TaxTMI 
TaxTMI 
2016 (12) TMI 1017
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.... is accorded special treatment within the framework of the Constitution of India. This case is all about the State of Jammu & Kashmir vis`-a-vis` the Union of India, in so far as legislative relations between the two are concerned. 2. The present appeals arise out of a judgment dated 16.7.2015 passed by the High Court of Jammu & Kashmir at Jammu, in which it has been held that various key provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as "SARFAESI") were outside the legislative competence of Parliament, as they would collide with Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920. The said Act has been held to be inapplicable to banks such as the State Bank of India which are all India banks. 3. Before going into the merits of the case, it is important to note that SARFAESI is an enactment which inter alia entitles banks to enforce their security interest outside the court's process by moving under Section 13 thereof to take possession of secured assets of the borrower and sell them outside the court process. Sections 13 (1) and (4) and 17 are key provisions of S....
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....d the person other than the borrower. Explanation: For the removal of doubts, it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under this sub-section. (2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder. (3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the business to the borrower or restoration of possession of the secured assets to....
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....atter which a Debts Recovery Tribunal or the Appellate Tribunal under the Act is empowered to determine, and Section 35 is a general non-obstante clause declaring that this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force. 5. The bone of contention in the present appeals is whether SARFAESI in its application to the State of Jammu & Kashmir would be held to be within the legislative competence of Parliament. To decide this question, we have heard wide ranging arguments from the learned Attorney General Shri Mukul Rohtagi and Shri Rakesh Dwivedi, learned Senior Advocate, on behalf of the Appellants. They have referred in detail to the provisions of Article 370 of the Constitution of India, read with Section 5 of the Jammu & Kashmir Constitution, 1956. It is their submission that the Instrument of Accession of Jammu and Kashmir, 1947 itself makes it clear that List I of the 7th Schedule of the Government of India Act, 1935 would apply, and that the various Constitution Application to J & K Orders issued from time to time under Article 370 makes it clear that Article 246 (1) read with Entry 45 and 95 List ....
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....der Article 370(1)(b) of the Constitution of India whereas under the Constitution of Jammu & Kashmir, the State Legislature has plenary powers over all matters, except those where the Parliament has power to make laws. He also argued that the subjects mentioned in the State List of the 7th Schedule under the Constitution of India were frozen and can never be delegated or conferred on Parliament so long as Article 370 remains and therefore any transference of a State List subject to the Concurrent List later cannot apply to the State of Jammu & Kashmir. He also argued that it is not enough under Article 370 to confer power on Parliament by a Presidential Order, but that every time Parliament enacts a law under such power, before such law can operate in the State of Jammu & Kashmir, the State Government's concurrence must be obtained. This was stated to be also for the reason that an amendment made to the Constitution of India will not apply unless the State concurs in applying it to the State of Jammu & Kashmir, in which case only a Presidential Order applying such amendment would take effect. Further, according to him, Section 140 of the Jammu & Kashmir Transfer of Property Act is ....
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....pt those surrendered to the Union, and the Constitution of the Union primarily operates upon the administration of the units. Our Constitution was not the result of any such compact or agreement: Units constituting a unitary State which were non-sovereign were transformed by abdication of power into a Union. (b) Supremacy of the Constitution which cannot be altered except by the component units. Our Constitution is undoubtedly supreme but it is liable to be altered by the Union Parliament alone and the units have no power to alter it. (c) Distribution of powers between the Union and the regional units each in its sphere coordinate and independent of the other. The basis of such distribution of power is that in matters of national importance in which a uniform policy is desirable in the interest of the units, authority is entrusted to the Union, and matters of local concern remain with the State. (d) Supreme authority of the Courts to interpret the Constitution and to invalidate action violative of the Constitution. A federal Constitution, by its very nature, consists of checks and balances and must contain provisions for resolving conflicts between the executive and legisl....
