , Board of Revenue, Madras v. R.S. Jhaver and Harakchand v. Union of India . It has also been laid down in this last decision that if some of the entries in the different lists or in some list overlap or may appear to be in direct conflict with each other, it is the duty of the Court to reconcile the entries and bring about a harmonions construction. An endeavour must be made to solve the conflict by having recourse to the context and scheme of the Act and a reconcilation attempted between two apparently conflicting jurisdictions by reading the two entries together and by interpreting and where necessary, modifying the language of the one by that of the other. A general power ought not to be so strict as to make a nullity of a particular power conferred by the same Act and operating in the same field when by reading the former in a more restricted sense effect can be given to the law in its natural and ordinary meaning. Similar observations are to be found in Waverly’s case in para. 11 where it is observed that where there are two entries, one general in its character and the other specific, the former must be construed as excluding the latter. It would thus be seen that if there is a general power in one List and, a particular power in the other list which specific power could also be included in the general power in the first list, then the general entry in the first list must be so read as to exclude the specific power from it so that general power may cover or occupy all the field excepting the field under the specific power under the second list and the specific power must be preserved to the Legislature which is empowered under that list. It is in the light of these guiding principles the impugned provision is to be looked at.

14. It is urged on behalf of the petitioners that Entry No. 43 in List I covers the whole field with respect to incorporation, regulation and winding up, of trading corporations as also banking, insurance and financial corporations and excludes only the co-operative societies. It is urged that entry No. 43 therefore would empower the Central Legislature to legislate in respect of banking corporations which would also cover banking co-operative societies and what is excluded is only the non-banking co-operative societies, that is, societies which do not deal in the business of banking. Now we do not think that entry No. 43 can be read in that sense. In our opinion, entry No. 43 excludes all co-operative societies including the trading, banking, insurance and financial co-operative societies and those are put in entry No. 32 of List II. There is no warrant to say that entry No. 43 excludes only non-banking co-operative societies, but includes within its sweep banking co-operative societies. If that were so, then there was no need for entry No. 45. Then it is urged that entry No. 45 which is ‘banking’ ordinarily takes within its sweep everything, relating to banking. Banking, however, would not mean the banking corporations, but would mean only the conduct of banking business by corporations. (Emphasis supplied)

12. In Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd., (2007) 6 SCC 236, the decisions in Sant Sadhu Singh
(supra)
and Nagpur District Central Co-op. Bank Ltd. (supra) were relied upon to hold that co-operative banks established under the Maharashtra Co-operative Societies Act, 1960 and the Andhra Pradesh Co­operative Societies Act, 1964, transacting the business of banking do not fall within the meaning of “banking company” as defined in Section 5(c) of the Banking Regulation Act, 1949 and therefore, the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 do not apply to the recovery of dues by co-operative banks from their members. Interestingly while holding that Greater Bombay Coop. Bank Ltd. (supra) was wrongly decided, the Court in Pandurang Ganpati Chaugule (supra) holds thus:-

“98. In Greater Bombay Coop. Bank Ltd. [Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd., (2007) 6 SCC 236] , the Court relied upon the decisions in Sadhu Singh v. State of Punjab [Sadhu Singh v. State of Punjab, 1970 SCC OnLine P&H 34 : AIR 1970 P&H 528] , and Nagpur District Central Coop. Bank Ltd. v. Registrar of Coop. Societies [Nagpur District Central Coop. Bank Ltd. v. Registrar of Coop. Societies, 1971 SCC OnLine Bom 92 : AIR 1971 Bom 365] . In Sadhu Singh [Sadhu Singh v. State of Punjab, 1970 SCC OnLine P&H 34 : AIR 1970 P&H 528] , the amendment made to the Punjab Cooperative Societies Act, 1961, which curtailed the rights and powers of the shareholders in managing the cooperative society, was under challenge. Thus, the question involved was related to the management aspect of the bank governed by the Cooperative Societies Act for which the State had the exclusive legislative competence under List II Entry 32. Whereas in Nagpur District Central Coop. Bank Ltd. [Nagpur District Central Coop. Bank Ltd. v. Registrar of Coop. Societies, 1971 SCC OnLine Bom 92 : AIR 1971 Bom 365] , the question arose whether the Registrar had the power under Section 78 of the Maharashtra Cooperative Societies Act to issue show-cause notice to any committee of the society or any member of such committee including the Directors in respect of any default or negligence in the performance of the duties imposed on it or him by the Act or the rule or the bye-laws and power of the Registrar to remove the Committee or the members thereof if any such action is called for. The argument was rejected that the cooperative societies indulged in the banking business, hence, the State did not have the legislative competence under List II Entry 32, and only Parliament had the legislative competence under List I Entry 45. The question involved as to management was clearly covered under List II Entry 32. It was with respect to incorporation, management, and winding up of a society. Thus, both the abovementioned decisions could not be said to be applicable with regard to the aspect of banking and were wrongly relied upon while forming an opinion in Greater Bombay Coop. Bank Ltd. [Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd., (2007) 6 SCC 236]

