| SooperKanoon Citation | sooperkanoon.com/381936 |
| Subject | Trusts and Societies;Constitution |
| Court | Karnataka High Court |
| Decided On | Mar-14-2001 |
| Case Number | Writ Petition Nos. 4197 to 4204 and 1995 to 2000 of 1999 |
| Judge | Kumar Rajaratnam, J. |
| Reported in | ILR2001KAR2524 |
| Acts | Karnataka Co-operative Societies Act, 1959 - Sections 2, 17, 17(1), 20, 20(2), 28-A, 28-A(2), 29(1), 29-C, 29-C(1), 29-G, 29-G(6), 39-A, 57, 57(2-A), 57(2-B), 57(4), 63, 109(1), 109(1-A), 109(2), 109(5), 109(7), 109(9), 109(13), 109(14), 110-A and 128-A; Karnataka Co-operative Societies (Amendment) Act, 1998; Constitution of India - Articles 14, 19, 19(1), 21, 38 and 300-A; Companies Act, 1956 - Sections 2(41), 6, 299, 300 and 314; Indian Penal Code (IPC), 1860 |
| Appellant | Arya Vysya Srirama Co-operative Society Limited, Shimoga and Others |
| Respondent | State of Karnataka and Others |
| Appellant Advocate | Sri B. Veerabhadrappa and ;Sri K.M. Nataraj, Advs. |
| Respondent Advocate | Sri A.N. Jayaram, Adv. General, ;Sri M.N. Ramanjaneya Gowda, Additional Government Adv. and ;Sri Shantesh Gureddy, Adv. |
| Disposition | Writ petitions disposed of accordingly |
The Court
1. Issue rule.
These writ petitions are taken up with the consent of parties for final disposal. Heard the learned Counsel for the petitioners and the learned Advocate General for the State.
2. The petitioners, in these writ petitions, challenge various amendments introduced into the Karnataka Co-operative Societies Act, 1959 (hereinafter referred to as the 'Act').
3. The easiest way to understand the case would be to extract the unamended sections and the amended sections of the Act side by side. Only the relevant sub-sections are extracted for the sake of brevity.
Unamended Act
Amended Act by Act No. 25 of 1998
1.
1. Section 17(1)(c)(c)Carries on business of the kind carried on by such Cooperative Society.
1. Section 17(1)(c)(c) Carries on(or any of his near relation carries on) business of the kind carried on bysuch Co-operative Society.
2.
2. Section 29-C(1)(c) (c) He carries ona business of the kind carried on by such Co-operative Society or by aCo-operative Society of which such Co-operative Society is a member.
2. Section 29-C(1)(c) (c) (he or anyof his near relation carries) on a business of the kind carried on by suchCo-operative Society or by a Co-operative Society of which such Cooperative Societyis a member.
3.
3.Section 28-A(2) The Committee of aCooperative Society shall consist of not less than nine members: Providedthat where the committee of a Co-operative Society consists wholly ofindividual members there shall be reserved not less than one seat for ScheduledCastes and Scheduled Tribes and one seat for Women;
3. Section 28-A(2) The committee of aCooperative Society shall consist of not less than nine but not exceeding thenumber of members specified below excluding Government nominees and the ChiefExecutive namely. - (i) in the case of a primary society and a secondary societywhose area of operation extends to:-
Provided further that no suchreservation shall be made if such Society has no woman member or a memberbelonging to Scheduled Castes or Scheduled Tribes, as the case may be.
(a) a part of taluk, nine members
(b) whole taluk, eleven membersbeyond a taluk but not
(c) beyond a district, thirteenmembers beyond a district, eighteen
(d) members in the case of federal
(ii) Society, excluding ApexSocieties, twenty-one members
(iii) in the case of Apex Society,twenty-five members:
Provided that a member shall not represent more than oneconstituency in the committee of a Society.
4.4. Section 28-G(6) (First time)
4. Section 29-GC6)
(6) In respect of Primary Cooperative Societies, theChief Executive shall send a copy of the extract of the cash book dulycertified by him every month to the Registrar and the financing bank or creditagency within fifteen days of the next following month. He shall also send acertified copy of the proceedings of the General Meetings and of thecommittee meetings to the Registrar and financing bank or credit agencywithin fifteen days from the date of such meetings.
5.
4. Section 57(4)(a)(b)
5. Section 67(2-A), (2-B)
(4)(a)
(4)(a) Every Co-operative Society (other than a Co-operativeSociety whose net profits do not exceed five hundred rupees) which declaresthe payment of a dividend to its members on their paid-up share capital at arate of two per cent or more shall contribute towards the CooperativeEducation Fund of such State Federal Society which may be notified in thisbehalf by the State Government at such rate not exceeding one and a half percent of the net profits as may be prescribed.
(2-A) A Co-operative Society shall, from out of thebalance of the net profits, contribute two per cent to the Co-operativeEducation Fund and five per cent to the Sahakari Kalyana Nidhi constituted bythe Government.
(2-B) No Co-operative Society which has failed tocontribute to the Cooperative Education Fund, and Sahakara Kalyana Nidhishall pay a dividend to its members.(4)(b)
(4)(b) No Co-operative Society which is liable to contributetowards the Co-operative Education Fund shall pay a dividend to its membersunless the said contribution is made to the State Federal Society notified asaforesaid.
6.Section 63 The Director of Co-operative Audit shall auditor cause to be audited by a person authorised by him by general or specialorder in writing in this behalf the accounts of every Co-operative Society atleast once in each year.
Section 63(1)(a) The Director of Cooperative Audit shallaudit or cause to be audited, at least once in each year by a personauthorised by him by general or special order in writing in this behalf, theaccounts of every Society which has been given financial assistance by way ofshare capital or loan or subsidy or guarantee by the State Government,financing bank or credit agency from time to time;
(2) The audit under subsection (1) shall include anexamination or overdue debts, if any, the verification of the cash balanceand securities, a valuation of the assets and liabilities, and an examinationof the working and the other prescribed particulars of the Society.
(3) The Directorof Cooperative Audit or the authorised person shall at all times have accessto all the books of accounts, documents, papers, securities, cash and otherproperties belonging to or in the custody of, the Society and may summon anyperson in possession or responsible for the custody of, any such books ofaccounts, documents,
(b) The Societies other than those referred to in clause(a) shall arrange to get their accounts audited at least once in eachco-operative year, by a Chartered Accountant holding a certificate issued bythe Institute of Chartered Accountants of India or by an auditor from thepanel of Auditors maintained by the Director of Co-operative Audit:
papers, securities, cash or Other properties to producethe same at any public office at the headquarters of the Society or any branchthereof.
Provided that every third year the accounts of theSocieties falling under this clause shall be audited or caused to be auditedby the Director of Co-operative Audit or by a person authorised by him inthis behalf.
(4) Every person who is or has at anytime being anofficer or employee of the Society and every member and past member of theSociety shall furnish such information in regard to the transaction andworking of the Society as the Registrar or the person authorised by him mayrequire.
(4-A) Every Co-operative Society shall for eachCooperative year prepare and furnish within two months from the end of thatyear, to the Registrar and the Director of Co-operative Audit, a statementshowing the receipt and disbursements, profit and loss and the balance sheetfor the year and such statements and returns as the Registrar or the Directorof Co-operative Audit may direct.(2) The audit under subsection (1) shall include anexamination of overdue debts, if any, the verification of the cash balanceand securities, a valuation of the assets and liabilities, and an examinationof the working and the other prescribed particulars of the Society.
(5) The Director of Cooperative Audit shall communicatethe result of the audit to the Society, the Registrar and to the FinancingBank or credit agency and, if the Society is affiliated to any other Society,to such Society.
(3) The Director of Cooperative Audit or the personauthorised by him or the person conducting audit under clause (b) ofsub-section (1) shall at all times have access to all the books, accounts,documents, papers,
securities, cash and other properties belonging to, or inthe custody of, the Society and may summon any person in possession orresponsible for the custody of any such books, accounts, documents, papers,securities, cash or other properties, to produce the same at any publicoffice at the head-quarters of the Society or any branch thereof.(6) Notwithstanding anything contained in this sectionthe account of Milk Co-operative Unions and Milk Co-operative Federations inthe State be audited or caused to be audited by an Audit Board constituted inthe prescribed manner by the Government in accordance with such rules as maybe prescribed.
(4) Every person who is or has at any time been, anofficer or employee of the Society and every member and past member of theSociety shall furnish such information in regard to the transactions and workingof the Society as the Director of Co-operative Audit or the personsauthorised by him or the person conducting audit under clause (b) ofsub-section (1) may require. (4-A) Every Co-operative Society shall for eachcooperative year, prepare and furnish within two months from the end of thatyear, to the Registrar and the Director of Co-operative Audit, a statement showingthe receipts and disbursements, profit and loss and the balance sheet for theyear and such other statements and returns as the Registrar or the Director ofCo-operative Audit may direct.
