State Bank of India v. Santosh Gupta & Anr. Etc.

The judgment was a path breaking decision wherein the Apex Court of India held that the Constitution of India was superior to the Constitution of J&K and secondly, that the provisions of SARFAESI were applicable to the State of Jammu and Kashmir.
CITATION(2017) 2 SCC 538
COURTSupreme Court of India
JUDGES/CORAMJustice Kurian Joseph and Justice R.F Nariman
DATE OF JUDGEMENT16.12.2016

Introduction

The Division bench of Hon’ble Supreme Court comprising of Justice Kurian Joseph & Justice Rohinton Fali Nariman in a path breaking decision dated 16.12.2016 State Bank of India v. Santosh Gupta & Anr came to the conclusion that the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) are applicable to the State of Jammu and Kashmir.

Facts

The facts of the case are as follows: The present appeals owes its genesis to the judgment dated 16-7-2015 Bhupinder Singh Sodhi v. Union of India[1], passed by the High Court of Jammu & Kashmir, wherein it was held that various key provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“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 was held to be inapplicable to banks such as State Bank of India (“SBI”), which are all-India banks.

Issues

The main issue in the case was: Whether SARFAESI in its application to the State of Jammu & Kashmir would be held to be within the legislative competence of Parliament?

Arguments on behalf of the Appellant

The Learned Counsels on behalf of the appellant placed reliance on the provisions of Article 370 of the Constitution of India, read with Section 5 of the Jammu & Kashmir Constitution, 1956. They contended that the Instrument of Accession of Jammu and Kashmir, 1947 makes it clear that List I of Schedule VII of the Government of India Act, 1935 would be applicable, and that the various Constitution Application to J&K Orders including the Presidential Order of 1954 issued from time to time under Article 370 makes it clear that Article 246(1) read with Entries 45 and 95 List I would clothe Parliament with power to enact SARFAESI.

The counsels further submitted that the State’s legislative power comes in only if none of the entries of List I or III are attracted. To refer to Entry 11-A and to Entry 6, and further to state that Section 140 of the Transfer of Property Act of Jammu & Kashmir would render the key provisions of SARFAESI without legislative competence, is wholly incorrect. Moreover entry 45 List I has no other competing entry, inasmuch as List II of Schedule VII to the Constitution of India has not been extended to the State of Jammu & Kashmir, and Entry 11-A dealing with Administration of Justice contained in List III of Schedule VII to the Constitution of India does not apply to Jammu & Kashmir, and Entry 6 List III dealing with transfer of property also does not apply, Entry 45 List I must therefore be read in its full plenitude and the same cannot be not cut down by the provisions of any other entry. Thus, if it were found that the entire SARFAESI is in fact enacted under Entry 45 read with Entry 95 of List I, it would be clear that no other enquiry is necessary, as the Act in pith and substance would be preferable to these two entries.

Applying the doctrine of pith and substance they opined that the SARFAESI Act does not deal with the transfer of property envisaged under Schedule VII List III Entry 6 of the Constitution of India but deals with the recovery of debts owing to banks and financial institutions and certain measures which can be enforced outside the court’s process to enforce such recovery. Under Section 13(4) of SARFAESI Act besides the option of selling assets to realize debts, the bank can also take over the management of business of borrower or appoint administrators to manage assets of borrower. Banks may also give notice for payment of the amount due. Thus transfer of property by way of sale or assignment is only one of the several ways for recovery of debt and thus SARFAESI Act, as a whole cannot be said to be in pith and substance, an Act relatable to subject of transfer of property and that therefore the entire 2002 Act would fall within Entry 45 read with Entry 95 List I.

Arguments on behalf of the Respondents

The learned counsel appearing on behalf of the private respondent argued that since both the Constitution of India and the Constitution of Jammu & Kashmir are expressions of the sovereign will of the people, they have equal status and none is subordinate to the other. 

Countering the argument of appellant the Ld. Counsel stated that the SARFAESI Act, in pith and substance, relates to “transfer of property” and not “banking” and would, therefore, be outside the competence of Parliament and exclusively within the competence of the State Legislature. He further argued that the power of Parliament is expressly “limited” under 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 Parliament has power to make laws. He also argued that the subjects mentioned in the State List of Schedule VII 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.

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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 in direct conflict with Section 13 of the SARFAESI Act and the Transfer of Property Act must prevail. The ld. Counsel stressed upon the fact that Sections 17-A and 18-B of the SARFAESI Act, being sections relatable to administration of justice, which is purely a State subject, would also be ultra vires Parliament. He relied upon Article 35-A and supported the impugned judgment on this score.