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....ven qua the State of Jammu & Kashmir, the quasi federal structure of the Constitution of India continues, but with the aforesaid differences. It is therefore difficult to accept the argument of Shri Hansaria that the Constitution of India and that of Jammu & Kashmir have equal status. Article 1 of the Constitution of India and Section 3 of the Jammu & Kashmir Constitution make it clear that India shall be a Union of States, and that the State of Jammu & Kashmir is and shall be an integral part of the Union of India. 11. It is interesting to note that the State of Jammu & Kashmir, though a state within the meaning of Article 1 of the Constitution of India, has been accorded a special status from the very beginning because of certain events that took place at the time that the erstwhile Ruler of Jammu & Kashmir acceded to the Indian Union. These events have been set out in detail in Prem Nath Kaul v. State of Jammu & Kashmir, (1959) Supp. 2 SCR 270, to which we will refer in some detail. The State of Jammu & Kashmir is dealt with by a special provision, namely, Article 370. At this juncture, it is necessary to set out this Article which reads as follows:- Article 370. Temporary....
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....ly with such exceptions and modifications and from such date as he may specify: Provided that the recommendation of the Constituent Assembly of the State referred to in clause (2) shall be necessary before the President issues such a notification. 12. The first thing that is noticed in Article 370 is that the marginal note states that it is a temporary provision with respect to the State of Jammu & Kashmir. However, unlike Article 369, which is also a temporary provision limited in point of time to five years from the commencement of this Constitution, no such limit is to be found in Article 370. Despite the fact that it is, therefore, stated to be temporary in nature, sub-clause (3) of Article 370 makes it clear that this Article shall cease to be operative only from such date as the President may by public notification declare. And this cannot be done under the proviso to Article 370 (3) unless there is a recommendation of the Constituent Assembly of the State so to do. This takes us to an interesting judgment of this Court, namely, Sampat Prakash v. the State of Jammu & Kashmir, (1969) 2 SCR 365. In this case, a writ petition under Article 32 was filed challenging the dete....
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....to all these factors, this Court clearly held that though the marginal note refers to Article 370 as only a temporary provision, it is in fact in current usage and will continue to be in force until the specified event in sub-clause (3) of the said Article takes place. It was further held by the Sampat Prakash judgment that Section 21 of the General Clauses Act, 1897 was also applicable so that the power under this Article can be used from time to time to meet with varying circumstances. 13. Article 370 begins with a non obstante clause stating that notwithstanding anything contained in the Constitution, first and foremost, under sub-clause (1)(a) the provisions of Article 238 shall not apply in relation to the State of Jammu & Kashmir. Article 238 has since been repealed and is not of any importance today. It only referred to the application of the provisions of Part VI to States in Part B of the 1st Schedule. Since the scheme of Article 370 was different, the said Article was stated not to apply. But more importantly, the power of Parliament to make laws for the said State shall be limited, in sub-clause (b)(i), to the matters in the Union List and the Concurrent List of the 7....
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.... Union of India, it must be respected, in which case if a matter is already provided for in it, it would become applicable straightaway without more, and only consultation with the Government of the State is necessary in order to work out the modalities of the extension of the provisions of the Government of India Act corresponding to the Constitution of India referred to in it. However, when it comes to applying the provisions of the Constitution of India which are not so reflected in the Instrument of Accession, they cannot be so applied without the concurrence of the Government of the State, meaning thereby that they can only be applied if the State Government accepts that they ought to be so applied. Under Article 370(2), the concurrence of the Government of the State, given before the Constituent Assembly is convened, can only be given effect to if ratified by the Constituent Assembly. This legislative scheme therefore illustrates that the State of Jammu & Kashmir is to be dealt with separately owing to the special conditions that existed at the time of the Instrument of Accession. 14. Under sub-clause (1)(d) of Article 370, other provisions of the Indian Constitution shall....
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....nter alia "to make partial changes in; to change (as object) in respect of some of its qualities; to alter or vary without radical transformation". Similarly the word "modification" means "the action of making changes in an object without altering its essential nature or character; the state of being thus changed; partial alteration". Stress is being placed on the meaning "to alter or vary without radical transformation" on behalf of the petitioner; but that is not the only meaning of the words "modify" or "modification". The word "modify" also means "to make partial changes in" and "modification" means "partial alteration". If therefore the President changed the method of direct election to indirect election he was in essence making a partial change or partial alteration in Art. 81 and therefore the modification made in the present case would be even within the dictionary meaning of that word. But, in law, the word "modify" has even a wider meaning. In "Words and Phrases" by Roland Burrows, the primary meaning of the word "modify" is given as "to limit" or "restrict" but it also means "'to vary" and may even mean to "extend" or "enlarge". Thus in law the word "modify" may just....
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....erred to as "this State") such functions as may be vested in them by or under the Government of India Act, 1935, as in force in the Dominion of India, on the 15th day of August 1947, (which Act as so in force is hereafter referred to as "the Act'). 3. I accept the matters specified in the schedule hereto as the matters with respect to which the Dominion Legislature may make law for this State. 8. Nothing in this Instrument affects the continuance of my Sovereignty in and over this State, or, save as provided by or under this Instrument, the exercise of any powers, authority and rights now enjoyed by me as Ruler of this State or the validity of any law at present in force in this State. 9. I hereby declare that I execute this Instrument on behalf of this State and that any reference in this Instrument to me or to the Ruler of the State is to be construed as including a reference to my heirs and successors." The Schedule which is referred to in clause 3 refers to defence, external affairs, communications and certain ancillary matters. 17. At this stage, it is necessary to see which of the provisions of the Constitution of India have in fact been applied by Article ....
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....ted to' does not occur in Article 370(1)(d),under which it is open to adopt the entire Constitution of India subject to exceptions and modifications, as has been noted above. The opening paragraphs of this Order read as follows:- "In exercise of the powers conferred by clause (1) of article 370 of the Constitution, the President, with the concurrence of the Government of the State of Jammu and Kashmir, is pleased to make the following Order:- 1. (1) This Order may be called the Constitution (Application to Jammu and Kashmir) Order, 1954. (2) It shall come into force on the fourteenth day of May, 1954, and shall thereupon supersede the Constitution (Application to Jammu and Kashmir) Order, 1950. 2. The provisions of the Constitution as in force on the 20th day of June, 1964 and as amended by the Constitution (Nineteenth Amendment) Act, 1966, the Constitution (Twenty-first Amendment) Act, 1967, Section 5 of the Constitution (Twenty-third Amendment) Act, 1969, the Constitution (Twenty-fourth Amendment) Act, 1971, section 2 of the Constitution (Twenty-fifth Amendment) Act, 1971, the Constitution (Twenty-sixth Amendment) Act, 1971, the Constitution (Thirtieth Amendment) Act,....
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....shmir. Equally, in the 7th Schedule Union List, the omission of Entries has now come down to only four i.e. Entries 8, 9, 34, and 79, with a few other Entries being modified or substituted. Significantly, Entries 45 and 95 of List I continue to apply to the State of Jammu & Kashmir. The State List continues to be omitted altogether, and from 1963 onwards, the Concurrent List applies to the State of Jammu & Kashmir with a number of Entries being omitted. What is of importance for the decision of this case is that Entry 6 dealing with the transfer of property and Entry 11A of the Concurrent List do not apply to the State of Jammu & Kashmir. Entry 6 does not apply because it has not been extended to the State, and Entry 11A does not apply because the 42nd Amendment to the Constitution of India, which introduced Entry 11A into the Concurrent List, is itself not applicable. 20. At this stage, it is important to refer to the Constitution of Jammu & Kashmir, 1956. This Constitution came into effect on 17.11.1956. Section 2(1)(a), and Sections 3, 4, and 5 read as follows:- "2. Definitions:- (1) In this Constitution, unless the context otherwise requires- (a) "Constitution of India....
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....laws made which are relatable to these subject matters. 4. Every other subject matter which is not expressly referred to in either List I or List III of the 7th Schedule of the Constitution of India, as applicable in the State of Jammu & Kashmir, is within the legislative competence of the State Legislature of Jammu & Kashmir. 22. An argument was made by learned counsel on behalf of the respondents that the subjects mentioned in the State List of the 7th Schedule to the Constitution of India as originally adopted were frozen and can never be delegated or conferred on the Parliament so long as Article 370 remains, since under Article 370(1)(b), the President could declare that the Parliament shall have power to make laws for the State of Jammu & Kashmir only on the fields of legislation mentioned in the Union List and the Concurrent List. We are afraid that this submission is also without force for the reason that Article 368 proviso, as applicable to the State of Jammu & Kashmir, expressly allows any Constitutional amendment to the Constitution of India to be applied with the concurrence of the State of Jammu & Kashmir. This would include within its ken, an amendment which ei....
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.... to the debts due to the banks. The special machinery of a Tribunal which has been constituted as per the preamble of the Act, "for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto" would squarely fall within the ambit of Entry 45 of List I. As none of the items in the lists are to be read in a narrow or restricted sense, the term "banking" in Entry 45 would mean legislation regarding all aspects of banking including ancillary or subsidiary matters relating to banking. Setting up of an adjudicatory body like the Banking Tribunal relating to transactions in which banks and financial institutions are concerned would clearly fall under Entry 45 of List I giving Parliament specific power to legislate in relation thereto." [para 14] 25. When it came to SARFAESI itself, this Court has held in Central Bank of India v. State of Kerala, (2009) 4 SCC 94: "Undisputedly, the DRT Act and the Securitisation Act have been enacted by Parliament under Entry 45 in List I in the 7th Schedule whereas the Bombay and Kerala Acts have been enacted by the State Legislatures concerned under Entry 54 in Lis....
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....I. Despite the fact that the Tripura Act received the protection of Article 31B read with Ninth Schedule, it was held that the Tripura Act, Section 187 of which put a legislative embargo on the sale of mortgaged properties by a bank to any person who is not a member of Scheduled Tribe, was held to give way to the Parliamentary enactment SARFAESI made under Entry 45 List I. Though this judgment does not apply on all fours to the present case, it clearly establishes that SARFAESI is relatable to Entry 45 List I and that any enactment made under the State List would have to give way to SARFAESI by virtue of the application of Article 246 of the Constitution of India. 28. R.C. Cooper v. Union of India, (1970) 1 SCC 248, has also in paragraph 36, stated that the subject matter 'banking' in Entry 45 List I must be construed so as to comprehend within its scope all matters that are incidental to such subject matter. It was held: "The legislative entry in List I of the 7th Schedule is "Banking" and not "Banker" or "Banks". To include within the connotation of the expression "Banking" in Entry 45, List I, power to legislate in respect of all commercial activities which a banker by the....
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..... Both are in a sense matters of property and civil rights, but in essence they are included within the category of banking." (At pages 44 and 46) 30. What is of significance to note is that since List II is not operative in the State of Jammu & Kashmir, there is no competing Entry in the said List and this would lead therefore to the conclusion that Entries 45 and 95 of List I must be given a wide meaning. Indeed, in a converse situation, this Court, in Union of India v. H.S. Dhillon, 1972(2) SCR 33, had this to say: "It was also said that if this was the intention of the Constitution makers they need not have formulated List I at all. This is the point which was taken by Sardar Hukam Singh and others in the debates referred to above and was answered by Dr. Ambedkar. But apart from what has been stated by Dr. Ambedkar in his speech extracted above there is some merit and legal effect in having included specific items in List I for when there are three lists it is easier to construe List II in the light of Lists I and II. If there had been no List I, many items in List II would perhaps have been given much wider interpretation than can be given under the present scheme. Be th....
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....ealing with investigation for possible criminal prosecution are inextricably intertwined with the provisions dealing with infliction of disciplinary punishment the whole Act must be read down so as to leave the members of the All India Service outside its purview. We accordingly hold that the provisions of the Commission Act do not apply to the members of the All India Services. Accordingly we dismiss the appeal. As the respondent was not represented there would be no order as to costs. We thank Mr. G.L. Sanghi for assisting us as amicus curiae." [paras 47 - 48] 32. Applying the doctrine of pith and substance to SARFAESI, it is clear that in pith and substance the entire Act is referable to Entry 45 List I read with Entry 95 List I in that it deals with recovery of debts due to banks and financial institutions, inter alia through facilitating securitization and reconstruction of financial assets of banks and financial institutions, and sets up a machinery in order to enforce the provisions of the Act. In pith and substance, SARFAESI does not deal with "transfer of property". In fact, in so far as banks and financial institutions are concerned, it deals with recovery of debts ....
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....the Court of District Judge under Section 17-A may prefer an appeal, to the High Court having jurisdiction over such Court, within thirty days from the date of receipt of the order of the Court of District Judge: Provided that no appeal shall be preferred unless the borrower has deposited, with the Jammu and Kashmir High Court, fifty per cent of the amount of the debt due from him as claimed by the secured creditor or determined by the Court of District Judge, whichever is less: Provided further that the High Court may, for the reasons to be recorded in writing, reduce the amount to not less than twenty-five per cent of the debt referred to in the first proviso." 33. It would be clear that these provisions are referable to Entry 45 as being ancillary to banking, and expressly to Entry 95 List I inasmuch as the jurisdiction and power of courts is laid down for the special subject of recovery of debts due to banks by these provisions. 34. In State of Maharashtra v. Narottamdas Jethabai, (1950) 1 SCR 51, this Court upheld the Bombay City Civil Courts Act, and in so doing, referred specifically to the following Entries in the legislative lists of the Government of India Act, 1....
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....th the jurisdiction and powers with respect to any of the matters enumerated in List II. (e) Both Parliament and the State Legislature may by appropriate legislation referable to Entry 46 of List III invest the High Court with jurisdiction and powers with respect to any of the matters enumerated in List III." [para 53] 37. It is thus clear on a reading of these judgments that SARFAESI as a whole would be referable to Entries 45 and 95 of List I. We must remember the admonition given by this Court in A.S. Krishna and others v. State of Madras, 1957 SCR 399, that it is not correct to first dissect an Act into various parts and then refer those parts to different Entries in the legislative Lists. It is clear therefore that the entire Act, including Sections 17A and 18B, would in pith and substance be referable to Entries 45 and 95 of List I, and that therefore the Act as a whole would necessarily operate in the State of Jammu & Kashmir. 38. The judgment of the High Court is wholly incorrect in referring to Entry 11A of the Concurrent List. First and foremost, as has been noted by us above, the Entry is not extended to the State of Jammu & Kashmir. From this, the counsel for t....
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....shall apply to the person who acquires such property in the State." 40. This Rule makes it amply clear that Section 140 of the Transfer of Property Act of Jammu & Kashmir will be respected in auction sales that take place within the State. This being the case, it is clear that there is no collision or repugnancy with any of the provisions of SARFAESI, and therefore it is clear that the High Court is absolutely wrong in finding that as Section 140 of the Transfer of Property Act will be infracted, SARFAESI cannot be held to apply to the State of Jammu & Kashmir. Rule 8 has been noticed but brushed aside by the aforesaid judgment. The High court judgment begins from the wrong end and therefore reaches the wrong conclusion. It states that in terms of Section 5 of the Constitution of Jammu & Kashmir, the State has absolute sovereign power to legislate in respect of laws touching the rights of its permanent residents qua their immovable properties. The State legislature having enacted Section 140 of the Jammu & Kashmir Transfer of Property Act, therefore, having clearly stated that the State's subjects/citizens are by virtue of the said provision protected, SARFAESI cannot intrude an....
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....ections 3 and 5; or (c) the provisions of the Constitution of India as applicable in relation to the State; shall be introduced or moved in either House of the Legislature." 42. It is also significant in this context to refer to the Preamble to the Constitution of Jammu & Kashmir, 1957 and compare it to that of the Constitution of India, 1950. The Preamble of the Constitution of Jammu and Kashmir reads as follows: "WE, THE PEOPLE OF THE STATE OF JAMMU AND KASHMIR, having solemnly resolved, in pursuance of the accession of this State to India which took place on the twenty-sixth day of October, 1947, to further define the existing relationship of the State with the Union of India as an integral part thereof, and to secure to ourselves- JUSTICE, social, economic and political; LIBERTY of thought, expression, belief, faith and worship; EQUALITY of status and of opportunity; and to promote among us all; FRATERNITY assuring dignity of the individual and the unity of the nation; IN OUR CONSTITUENT ASSEMBLY this seventeenth day of November, 1956, do HEREBY ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION." It is to be noted that the opening paragraph of t....
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....y 7th June, 1932." They are governed first by the Constitution of India and also by the Constitution of Jammu & Kashmir. This is made clear by Section 10 of the Jammu & Kashmir Constitution which states: "10. Rights of the permanent residents:- The permanent, residents of the State shall have all the rights guaranteed to them under the Constitution of India." We have been constrained to observe this because in at least three places the High Court has gone out of its way to refer to a sovereignty which does not exist. 44. Again it is wholly incorrect to refer to Entry 11A of List 3 and to state that since it is not extended to the State of Jammu & Kashmir, Parliament would have no legislative competence to enact Sections 17A and 18B of SARFAESI. There are at least three errors in this conclusion. First and foremost, it is not possible to dissect the provisions of SARFAESI and attach them to different Entries under different Lists. As has been held by us, the whole of SARFAESI is referable to Entry 45 and 95 of List I. Secondly, what has been missed by the impugned judgment is that Entry 95 List I is a source of legislative power for Parliament for conferring power and ju....