99. At the same time, we are unable to accept the argument raised on behalf of the respondents. The Sarfaesi Act is relatable to Entry 6 of List III considering the provisions contained in Sections 69 and 69-A of the Transfer of Property Act, 1882. We are of the opinion that it relates to Schedule VII List I Entry 45 of the Constitution of India.

100. The learned counsel for the appellants has also placed reliance on Virendra Pal Singh [Virendra Pal Singh v. Registrar of Coop. Societies, (1980) 4 SCC 109 : 1980 SCC (L&S) 516] , in which the provisions relating to the recruitment, emoluments, terms, and conditions of service, including disciplinary control of employees working in the cooperative societies involved in the banking were considered. Thus, the question of management/regulation of the cooperative societies was involved. The aspect of the banking business of the cooperative banks was not involved. A question was raised as to the legislative competence of the State to enact. In that context, the Court held that, in pith and substance, the U.P. Cooperative Societies Act dealt with incorporation, management and winding up and that if it incidentally trenches upon banking, would not take the legislation beyond the competence of the State Legislature. For the proper financing and effective functioning of cooperative societies, there must also be cooperative societies that do banking business to facilitate the working of other cooperative societies merely because they do banking business, they do not cease to be cooperative societies. It was opined: (SCC p. 114, para 10)

“10. We do not think it necessary to refer to the abundance of authority on the question as to how to determine whether a legislation falls under an entry in one List or another entry in another List. Long ago in Prafulla Kumar Mukherjee v. Bank of Commerce Ltd. [Prafulla Kumar Mukherjee v. Bank of Commerce Ltd., 1947 SCC OnLine PC 6 : (1946-47) 74 IA 23 : (1947) 9 FCR 28 : AIR 1947 PC 60] , the Privy Council was confronted with the question whether the Bengal Money-Lenders Act fell within Schedule VII List II Entry 27 to the Government of India Act, 1935, which was “money-lending”, in respect of which the provincial legislature was competent to legislate, or whether it fell within Entries 28 and 38 in List I which were “promissory notes” and “banking” which were within the competence of the Central Legislature. The argument was that the Bengal Money-Lenders Act was beyond the competence of the Provincial Legislature insofar as it dealt with promissory notes and the business of banking. The Privy Council upheld the vires of the whole of the Act because it dealt, in pith and substance, with money-lending. They observed: (SCC OnLine PC)

‘Subjects must still overlap, and where they do the question must be asked what in pith and substance is the effect of the enactment of which complaint is made, and in what List is its true nature and character to be found. If these questions could not be asked, much beneficent legislation would be stifled at birth, and many of the subjects entrusted to provincial legislation could never effectively be dealt with.’

Examining the provisions of the U.P. Cooperative Societies Act in the light of the observations of the Privy Council we do not have the slightest doubt that in pith and substance the Act deals with “cooperative societies”. That it trenches upon banking incidentally does not take it beyond the competence of the State Legislature. It is obvious that for the proper financing and effective functioning of cooperative societies there must also be cooperative societies which do banking business to facilitate the working of other cooperative societies. Merely because they do banking business such cooperative societies do not cease to be cooperative societies, when otherwise they are registered under the Cooperative Societies Act and are subject to the duties, liabilities and control of the provisions of the Cooperative Societies Act. We do not think that the question deserves any more consideration and, we, therefore, hold that the U.P. Cooperative Societies Act was within the competence of the State Legislature. This was also the view taken in Nagpur District Central Coop. Bank Ltd. v. Registrar of Coop. Societies [Nagpur District Central Coop. Bank Ltd. v. Registrar of Coop. Societies, 1971 SCC OnLine Bom 92 : AIR 1971 Bom 365] and Sadhu Singh v. State of Punjab [Sadhu Singh v. State of Punjab, 1970 SCC OnLine P&H 34 : AIR 1970 P&H 528] .”

13. In Pandurang Ganpati Chaugule (supra), the question that arose for consideration was whether the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the SARFAESI Act) would apply to Co­operative Banks. It was squarely held that since the recovery of loans is part of banking activities, a law in the nature of the SARFAESI Act would be applicable to Co-operative Banks as the banking activity of Co-operative Banks was clearly subject matter of law made with reference to the Entry 45 of List-I. However, the decision in Pandurang Ganpati Chaugule (supra) clearly holds that any aspect other than banking and touching upon the aspects of incorporation, regulation and winding up of Co-operative Societies which are also banks could be regulated only by law made with reference to Entry 32 of List-II and not with reference to Entry 43 of List-I. Paragraphs 87 and 88 of Pandurang Ganpati Chaugule (supra) read thus:-

“87. It is apparent that “incorporation, regulation and winding up” of the cooperative societies are covered under Schedule VII List II Entry 32 of the Constitution of India, whereas “banking” is covered by List I Entry 45. Thus, aspect of “incorporation, regulation and winding up” would be covered under List II Entry 32. However, banking activity of such cooperative societies/banks shall be governed by List I Entry 45. The said banks are governed and regulated by legislation related to List I Entry 45, the BR Act, 1949 as well as the Reserve Bank of India Act under Entry 38 of List I. In the matter of licensing and doing business, a deep and pervasive control is carved out under the provisions of the BR Act, 1949 and banking activity done by any entity, primary credit societies, is a bank and is required to submit the accounts to Reserve Bank of India, and there is complete control under the aforesaid Act. For activity of banking, these banks are governed by the legislation under List I Entry Thus, recovery being an essential part of the banking, no conflict has been created by providing additional procedures under Section 13 of the Sarfaesi Act. It is open to the bank to adopt a procedure which it may so choose. When banking in pith and substance is covered under List I Entry 45, even incidental trenching upon the field reserved for the State under Entry 32 List II is permissible.” (Emphasis supplied)

“88There can be various aspects of an activity. The cooperative societies may be formed under the provisions of the State Cooperative Acts. The State law provides for “incorporation, regulation and winding up” under List II Entry 32, a membership registration, and other matters can be governed by List II Entry 32, and, at the same time, the aspects relating to the banking, licensing, accounts, etc. can be covered under Entry 45 List I.” (Emphasis supplied)

The decision of the Constitution Bench in Pandurang Ganpati Chaugule (supra) is, therefore, clear authority for the proposition that in all aspects relating to banking, Co-operative Banks would be the subject matter of regulation under the provisions of the Banking Regulation Act, 1949. The fact that Section 3 of the Banking Regulation Act, 1949 was amended as noticed above after the judgment of the Supreme Court in Pandurang Ganpati Chaugule (supra) does not in any manner change the situation.

14. It is settled law that while interpreting the Entries in the various Lists in the Seventh Schedule to the Constitution of India, it must be borne in mind that the Entries are only fields of legislation and each Entry must be given the widest scope and each general word should extend to all ancillary and subsidiary matters which can fairly and reasonably be comprehended in it. The Banking Regulation Act, 1949, is undoubtedly a law relatable to Entry 45 of List-I. Section 44A of the Banking Regulation Act, 1949, sets out the procedure for the amalgamation of Banking Companies. Part V of the Banking Regulation Act, 1949, makes the provisions of the Act applicable to Co-operative Societies subject to modifications specified in the provisions of Section 56 which is the only provision in Part V. The fact that the provisions of Section 56 provide that the Banking Regulation Act, 1949, will apply to Co­operative Societies subject to the modifications specified in Section 56 is, in my view, sufficient indication that the Parliament sought to bring Co­operative Societies within the field of Banking Regulation Act, 1949, in only as much as it relates to the carrying out of banking activities and for no other purpose. Certain provisions of the Banking Regulation Act, 1949 applicable to other Banking Companies have been specifically excluded in the application of the Act to Co-operative Societies, for example, Section 35B of the Banking Regulation Act, 1949, is specifically excluded. Section 36(1)21(b) is also specifically excluded from its application to Co-operative Societies by the virtue of the provisions contained in Section 56. This fortifies my view that while in all aspects of banking, Co-operative Societies which are banks would specifically come within the purview of law made by Union Parliament with reference to Entry 45 of List-1, and in all other aspects, they would be controlled and regulated by law made with reference to Entry 32 of List -II.