(5) The Director of Cooperative Auditor the person conducting audit under clause (b) of sub-section (1) shall sendcopies of the audit report and communicate the results of audit to theCooperative Society, the Registrar and to the financing bank or creditagency, and if the Society is affiliated to any other Cooperative Society, tosuch Cooperative Society.(6) The Director of Co-operative Auditor any officer authorised by him shall have right to receive all notices and everycommunication relating to the annual general meeting of a Co-operativeSociety and to attend such meeting and to be heard thereat, in respect of anypart of the business with which he is concerned as auditor.(7) If the result of the audit held undersub-section (1) discloses any defects in the working of Society, the Societyshall within six months from the date of the audit report explain to theDirector of Co-operative Audit and to the Registrar the defects or theirregularities pointed out in audit, and take steps to rectify the defects andremedy the irregularities and report to the Registrarthe action taken by it thereon. TheRegistrar may also make an order directing the Society or its office-bearersto take such action, as may be specified in the order to remedy the defects withinthe time specified therein.(8)(a) Any Society aggrieved by anyitem held under objection in the audit report may apply to the Director ofCo-operative Audit for its deletion within six months of the receipt of theaudit report.(b) The Director of Co-operativeAudit may on receipt of the application under clause (a) summon the productionof documents, if any, pertaining to the objection and examine the same. Hemay also examine any person including the auditor and order for deletion orconfirmation of the audit objection and on deletion, the objection shall at andremoved from the balance sheet of the Society and on confirmation, the amountheld under objection shall be recoverable.(9) The Registrar shall submithalf-yearly reports to the State Government furnishing details of the numberof defects disclosed in audit, number of defects rectified, action taken toremedy the defects and the reasons for pendency, if any. A copy of suchreport may be forwarded to the Director of Co-operative Audit.(10) If it appears to the StateGovernment on an application by a Co-operative Society or otherwise that it isnecessary or expedient to re-audit any account of a Society, the StateGovernment may, by an order provide for such re-audit and the provisions ofthe Act and the rules applicable to the audit shall apply to such re-audit:Provided that such a re-audit shall not be ordered i n respect of any yearfor which an audit report was issued more than three years prior to the dateof such order: Provided also that such re-audit shall be ordered only whenthere is a prime facie case of fraud or misappropriation or embezzlementof Funds not detected or properly examined by the auditor during regularaudit or misclassification of accounts or for any other valid reasons with aview to truly reflect the financial position of the Society.(11) Notwithstanding anything contained in thepreceding sub-sections, the Director of Co-operative Audit shall have powerto re-examine or re-verify the audited accounts of any Co-operative Societypertaining to any year and incorporate the lapses observed during suchre-examination or re-verification in the next audit report to be issued.7. Section 110- A. Power to compoundoffences. -(1) The Registrar may accept from anyperson against whom a reasonable suspicion exists that he has committed any offencepunishable under subsections (1), (1-A), (2), (5), (7), (9), (13) and (14) ofSection 109 a sum of money not exceeding one thousand rupees by way ofcomposition for the offence which such person is suspected to have committed.(2) On the payment of such money tothe Registrar the suspected person if in custody shall be discharged, theproperty, if any, seized shall be released and no further proceeding shall betaken against such person or property.4. The petitioners are the Co-operative Societies registered under the Act. The area of operation is confined to their respective town in which they are situated. The total membership of petitioners Co-operative Societies and the number of Directors in the Board of Directors are as follows.--
Sl. No.
No. ofmembers
No. ofDirectors
1.
1stpetitioner
2475
15
2.
2ndpetitioner
3157
15
3.
3rdpetitioner
1007
15
4.
4thpetitioner
850
15
5.
5thpetitioner
738
15
6.
6thpetitioner
57
13
7.
7thpetitioner
1980
15
8.
8thpetitioner
167
11
5. It was submitted that the Karnataka Co-operative Societies Act, 1959 was amended from time to time and now it is amended by Karnataka Act No. 25 of 1998 which came into force on 15-8-1998 and some of the amending sections were given effect to on 27-10-1998. The major changes which affected the rights of the petitioners and their members are Sections 17, 20, 28-A, 29-C, 29-G, 39-A, 57, 63 and 110-A of the Act.
6. It is submitted that the amended Act takes away the right to prescribe the maximum number of members and prescribes the maximum number of members with reference to the area of operation of a Co-operative Society irrespective of total number of members. The classification made by the legislature for the purpose of fixation of maximum number of members in the committee of management is arbitrary and has no basis. It is submitted that the total strength of the members of the Society shall be taken and not the area of operation. The primary societies are having limited area of operation but have more members than the Apex Societies having larger area of operation. Therefore, it is unreasonable and arbitrary to take the area of operation as the criteria for the purpose of determination of maximum number of members/directors in the committee of management. There is no rationale or nexus between the area of operation and the members of the committee of management.
7. It is further submitted that the amended Section 17(1)(c) disqualifies a person from becoming or continuing as member and Director of a Co-operative Society is unreasonable, arbitrary and violative of Articles 14, 19(1)(c), 19(1)(g) and 21 of the Constitution.
8. It is submitted that Section 20(2)(a-iii) depriving existing members from exercising voting rights is arbitrary and violative of Article 14 of the Constitution. The amended Section 20(2)(a-iii) cannot be made retrospective and it can only be prospective.
9. It is submitted that fixing maximum number of Directors in a committee of management is arbitrary as it fixes the maximum number taking the area of operation of the Society rather than number of members which has nexus to democratic principles. It has taken away the individual rights of the members and is violative of Articles 19(c) and 38 of the Constitution. It denies reasonable opportunity to members fromparticipating in administration of the Co-operative Society. It failed to take note of the fact that Co-operative Societies and local bodies serve as grass-roots of democracy. It is further submitted that Section 29-G(6) imposes unreasonable and unworkable duties on the Society by imposing restrictions.
10. It is submitted that Section 57(2-A) and (2-B) imposing Co-operative Education Fund and Sahakari Kalyana Nidhi is without authority of law and beyond the legislative competence of State Legislature. It is not authorised by any of the entries in List II of Schedule VII of the Constitution.
11. It is further submitted that Section 110-A is contrary to the general law i.e., Indian Penal Code. It minimises the punishment for an offence which would have a severe punishment for the same offence under Indian Penal Code and it is beyond the competence of State Legislature.
12. Therefore, the petitioners have filed these writ petitions challenging the various amendments introduced into the Act.
13. At the outset when a challenge is made to any statute the Court will not question its validity on the ground of lack of legislative wisdom. All that the Court can do is to consider whether the amendments have been made on an intelligible and understandable basis having regard to the object of the statute. It is equally clear that Courts will not strike down a statute at the drop of a hat. The Supreme Court has often cautioned Courts from questioning the validity of a statute on the ground of lack of legislative wisdom. The legislative wisdom of a statute is to be presumed.
14. In this background, I shall deal with each of the amendments referred to above at paragraph 3.
15. Under Section 17 of the unamended Act no person shall be eligible for admission as a member of Co-operative Society if he.-
(a) has applied to be adjudicated as an insolvent or is an undischarged insolvent; or
(b) has been sentenced for any offence other than an offence of a political character or an offence not involving moral turpitude such sentence not having been reversed or the offence pardoned and a period of five years has not elapsed from the date of expiry of the sentence;
(c) if he carries on business of the kind carried on by such Cooperative Society;
(d) if he is already a member of a Co-operative Society which carries on business of the same kind.
16. In all the above cases under the old Act he ceased to be a member from the date when the disqualification had occurred.
17. We are primarily concerned with the explanation of the definition 'near relation'. Before the amendment, the disqualification applied onlyif that person who seeks to be a member is carrying on business similar to that carried on by the Co-operative Society. After the amendment it included not only that person who seeks to be a member but also if his near relations carry on business similar to that of the Society. In other words, not only should the member not carry on business similar to the one carried on by the Co-operative Society but even if his near relation carries on a similar business the member stands disqualified under the amended Act.
18. Near relation is defined under clause (f) of sub-section (1) of Section 29-C. The explanation in the said sub-section reads as follows:
'(i) husband, wife and unmarried daughter;
(ii) father, mother, undivided son, undivided brother and unmarried sister; and
(iii) such other relations as may be prescribed to be a near relation'.
