Karnataka High Court
Vyavasaya Seva Sahakara Sangha ... vs State Of Karnataka And Others on 19 March, 1990
Equivalent citations: [1993]76COMPCAS278(KAR), ILR1990KAR2080
JUDGMENT K.A. Swami, J.
1. These writ appeals are preferred against the order dated 3rd January, 1990, passed in Writ Petitions Nos. 19340 to 19343 of 1989 and Writ Petition No. 18760 of 1989. The appellants were the petitioners in writ petitions. Therefore, in this judgment the appellants will be referred to as the petitioners.
2. In the writ petitions, the petitioners sought for issue of a writ in the nature of prohibition, prohibiting the respondents from enforcing the Government Order dated May 17, 1989, bearing No. CMW/73/CCB/89, produced as annexure `A' and also to quash the resolution, annexure `K' passed by the third respondent, in respect of the appellant in W. A. No. 435 of 1990,dated September 7, 1989, resolving to have ceding with the District Central Co- operative Bank, Bellary.
3. The petitioners put forth four contentions before the learned single judge. (i) The order, annexure `A', issued by the State Government is beyond the legislative competence of the State Legislature and, therefore, the executive power cannot extend to issue such an order. (ii) The circular dated April 14, 1982, annexure-J, issued by the Reserve Bank of India has statutory force, inasmuch as it falls under section 54(b) of the Reserve Bank of India Act read with section 21 of the Banking Regulation Act and, therefore, it was not open to the State Government to issue circular, annexure-A, contrary to the terms contained in the circular, annexure J. (iii) The re-ceding of the appellants/petitioners to the District Central Co-operative Bank results in civil consequences, and, therefore, the petitioners ought to have been given an opportunity before directing them to pass a resolution to agree to have linking with the District Central Co-operative Bank. (iv) All the societies whether their performance is good or bad are roped in in one category and have been directed to re-cede to the District Central Co-operative Bank and, therefore, there is discrimination.
4. The learned single judge has negatived all the four contentions and has dismissed the writ petitions. Before us, the last contention is not pressed into service. However, the first three contentions are advanced. Therefore, the points that arise for consideration are :
1. Whether circular, annexure-J, has any statutory force ?
2. Whether annexure-A circular dated May 17, 1989, issued by the State Government is beyond the legislative competence of the State Legislature and, therefore, the same could not have been issued in exercise of the executive power ?
3. Whether the re-ceding of the petitioners societies to the District Central Co-operative Bank results in civil consequences, therefore, whether an opportunity should have been afforded to the petitioners ?
5. Point No. 1. - A reading of annexure-J makes it clear that it does not contain any direction. It is in the nature of advice. Formerly, before the issuance of annexure-J, all the co-operative societies had a linkage with the commercial banks for the purpose of financing under a scheme framed. In order to find out whether the scheme of financing Primary Agricultural Co-operative Credit Societies by commercial banks introduced in the year 1970 in 13 States was successful or not, a study group was appointed by the Reserve Bank of India to go into the working of the scheme in depth and make a report. Accordingly, the study group went into the matter in detail and annexure-J came to be issued after the study group reviewed the scheme of financing of Primary Agricultural Credit Societies by commercial banks. The study group came to the conclusion that the linkage of the Primary Agricultural Credit Co-operative Societies with the commercial banks for financing should be discontinued and the same linking should be established with the District Central Co-operative Banks. However, it also opined that wherever the District Central Co-operative Banks were not sound and weak in finance, in such cases the option should be left to the Primary Agricultural Credit Co-operative Societies to continue their financial linkage either with the commercial banks or with the District Central Co- operative Banks. Accordingly, the circular dated April 14, 1982, was issued after the matter was discussed at the State Level Committee set up for this purpose. Pursuant to the circular, annexure-J, most of the Primary Agricultural Credit Co-operative Societies ceased to have linkage with the commercial banks and established their linkage with the District Central Co-operative Banks. However, a few of them continued their linkage with the commercial banks and the petitioners herein are among those institutions who have continued their linkage with the commercial banks.
6. Sri B.V. Acharya, the learned Advocate General appearing for respondents Nos. 1 to 3, submitted that the Primary Agricultural Co-operative Societies that were left with the commercial banks were very few and that their number was about 10 per cent. It is these Primary Agricultural Credit Co-operative Societies which continued their linkage with commercial banks which are now required to end their linkage with the commercial banks and to re-establish the same with the District Central Co-operative Banks. It is in this regard that the impugned circular dated May 17, 1989, produced as annexure-J is issued. Annexure-J is not a direction. It is only an advice issued by the Reserve Bank of India as to the policy to be followed with regard to the financing of the Primary Agricultural Credit Co-operative Societies.
7. The said circular also does not fall under section 54(b) of the Reserve Bank of India Act read with section 21 of the Banking Regulation Act.
8. Section 54 of the Reserve Bank of India Act states that the bank may maintain expert staff to study various aspects of rural credit and development and in particular it may tender expert guidance and assistance to the National Bank; conduct special studies in such areas as it may consider necessary to do so promoting integrated rural development.
9. All that can be said is that it is because of section 54 of the Reserve Bank of India Act, that the Reserve Bank of India could undertake such studies and tender advice. Any study undertaken pursuant to section 54 of the Reserve Bank of India Act and the expert guidance tendered and the expert guidance tendered and the assistance rendered to the Primary Agricultural Credit Co- operative Societies cannot be treated as a direction having the statutory force.
10. Section 21 of the Banking Regulation Act has no relevance because it only with the power of the Reserve Bank to control advances by banking companies. The petitioner-societies are co-operative societies. By no stretch of imagination can they be considered to be banking companies. Merely because one of the functions of the petitioners-co-operative societies is to advance loans to its members and do other financing transactions, they do not become banking companies and do not cease to be co-operative societies governed by the Karnataka Co-operative Societies Act, 1959 (hereinafter referred to as "the Act"). Therefore, we are of the view that the contention that annexure J has statutory force because it falls under section 54(b) of the Reserve Bank of India Act and becomes a direction under section 21 of the Banking Regulation Act, cannot be accepted. It is accordingly rejected. Hence, point No.1 is answered in the negative.
11. Point No.2. - It is also not possible to hold that annexure-A is beyond the executive power of the State because it is beyond the legislative competence of the State Legislature. It is contended by Sri G. R. Gurumath, learned counsel for the petitioners, that as the law governing the banking activities falls within entry 45 of List I of Schedule VII to the Constitution; and as such the law concerning this topic can be legislated only by Parliament and not by the State Legislature; therefore, the circular issued by the State Government governing the banking activities is beyond its legislative competence; that as the executive power does not extend beyond the legislative power of the State, the circular issued in purported exercise of the executive power of the State is invalid.
12. It is not possible to accept this contention. The petitioners are not the banking institutions coming under the purview of the Banking Regulation Act. They are the co-operative societies registered under the Act, and as such they are governed by the provisions of the Act passed by the State Legislature. Consequently, the State Government has control over them to the extent the Act permits. Major activities of the petitioners are to finance its members. For the purpose of financing its members, they borrow money from the financing agencies and repay the same. Merely because the petitioners-the co-operative societies in question-are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor can they be treated as banking companies. It is also not possible to hold that these activities of the petitioners amount to "banking" as contemplated under the Banking Regulation Act, 1949, inasmuch as these co-operative societies are not established for the purpose of doing "banking" as defined in section 5(b) of the Banking Regulation Act, 1949.
13. The validity of annexure-A is challenged on the ground that the State Legislature is not competent to legislate on the topic covered by annexure A, Therefore, the State Government, in exercise of its executive power does not extend over the topics over which legislative power does not extend. Whenever a statute is impugned on the ground that it is ultra vires the powers of the Legislature, the first thing that has to be ascertained is the true character of the statute. The court must examine the enactment as a whole with reference to its objects and the scope and effect of its provisions and decide the controversy, whether the statute falls within the legislative power of the Legislature. The court has to find out the pith and substance of the statute and decide having regard to the pith and substance of the statute in which entry it falls. If the statute incidentally trenches upon and might enter a field under another list, it must be held to be valid in its entirety even though it might incidentally trench on matters which are beyond its competence. (See Delhi Cloth and General Mills Co. Ltd. v. Union of India ).
14. Annexure A, examined in this background, discloses that it is nothing but a direction issued to all Primary Agricultural Co- operative Societies except F.S.C.S. and S.F.S.C.S. that they should have linkage with the District Central Co-operative Banks. Certain modalities are also stated in annexure A for change of linkage from commercial banks to D.C.C. Banks. Thus, annexure-A is nothing but a direction issued by the State Government in exercise of its administrative control over the primary agricultural co-operative societies as permissible under the Act. Therefore, annexure-A cannot be held to deal with the topic or topics falling under entry No. 45 of List I of Schedule VII to the Constitution as in substance it is an administrative direction issued by the State Government to the co-operative societies governed by the Act.
15. In addition to this, it may also be pointed out that entry No. 45 of List I of Schedule VII to the Constitution is equivalent to entry No. 38 of List I, Schedule VII to the Government of India Act, 1935. The Federal Court had occasion to examine the scope of this entry in Bank of Commerce Ltd. v. Nripendra Nath Datta, AIR 1945 FC 7. In that case, the question arose as to whether sections 30 and 36 of the Bengal Money Lenders Act were invalid because the said provisions affected the subject of "banking". It was claimed in that case that the said provisions were ultra vires the powers of the Provincial Legislature. Repelling the said contention, the Federal Court held thus (at page 8) :
"The validity of section 30 and 36 of the Act was also impugned on the ground that even these provisions affect the subject of `banking'. As the liabilities of the debtors in these cases have been fixed with reference to the provisions of these sections it is necessary to deal with this contention separately. Our attention was drawn in this connection to certain observations of Duff C.J. in [1942] SCR (Can) 31-Reference as to Validity of the Debt Adjustment Act, Alberta. A number of objections to the validity of the legislation then in question were considered by the Supreme Court in that case but when the matter went on appeal to the Judicial Committee in Attorney-General for Alberta v. Attorney-General for Canada [1943] AC 356, their Lordships dealt with only one objection (not relevant to the present case) and expressed no opinion on the other points. It has been argued before us that as the application of sections 30 and 36 of the Act will greatly reduce the amount which a bank can recover in execution of decrees obtained by it, these provisions must be held to constitute a serious interference with the conduct of banking business. This contention seems to us to rest on an unduly wide interpretation of the expression `conduct of banking business'. A law of limitation or a law relating to the compulsory acquisition of land may affect the rights of a bank just as they may affect the rights of other suitors or property owners. It would be too much to say that every law which in its operation might affect the property or interests of a bank just as it affects the property or interests of other persons, would constitute an encroachment on entry 38 of List I. On a reasonable construction, the entry must be limited to laws which affect the conduct of the business of banks qua banks. In this view, we must overrule this last objection to the validity of these section."
16. Therefore, it is clear that annexure A cannot be held to affect the subject of "banking".
17. In view of what is stated above, it is not possible to hold that the decision of the Supreme Court in Kerala State Electricity Board v. Indian Aluminium Co. Ltd., , on which reliance is placed by Sri Gurumath, learned counsel for the appellants, has any bearing on the case. Consequently, we are of the view that annexure-A squarely falls within the power of the State Government as it has got control over the co-operative societies in question. Hence point No.2 is answered in the negative.
18. Point No. 3. - Before issuing the circular, annexure-A, there was a Committee set up known as "Task Force". This Committee consisted of several authorities, including the members representing the interest of the co-operative societies. The members of the Committee were as follows :
1. Sri Madanlal, A.C.O., Reserve Bank of India, Bangalore.
2. Sri M. N. Aswathanarayan, JRCS (Credit), Bangalore.
3. Sri H. G. Balagopal, General Manager, State Bank of Mysore, Bangalore.
4. Sri T. M. Rajashekar, D. M. (Agrl.), State Bank of Mysore, Bangalore.
5. Sri S. S. Rao, Divisional Manager, H. O. Canara Bank, Bangalore.
6. Sri N. N. Bhat, Senior Manager, Canara Bank, Bangalore.
7. Sri N. S. Kamath, Senior Manager, Circle Office, Canara Bank, Bangalore.
8. Sri Arun Roy, Divisional Manager, United Commercial Bank, Divisional Office, Bangalore.
9. Sri N. Jagathpal, Manager, H. O. Syndicate Bank, Manipal.
10. Sri K. M. Holla, A.D.O., Zonal Office, Syndicate Bank, Bangalore.
11. Sri V. Jeevendhar Kumar, A.D.O. Zonal Office, Syndicate Bank, Bangalore.
12. Sri S. B. Angadi, Deputy General Manager, Apex Bank, Bangalore.
13. Sri G. V. Ramanathan, Manager, NABARD, Bangalore.
14. Sri P. Das, Deputy Manager, NABARD, Bangalore.
15. Sri R. V. Kulkarni, Deputy Manager, NABARD, Bangalore.
19. This committee examined the matter in its meeting held on March, 18, 1989, and reported to the State Government. The said report reads :
"Scheme for financing of PACS by commercial banks-Task forces meeting on modalities of transfer of PACS to DCCBs. Held on March, 18, 1989-Proceedings.
The Fifth State Level Co-ordination Meeting dated July 14, 1988, chaired by Chief Minister decided to set up a task force under the chairmanship of DGM, National Bank to decide the modalities of retransfer of PACs ceded to commerical banks/RRBs to their respective DCCBs so that the borrower members start getting crop loans from the DCBs from the kharif 1989 season.
Accordingly, a meeting of the task force was convened by the National Bank (Regional Office) at 11. a.m. on March 18, 1989. The list of participants in the meeting is given in annexure I. Welcoming the participants, DGM,Dr. K. P. Agrawal expressed that there has been some delay in convening the task force as it took some time to get full particulars of the present position of PACs (district-wise and bank-wise) ceded to commercial banks/RRBs and also to have the analysis of problems coming in the way of their retransfer. With considerable efforts the position has now finally emerged (annexure II) which, inter alia, indicates that the concentration of ceded societies was only in the case of six commercial banks, viz., State Bank of Mysore, Canara Bank, Syndicate Bank, State Bank of Hyderabad, United Commercial Bank, State Bank of India covering nine districts, viz., Bangalore, Tumkur, Kolar, Hassan, Mysore, Chitradurga, Gulburga, Raichur and Bellary. While there was a sort of consensus among all concerned about the retransfer of PACs to DCCBs, there were some differences about the mode of transfer, payment of dues, etc. Then there was also the problem of RSSNs, which needs to be deliberated. Dr. Agarwal thereafter requested the members to deliberate and discuss to take a final view.
After a detailed discussion, it was the consensus among the participants that all PACs, whether good or bad, need to be transferred from commercial banks and RRBs to the DCCBs concerned. The transfer of FSS will be taken up later on as their problems and solutions to them were different from those of PACs. Some members expressed that in view of the fast approaching kharif season, it may be difficult to complete all the formalities of transfer before the end of April, 1989. However, it was the general opinion that transfer should be completed on a priority basis and, if necessary, with an element of compulsion, because the matter has been delayed due to lack of proper co- ordinated efforts in the past. After deliberations, it was agreed that the process of transfer of PACs should be completed before the end of April, 1989, or latest by May 15, 1989. For this purpose, it was felt necessary that the State Government must pass an order on the same lines as in Andhra Pradesh, ordering retransfer of PACs en bloc to the respective DCCBs. It was decided that the chairman of the task force should immediately take up the matter with the Development Commissioner, Secretary of Co-operation Department and RCS for issue of the Government order urgently. Other formalities of transfer should be over by a time-bound programme within one month from the Government order.
The other decisions taken on the modalities of transfer were as under :
(i) The retransfer of PACs to concerned DCBs will take place on the same terms and conditions as at the time of original ceding, namely, that the current dues and overdues of the concerned PACs will be taken over by the DCCBs on "collection basis" as specified in the RBI circular dated April 14, 1982. The DCCBs will not have to make outright payment for these dues immediately but on recovery of dues, as and when effected, they will pass on the amounts to the commercial banks/RRBs concerned without using them in their business as done in the past. Separate accounts and records will be maintained by DCCBs/RRBs/CBs. The Department of Co-operation/RCs will keep a watch over this through the concerned JRCs/DRCs in the district.
(ii) Cases of misappropriation, etc., showing "gaps" between outstandings at PACs and DCCB levels which normally take a longer period of time for various procedural formalities will be dealt with separately. Efforts will be made for their expeditious disposal and recoveries as and when effected, should be passed on by the DCCB to the comerical banks without their deployment in DCCB business. The RCS/Co-operation Department will help in early disposal of misappropriation cases in particular. The RCS will continue to review the progress of misappropriation cases periodically as being done now.'
(iii) The following formalities of retransfer will be completed on priority basis positively within 30 days from the issue of the Government order for transfer. To facilitate this,
(a) the PACs will pass resolutions favouring their re-ceding to DCCB;
(b) the DCCB concerned shall pass board resolution to take over the PACs;
(c) the commercial banks/RRBs shall issue unconditional "No- objection Certificates" to transfer the PACs;
(d) the concerned Deputy Registrars of Co-operative Societies shall quickly prepare proposals of transfer and send them to the RSC, who will issue final orders quickly;
(e) the controlling offices of commercial banks/RRBs, RCS and Apex bank shall issue necessary orders to their bank branches, Deputy Registrars, DCCBs/PACs respectively, for expediting the above process by setting dead-lines; and
(f) the commercial bank/RRB branches shall prepare a list of new and non-defaulting members of ceded PACs and estimates of their production and credit requirement for kharif 1989, and pass on the same to DCCBs for making preliminary arrangements for supply of credit to their members in time.
It was decided that the national bank will provide adequate credit support to the concerned DCCBs for financing new and non- defaulting members of the receded societies from 1989 kharif season onwards. DCCBs should, therefore, quickly work out on the basis of information furnished by the commercial banks/RRBs or even on their own the credit requirements of these members and submit their applications for credit limits to the National Bank through the apex bank and RCS expeditiously."
20. Therefore, from the aforesaid report it is clear that after taking into consideration the report of the Registrar, who in turn forwarded the same to the Government, that annexure A was issued. It is relevant to notice that, as far as the petitioners are concerned, they are not in any way adversely affected. Hitherto, they were having financial linkage with commercial banks. Now they will continue to have the same linkage with the District Central Co-operative Banks. It is not brought to our notice as to what difference it will make in the working of these petitioners-co-operative societies and how they are adversely affected by a change in the financial linkage. Therefore, we are of the view that there is no question of any civil consequences resulting out of the circular in question by changing the financial linkage. In addition to this, this circular has been given effect to after issuing letters to all the co-operative societies and further requesting them to resolve to have the linking with the District Central Co-operative Banks. Therefore, it is not possible to accept the contention of learned counsel that there is any violation of the principles of natural justice.
21. It is also submitted by learned counsel for the petitioners that it does result in civil consequences because in the case of the co-operative societies which have got linking with the commercial banks,certain portoin of the loans advance by the commercial banks will be retained as deposits and interest is paid on it. Whereas, though the DCC banks retain certain portion of the loan amount, they do not retain it as deposit but convert it into a share amount of the society. Consequently, as a result thereof, it is submitted that the co-operative societies do not get any interest on the amount retained by the DCC bank. It is relevant to notice that the amount converted as share amount of the petitioner-societies will be entitled to dividend. Therefore, it is not possible to hold that any financial loss is caused to the petitioner-co-operative societies by changing their financial linkage from the commercial banks to the DCC banks. Accordingly, point No. 3 is also answered in the negative.
22. It is submitted by learned counsel for the petitioners that the learned single judge ought to have followed a Division Bench decision of this court in D. S. Gowda v. Corporation Bank, . It is relevant to notice that the Gowda's case, , the direction was issued by the Reserve Bank of India to the banking companies, namely, commercial banks for levying interest on the loans advanced to agriculturists on the security of agricultural lands. Such a direction was a direction issued to commercial banks, and as such it did fall within the ambit of section 21 of the Banking Regulation Act. Therefore, the said decision cannot have any bearing on the question concerned in these appeals. Hence, the learned single judge is justified in distinguishing the decision in Gowda's case, .
23. All the contentions raised by the petitioners fail. Consequently, the writ appeals fail and the same are dismissed.
24. After we pronounced judgment, Sri Gurumath, learned counsel for the appellants-petitioners made an oral application for grant of a certificate under article 134-A read with article 133 of the Constitution. We are of the view that the judgment does not involve a substantial question of law of general importance which needs to be decided by the Supreme Court. Hence the certificate is refused.