15. The ‘rag-bag’ theory:- It has to be noted that by virtue of Entries in List-I, the entire law relating to banking as well as the entire law relating to incorporation, regulation and winding up of Corporations including banking companies except Co-operative Societies is within the purview of the competence of the Union Parliament. It is settled from the decision of the Constitution Bench of the Supreme Court in Ujagar Prints (II) v. Union of India, (1989) 3 SCC 488 that a legislative enactment could draw sustenance from two or more Entries in the same List and legislation need not be confined to or draw sustenance from a single entry in any List contained in Seventh Schedule. It was held:-

53. If a legislation purporting to be under a particular legislative entry is assailed for lack of legislative competence, the State can seek to support it on the basis of any other entry within the legislative competence of the legislature. It is not necessary for the State to show that the legislature, in enacting the law, consciously applied its mind to the source of its own competence. Competence to legislate flows from Articles 245, 246, and the other articles following, in Part XI of the Constitution. In defending the validity of a law questioned on ground of legislative incompetence, the State can always show that the law was supportable under any other entry within the competence of the legislature. Indeed in supporting a legislation sustenance could be drawn and had from a number of entries. The legislation could be a composite legislation drawing upon several entries. Such a “ragbag” legislation is particularly familiar in taxation.

54. Bennion in his Statutory Interpretation (at p. 644) refers to such a composite legislation, though the observations must be understood in the context of the supremacy of the British Parliament and one of unlimited powers and which is under no inhibitions, unlike a federal polity, of distribution of legislative powers. Learned author refers to:

“Ragbag” Acts : Some Acts are “ragbag” Acts, covering many areas. The annual Finance Act is an extreme example. It is divided into Parts, dealing respectively with customs and excise duty, value added tax, income tax, capital gains tax, stamp duty, capital transfer tax and so on. Even within a Part of a Finance Act the various provisions have quite different aims….

In Hari Krishna Bhargav v. Union of India [(1966) 2 SCR 22 : AIR 1966 SC 619 : (1966) 59 ITR 243] , this Court said : (SCR p. 27)

There is no prohibition against the Parliament enacting in a single statute, matters which call for the exercise of power under two or more entries in List I of the Seventh Schedule. Illustrations of such legislation are not wanting in our statute book, and the fact that one of such entries is the residuary entry does not also attract any disability.”

Therefore, insofar as the provisions of the Banking Regulation Act, 1949 also provide for the regulation of amalgamation etc., of a banking company, it could be said that the Banking Regulation Act, 1949 could make provision for such measures as well on account of the fact that both incorporation, regulation and winding up of Corporations including Banking Companies (but excluding Co-operative Societies) as well as the subject of banking are both within the competence of the Union Parliament by virtue of Entries 43 and 45 in List-I of the Seventh Schedule. However, insofar as the provisions of the Banking Regulation Act, 1949 seek to regulate the incorporation, regulation or winding up (including amalgamation) of a Co-operative Society, it must be held that the provisions of the Banking Regulation Act, 1949 to that extent cannot apply to Co-operative Societies as any other interpretation would mean that subjects specifically excluded from List-I would be controlled by a legislation made with reference to Entries in List -I. In other words, the Banking Regulation Act, 1949, in so far as it seeks to regulate activities of Co­operative Societies falling outside the scope of banking and falling within the scope of incorporation, regulation and winding up of Co-operative Societies cannot be held to be operative against Co-operative Societies which are engaged in the banking business. Viewed in that manner, the only conclusion can be that, while in every aspect of banking, Co-operative Societies engaged in the business of banking would be subject to the provisions in the Banking Regulation Act, 1949 in so far as it seeks to regulate the business of banking, the provisions in the Banking Regulation Act, 1949, which encroach into the aspects of incorporation, regulation and winding up of Co-operative Societies would have to be held inapplicable to Co-operative Societies. It cannot be disputed that amalgamation by its very nature is an aspect of incorporation and/or regulation and cannot be an aspect of banking. Therefore, when amalgamation and regulation of Co-operative Societies is specifically excluded from Entry 43 of List-I and is specifically included in Entry 32 of List-II, it cannot be said that by virtue of law relating to banking (The Banking Regulation Act, 1949) under and with reference to Entry 45 of List-I any aspect of incorporation and regulation of Co-operative Societies could be brought under the control of Union Legislation referable to Entry 45 of List-I. In Waverly Jute Mills Co.Ltd. v. Raymon and Company (India) Pvt. Ltd., AIR 1963 SC 90, it was held:-

