Dismissed

Om Shree Nagraj Gining Factory v. Union of India

Gujarat HC9 May 2018SCA/12138/2015

Case brief

AI extract

What is this about?

Borrowers whose accounts were declared NPA and against whom SARFAESI proceedings were initiated challenged the vires of Sections 3(2), 3(3) and 10 of the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, which deem the transferee company a banking company without a licence under Section 22 of the Banking Regulation Act. The High Court upheld the provisions and dismissed t

What the court decided

AI extract

Om Shree Nagraj Gining Factory Vs Union of India — Banking and Recovery | Gujarat HC (2018)

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C/SCA/17966/2013 CAV JUDGMENT

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

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R/SPECIAL CIVIL APPLICATION NO. 17966 of 2013 With R/SPECIAL CIVIL APPLICATION NO. 12138 of 2015 With R/SPECIAL CIVIL APPLICATION NO. 12692 of 2015 With R/SPECIAL CIVIL APPLICATION NO. 18060 of 2014 With R/SPECIAL CIVIL APPLICATION NO. 18791 of 2013 With R/SPECIAL CIVIL APPLICATION NO. 195 of 2015 With R/SPECIAL CIVIL APPLICATION NO. 197 of 2015 With R/SPECIAL CIVIL APPLICATION NO. 20624 of 2015 With R/SPECIAL CIVIL APPLICATION NO. 6561 of 2014 With R/SPECIAL CIVIL APPLICATION NO. 711 of 2015 With R/SPECIAL CIVIL APPLICATION NO. 8130 of 2015

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FOR APPROVAL AND SIGNATURE:

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HONOURABLE THE CHIEF JUSTICE MR. R.SUBHASH REDDY

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and

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HONOURABLE MR.JUSTICE VIPUL M. PANCHOLI

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=============================================

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1	Whether Reporters of Local Papers may be allowed to see the judgment ?	Yes
2	To be referred to the Reporter or not ?	Yes
3	Whether their Lordships wish to see the fair copy of the judgment ?	No
4	Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?	Yes

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VISHWA MOTORS, Versus

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UNION OF INDIA

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============================================= Appearance in Special Civil Application No.17966 of 2013

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Shri Vishwas K. Shah and Shri Dharmesh Gurjar, Advocates for the petitioners. Mrs. Suman Khare and Mr. Akshat Khare, Advocates for respondent No.2. Mr. Parth Bhatt, Advocate for respondent No.1.

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Appearance in Special Civil Application No.6561 of 2014

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Ms. Mohini K. Shah and Mr. Massom K. Shah, Advocates for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2. Mr. Parth Bhatt, Advocate for respondent No.1. Mr. K.N.Antani, AGP for respondent No.3

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Appearance in Special Civil Application No.18791 of 2013

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Shri. Vishwas K. Shah and Mr. Massom K. Shah, Advocates for the petitioners. Mr. Bharat Jani, Advocates for respondent No.2. Mr. Parth Bhatt, Advocate for respondent No.1.

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Appearance in Special Civil Application No.12692 of 2015

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Ms. Mohini K. Shah and Mr. Massom K. Shah, Advocates for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2. Mr. Parth Bhatt, Advocate for respondent No.1.

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Appearance in Special Civil Application No.12138 of 2015

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Mr. Shakti S. Jadeja, Advocate for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2. Mr. Parth Bhatt, Advocate for respondent No.1.

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Appearance in Special Civil Application No.20624 of 2015

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Mr. A.R. Gupta and Mr. Aditya A Gupta, Advocates for the petitioner. Mrs. Suman Khare and Mr. Akshat Khare, Advocates for respondent No.1.

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Appearance in Special Civil Application No.8130 of 2015

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Mr. A.R.Gupta, Advocate for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2. Mr. Parth Bhatt, Advocate for respondent No.1.

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Appearance in Special Civil Application No.195 of 2015

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Ms. Mohini K. Shah and Mr. Massom K. Shah, Advocates for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2. Mr. Devang Vyas and Mr. Parth Bhatt, Advocates for respondent No.1.

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Appearance in Special Civil Application No.18060 of 2014

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Shri Vishwas K. Shah and Shri Dharmesh J. Gurjar, Advocates for the petitioners.