The learned Standing Counsel for the State of Jammu & Kashmir referred to Article 370 and the Constitution of Jammu & Kashmir in some detail and cited judgments of this Court dealing with the same. He pointed out local statutory laws which prohibit transfer of land belonging to State residents to non-State residents. His submission was that though the SARFAESI Act was enacted by Parliament by virtue of Entry 45 List I, yet Section 13(4) alone incidentally encroaches upon the property rights of permanent residents of the State of Jammu & Kashmir and must be read down so that it will not be permissible under this section to sell property belonging to a permanent resident of the State to a person who is not a permanent resident of the State. He further submitted that the proviso added to Rule 8(5) of the SARFAESI Rules must be read along with Section 13(4) of the SARFAESI Act and if so read, the State of Jammu & Kashmir would have no objection to the SARFAESI Act applying to the State of Jammu & Kashmir.

Summary of court decision and judgment

The Hon’ble Supreme Court while setting aside the Judgment of the High Court held that the provisions of the SARFAESI Act were applicable to the State of J&K. At the outset while relying on the Judgment of State of West Bengal v. Union of India the Court held that Article 1 of the Constitution of India and Section 3 of the J&K Constitution make it clear that India shall be Union of States and that the State of J&K is and shall be an integral part of the Union of India. The Court went on to note that the State of J&K, though a State within the meaning of Article 1 of the Constitution of India, has been accorded a special status by virtue of Article 370 of the Constitution of India because of certain events that took place at the time of erstwhile Ruler of J&K acceded to the Indian Union.

The Division Bench comprising of Kurian Joseph & Rohinton Fali Nariman JJ. In order to ascertain the position insofar as the legislative competence of Parliament of India vis-à-vis the State of Jammu & Kashmir was concerned took a holistic view of Article 370 of the Constitution of India, the 1954 Presidential Order as amended from time to time, and the Constitution of Jammu & Kashmir, 1956 and came to the following conclusion:

  1. All entries specified by the 1954 Order contained in List I of Schedule VII to the Constitution of India would clothe Parliament with exclusive jurisdiction to make laws in relation to the subject-matters set out in those entries.
  2. Equally, under the residuary power contained in Entry 97 List I read with Article 248, the specified subject-matters set out would indicate that the residuary power of Parliament to enact exclusive laws relating to the aforesaid subject-matters would extend only to the aforesaid subject-matters and no further.
  3. Parliament would have concurrent power with the State of Jammu & Kashmir with respect to the entries that are specified in the Presidential Order of 1954 under List III of Schedule VII of the Constitution of India. This would mean that all the decisions of this Court on principles of repugnancy applicable to Article 254 would apply in full force to 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 Schedule VII 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.
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Negating the argument made by the learned counsel on behalf of the respondents that the subjects mentioned in the State List of Schedule VII to the Constitution of India as originally adopted were frozen and can never be delegated or conferred on Parliament so long as Article 370 remains, since under Article 370(1)(b), the President could declare that 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, the Court observed that proviso to Article, 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 either adds to or subtracts from the State List and confers upon Parliament, either exclusively under List I or concurrently under List III, a subject-matter hitherto in the State List.[2] The bench took cognizance of the dicta in Puranlal Lakhanpal v. President of India[3]wherein the expression “modifications” occurring in Article 370(1)(d) has been construed not only to mean “to limit or restrict” but even “to extend or enlarge” and went on to held that the word “modification” must be given the widest meaning and would include all amendments which either limit or restrict or extend or enlarge the provisions of the Constitution of India. For this reason also it is clear that nothing can ever be frozen so long as the drill of Article 370 is followed.

Applying the doctrine of pith and substance to SARFAESI, the Court concluded that it was clear that in pith and substance the entire Act was preferable to Entry 45 List I read with Entry 95 List I that 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. Under Section 13(4) of SARFAESI Act besides the option of selling assets to realize debts, the bank can also take over the management of business of borrower or appoint administrators to manage assets of borrower. Banks may also give notice for payment of the amount due. Thus it is clear that the transfer of property, by way of sale or assignment, is only one of several measures of recovery of a secured debt owing to a bank and this being the case, it is clear that SARFAESI, as a whole, cannot possibly be said to be in pith and substance, an Act relatable to the subject-matter “transfer of property”.  In arriving at this conclusion the Hon’ble Supreme Court relied on plethora of judgments including the recent Judgment of this Court in UCO Bank v. Dipak Debbarma[4] wherein it was held that the 2002 Act is relatable to the entry of banking which is included in List I of the Seventh Schedule. In this case, a Tripura Land Reform law, which was made under Entries 18 and 45 of List II, was pitted against SARFAESI, which is made under Entry 45 List I. Despite the fact that the Tripura Act received the protection of Article 31-B read with Schedule IX, 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 by virtue of the application of Article 246 of the Constitution of India.