19. In other words, a person cannot be a member of the Co-operative Society if the person's husband, wife, unmarried daughter, father, mother, undivided son, undivided brother and unmarried sister and such other relations as may be prescribed later to be a near relation, if any one of them carries on the same kind of business as that of the Society.
20. It is mind-boggling to think all the categories that come under explanation to Section 29-C(1)(f). It is not known how the explanation could include near relations to be prescribed later apart from the categories already enumerated. In other words, there is power to include such other persons as may be prescribed as near relations subsequently. This is an unfettered and undefined power at the discretion of the legislature. What such other persons is not defined in the explanation.
21. Apart from the unfettered power the definition of 'Near Relation'' is too wide. It practically includes every other person around you.
22. The spirit of the co-operative movement as contemplated by the founders of the co-operative movement and by various statutes in the country is to encourage people particularly rural people to join the co-operative movement. If that aim is to be achieved, it would be practically impossible for most of the citizens to be members of a Co-operative Society. It will also discourage persons from joining the co-operative movement apprehending that some near relations over whom the member has no control does some business akin to the business transacted by the Co-operative Society.
23. Learned Advocate General submitted that the definition of 'near relation' as incorporated in the explanation of the Act is not violative of Articles 14 and 19(1)(g) of the Constitution. It was introduced only for the purpose of transparency and the definition of near relation is neither rigorous nor arbitrary. The learned Advocate General also submitted that similar provisions were also available under the provisions of theCompanies Act, 1956. Reliance was placed on Section 2(41) of the Companies Act, 1956. Section 2(41) of the Companies Act reads as follows.-
' 'Relative' means, with reference to any person, anyone who is related to such person in any of the ways specified in Section 6, and no others'.
Section 6 reads as follows.--
'Meaning of 'relative'.--A person shall be deemed to be a relative of another, if, and only if.-
(a) they are members of a Hindu undivided family; or
(b) they are husband and wife, or
(c) one is related to the other in the manner indicated in Schedule I-A'.
A further explanation is given under Schedule I-A. Schedule I-A reads as follows.-
'List of relatives:
1. Father
2. Mother (including step-mother)
3. Son (including step-son)
4. Son's wife
5. Daughter (including step-daughter)
6. Father's father
7. Father's mother
8. Mother's mother
9. Mother's father
10. Son's son
11. Son's son's wife
12. Son's daughter
13. Son's daughter's husband
14. Daughter's husband
15. Daughter's son
16. Daughter's son's wife
17. Daughter's daughter
18. Daughter's daughter's husband
19. Brother (including step-brother)
20. Brother's wife
21. Sister (including step-sister)
22. Sister's husband'.
24. By this it was submitted by the learned Advocate General that the definition of 'relations' is so wide in the Companies Act that it cannot be said that the definition of 'near relation' in the Act is rigorous or arbitrary.
25. At first blush the argument is tempting but on a closure scrutiny it cannot hold water. Section 314 of the Companies Act stipulates that no Director shall hold any office of profit or no person who is related to a Director shall hold any office of profit unless such office of profit is with the consent of the company by a special resolution passed by the general meeting of the company. Even in case where a relation holds an office of profit without the knowledge of the Director, consent can be obtained retrospectively within three months from the date of appointment.
26. Section 299 of the Companies Act also deals with disclosure of interest by a Director. It stipulates that every Director of a company who is in anyway, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of Directors. Section 300 of the Companies Act stipulates that no Director shall as a Director take part in any discussion or vote in a matter in which he is directly or indirectly concerned or interested in the contract or arrangement.
27. It appears to me that there is no provision in the Companies Act which bars a person from becoming a shareholder if his 'near relation' is on the Board of Directors. There is also no provision in the Companies Act which has been pointed out to me to show that a person cannot be a Director of a company merely because his 'near relation' is doing the same kind of business as that of the company. All that is required under the Companies Act is that the director should disclose his interest or his near relation's interest in any transaction by the company. Even if the Director has an interest or his near relation has an interest, he should not participate in the Board Meeting when the Board takes its decision on that matter. Apart from that, there is no other prohibition in the Companies Act which bars a person from being a Director of a company merely because his near relation is doing the same kind of business.
28. Please compare this with the provisions of the Act. Section 17(1)(c) of the Act before amendment states 'carries on business of the kind carried on by such Co-operative Society'. After the amendment Section 17(1)(c) states 'carries on (or any of his near relation carries on) business of the kind carried on by such Co-operative Society'. Section 17 clearly stipulates that no person shall be eligible for admission as a member of a Co-operative Society if any of his near relation carries on business of the kind carried on by such Co-operative Society. In other words, if a person's relation carries on business of a similar nature, he shall be ineligible to be a member of a Co-operative Society. As stated earlier 'near relation' is defined as husband, wife, unmarried daughter, father, mother, undivided son and unmarried sister and such other relations as may be prescribed to be near relations.
29. See the sweeping bar on a person becoming a member of a Co-operative Society even if his father, mother, undivided son, undivided brother, unmarried sister and such other relations as may be prescribed as 'near relations' who carry on the same business as that of the Co-operative Society. It is not known how such an embargo would help the co-operative movement. It is not too difficult to visualise a situation where a person can be prevented from being a member or disqualified if any of his near relations start a business similar to that of a Co-operative Society and seek for disqualification of the member. What physical control can a person have over such person who are 'near relations'. It may lead to a mischief of some near relation deliberately starting a business similar to the one that is carried on by the Co-operative Society and seek disqualification of the member. I do not see any rational in such a sweeping definition of 'near relations'. The definition 'near relations' includes undivided brother and unmarried sister. How is it possible in these days to prevent an unmarried sister from carrying on her own business? What control can a member have over an unmarried sister?
30. The counter-affidavit filed by the State took a feeble stand that the Societies who have filed these writ petitions are not aggrieved with regard to the disqualification of members and only an individual can be aggrieved. It was further stated that this restriction has been placed to prevent the unhealthy transactions of the Society with 'near relations' and that restriction is a reasonable restriction.
31. No instances have been cited before this Court in the counter-affidavit to show that there was instance of 'near relations' indulging in unhealthy competition with the Co-operative Society. The Act has been in force since 1959 and not a single instance has been brought to the notice of this Court that the co-operative movement was prejudiced because of the business carried on by a 'near relation'. Of course it is not for this Court to question the wisdom of the legislature. But equally when a statute appears clearly is in violation of Articles 14, 19(1)(c), 19(1)(g) and 21 of the Constitution, such a provision in the Act cannot be sustained.
32. The Supreme Court in Roop Chand Adlakha and Others v Delhi Development Authority and Others, at paragraph 7 had pronounced as follows.-
'7.....But then the process of classification is in itself productive of inequality and in that sense antithetical of equality'. The process would be constitutionally valid if it recognises a pre-existing inequality and acts in aid of amelioration of the effects of such pre-existent inequality. But the process cannot in itself generate or aggravate the inequality. The process cannot merely blow up or magnify insubstantial or microscopic differences on merely meretricious or plausible differences. The over-emphasis on the doctrine of classification or any anxious and sustained attempts todiscover some basis for classification may gradually and imperceptibly deprive the article of its precious content and end in replacing Doctrine of Equality by the doctrine of classification. The presumption of good faith in and of constitutionality of a classification cannot be pushed 'to the point of predicating some possible or hypothetical but undisclosed and unknown reason for a classification rendering the precious guarantee of equality 'a mere rope of sand'.
'To overdo classification is to undo equality'. The idea of similarity or dissimilarity of situations of persons, to justify classification, cannot rest on merely differentia which may, by themselves be rational or logical, but depends on whether the differences are relevant to the goals sought to be reached by the law which seeks to classify. The justification of the classification must needs, therefore, to be sought beyond the classification. All marks of distinction do not necessarily justify classification irrespective of the relevance or nexus to objects sought to be achieved by the law imposing the classification'.
(emphasis supplied)
33. Let me now deal with Section 29-C which relates to disqualification for membership of the committee. What is sauce to the goose is sauce to the gander. If this Court holds that the definition 'near relations' is extended without any rational or basis for the purpose of being a member, such extension of 'near relation' to be a member of the committee is equally unsustainable and is violative under Articles 14 and 19 of the Constitution.
34. The definition of 'near relation' extending to all kinds of persons who are really speaking not 'near relations' would be detrimental to the co-operative movement. It also would cause mischief insofar as any near relation over which that member has no control can start rival business and seek disqualification of that member,
35. The Supreme Court in the case of Bidi Supply Company v Union of India and Others, at paragraph (5) held as follows.-
'(5) Article 14 of the Constitution enjoins that the State shall not deny to any person equality before the law or the equal protection of the laws within the territories of India. The expression 'the State' used in Part III of the Constitution which deals with fundamental rights includes, unless the context otherwise requires, the Government and Parliament of India and the Government and the legislatures each of the States and all local or other authorities within the territory of India or under the control of the Government of India.