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Mr. Akshat Khare, Advocate for respondent No.2.

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Mr. Parth Bhatt, Advocate for respondent No.1.

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Appearance in Special Civil Application No.197 of 2015

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Ms. Mohini K. Shah and Mr. Masoom K. Shah, Advocates for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2.

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Mr. Devang Vyas and Mr. Parth Bhatt, Advocates for respondent No.1.

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Appearance in Special Civil Application No.711 of 2015

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Mr. Maunish T Pathak and Mr. Masoom K. Shah, Advocates for the petitioners. Mr. Bharat Jani, Advocate for respondent No.2.

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Mr. Devang Vyas and Mr. Parth Bhatt, Advocates for respondent No.1. Mr. Anand B. Gogia, Mr. B.B.Gogia and Ms. Kajal L. Kalwani, Advocates for respondent No.3

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========================================= CORAM: HONOURABLE THE CHIEF JUSTICE MR. R.SUBHASH REDDY and

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HONOURABLE MR.JUSTICE VIPUL M. PANCHOLI

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Date : 09/05/2018

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CAV JUDGMENT

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(PER : HONOURABLE THE CHIEF JUSTICE MR. R.SUBHASH REDDY)

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[1] All these Special Civil Applications are filed on similar set of facts, challenging vires of provisions under Sections 3(2), 3(3) and 10 of the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 ( “Act 53 of 2003” for short), as such, they are heard together and disposed of by this common judgment.

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[2] The petitioners have also challenged vires of provision under Section 2(o) of the Securitization Act, 2002. So far as challenge to the validity of section 2(o) is concerned, the petitioners have not pressed

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in view of judgment of Hon'ble Supreme Court in the case of Keshavlal Khemchand Sons Pvt. Ltd. And Ors. v/s. Union of India reported in (2015) 4 SCC 770. wherein, said provision is upheld. In this batch of cases, submission made by learned Counsel for the petitioners are confined only to validity of provisions of the Act 53 of 2003.

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[3] For the purpose of disposal, we draw facts from Special Civil Application No.17966 of 2013.

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[4] The petitioners have availed loan facilities from the 2^nd respondent – Bank by creating security interest on the property belonging to the company and guarantors. When the petitioners have committed default in their loan account, 2^nd respondent – Bank initiated proceedings under Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“ the Act, 2002 ” for short). When said proceedings have started, the petitioners resisted the same, and ultimately, present petitions came to be filed challenging the validity of the provisions as referred above.

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[5] While issuing notice, at the first instance on 11.12.2013, interim relief was granted and following order was passed :-

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“Issue NOTICE returnable on 24th December, 2013. Since the petitioners have prayed to declare Section 3(2), 3(3)

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and 10 of the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 as ultra vires the Constitution of India, let NOTICE be issued upon the learned Attorney General of India.

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After hearing the learned advocate for the petitioners and after taking into consideration the fact that the petitioners are the owners of the property against whom notice under section 13 (2) of the SARFAESI Act has been issued, we stay all further proceedings against the petitioners under the SARFAESI Act and at the same time restrain the present petitioners from transferring, alienating, or in any way dealing with the property in question till further order. As stated by the learned advocate for the petitioners, the petitioners shall give an undertaking before this Court within 7 days from today that they are the owners and are in possession of the property and have not yet transferred, and will not transfer the property to any third-party apart from the respondent-Bank. In default of filing such undertaking, the interim order will stand vacated after expiry of the above period. We pass this interim order for a period of three weeks from today with liberty to the petitioners to apply for extension on the selfsame application after service of notice on the respondents.

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The petitioners are at liberty to communicate this order to the concerned respondent forthwith.

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Direct Service is permitted.”

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[6] When the petition came up for confirmation of interim relief, on 18.12.2015, after hearing the parties, following order is

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passed:-

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“1. We have heard Mr.Vishwas Shah, Ms.Pandit for Mr. A R Gupta, learned Counsel for the petitioners in all the petitions. We have also heard Mr. Akshat Khare and Mr. Jani, learned Counsel for IDBI Bank, Mr.Parth Bhatt, learned Counsel for Union of India, main contesting party, and Mr.Gogia, learned Counsel for respondent No.3 in Special Civil Application No.711 of 2015, on the aspects of confirmation of the interim relief.