“11.It is next argued for the appellants that even if a law on Forward Contracts can be said to be a law on Futures Markets, it must be held to be legislation falling under Entry 26 in List II, and not Entry 48 in List I, because Forward Contracts form a major sector of modern trade, and constitute its very core, and to exclude them from the ambit of Entry 26 in List II, would be to rob it of much of its contents. Reliance was placed in support of this contention, on the rule of construction that the entries in the Lists should be construed liberally and on the decision in Bhuwalka Brothers Ltd. v. Dunichand Rateria, AIR 1952 Cal 740 (SB) which, on this point was affirmed by this Court in Duni Chand Rateria v. Bhuwalka Brothers Ltd. 1955-1 SCR 1071: (S) AIR 1955 SC 182. The rule of construction is undoubtedly well established that the entries in the Lists should be construed broadly and not in a narrow or pedantic sense. But there is no need for the appellants to call this rule in aid of their contention, as trade and commerce would, in their ordinary and accepted sense, include forward contracts. That was the view which was adopted in Bhuwalka Brothers Ltd. case, AIR 1952 Cal 740 (SB) and which commended itself to this Court in Duni Chand Rateria case., 1955- 1 SCR 1071: (S) AIR 1955 SC 182. Therefore, if the question were simply whether a law on Forward Contracts would be a law with respect to Trade and commerce, there should be no difficulty in answering it in the affirmative. But the point which we have got to decide is as to the scope of the entry “Trade and commerce” read in juxtaposition with Entry 48 of List I. As the two entries relate to the powers mutually exclusive of two different legislatures, the question is how these two are to be reconciled. Now it is a rule of construction as well established as that on which the appellants rely, that the entries in the Lists should be so construed as to give effect to all of them and that a construction which will result in any of them being rendered futile or otiose must be avoided. It follows from this that where there are two entries, one general in its character and the other specific, the former must be construed as excluding the latter. This is only an application of the general maxim that Generalia specialibus non derogant. It is obvious that if Entry 26 is to be construed as comprehending Forward Contracts, then “Futures Markets” in Entry 48 will be rendered useless. We are therefore of opinion that legislation on Forward Contracts must be held to fall within the exclusive competence of the Union under Entry 48 in List I.”

16. Consideration of the Entries of the field of legislation specified in Entry 43 of List-I and Entry 32 of List-II would clearly indicate that subjects included under Entry 43 of List-I specifically exclude the subjects falling within the Entry 32 of List-II and vice-versa for they are powers mutually exclusive of two different legislatures. Therefore, it could only be held that in matters relating to subjects other than banking Co-operative Banks would be subject only to the legislation made with reference to Entry 32 of List-II and not with reference to legislation relatable to Entry 45 of List-I.

Can the amendment of the Banking Regulation Act, 1949 change the limits of legislative power in terms of the provisions of Article 246 of the Constitution of India read with the Entries in the Seventh Schedule?