The scope and effect of Article 14, insofar as it protects all persons against discriminatory and hostile legislation, have been discussed and explained by this Court in a series of casesbeginning with Chiranjit Lal Chowdhury v Union of India and Others and ending with 'Budhan Choudhry v State of Bihar'. In the last mentioned case a Full Bench of this Court summarised the result of the earlier decisions on this point in the words following:
'It is now well-established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and (2) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different basis; namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well-established by the decisions of this Court that Article 14 condemns discrimination not only by a substantive law but also by a law of procedure''.
We have, therefore, to approach the problem posed before us bearing in mind the above principles laid down by this Court insofar as they may be applicable to the facts of the present case''.
In other words, the classification must be founded on an intelligible differentia and that differentia must have a rational relation with the object sought to be achieved by the statute in question.
36. In the case of Bidi Supply Company, supra, at paragraph 19 the Supreme Court held as follows.-
'Nor, in the past, has this Court hesitated to strike down the Act or Order itself when it confers unrestricted power as here. That was what happened in the Coal control case; M/s. Dwarka Prasad Laxmi Narain v State of Uttar Pradesh and Others, the Order itself was struck down and not the executive action taken by the unrestricted powers conferred by that law. See page 227 where it was said-
'The order commits to the unrestrained Will of a single individual the power to grant, withhold or cancel licences in anyway he chooses and there is nothing in the order which would ensure a proper execution of the power or operate as a check upon injustice that might result from improper execution of the same'.
So also in the State of Madras v V.G. Row , it is true that these were cases under Article 19 and not 14 of the Constitution but the principle is the same. I need not multiply instances'.
37. In my opinion the restriction placed on a member is arbitrary and irrational and it does not in anyway serve the co-operative movement and is violative of Articles 14 and 21 of the Constitution.
38. I accordingly hold that the words 'or any of his near relation carried on' in Section 17(1)(c) and the explanation to Section 17(1)(c) and the explanation immediately after and Section 29-C(1)(f) is liable to be struck down and is struck down as being violative of Articles 14, 19 and 21 of the Constitution of India and in Section 29-C(1)(c) the words 'or any of his near relation' and the proviso therein and the explanation of 'near relation' immediately after Section 29(1)(f) and the words 'or any of his near relation' and its explanation of 'near relation' for the purpose of disqualification is liable to be struck down and is struck down as being violative of Articles 14, 19 and 21 of the Constitution of India.
39. A challenge has been made to the amendment under Section 28-A of the Act. Before the amendment Section 28-A stipulated that the committee of the Co-operative Society cannot he less than 9 members with certain reservations for Scheduled Castes, Scheduled Tribes and for women. After the amendment by Act 25 of 1998 a cap was put on the total number of the committee members depending on the area of operation.
40. In case of primary societies and Secondary Societies the limit was 9 members for the part of a taluk. It was 11 members for the whole taluk. Beyond the taluk but not beyond the district limit was 13 members, beyond the district was 18 members. In case of Federal Society it was 21 members. In case of Apex Society it was 25 members.
41. We are not now concerned with the limit on committee of members fixed for Federal Societies and Apex Societies. We are only concerned with the limit fixed for primary societies.
42. It was submitted by Mr. Veerabhadrappa, learned Counsel for the petitioners that as a result of this amendment in case of Societies having the area of operation in part of taluk the minimum is also 9 and maximum is also 9. Therefore, the right to prescribe the maximum is taken away. It was further submitted that the entire basis for fixing the maximum number of members of a committee is based on the area of operation of the Co-operative Society irrespective of the total members. The total strength of the members of the Society was not taken into account and only the area of operation was taken into account.
43. It was further submitted that the primary societies though having limited area of operation have more members than the Apex Society having larger area of operation. The classification is unreasonable and arbitrary. To take the area of operation as the criteria for the purpose ofdetermination of maximum number of Directors is irrational and has no nexus with the objects of the Act.
44, Mr. Veerabhadrappa, learned Counsel also pointed out that the total membership of petitioners Co-operative Societies and the total number of Directors in the Board of Directors are as follows:
Sl No.
No. of members
No. of Directors
1.
1st petitioner
2475
15
2.
2nd petitioner
3157
15
3.
3rd petitioner
1007
15
4.
4th petitioner
850
15
5.
5th petitioner
730
15
6.
6th petitioner
57
13
7.
7th petitioner
1980
15
8.
8th petitioner
167
11
45. He submitted that many primary societies have thousands of members and to limit the number of Directors would be arbitrary and wilfull interference in the affairs of the Co-operative Society. It was also pointed out that there was absolutely no complaint against the primary societies in having Directors far in excess of a reasonable limit. It was submitted that the amendment is a direct interference in the autonomy of a Co-operative Society to run its affairs in accordance with the bye-laws.
46. Learned Advocate-General strenuously submitted that fixing the number of members of the committee of Management of a Co-operative Society based on the area of operation of the Society is neither arbitrary nor violative of Article 14 of the Constitution. He further submitted that there was nothing wrong in the legislature to rationalise the affairs of Co-operative Society based on the area of operation. He also submitted that the maximum number of committee members allotted to each category of primary society is sufficient. Although there may be hundred or thousand members is a primary society, the committee of Management is fixed on the basis of the area of operation of the Society. There cannot be an objection for any Society to manage the affairs of the Society within the limit fixed with respect to the area of operation. The minimum has been fixed as 9 members and the maximum for a primary society is fixed as 18 members depending on the area of operation. Therefore, it was submitted that the difference in the number of committee members with respect to a primary society, Federal Society and Apex Society is based purely on the area of operation and no objection can be taken with that criteria.
47. As stated earlier we are not now concerned with the limit fixed for Federal Society and Apex Society. We are only dealing with the cap fixed for Primary societies.
48. Section 2(h-1) defines 'primary society'. Accordingly a primary society means a Co-operative Society whose membership is not open to another Co-operative Society. Throughout Section 2 no distinction is made in the definition of a primary society on the basis of the area of operation. For the first time a definition is sought to be introduced by legislation under Section 28-A of the Act dividing a primary Society into four categories:
(a) a part of a taluk, nine members;
(b) whole taluk, eleven members;
(c) beyond a taluk but not beyond a district, thirteen members;
(d) beyond a district, eighteen members.
49. As long as the definition of a primary society is clear and unambiguous it appears to me that Primary Society cannot be further dissected into four categories. If that was the intention of the legislature to define primary society into four kinds of primary societies depending on the area of operation then it would have found a place in Section 2 of the Act (Definition Section).
50. Section 2(h-1) of the Act defines a primary society as a Co- operative Society whose membership is not open to another Co-operative Society. Nothing more nothing less.
51. The primary Societies are the backbone of the Co-operative movement. Some primary societies although the area of operation is restricted to part of the taluk or the whole of the taluk have membership running into thousands of members. No statistics has been brought to the notice of the Court to show that the unamended section was subject to the misuse or mischief. On the average at present the maximum number of Directors of a primary society had been approximately 10 to 15 per Society.
52. An amendment that is sought to be introduced must resolve some mischief and it should not be an amendment for the sake of amendment. The Act recognises only one form of primary society. It does not contemplate four categories of primary societies and any distinction between one primary society and other primary society on the basis of the area of operation alone cannot be sustained unless different categories of primary societies are defined under the provisions of the Co-operative Societies.
53. Any distinction between categories of primary societies should and ought to have found a place in the definition of a primary society. When there is no distinction in the definition of the Co-operative Society it is not permissible to further categorise primary societies on the basis of area of operation without legal definition in Section 2(h-1). It is common ground that the categorising of the area of operation was only an administrative mechanism and not a legal one.