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2. We may record that the first matter is Special Civil Application No.17966 of 2013, which is the lead matter and in the said petition, on 11.12.2013, this Court, when issued notice, had passed the following interim order:-

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“Issue NOTICE returnable on 24th December, 2013. Since the petitioners have prayed to declare Section 3(2), 3(3) and 10 of the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 as ultra vires the Constitution of India, let NOTICE be issued upon the learned Attorney General of India.

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After hearing the learned advocate for the petitioners and after taking into consideration the fact that the petitioners are the owners of the property against whom notice under section 13 (2) of the SARFAESI Act has been issued, we stay all further proceedings against the petitioners under the SARFAESI Act and at the same time restrain the present petitioners from transferring, alienating, or in any way dealing with the property in question till further order. As stated by the learned advocate for the petitioners, the petitioners shall give an undertaking before this Court within 7 days from today that they are the owners and are in possession of the property and have not yet transferred, and will not transfer the property to any third party apart from the respondent Bank. In default of filing such undertaking, the interim order will stand vacated after expiry of the above period. We pass this interim order for a period of three weeks from today with liberty to the petitioners to

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apply for extension on the selfsame application after service of notice on the respondents. The petitioners are at liberty to communicate this order to the concerned respondent forthwith.

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Direct Service is permitted.”

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3. Based on the proceedings in the present matter,in all the other matters, the orders are passed including that for interim protection, save and except separately granted in Special Civil Application Nos.711 of 2015 and 8449 of 2015. It has been stated that in Special Civil Application No.8130 of 2015, interim oder is also passed for staying the proceedings under RDDB Act. The petitioner of SCA No.12692 of 2015 is stated to be the purchaser of the property from the borrower or loanee, who has taken loan from the bank by creating interest over the property.

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4. It is an admitted position that the petitioners are the persons as parties, save and except petitioner of Special Civil Application No.12692 of 2015 to the loan transactions given by the respective banks and their capacity is either as that of principal debtor or as the guarantor, as the case may be. Based on the loan transaction, when the proceedings under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the “SARFAESI Act”) were initiated, the litigation has started by resistance of the proceedings. In SCA No.8449 of 2015, the account is declared as NPA, but the petitioner was yet to be declared as willful defaulter. In some matters, the proceedings under SARFAESI Act have reached to the stage of section 13(2) of SARFAESI Act, in some matters it has reached to section 13(4) of

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SARFAESI Act and in some matters, after the stage of Section 13(4) of SARFAESI Act, the auctions were in process or held. Suffice it to observe that in all matters, the proceedings for recovery were initiated and they were going on under SARFAESI Act. At that stage, the petitioners have approached this Court for challenging actions under Section 3(2) of SARFAESI Act, section 3(3) and section 10 of the Industrial Bank (Transfer of Undertaking and Repeal) Act, 2003 and the prayer is made to declare the same as ultra vires the Constitution. Additional prayers are also made to declare section 2(O) of the SARFAESI Act as ultra vires the Constitution and it is prayed that the action taken by the respondent no.2 Bank, i.e., IDBI under SARFAESI Act is illegal. Since the matters are already admitted earlier, the question of constitutional validity of the aforesaid respective provisions may be examined and finalised by the Court at the time of final hearing.

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5. However, the aspect for confirmation of adinterim relief would require consideration at this stage. The factum of the original petitioners and other persons as parties to the transaction of the loans and the guarantees, as the case may be, is not in dispute. The petitioners are the persons, who have enjoyed the benefits of transaction of loans by receiving the loan amounts, either directly or for the principal borrowers, who have taken loans. After having pocketed the loan amounts, when the question arose for recovery of the amounts, which otherwise were liable to be paid by them as per the terms and conditions of the loan agreements, the petitioners have come out with the challenge to constitutional