17. The answer to this question would be an emphatic no unless the Constitution itself were to make provision for it. The argument raised for the petitioners, as already noticed, is that with the amendment of the Banking Regulation Act, 1949, by the Banking Regulation Amendment Act, 2020, every Co-operative society engaged in the business of banking and uses in connection with its business, the words “bank”, “banker” or “banking” and acts as drawee of cheques would be subject matter of the provisions in the Banking Regulation Act, 1949, relating to amalgamation etc. even if the aspect of incorporation, regulation and winding up of co-operative societies are specifically taken out of the purview of Entry-43 of List-I and placed in Entry-32 of List -II of the Seventh Schedule to the Constitution of India. However, this raises the fundamental question as to whether the amendment of the Banking Regulation Act, 1949 can change the limits of legislative power in terms of the provisions of Article 246 of the Constitution of India read with the Entries in the Seventh Schedule. The only instance that comes to my mind where the amendment of a statute by parliament would change the limits of legislative power is seen in the provisions of the Income Tax Act, 1961. Article 366(1) of the Constitution provides that the expression ‘agricultural income’ in the Constitution means agricultural income as defined for the purpose of enactments relating to Indian Income Tax. The power to enact legislation to levy tax on agricultural income is reserved to the State Legislatures by virtue of Entry 46 of List-II while the power to enact legislation to levy tax on all other kinds of income is reserved to the Union Parliament under Entry 82 of List-I. However by virtue of Article 366(1) the term ‘agricultural income’ in the Constitution means agricultural income as defined for the purpose of enactments relating to Indian Income Tax. Therefore, by amending Section 2(1A) of the Income Tax Act, 1961, if a narrower definition is provided to the said term, the power of the State Legislature to legislate with respect to ‘agricultural income’ will be narrower and vice-versa. However, this cannot be true of the Banking Regulation Act,1949. There is no provision in the Constitution akin to Article 366(1) to indicate that the moment the Banking Regulation Act, 1949, is amended the power of the State Legislature to legislate in respect of ‘Incorporation, regulation and winding up’ of Co­operative Societies would be denuded.

18. The decision in Central Bank of India v. State of Kerala, (2009) 4 SCC 94 is authority for the proposition that Article 254 of the Constitution of India is not applicable when the Court is considering legislations made with reference to Entries in Lists I & II of the Seventh Schedule. No legislation made with reference to an entry under List-II can be struck down on the ground that it is in conflict with law made by the Parliament with reference to an Entry in List-I.

19. The Constitution of India is the “grundnorm” [Kelsen –The Pure Theory of Law]. In of A.P. and others v. P.Laxmi Devi, (2008) 4 SCC 720 it was held:-

32. According to Kelsen, in every country there is a hierarchy of legal norms, headed by what he calls as the ‘Grundnorm’ (The Basic Norm). If a legal norm in a higher layer of this hierarchy conflicts with a legal norm in a lower layer the former will prevail (see Kelsen’s ‘The General Theory of Law and State’).

33. In India the Grundnorm is the Indian Constitution, and the hierarchy is as follows:

(i) The Constitution of India;

(ii) Statutory law, which may be either law made byParliament or by the State Legislature;

(iii) Delegated legislation, which may be in the form of Rules made under the Statute, Regulations made under the Statute,etc.;

(iv) Purely executive orders not made under any statute.

34. If a law (norm) in a higher layer in the above hierarchy clashes with a law in a lower layer, the former will prevail. Hence a constitutional provision will prevail over all other laws, whether in a statute or in delegated legislation or in an executive order. The Constitution is the highest law of the land,and no law which is in conflict with it can survive. Since the law made by the legislature is in the second layer of the hierarchy, obviously it will be invalid if it is in conflict with a provision in the Constitution (except the Directive Principles which, by Article 37, have been expressly made nonenforceable).”

Therefore, in the light of the constitutional scheme and the language of Article 246 of the Constitution of India and Entries 43 and 45 of List-I and Entry 32 of List-II, it is not possible to accept the argument raised on behalf of the petitioners that with the amendment of the Banking Regulation Act, 1949, 1949 by the Banking Regulation (Amendment) Act, 2020 the legislative power of the State Legislature to legislate with reference to Entry-32 of List II stood whittled down. Every legislation must be interpreted with reference to the constitutional scheme and not otherwise.

20. Now, it could be argued that when Co-operative Societies are engaged in the business of banking, they should be subjected to the control of the Reserve Bank of India under the Banking Regulation Act, 1949. As already noticed, the amended provisions of Section 3 of the Banking Regulation Act, 1949, 1949 read with the provisions of Section 56 of the said Act, make it clear that most of the provisions of the Banking Regulation Act, 1949 will apply to Co-operative Banks subject to the modifications specified in Section 56. However, I am unable to read the provisions as regulating any aspect other than banking. In terms of the provisions contained in Section 56, the reference to the terms ‘banking company’ or ‘the company’ or ‘such company’ in the Banking Regulation Act, 1949 shall be construed as references to a Co-operative Bank. Thus the power of inspection under Section 35, the power of the Reserve Bank of India to issue directions in respect of stressed assets under Section 35AB, the further powers and functions of the Reserve Bank of India set out in Section 36, the provisions in Part IIA and other enabling provisions of the Banking Regulation Act, 1949 providing for control over management and all other powers of the Banking Regulation Act, 1949 permitting the Reserve Bank to intervene the affairs of a banking company would extend to Co-operative Banks and this is sufficient safeguard to ensure that Co-operative Banks engaged in banking activity are subject to the overall control of the Reserve Bank of India.

21. In the light of the above findings, I hold that the impugned provisions, namely Sections 14A & 74H of the 1969 Act, do not relate to any aspect of banking, and, therefore, the impugned provisions are within the legislative competence of the State Legislature.

Re-issue No.2.

22. Section 74A of the 1969 Act was incorporated to ensure that the benefits of the DICGC Act, 1969 were extended to the Co-operative Banks as well. However, none of the provisions of the DICGC Act, 1961 indicate that any consequence other than the consequence of losing the benefits of the DICGC Act will flow from the failure to follow the provisions of Section 44A of the Banking Regulation Act, 1949. The term ‘eligible Co-operative Bank’ under Section 2(gg) of DICGC Act, 1961 has been defined under:-

2. In this Act, unless the context otherwise requires, –

(gg) “eligible co-operative bank” means a co-operative bank the law for the time being governing which provides that,

(i) an order for the winding up, or an order sanctioning a scheme of compromise or arrangement or of amalgamation or reconstruction, of the bank may be made only with the previous sanction in writing of the Reserve Bank;

(ii) an order for the winding up of the bank shall be made if so required by the Reserve Bank in the circumstances referred to in section 13D;

(iii) if so required by the Reserve Bank in the public interest or for preventing the affairs of the bank being conducted in a manner detrimental to the interests of the depositors or for securing the proper management of the bank, an order shall be made for the supersession of the committee of management or other managing body (by whatever name called) of the bank and the appointment of an administrator therefore for such period or periods not exceeding five years in the aggregate as may from time to time be specified by the Reserve Bank;

(iv) an order for the winding up of the bank or an order sanctioning a scheme of compromise or arrangement or of amalgamation or reconstruction or an order for the supersession of the committee of management or other managing body (by whatever name called) of the bank and the appointment of an administrator therefore made with the previous sanction in writing or on the requisition of the Reserve Bank shall not be liable to be called in question in any manner; and

(v) the liquidator or the insured bank or the transferee bank, as the case may be, shall be under an obligation to repay the Corporation in the circumstances, to the extent and in the manner referred to in section 21;”

23. The provisions of Section 13C(i) of the DICGC Act, 1961 indicates that if a Co-operative Bank ceases to be an eligible Co-operative bank, the consequence is that the registration of the Co-operative Bank as an insured bank under the DICGC Act, 1961 will be lost. No other consequence flows from the provisions of the DICGC Act, 1961. Further, in the light of the interpretation that I have placed on the scope of the Entries in List-I, it cannot be said that the provisions of the DICGC Act, 1961 have any relevance in determining the constitutional validity of the impugned provisions of the 1969 Act.

I.A Nos. 7 & 8 of 2023 in W.P (C) 4215 of 2023:-

24. After these Writ Petitions were reserved for judgment, the aforesaid interlocutory applications were filed. I.A No. 6 of 2023 was filed seeking a stay of Ext P.6 in the light of “subsequent developments in the co­operative sector”. The I.A came up for consideration on 10.10.2023 and the following order was passed on I.A No. 6 of 2023:-

“This matter was reserved for judgment on 17.08.2023. It has been listed today on I.A. No.7/2023 being filed in W.P (C) No.421 5/2 023.

Heard the learned Senior Counsel appearing for the petitioners in the interlocutory application and the learned Government Pleader appearing for the State.

Since the main matter is reserved for judgment, I am not inclined to consider the interim relief sought for.”

Thereafter, I.A No 8 of 2023 was filed stating that the National Bank for Agriculture and Rural Development has issued a communication/direction to the Secretary, Co-operative Department, Government of Kerala, stating that the approval of the Reserve Bank of India must be obtained as contemplated by the provisions of the banking Regulation Act, 1949 and seeking a direction for the production of the said document. However, taking into consideration my conclusions in this judgment, I am not inclined to issue any direction as sought.

In the light of the findings on issues (i) and (ii), a declaration that Sections 14A and 74-H of the Kerala Co-operative Societies Act, 1969, are unconstitutional and beyond the legislative competence of the State Legislature cannot be granted. These writ petitions fail, and they are accordingly dismissed.

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