Thereafter the court turned its focus on Section 17-A and Section 18-B of SARFAESI, which apply to the State of Jammu & Kashmir, substituted “District Judge” and the “High Court” for the “Debts Recovery Tribunal” and the “Appellate Tribunal” respectively, and held that the abovementioned sections were appropriately framed and amended to be applicable to the State of J&K so that no conflict arises. They Hon’ble Judges held 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.

At this juncture the Court while respecting the admonition given by this Court in A.S. Krishna v. State of Madras[5] held 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. Hence the entire Act, including Sections 17-A and 18-B, would in pith and substance be referable to Entries 45 and 95 of List I, and would therefore necessarily operate in the State of Jammu & Kashmir.

The judgment of the High Court was held to be flawed insofar it referred to Entry 11-A of the Concurrent List, as the same is not extended to the State of Jammu & Kashmir. From this, the counsel for the respondents sought to contend that Parliament would, therefore, have no power under the Concurrent List to legislate on the subject matter “Administration of Justice”. In contravention the Court observed that under Section 5 of the Jammu & Kashmir Constitution, “Administration of Justice” would come into play only when Entries 45 and 95 of List I are not attracted. Even if this were not so, the expression “administration of justice” is general and must give way to the special laws that are enacted under Entry 95 List I when coupled with another entry in the same List—in this case Entry 45 List I.

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Subsequently the Ld. Bench referred to Rule 8(5) of the Security Interest (Enforcement) Rules, 2002 that 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.

During the course of examining the validity of Sections 13(1) and (4) the judgment of High Court was held to be erroneous in holding 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. In other words, the State Legislature having enacted Section 140 of the Jammu & Kashmir Transfer of Property Act, SARFAESI cannot intrude and disturb such protection extended to the State’s subjects. The whole approach was held to be inconsistent with the prevailing law since Entries 45 and 95 of List I clothe Parliament with exclusive power to make laws with respect to banking, and the entirety of SARFAESI can be said to be referable to Schedule VII List I Entries 45 and 95 to the Constitution of India. This being the case, Section 5 of the Jammu & Kashmir Constitution will only operate in areas in which Parliament has no power to make laws for the State. Thus, it is clear that anything that comes in the way of SARFAESI by way of a Jammu & Kashmir law must necessarily give way to the said law by virtue of Article 246 of the Constitution of India as extended to the State of Jammu & Kashmir, read with Section 5 of the Constitution of Jammu & Kashmir. Hence, Sections 13(1) and (4) cannot be held to be beyond the legislative competence of Parliament as has wrongly been held by the High Court.

The Court thereafter took cognizance of the fact that the constitution of J&K does not use the word sovereign, which is indeed used in the Constitution of India. It is thus clear that the State of Jammu and Kashmir has no vestige of sovereignty outside the Constitution of India and is thus, subordinate to the Constitution of India and cannot be placed on same pedestal as the latter.

While concluding the judgment the Hon’ble bench frowned upon the reliance of 35-A of the Constitution as conferring of rights and privileges mentioned in Section 140 of the Jammu & Kashmir Transfer of Property Act was not the subject matter of challenge on the ground that it violates any fundamental right of the Constitution of India. Furthermore, in view of Rule 8(5) proviso, such rights were expressly preserved.

Analysis

The Division bench of Hon’ble Supreme Court made a careful and detailed analysis of the controversy in hand starting with the historical background of Article 370 of the Constitution of India, Instrument of Accession and the Presidential Order of 1954.

Thereafter in the backdrop of provisions contained in Constitutions of India and the State of J&K the court examined the contention raised by the Appellants that the constitution of India is subordinate to the constitution of State of J&K. The appreciable factor of the decision is the application of the doctrine of pith and substance to assess whether the concerned act well within the legislative power of the State i.e. List II Schedule 7 or that of the Parliament i.e. List I Schedule 7. Thereafter the Ld. Judges analyzed Article 368 to nullify the argument that the parliament with respect to J&K can make laws only for subject matters of list 1 and 3. At last it examined the validity of Section 17A and 18B of the act 2002 and came to conclusion that there was no repugnance between the provisions of J&K Transfer of property Act and SARFAESI Act.

Conclusion

The judgment was a path breaking decision wherein the Apex Court of India held that the Constitution of India was superior to the Constitution of J&K and secondly, that the provisions of SARFAESI were applicable to the State of Jammu and Kashmir.


[1] Bhupinder Singh Sodhi v. Union of India 2015 SCC OnLine J&K 126 : 2015 AIR CC 2480.

[2] SampatPrakash v. State of J&K (1969) 2 SCR 365: AIR 1970 SC 1118.

[3] PuranlalLakhanpal v. President of India (1962) 1 SCR 688 : AIR 1961 SC 1519.

[4] UCO Bank v. Dipak Debbarma (2017) 2 SCC 585.

[5] A.S. Krishna v. State of Madras 1957 SCR 399: AIR 1957 SC 297 : 1957 Cri LJ 409.