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validity of the aforesaid respective provisions, contending, inter alia, that the concerned banks, who had extended the facility of loan are not covered by the SARFAESI Act or IDB Act, as the case may be, and they have no right to recover the amounts as per the SARFAESI Act. It is hardly required to be stated that the Court, while considering the question of interim relief, would more be carried by the equitable consideration. But at the same time, Court may ensure that in the event any final order is to be passed, the Court may be in a position to see that the situation may not become irreversible. Considering the facts and circumstances, it appears to us that if the petitioners deposit the demanded amounts with the accrued interest, further proceedings can be stayed, but if there is any failure on the part of the petitioners to deposit the amounts, respective banks should be at liberty to proceed with in accordance with the law for realization of the money, but the action, if any, at the most can be made, subject to the final order, which may be passed in the respective main petitions.

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6. Hence, ad-interim relief granted earlier in all the petitions are modified to the effect that if the respective petitioners deposit with the concerned bank the demanded amounts as per the demand raised by the banks with accrued interest therein, either prior to the initiation of the proceedings or, if the notice under Section 13(2) of the SARFAESI Act has been issued, the amount claimed in the notice under Section 13(2) of the SARFAESI Act with accrued interest as per the agreement of loan, within a period of one month from today, there shall be stay against recovery proceeding under

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SARFAESI Act. If there is any failure on the part of the petitioners to deposit the aforesaid amount, the interim relief granted shall automatically stand vacated and the respective banks shall be at liberty to proceed with in accordance with law for realization of the money, but all actions, including the sale of the properties, if required, shall be subject to the final order, as may be passed by this Court in the respective main petitions. If the properties are to be sold by way of realization of the money after vacation of the interim relief as observed by us on account of the noncompliance of the conditions, the purchaser shall be specifically informed about the pendency of the petitions and that the sale is subject to the final order, as may be passed in the respective petitions. It is clarified that in the matters where no stay was granted, there also the present interim relief will continue on the same conditions.

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7. So far as SCA No.12692 of 2015 is concerned, as per the petitioner, he is he purchaser of the property but after the notice under Section 13(2) of the SARFAESI Act was issued by the Bank. As per the provisions of Section 13(13) of the SARFAESI Act, sale of the property is completely prohibited after the notice is under Section 13(2) of the SARFAESI Act without prior consent of the secured creditor. Therefore, the sale is barred by law and if the matter is strictly examined, it can be said that no right or title would vest in favour of the petitioners by the so-called sale deed. Further, the sale deeds show that the property is sold for the consideration of Rs.12 lac and Rs.7 lac, total Rs.19 lac. The sale deeds are of August 2012. Hence, the said petitioner may not be required to deposit the amount as per notice under Section 13(2) of the

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SARFAESI Act qua the other transactions of the loans and the other properties of the principal borrower(s), since they are not the subject matter of the said petition, but the fact is apparent that the price mentioned of the properties is not less than Rs.19 lac in August 2012 and by now about three years’ time has passed and if the interest is calculated at the rate of 10% per annum, it would be around Rs.6 lac. Hence, so far as the said petitioners are concerned, they will be required to deposit the amount of Rs.25 lac with the bank, instead of the amount demanded by the bank in the notice under Section 13(2) of the Act within a period of one month and if he fails to deposit the amount, the interim relief shall automatically stand vacated and the bank shall be in a position to proceed against the properties concerned, in accordance with law. 8. Let the petitions be listed for final hearing on 11.4.2016.”

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[7] The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, is an Act to provide for the transfer and vesting of the undertaking of the Industrial Development Bank of India to, and in, the Company to be formed and registered as a Company under the Companies Act, 1956 to carry on banking business etc. Sections 3 and 10 of the said Act which are subject matter of challenge reads as under :-

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“ Section 3 – Undertaking of Development Bank to vest in Company :- 1) On such date as the Central Government may, by notification, appoint, there shall be transferred to, and vest in, the Company, the undertaking of Development Bank.

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(2) Notwithstanding anything contained in the Banking Regulation Act, 1949(10 of 1949), the Company referred to in sub-section (1) shall be deemed to be a banking company within the meaning of clause (c) of section 5 of the Banking Regulation Act, 1949 and as such shall carry on banking business in accordance with the provisions of that Act, in addition to the business which may be carried on and transacted by the Development Bank: Provided that such Company shall not be required to--

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(a) obtain licence under section 22 of the Banking Regulation Act, 1949(10 of 1949);

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(b) maintain for a period of five years from the appointed day the percentage of assets required to be maintained under section 24 of the said Act.

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(3) The provisions of the Banking Regulation Act, 1949(10 of 1949) shall, as far as may be, to the extent they are not repugnant to any provision of this Act, apply to such Company.

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(4) Notwithstanding anything contained in the Banking Regulation Act, 1949(10 of 1949), the Central Government may, in consultation with the Reserve Bank of India, by notification, direct that any of the provisions of that Act specified in the notification --

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(a) shall not apply to the Company; or

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(b) shall apply to the Company, only with such exceptions, modifications and the adaptations as may be specified in the

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notification.

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(5) A copy of every notification proposed to be issued under subsection (4), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses.

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Section 10 - Act to have overriding effect :-

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The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument having effect by virtue of any enactment other than this Act.

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[8] By virtue of provision under Section 3(2) of the Act, 2003, the company referred to under section 3(1) is deemed to be a banking company within the meaning of clause (c) of Section 5 of the Banking Regulation Act, 1949. As such, it is permitted to carry on business in banking. By virtue of provision under section 3(3) of the Act, 2003, the provisions of the Banking Regulation Act, 1949 are made applicable to company under section 3(1) of the Act, to the extent they are not repugnant to any provisions of the Act 53 of 2003. Under section 10 of

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the Act 53 of 2003, provisions of the Act, 2003 are given overriding effect.

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[9] Mainly, it is the case of the petitioners, that impugned provisions of the Act, 2003 are arbitrary and discriminatory, as such, violative of rights guaranteed under Article 14 of the Constitution of India. It is their case that there is no rational or logic to allow respondent no.2 to undertake business of Banking without obtaining Banking license as contemplated under Section 22 of the Banking Regulation Act, 1949, which otherwise is the law for all banks and there is no reason for exemption of such license in favour of 2^nd respondent Bank. It is their case that there is no logic why other Banks are saddled with responsibility to obtain banking license and 2^nd respondent is relieved from such rigours. According to the petitioners there is no difference between other banking companies, which have obtained banking license from Reserve Bank of India and and 2^nd respondent Bank. Thus, it is the case of the petitioners that permitting 2^nd respondent as banking company, without obtaining license as contemplated under Section 22 of the Banking Regulation Act, 1949, is arbitrary and unreasonable.

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[10] Additional affidavit is filed on behalf of the petitioners. It is the case of the petitioners that by virtue of Act 53 of 2003, term banking

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company as defined under the provision of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is a case of incorporation by reference and it becomes internal part of the Securitization Act. Though Act 53 of 2003, is enacted later to Securitization Act, 2002, however, it creates legal fiction to be treated as bank without banking license. Precisely, it is the case of the petitioners that Act 53 of 2003 being later enactment, 2^nd respondent Bank cannot be treated as banking company for the purpose of the Securitization Act, 2002. In the additional affidavit, reference is made to amendment made to the Securitization Act in the year 2013, by which definition of banking is expanded to include Multi State Cooperative Banks.

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[11] Affidavit in reply is filed on behalf of respondent – Union of India and also on behalf of 2^nd respondent – IDBI Bank. In the affidavit in reply filed on behalf of 1^st respondent – Union of India, while denying various allegations made by the petitioners, it is stated that present petitions filed by the petitioners is wholly misconceived. Case of the respondent Union of India is as under :-

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(i) The petition filed by the petitioners is only mala fide one.

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(ii) At the time of availing the loan from respondent No.2 – Bank, the petitioners had no doubt on the vires of the Repeal Act and SARFAESI Act.

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(iii) Having executed the loan documents, all of a sudden the petitioners have raised all kinds of false, frivolous and

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technical objections.

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(iv) The petitioners have failed to establish, that the provisions of the Repeal Act infringe their fundamental rights.

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(v) The Hon'ble Supreme Court vide its common order dated 28.01.2015 has declared amended definition of the expression “NPA” under section 2(1)(o) of the Act as constitutionally valid.

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(vi) A statute can be assailed only by the person on alleged invasion of his own constitutional rights and by virtue of such infringement, they have suffered direct and legal injury.

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(vii) The petitioners have not stated facts of their own cases and there is no factual foundation for assailing the validity of provisions of the Act 53 of 2003.

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[11.1] It is further submitted that the IDBI was initially established as a subsidiary institution of Reserve Bank of India by Industrial Development Bank of India Act, 1964. Thereafter, in the year 1976, IDBI was converted into full fledged financial institution under the ownership of Government of India and has been registered as Public Financial Institution as per section 4(A) of the Companies Act, 1956. The Government of India from time to time has supported the bank with financial assistance with low cost funds and restructuring liabilities, only with a goal of overall industrial development, as a result of which the economy of the country can march towards progress. Due to changed and complex economic conditions of the country, the financial

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institutions were falling short of funds which they were receiving from National Industrial Credit Long Term Operation of RBI and Statutory Liquidity Ratio Bonds (SLR). Thus, there was need for mobilizing the small savings of the citizens of the country at macro level for sustaining the development activities in the country. Therefore, with a view to meet the demand of low cost capital in the industrial sector of the country, the commercial banks were allowed to give project finance and the financial institutions were converted into commercial banks or Non Banking Financial Companies (NBFC) as per the recommendations of Narsimhan Committee -II and RBI's Khan Working Group and the same was acknowledged by the Finance Minister in the budget speech of Financial Year 2002-03. Accordingly, the Industrial Development Bank (Transfer of Undertaking and Repeal) Bill, 2002 was introduced in Lok Sabha on 04.12.2002 and was passed by the Parliament to enable smooth transfer and vesting of erstwhile institution into newly formed banking company. Said Act was assented by the President of India on 30.12.2003 and as such, the Act 53 of 2003 has come into force on 29.09.2004.

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[11.2] It is further submitted that the Reserve Bank of India has also classified the IDBI Bank under new sub-group “Other Public Sector Banks” vide letter dated 15.04.2005. The Government of India has issued letter dated 17.02.2006 for treating IDBI Bank on par with other

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nationalized banks and has categorized it under new sub group of “Other Public Sector Banks”. The IDBI Bank Limited, undisputedly is a banking company under section 3(2) of the Act, 2003 and also under section 5(c) of the Banking Regulation Act, 1949 without the requirement of separate banking license as per Section 22 of the Banking Regulation Act, 1949. Therefore, special provisions was made for smooth transfer and vesting of erstwhile institution into newly formed banking company by way of special enactment. So as to achieve said objective, section 3(2) is enacted in the Act, as such, 2^nd respondent has been explicitly not required to take license under Section 22 of the Banking Regulation Act, 1949.

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[11.3] It is further submitted that the petitioners have not challenged the Repeal Act when it came into force on 29.09.2004. The petitioners have also not challenged the Repeal Act at the time of availing or getting disbursement of the financial assistance in the year 2009. The petitioners have challenged the validity of Sections 3(2), 3(3) and 10 of the Act, 2003 in the year 2013 when the IDBI Bank Ltd. initiated legal proceeding for recovery of finance availed by the petitioners.

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[11.4] It is submitted that impugned provisions of the Act have been enacted only to remove legal hurdles and to have smooth transfer

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of assets for creating erstwhile financial institution into a banking company with main objective to meet the demand of capital of the industrial sector. It is submitted that said Act was enacted for overall benefit of the public at large. It is submitted that only for private gain, the petitioners have challenged the validity of impugned provisions. It is pleaded that provisions under sections 3(2), 3(3) and 10 of the Act, 2003, nowhere infringes any legal right of the petitioners who have committed default and failed to repay the financial commitments to the 2^nd respondent Bank.

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[12] Separate reply affidavit is filed on behalf of 2^nd respondent – Bank. Case of the 2^nd respondent Bank is as under :-

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(i) The applicant – M/s. Vishwa Motors has approached IDBI Bank Ltd., for financial assistance of Rs.80 lakhs (Cash Credit of Rs.70 lakhs plus Bank Guarantee of Rs.10 lakhs), which has been sanctioned and letter of intent dated 28.02.2009 was issued by the Bank, which was duly acknowledged by the petitioners by letter dated 27.03.2009. The petitioner no.1 has executed a loan cum hypothecation agreement dated 27.03.2009 in favour of IDBI Bank Ltd. The petitioners nos.2 and 3 have signed and executed a personal guarantee agreement in favour of the Bank on

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27.03.2009.

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(ii) The applicant has never paid amount of installment and whatever was paid, it was irregular. Therefore, the loan account was classified as NPA on 30.12.2010. It is stated that despite various intimations, the petitioners have not taken care to repay the loan amount and therefore, loan cum hypothecation agreement was terminated and entire loan amount was recalled vide letter dated 12.12.2011. Both the letters were acknowledged by the petitioners.

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(iii) Thereafter, the Bank has issued notice dated 02.02.2012 under section 13(2) of the Securitization Act demanding amount of Rs.90,47,467/- towards outstanding dues till 31.01.2012. It is submitted that even after receipt of Section 13(2) notice, the petitioners have not paid any amount, which constrained the Bank to take symbolic possession of the said mortgage property by possession notice dated 29.10.2012 and same was published on 31.10.2012 in two newspaper i.e. Gujarat Guardian and Times of India.

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(iv) As the petitioners had not paid the outstanding amount, the Bank had left with no other option, but to take physical possession of the mortgage property to recover its dues. Physical possession notice was issued on 03.12.2013 and same was received by the petitioners.

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(v) It is stated that IDBI Bank Ltd. is a company incorporated under the Companies Act, 1956, and is classified as banking company as per Section 3(2) of the Act, 2003, deemed to be holding banking license under Section 22 of the Banking Regulation Act, 1949 and as such, Reserve Bank of India has given branch license for Surat Branch.

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(vi) While narrating reasons for brining impugned legislation, it is stated that Government of India has issued letter dated 17.02.2006 for treating IDBI Bank on par with other nationalized banks and has categorized it under new sub group of “Other Public Sector Banks”. It is stated that pursuant to this, Reserve Bank of India has also classified the IDBI Bank under new sub-group “Other Public Sector Banks” vide letter dated 15.04.2005. Thereafter, IDBI Ltd. was renamed as “IDBI Bank Ltd.” and therefore, fresh

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certificate of incorporation was issued on 07.05.2008 and

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said change has been recorded by RBI.

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(vii) It is pleaded that in view of provisions under sections 2(1) (c)(i), Section 2(1)(c)(v) and section 2(1)(d) read with section 2(1)(zd) of Securitization Act, 2002, IDBI Bank is regarded as Bank – secured creditor and has authority to initiate recovery proceedings as per Section 13 of the Securitization Act, 2002. It is stated that in view of default committed by the petitioners, their account was rightly classified as NPA in accordance with section 2(1)(o) of the Act and proceedings were initiated for recovery of amount.

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(viii) While reiterating the contentions which are raised in the reply affidavit filed on behalf of respondent -Union of India, the respondent Bank has prayed for dismissal of the petitions.

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[13] Affidavit in rejoinder is filed on behalf of the petitioners. While denying various allegations made in reply affidavits filed on behalf of the respondents, the petitioners have reiterated their stand as stated in the petitions. It is their case that respondents in the petitions have failed to justify why 2^nd respondent is exempted from definition of banking license. It is pleaded that State Bank of India and its subsidiary

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Banks are also creation of the Act of the Parliament, yet they are not exempted from taking banking license. Precisely, it is their case that in absence of any banking license, as contemplated under section 22 of the Banking Regulation Act, 2^nd respondent cannot be regarded as bank. Thus, 2^nd respondent – Bank has no power or authority to proceed under the Securitization Act against security interest created by the petitioners.

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[14] Heard learned Counsel Mr. Vishwas K. Shah, learned Counsel Mr. Massom Shah, learned Counsel Mr. Shakti Jadeja, learned Counsel Mr. A.R.Gupta for the petitioners and learned Counsel Mr. Parth Bhatt for respondent No.1 – Union of India, learned Counsel Mr. Bharat Jani for respondent – Bank, learned Counsel Mr. