Case: Shri Vijay C. Puljal Vs. State of Maharashtra &amp; Others

The constitutional validity of the Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999, forms the basis of challenge in this batch of petitions under Article 226 of the Constitution. These petitions have been placed before the Full Bench by the Learned Chief Justice, in pursuance of a reference made on rd 3 September 2004 by a Division Bench. Though the Act has been challenged on several grounds, arguments before the Court have been confined to the legislative competence of the State Legislature to enact the law. Counsel appearing on behalf of the Petitioners and the State had fairly stated before the Court that it would become necessary for the Court to deal with the other challenges only in the event that this Court does not accept the principal challenge on the ground of a want of legislative competence. We have come to the conclusion that the provisions of the Act are ultra vires for want of legislative competence in the State Legislature.

Court's reasoning:
It cannot be predicated that freedom of religion can have no bearing whatever on the maintenance of public order or that a law creating an offence relating to religion cannot under any circumstances be said to have been enacted in the interests of public orderIt has been held that these two Articles in terms contemplate that restrictions may be imposed on the rights guaranteed by them in the interests of public order. Reference may as well be made to the decision in Arun Ghosh v. State of West Bengal where it has been held that if a thing disturbs the current of the life of the community, and does not merely affect an individual, it would amount to disturbance of the public order. Thus if an attempt is made to raise communal passion, e.g. On the ground that some one has been forcibly converted to another religion, it would, in all probability, give rise to an apprehension of a breach of the public order, affecting the community at large. The impugned Acts therefore, fall within the purview of Entry 1 of List II of the Seventh Schedule as they are meant to avoid disturbances to the public order by prohibiting conversion from one religion to another in a manner reprehensible to the conscience of the community30. Both these cases provide instances where the subject matter of the legislation had a real and substantial nexus cases with respect to public order. In the first case, the law regulated the use of amplifiers and the Supreme Court held that there was a real connection between public health and tranquility on one hand and the use of amplifier on the other. Excessive use of loud speakers in disregard to the comfort of others is liable to be a nuisance to society. Hence, the legislation was held to be relatable to public health and conceivably, to public order. In the second case, a recourse to conversion by force, threat or through the use of fraudulent means was liable to raise communal passions and to give rise to an apprehension of a breach of public order affecting the community at large. In the present case, on the other hand, the substance of the legislation is not to deal with a problem of public order, but to control and regulate deposits accepted by financial establishments by creating an offence of a fraudulent default in the payment of deposits and laying down provisions for the attachment of assets, realization of assets and for equitable distribution of the proceeds to depositors. This, in essence, is not a law in relation to public order. Indeed, as has been noted earlier, legislation on the same subject has been enacted by Parliament in Sections 58A, 58AA and 58AAA of the Companies Act, 1956. Section 58A has been held specifically to relate to the legislative head contained in Entries 43 and 44 of List I. The legislation enacted by Parliament in the form of ChapterC of the Reserve Bank of India Act, 1934 has similarly been upheld as having been enacted with respect to the legislative heads contained in Entry 45 of List I or, at any rate, under Entry 9731. Counsel appearing on behalf of the State urged that what the legislation does in the present case is to carve out a category from the subject matter of the Central legislation, namely, the category of fraudulent default and to provide for a special machinery that would be effective in realizing the dues of depositors.The Reserve Bank of India, it was submitted, addressed a letter to the Chief Secretary to the State Government on 12 August 1998 requesting that a suitable legislation can be considered on the model of The Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997. Again it was submitted that a Division Bench of this Court had in Kirit Somaiya vs. SEBI (1999) 2 LJ 223 and in Securities and Exchange Board of India vs. Libra, 1998 4 LJ 421, adverted to a mushrooming of Companies which had defrauded investors. This background cannot, however, sustain the legislation once the Court comes to the conclusion that there is a clear want of legislative power in the State Government. The State cannot carve out an area of legislation that falls in the Union List on the supposed hypothesis that the legislation enacted by Parliament is not effective. A resource to the supposed inefficacy of a law enacted by Parliament must lie to Parliament. In P.N. Krishna Lal vs. Govt. of Kerala, 1995 Supp (2) SCC 187, the State Legislature amended the provisions of the Kerala Abkari Act so as to impose penal sanction for adulterating liquor or intoxicating drugs with noxious substances and to provide for the payment of compensation. The Supreme Court held that the Act fell within the purview of Entry 8 of the State List and that the legislature could, therefore, impose penal sanctions under Entries 64 and 65 of the List. The trespass into the field of operation of the Central legislation was only incidental. That was, therefore, a case where the creation of an offence by the State legislature was under a legislation referable to the power of the State Legislature to legislate on a subject clearly falling within the State List32. Finally, it was urged on behalf of the State even if the Court were to come to the conclusion that the State law in so far as it regulates Companies and NBFCs is unconstitutional, the legislation could well be saved in its application to individuals and unincorporated entities by applying the doctrine of sever ability. It is not possible to accept this submission. The provisions of Chapter III33. This is not a case where a state law is essentially and in substance with respect to a matter in the State List. Were it to be, an incidental encroachment on a subject reserved for the Union would not have risked attracting the vice of unconstitutionality. The substance of legislation determines constitutionality. An incidental trenching on a subject not reserved to the States is permitted when the substance still is within the purview of the power of the State. What is incidental is not of constitutional significance; this is so not because the incident is an aberration but because the incident is not of such overarching significance as to be determinative of the true character of the law. Subjects of legislative power are not defined by boundaries constructed with iron fences. The boundaries are open textured and porous; in their peripheries they may possess common attributes or characteristics. The vice of the State law in this case is that its core has transgressed into a field reserved for Parliament. The transgression of the core into the Parliamentary domain is ever clearer when one has regard to legislation enacted by Parliament. In relation to corporate entities, the State law penalises a species of default – a fraudulent failure to repay – which is clearly within the purview of the sanctions imposed by the Companies Act, 1956. The State law regulates by imposing penal sanctions on transactions which Parliament has regulated by the imposition of sanctions. The penalties which the State law envisages are at variance with what Parliament envisaged. Provisions have been made in the State law for attachment, realisation and equitable distribution of assets among depositors. There are provisions for tracing assets and for the avoidance of mala fide transfers. The State government submits that Parliamentary legislation was deficient and the law had to be armed with teeth to reach out to and penalise wrong doing. This lies outside the competence of the States where the subject of the legislation is with respect to an entry in the Union List. The deficiencies that are perceived in Parliamentary Legislation have to be corrected by Parliament. The State legislature cannot arrogate to itself the power to supplant, or for that matter, supplement Parliamentary legislation on an area in the Union List. That is what in effect the State Legislature has done here on the logic that Parliament has not been adequate in its enactment. That logic is not constitutionally sound in our federal polity34. Public order is a subject that is reserved to the States in our constitutional scheme. It may appear tautological to say that legislation on public order must in substance be based upon public order. The point is of significance because numerous problems of law enforcement and of maintaining public order have their genesis in diverse and complex societal issues. If the State, in the process of enacting legislation on public order, were to legislate by regulating substantive areas which fall in the Union List, that would lead to the destruction of the basic scheme envisaged in the distribution of legislative powers. Legislation on public order must address public order. Otherwise, in the guise of legislating on public order, substantive areas which are reserved to Parliament in the Union List would be subject to regulation by the States. This is impermissible. A law on public order must truly and essentially address itself to the preservation and maintenance of public order. That is not what the State law does in the present case. The essential nature of the State law in the present case is not public order, but subjects which fall within the Union List.