54. It is common knowledge that in some cases the primary societies whose area of operation extends to part of taluk have more members than a primary society whose area of operation extends to beyond thedistrict. If that be so, why should a part taluk have only nine members and a Society which extends beyond the district have 18 members. There appears to be no basis for limiting the number of Directors of a primary society except on the basis of the area of operation. The total membership of the Society has been ignored. The definition of a primary society has been ignored. On the contrary, under Section 28-A(2) four categories are created for the first time depending on the area of operation. If there was such a need to divide the Primary Society, it should have found a place in Section 2 which defines a 'primary society'. This definition which finds a place in Section 28-A(2) is purely for the purpose of administration and not for the purpose of legal definition. Throughout the provisions of the Karnataka Co-operative Societies Act apart from Section 28-A(2) there is no mention of different categories of Primary Co-operative Societies. On the contrary, Apex Society and Federal Society have been defined under Section 2. The Act contemplates only one category of primary society. The provision of the Act contemplates only one form of primary society. Any further division of primary societies only for the purpose of putting a cap on the total number of Directors is clearly discriminatory and violative of Article 14. If a cap was put on the primary societies in general, such a thing may have been permissible. The said division of Co-operative Societies must be on the basis of a definite definition and the law does not define different categories of primary society under Section 2(h-1) and (j-2). It is not permissible for the Legislature to discriminate between one kind of primary society with that of other kind of primary society only for the purpose of fixing the limit on the committee of members. This is specially so, when it is common ground that a part taluk Society has more members in some cases than a whole taluk Society and a whole taluk Society has more members than a Society beyond the taluk but not beyond the district and a Society not beyond the district has more members when a Society which is beyond the district, When such is the admitted fact, it is not necessary to refer to the statistics produced by the petitioners since it is common ground that a part taluk Society invariably has more members than a whole taluk Society. Therefore, there cannot be any objection in fixing a limit on the number of Directors as a whole for primary societies. But to further split primary societies into categories without defining it in the definition section is clearly violative of Article 14. The amendment ought to have applied to all the primary societies equally. Any discrimination between primary societies only for the purpose of limiting the number of members of the committee is clearly violative of Article 14 of the Constitution of India.
55. The Supreme Court in the case of Bidi Supply Company, supra, at paragraph 18 held as follows.-
'I endeavoured to point out in my judgment in the case of State of West Bengal v Anwar Ali Sarkar and Another, that one can conceive of classifications that conform to all these rules and yet which are bad; classifications made in the utmost good faith;classifications that are scientific and rational, that will have direct and reasonable relation to the object sought to be achieved and yet which are bad because despite all that the object itself cannot be allowed on the ground that it offends Article 14.
In such a case, the object itself must be struck down and not the mere classification which, after all, is only a means of attaining the end desired; and that, in my judgment, is precisely the point here. It is the very point that Fazi Ali, J., made in the case of Anwar Ali Sarkar, supra.-
'It was suggested that the reply to this query is that the Act itself being general and applicable to all persons and to all offences, cannot be said to discriminate in favour of or against any particular case or classes of persons or cases, and if any charge of discrimination can be levelled at all, it can be levelled only against the act of the executive authority if the Act is misused. This kind of argument however does not appear to me to solve the difficulty.
The result of accepting it would be that even where discrimination is quite evident one cannot challenge the Act simply because it is couched in general terms, and one cannot also challenge the act of the executive authority whose duty it is to administer the Act, because that authority will say: I am not to blame as I am acting under the Act. It is clear that if the argument were to be accepted, Article 14 could be easily defeated.
I think the fallacy of the argument lies in overlooking the fact that the 'insidious discrimination complained of is incorporated in the Act itself, it being so drafted that whenever any discrimination is made such discrimination would be ultimately traceable to it''.
56. The Supreme Court in T. Devadasan v Union of India and Another, at page 179 has defined 'equality' as follows.-
'What is meant by equality in this Article is, equality amongst equals. It does not provide for an absolute equality of treatment to all persons in utter disregard in every conceivable circumstance of the differences such as age, sex, education and so on and so forth as may be found amongst people in general. Indeed, while the aim of this Article is to ensure that invidious distinction or arbitrary discrimination shall not be made by the State between a citizen and citizen who answer the same description and the differences which may obtain between them are of no relevance for the purpose of applying a particular law reasonable classification is permissible. It does not mean anything more'.
57. The Supreme Court in various pronouncements has clearly held that Article 14 contemplates doctrine of equality and not a doctrine of classification. The classifications shall be reasonable and should have a nexus with the object to be achieved. The object of classification should not be arbitrary, discriminatory or hostile. In the object of classification shall not vary from persons to persons so classified, flam Krishna Dalmiya v Justice S.R. Tendolkar and Others; In re The Special Courts Bill, 1978, Bidi Supply Company's case, supra, and Roop Chand's case, supra.
58. I accordingly hold that all Primary and Secondary Co-operative Societies shall have a common minimum and a common maximum as committee members. I also hold that maximum prescribed under Section 28-A(2)(i)(d) beyond district 18 members will hold good to all the Primary and Secondary Co-operative Societies. Accordingly the maximum limit under Section 28-A(2)(i)(a), (b) and (c) are struck down as violative of Article 14 of the Constitution.
59. A feeble challenge has also been made to Section 110-A of the Act. It was submitted by Mr. Nataraj that Section 110-A is contrary to the Indian Penal Code and it minimises the punishment for an offence which would have a severe punishment for the same offence under Indian Penal Code and opposed to the object of the Act. It is beyond the competence of State Legislature, arbitrary and illegal.
60. With respect to violation of certain provisions of the Act penalties have been provided under Chapter XIV. This has been done for the strict enforcement of the provisions of the Act and the said provision is neither unconstitutional nor ultra vires and only regulatory and only for the better management of the Societies. The provision has been made only for the implementation of the provisions of the Act. It does not in any way deny the aggrieved party or the Society to also take steps in accordance with law under the provisions of the Indian Penal Code or any other Penal Law in force. I, therefore, hold that Section 110-A is neither unconstitutional nor contrary to the objects enshrined in the Act.
61. We shall now deal with constitutional validity of the provisions of Section 57(2-A) and 57(2-B) of the Co-operative Societies Act. According to Section 57(2-A) the Co-operative Society shall from out of the balance of the net profits, contribute two per cent to the Co-operative Education Fund and five per cent to the Sahakara Kalyana Nidhi constituted by the Government.
62. Section 57(2-B) states that no Co-operative Society which has failed to contribute to the Co-operative Education Fund and Sahakara Kalyana Nidhi shall pay a dividend to its members. The petitioners are the Co-operative Societies established by contribution by members. The petitioners and its members are competent to decide as to how the net profits of a Society has to be utilised. It was submitted that the Statecannot interfere in such matters and the restriction that the Societies must not pay dividends to its members before payment to the Co-operative Education Fund and the Sahakara Kalyana Nidhi is illegal, unreasonable and unjustified.
63. It was further submitted that there is no quid pro quo for demanding a portion of the profit from the Societies. Only the profit making Societies are required to make contribution. No service is rendered by the Government in return for the payment. The compulsory payment of money from the profit of the Society has no reasonable nexus with the object to be achieved by such a demand.
64. It was further submitted that there is a discrimination between profit making Societies and non-profit making Societies. Such a discrimination is violative of Article 14 of the Constitution. It was finally submitted that the demand is neither a fee nor a tax.
65. The learned Advocate General submitted that the Co-operative Movement is a formidable movement in India. It has spread like a banian tree giving aid and succour to thousands of people. It is a social movement and the Co-operative Societies have to give something in return out of the profit for the welfare and well-being of former members of the Co-operative Movement. Some of these members are in distress. The Education Fund is to be used for the education of the children of poor co-operative members. The Funds from the Nidhi is to be used exclusively for training members with respect to the rights, duties and obligations under the Co-operative Movement. The learned Advocate General made an impassioned plea and even put it as pious obligation for the Societies to contribute to the Fund as well as to the Nidhi. The learned Advocate General, however, was not able to state whether it is a fee or a tax, but only a regulatory fee.
66. It was submitted that the Government has constituted a committee and Rules have been framed with regard to the operation of the Funds and the purpose for which the Funds shall be utilised. The intention of the State Legislature in amending the Section is to help persons who have rendered outstanding contribution for all-round development of the Co-operative Movement in the State. It is mainly for the members of the Societies to maintain its members and, therefore, the State Legislature has every right to enact such a legislation. It was further submitted that though the Government has not contributed any share capital to the petitioners' Societies, it has applied the amending section uniformly to all Co-operative Societies in the State. The very purpose of forming the Fund is to formulate a useful plan for overall development of the Co-operative Movement. The provision in the Act has been introduced to encourage the Co-operative Movement which leads to economic development of the Nation as a whole. It was submitted that it is in conformity with the principles enunciated by the International Co-operative Movement. It was further submitted that the proposed Nidhi is meant to serve past and present members with much wider and comprehensive help in promoting the Co-operative Movement.
67. Mr. Shantesh Gureddi, the learned Counsel for the State Co-operative Federation (the impleading applicant) submitted that this Court by an interim order dated 28-8-1999 stayed the operation of the provision subject to the condition that the petitioners shall deposit the Education Fund amount and Kalyan Nidhi amount separately and not to utilise the same. When the said order was passed, the 5th petitioner has sent a letter to the respondent-Federation asking the respondent to refund the entire amount of contribution made by them towards Education Fund prior to the grant of the stay order.
68. It was submitted that the co-operative institutions are making contributions towards Education Fund since 1965 and the petitioners cannot ask refund of the same on the strength of the interim order granted by this Court. This Court by interim orders made it clear that the petitioners-Societies shall keep contributions in separate accounts without using the same till the disposal of the main writ petition. That being the position, it was submitted that the question of refund to the petitioners does not arise. It was further submitted that the very purpose of establishing Co-operative Education Fund is for imparting co-operative education, training and development of Co-operative Movement in the State. The main source of funds to these activities is from the funds granted by the State Government under plan and non-plan schemes. This Fund is not sufficient to meet out the vast activities of this respondent. As such the Government has provided for contribution by the Co-operative Societies which make profits towards this Fund under Section 57(4)(a) of the earlier Act which was now substituted by Section 57(2-A) of the amended Act and there cannot be any illegality or irregularity in the said provision.
69. Mr. Shantesh Gureddi, the learned Counsel for the Federation (impleading applicant) further submitted that the main objects of the respondent-Federation are to function as the representative of the Cooperative Movement in the State for its progress and to safeguard its interests, to propagate co-operative principles and practices for the purpose of ensuring their adoption by all Co-operative organisations throughout the State, to impart education and training to employees, members and potential members, office-bearers of Co-operative Societies and the other workers in the Co-operative Movement, to act as coordinating agency on all matters pertaining to Co-operative Education, to serve as the exponent of co-operative opinion and function as a focussing centre of non-official opinion on various subjects affecting the Movement and also advise Government on matters affecting the Co-operative Movement, to promote different types of co-operative activity in accordance with the plans of co-operative development and to strengthen the existing Societies in the State by providing assistance and guidance, to bring co-ordination among different types of co-operative organisations in the State for their mutual benefit, to co-operate with the National Co-operative Union of India and implement to the extent possible the policies adopted by the National Co-operative Union of India, to open libraries, reading rooms, to publish or arrange publication, purchase and sale of periodicals, books, pamphlets and literature in general on co-operation, rural development and allied subjects and arrange for the production of audio-visual aids including films on Co-operation and allied subjects and to maintain or cause to be maintained co-operative publicity vans, to arrange for the exhibition of articles relating to agriculture, cottage industries, village and small-scale industries made by the co-operative institutions, to conduct co-operative training centres, schools and colleges for undertaking prescribed courses of training and imparting instructions for them, hold examinations and award certificates or diplomas; to develop inter-co-operative relationship and help the coordinated functioning of the Co-operative Movement in various sectors, to convene State Co-operative conferences, seminars, meetings, workshops and conduct competitions in schools and colleges, to acquire, purchase, own or dispose of immovable property by way of sale, lease, exchange or otherwise for the furtherance of the objects of the Federation with approval of the Registrar of Co-operative Societies, to promote study and research on problems connected with rural development in general and co-operation in particular and to conduct socio-economic surveys of rural and urban areas and to take up consultancy work, evaluation etc., to establish printing press on a commercial scale for printing of books, journals, periodicals and newspapers, to raise funds including Corpus Fund and administer the funds so raised according to the bye-laws and subsidiary rules framed by the Governing Council from time to time; to advise the Government on matters relating to Co-operative Movement from time to time, to act as an Employment Bureau for the trained co-operative personnel and function as Common Cadre Authority as per Section 128-A of the Act and Rules framed thereunder for appointment, transfer and disciplinary action in respect of such categories of employees of the affiliated District Co-operative Unions and other co-operative institutions as the Registrar may authorise, to supervise and inspect the work of the District Co-operative Unions and represent their interest, to provide lodging arrangements for the co-operators and others and to run a canteen and to generally undertake such other activities as are incidental to or conducive to the attainment of the objectives. The learned Counsel for the Federation submitted that this being the position, the contribution made towards Education Fund is not a new one and it is not for the first time that the said Fund is being collected and the same is being done since 1965. It is submitted that if the Co-operative Education Fund is not paid to the Federation its very functioning will come to a standstill and its activities cannot be carried on as the Federation will have shortage of funds and it will create undue hardship and financial burden on this respondent and affect lot of members of the Co-operative Societies.
70. When a specific question was posed to the learned Advocate-General under what provision of the Constitution can this levy be justified, the learned Advocate-General submitted that it is within the competence of the State Legislature to enact the law in accordance with Entry 32, List II of the Seventh Schedule of the Constitution. List II of the Seventh Schedule deals with the State List. Entry 32 reads as follows.-
'Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities;unincorporated trading, literary, scientific, religious and otherSocieties and associations; Co-operative Societies'.
71. A tax is defined in 'Cooley's Law of Taxation (4th Edition), as follows:
' 'Taxes' are the enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of Government and for all public needs. This definition of taxes, often referred to as 'Cooley's definition', has been quoted and indorsed, or approved, expressly or otherwise, by many different Courts. While this definition of taxes characterises them as 'contributions', other definitions refer to them as imposts, duty or impost, charges burdens or exactions but these variations in phraseology are of no practical importance'.
72. A levy is defined as a right to impose or assess (a fine or a tax) by legal authority.
73. A fee is defined as a charge for services rendered.
74. I have heard Mr. B. Veerabhadrappa, Mr. K.M. Nataraj, Mr. Jayakumar S. Patil, and other members of the Bar for the petitioners. I have also had the benefit of submissions made by the learned Advocate General appearing for the State and Mr. Shantesh Gureddi, learned Counsel for the respondent.
75. Learned Advocate General submitted that the contribution of two per cent out of the net profits to the Co-operative Education Fund and five per cent to the Sahakara Kalyana Nidhi does not in any way violate Article 19(1)(g) and is neither unconstitutional nor ultra vires to the provision of the Co-operative Societies. It is not unreasonable, arbitrary or violative of Article 14 of the Constitution.
76. It was further submitted that the Karnataka State Co-operative Federation is imparting Co-operative training to the Directors of the Co-operative Societies, staff of the Co-operative Societies, perspective members, youth and women in the State of Karnataka, tribal people who are the members of the Tribal Co-operative Societies. The said Federation is in charge of Co-operative Education. There are 26 District Co-operative Unions in the State for implementing district level programmes for the above purpose.
77. It was also submitted that the Federations and Unions have already created infrastructure facilities like establishing training schools and colleges, appointing the staff to carry out the functions. The contributions made under Section 57 of the Act is one of the main sources of income to meet the incidental expenditure of the said organisations. It was also submitted that since the said Fund is created for the purpose above mentioned and for the welfare of the Societies, the provisions made for contribution of 2% of the net profits to the said Fund is neither unconstitutional nor ultra vires of the provisions of the Act.
78. It was further submitted that a Fund called as Sahakara Kalyana Nidhi is created for the benefit of the co-operators who have rendered service for the development of the Co-operative Movement in the State, establishment of hospitals for the co-operators, meeting educational expenses of their children who are financially week. The rules have already been framed and published in the Gazette dated 6-6-2000. It was also submitted that the Societies out of the net profit required to pay 5% to the Sahakara Kalyana Nidhi and 2% to the Co-operative Education Fund. The provision is made only to safeguard the Co-operative Movement and for the existence of the Societies.
79. It was also submitted that only the profit earning Societies are liable to contribute and it is not applicable universally to all the Societies. The profit earning Societies itself is a class of Societies to which this provision is applicable. It was submitted that the collection of the said Fund from the Societies is not illegal and does not amount to depriving the property right of the Society under Article 300-A of the Constitution.
80. Having dealt with the lengthy submissions of both the parties, I shall now come to the brass tacks.
81. The State Government has to justify the levy either as a tax or as a fee or as a regulatory fee.
82. By no stretch of imagination can this levy under Section 57(2-A) and 57(2-B) be treated as a tax. If it is a tax, it will have to be a tax on income and the State Legislature has no power to levy tax on income in view of the Entry 82 of List I of the Seventh Schedule. The tax on income as is well-known is the exclusive subject of Parliament.
83. Let us see whether it is a fee. If it is a fee, the State has to justify it by correlating the amount at least to some extent to the services rendered to the Co-operative Societies. There can be no dispute that the levy can be justified and can be brought under List II, Entry 32 which is confined to the State List. Entry 32 reads as follows.-
'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'.
84. It can also be brought under Entry 66 of the State List. Entry 66 reads as follows.-
'66. Fees in respect of any of the matters in this List, but not including fees taken in any Court'.
85. Therefore, I hold that the State has the legislative competence to pass such a levy under Section 57(2-A) and 57(2-B) of the Act.
86. The only question that arises for consideration is, whether such a levy has some element of quid pro quo?
87. The Supreme Court in the case of Commissioner, Hindu Religious Endowments, Madras v Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, where while enumerating the difference between a tax and a fee held that the distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of the common burden while a fee is a payment for a special benefit or privilege.
88. A tax is a compulsory exaction of money by public authority for public purposes enforceable by State and is not a payment for services rendered.
89. The Supreme Court also held that it is not possible to formulate an exact definition of fee as there are various kinds of fees.
90. Generally speaking a fee may be defined as a charge for a special service rendered to individuals in conformity with the provisions of the Act. The amount of fee levied should be relatable at least to some extent to the expenditure incurred by the Government in rendering the services in accordance with the provisions of the Act.
91. The Supreme Court in the case of Chief Commissioner, Delhi and Another v Delhi Cloth and General Mills Company Limited and Others , held that a fee should be in consideration of certain services rendered by the Government and such levy should be set apart for the specific purpose for which levy is made.
92. The Supreme Court in the case of Om Parkash Agarwal and Others v Giri Raj Kishori and Others, held in the facts of that case that where a levy which was meant for the benefit of the Municipality was extended by the State Government for the development of rural areas, that levy could not be treated as a fee because it was more in the nature of a tax and the funds so collected were not being utilised for fulfilling the objects of the Act under which the collection was made but for the general requirement of the State's functions.
93. The Supreme Court in an unreported judgment in a Transferred Case (Civil) No. 20 of 2000, DD: 1-2-2001 has held that a lot of ice has melted in the Himalayas after rendering of the judgments in the above cited cases so also there has been a sea change in the judicial thinking as to the differences between a tax and a fee since then.
94. The Supreme Court in the case of Sreenivasa General Traders and Others v State of Andhra Pradesh and Others, relied on other pronouncements of the Supreme Court and held as follows.-
'the distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of a common burden. While a fee is for payment of a specific benefit or privilege although the special advantage is secondary to the primary motive of regulation inpublic interest. This Court said that in determining whether a levy is a fee or not emphasis must be on whether its primary and essential purpose is to render specific services to a specified area or class. In that process if it is found that the State ultimately stood to benefit indirectly from such levy, the same is of no consequence. It also held that there is no generic difference between a tax and a fee and both are compulsory exactions of money by public authorities. This was on the basis of the fact that the compulsion lies in the fact that the payment is enforceable by law against a person in spite of his unwillingness or want of consent. It also held that a levy does not cease to be a fee merely because there is an element of compulsion or coerciveness present in it nor is it a postulate of a fee that it must have direct relation to the actual service rendered by the authority to each individual who obtains the benefit of the service. It also held that the element of quid pro quo in the strict sense is not always a sine qua non for a fee, and all that is necessary is that there should be a reasonable relationship between the levy of fee and the services rendered. That judgment also held that the earlier judgment of this Court in Kewal Krishan Puri v State of Punjab, is only an obiter'.
95. The Supreme Court in the case of Commissioner and Secretary to Government, Commercial Taxes and Religious Endowments Department and Others v Sree Murugan Financing Corporation, Coimbatore and Others and in Krishi Utpadan Mandi Samiti, Haldwani v M/s. Orient Paper and Industries Limited, and in the case of Government of Madras and Another v P.R. Sriramulu and Another, held that a levy should not be examined so minutely or be weighed in golden scale with respect to the element of quid pro quo there cannot be a scientific method by which levy or fee may be made exactly tally or correspond to the expenditure incurred and nor is it possible to tally the levy with the corresponding expenditure.
96. In case of regulatory fee the pronouncements of the Supreme Court are to the effect that as distinct from a licence fee, existence of quid pro quo is not necessary although the fee imposed must not be in the circumstances of the case excessive, keeping in view the quantum and nature of the work for the required supervision.
97. Therefore, it is necessary to state that the traditional concept of, quid pro quo in a fee has undergone considerable transformation. Although a distinction is sought to be made between a fee and a regulatory fee in both the cases there must be some element of services rendered by the State to fulfil the objects for which the fee or regulatory fee is levied.
98. The State did not choose to justify the fee either as a levy or a tax in its objections. Notwithstanding the stand taken by the State in its objection dated 13-7-2000, it would be the duty of the Court to try tojustify the levy if it can be justified. The levy was sought to be justified by the State on the ground only profit making Societies were asked to contribute 2% of the net profit and this contribution was to be a Fund created for the benefit of the present and former members and their families of corporators the Fund that were to be used for imparting co-operative education, training and to propagate principles of co-operation. It is further submitted that the funds were to be used for the welfare of the tribal people who are the members of the tribal Co-operative Societies and for running schools and colleges, appointing of staffs to carry out the functions. The funds were also to be used for the benefit of co-operators who have rendered services and for the establishment of hospitals, meetings and educational expenses. It was ironically submitted that only profit making Societies are liable to contribute and it is not illegal.
99. It was further submitted that only the profit earning Societies were liable to contribute and it is not applicable universally to all the Societies. The profit making Societies itself are a class of Societies to which this provision is applicable. The collection of the said Fund from the Societies is not illegal and does not amount to depriving the property right of the Society under Article 300A of the Constitution.
100. In a recent judgment of the Supreme Court in A.P. Paper Mills Limited v Government of Andhra Pradesh and Another, the Supreme Court held after considering various pronouncements of the Court as follows.-
'From the conspectus of the views taken in the decided cases noted above, it is clear that the impugned licence fee is regulatory in character. Therefore, stricto sense, the element of quid pro quo does not apply in the case. The question to be considered is if there is a reasonable correlation between the levy of the licence fee and the purpose for which the provisions of the Act and the Rules have been enacted/framed'.
(emphasis supplied)
101. Therefore, it is clear that whether it is called a fee or a regulatory fee, there should be some element of quid pro quo or reasonablecorrelation between the levy of the licence fee and the purpose for whichthe provisions of the Act and Rules have been enacted. Ultimately,wherever a challenge is made to the constitutional validity of a levy or afee, it must to a large measure depend on the facts of each case. If it is afee, the State must show that some element of quid pro quo. If it is aregulatory fee, the State must establish that there is a reasonable correlation between the levy of the licence fee and the purpose for which theprovisions of the Act and the Rules made thereunder have been enacted.If there is no correlation, the imposition of a levy is liable to be set asideas violative of Articles 14 and 19(1)(g).
102. The answer given by the State for justifying levy under Section 57(2-A) is set out at paragraphs 11, 12 and 13 of the statement of objections dated 12/13-7-2000. It is stated in the statement of objections that infrastructure has been created for establishing training schools and colleges and the levy is the main source of income to meet the incidental expenditure for the purpose of training schools and colleges. It is also submitted that the levy is meant for imparting co-operative training to the members of the Co-operative Societies, youth and women in the State of Karnataka and tribal people who are members of the Co-operative Societies.
103. With regard to the Sahakara Kalyana Nidhi it is stated that the levy is created for the benefit of former co-operators who have rendered service for the development of hospitals for the co-operators and to meet educational expenses of their children who are financially weak. It is also stated that the rules have already been framed and published in the Gazette dated 10-5-2000. It is further stated that this provision is made only to safeguard the Co-operative Movement.
104. Strangely, it is further stated that only the Societies who are earning profits are liable to contribute and it will not apply to loss making Societies. It was further submitted that if the contribution is not made, the Societies will be denied the right to pay the dividend to its members.
105. It is not known how these objects stated in the statement of objections, however, laudable they may be, are correlated with the objects of the provisions of the Act and the Rules made thereunder.
106. The Co-operative Societies Act is undoubtedly an omnibus Act which deals with the conduct of Co-operative Societies and regulates the business of Co-operative Societies and permits the Co-operative Societies to run the Society themselves without any interference from the State Government. It also permits the Societies to pay dividend on the profits. There are no doubt stringent regulations as to how the Society should be run such as holding of meetings and other such directions with respect to the welfare of the Society.
107. To create a Fund whether it be in the form of fee or regulatory fee for the purpose of former corporators and for the welfare of the children of corporators cannot in anyway be considered as a fee or a regulatory fee in accordance with the provisions of the Act. Glaringly only those Societies which make a profit are directed to subscribe to the Fund and the Nidhi. If the Society does not contribute to the Fund and the Nidhi, the Society will be barred from paying dividend to the members. It is not known how such restrictions can be placed on the Co-operative Society for the purpose of compulsorily creating a Nidhi and a Fund which would function outside the scope of the Act. It is not possible for the State to say that I shall rob Peter and pay Paul.
108. Admittedly, both these funds are created as independent institutions.
109. Having regard to the pronouncements of the Supreme Court the levy imposed as contribution to the Nidhi and Fund cannot be a fee at all. First of all the levy imposed relates only to profit making Co-operative Societies. Non-profit making Co-operative Societies are not obliged to pay any levy. There is a clear violation of Article 14. A levy should be uniform and should apply to all the Co-operative Societies without regard to whether they make profit or not. Only then can it be considered as a fee in the real sense.
110. The statement of objections filed by the State has not placed any data before the Court to justify such a levy. They have merely stated that a notification has been issued dated 6-6-2000 publishing certain rules with regard to the Nidhi to be constituted. The purpose mentioned in the said rules do not have any scope to even vaguely correlate it with the objects of the Act and Rules thereunder. There is no special service rendered to the Co-operative Societies. No data has been given as to how much is expected from the Nidhi and the Fund and how it is related to the functions of a Co-operative Society.
111. The creation of the Nidhi and the Fund functions is totally outside the provisions of the Act. The purpose of the Nidhi and the Fund has nothing to do with the service rendered by the State for the regulation of the Co-operative Society. It does not in any way advance the aims and the objects of the Act however, commendable it may be. No service is rendered to the Co-operative Society by such levy per se. But is meant only for the creation of two separate Funds for the welfare of former corporators and their children and for creation of educational institutions. This is totally outside the scope of the provisions of the Act.
112. What is also challenged in these writ petitions is the new section introduced by amended Act 25 of 1998. The new section is 29-G(6). Section 29-G(6) provides for and mandates the Chief Executive Officer to send copy of the extract of the cash book every month to the Registrar and to the financing bank or the credit agency within fifteen days of the next following month. The proceedings of the committee meetings are also required to be sent within-fifteen days from the date of such meetings.
113. It was submitted by the learned Counsel for the petitioners that this mandate is highly cumbersome, unworkable, impracticable and unreasonable. It was also submitted that the liability is imposed only in respect of Primary Co-operative Societies and not in respect of other Co-operative Societies. By this, it was meant that other categories of Co-operative Societies have more financial autonomy and have a wider sphere of activity. No such direction is given to other Societies except to primary Co-operative Societies.
114. The learned Advocate General submitted that these are administrative measures in the form of legislation to streamline the activities of primary societies. The learned Advocate General further submitted that there is no discrimination whatsoever. The primary societies have to be kept under supervision. The Registrar has a duty cast upon him under the Act to monitor the conduct of the Primary Co-operative Societies and to make sure that their finances and business are run strictly in accordance with the provisions of the Act and Rules made thereunder. The learned Advocate General, however, was fair enough to suggest that if a representation is made to the Government expressing the difficulties faced by the Co-operative Societies as far as the paper work is concerned, the Government will consider it and make necessary amendments which help in the smooth running of the Co-operative Society.
115. As rightly pointed out by the learned Advocate General Courts cannot interfere in the wisdom of the Legislature which regulates the conduct of a Co-operative Society. There is no question of any violation of Article 14 or 19. The Legislature after due consideration felt that it was necessary to introduce an amendment which requires the Co-operative Society to send status reports of the proceedings of the Society. This cannot be faulted on any account.
116. I therefore, hold that there is no merit in the submissions of the learned Counsel for the petitioners with respect to the challenge of the validity of Section 29-G(6). This, however, will not preclude the Co-operative Societies from making a representation to the State Government expressing their difficulty.
117. On the same reason I hold that there is no merit in the challenge to Section 63 which is purely regulatory and in the interest of theSociety.
118. Section 20(2)(a-iii) is also under challenge in these writ petitions. This proviso was introduced by Act 26 of 1998 which came into force from 15-8-1998.
119. Section 20 of the Act deals with voting of members.
120. Section 20(2)(a-iii) bars a new member from voting for a period of one year.
121. This bar will not apply to a new Society at its first general body meeting.
122. Bar under Section 20(2)(a-iii) reads as follows:
'an individual member who has become member of a Society not later than one year prior to the date of such meeting:
Provided that nothing in this clause shall apply to an individual member of a Society participating in the first general body meeting of such Society held immediately after its registration'.
123. The effect of Section 20(2)(a-iii) is that an individual member who has just become a member of the Society shall have no voting rights for one year.
124. However, the Section 20(2)(a-iii) states that this will not apply to the Society at the first general body meeting immediately after the registration.
125. The reason why this section was introduced was clearly to prevent the abuse by the outgoing committee to enroll members of their choice for the purpose of getting themselves or their friends from getting elected to the committee. This is purely a regulatory enactment made to prevent the abuse of getting new members enrolled by the outgoing committee to perpetuate their own oligarchy.
126. None of the petitioners have seriously challenged this provisionas unconstitutional.
127. Even otherwise, it is always open for the Legislature to enact such measures to prevent an abuse that may arise in creating a vote bank. It is not as if a new member is prevented from enjoying all the rights as a member such as seeking loans and other facilities provided in the bye-laws of that Society. All that Section 20(2)(a-ii) does is to impose a ban on the voting rights of the members for a period of one year after they become a member. It is not for this Court to question the wisdom of the Legislature. All these are regulatory measures for the better functioning of Co-operative Societies.
128. There is no violation of Article 14 or 19(1)(g) for such a measure. It is a healthy rule which prevents abuse by the committee at the fag end of their tenure. It is a valid classification and cannot be assailed as violative of Article 14.
129. I accordingly uphold the validity of Section 20(2)(a-ii) as constitutional.
129-A. During the course of the hearing of these writ petitions the learned Advocate General submitted that understanding the difficulty of the Co-operative Societies certain amendments are being brought to Section 29-G(6) to make it more practical and less onerous on the Co-operative Societies.
130. No doubt Section 29-G(6) directing the Chief Officer to send copies of the extract of the cash books duly certified by him every month to the Registrar and to the financing bank or credit agencies within fifteen days of the next following month will create enormous amount of work for the Co-operative Societies. It may even require extra staff to be recruited to comply with Section 29-G(6). The section further ordains proceedings of the general meeting and committee meetings to be sent to the Registrar and the financing bank within fifteen days of such meeting.
131. The learned Advocate General fairly submitted that such cumbersome bureaucratic directions will not only increase the paper work of the Co-operative Society but will also require huge storage place for the returns to be kept in the Registrar's Office. By this direction it is not known how such directions are helpful to the Registrar when it would be practically impossible to peruse these records which are sent every fifteen days. Tons of paper will have to be wasted and huge storage space will have to be created in the Office of the Registrar.
132. Taking all this into account, the learned Advocate General during the course of the hearing submitted that a legislation is to be brought forward to reduce the rigour of this mandatory provision under Section 29-G(6). It is for the Legislature to decide how to modify this section to make it more purposeful.
133. However, there is nothing unconstitutional and this Court cannot be expected to interfere with such regulations. It is fervently hoped that more meaningful and purposeful directions will be given by the Legislature in the proposed amendment to Section 29-G(6).
134. Equally the sub-sections introduced under Section 63 by Act 25 of 1998 are also regulatory in nature and it is not for this Court to question the wisdom of such regulation. The introduction of the sub-sections under Section 63 cannot be assailed as being violative of Articles 14 and 19(1)(g) and uphold the constitutional validity of Section 63.
135. In the result, the batch of writ petitions are disposed of with the following declarations.-
(i) I declare Section 57(2-A) and 57(2-B) of the Act as unconstitutional, arbitrary and violative of Articles 14 and 19(1)(g) and contrary to the pronouncements of the Supreme Court. However, the effect of declaring unconstitutional of Section 57(2-A) and 57(2-B) by this Court will operate prospectively.
(ii) I declare Sections 17(1)(c) and 29(1)(c) of the amended Act 25 of 1998 only insofar as the explanation 'near relation' which includes (i), (ii), (iii) in Section 29-G(f) which defines 'near relation' as unconstitutional and violative of Articles 14 and 19(1)(g).
(iii) I also declare that the maximum prescribed under Section 28-A(2)(i)(a), (b), (c) as unconstitutional and violative of Articles 14 and 19(1)(g).
(iv) I also declare that the maximum prescribed under Section 28-A(2)(i)(d) fixing the maximum of eighteen members to be applicable to all Primary and Secondary Co-operative Societies.
(v) I uphold the validity of Section 110-A of the Act.
(vi) I also uphold the constitutional validity of Section 29-G(6) and the amendments made in Section 63 as valid subject to the proposed legislation to be brought forward by the State Government as submitted by the learned Advocate General.
(vii) I also declare Section 20(2)(a-iii) as a valid legislation.
Rule made absolute. All emphasis by this Court.
I place on record the valuable assistance rendered by Mr. Veerabadrappa and for his meticulous presentation of the case on behalf of the petitioners.
The writ petitions are disposed of accordingly. No costs.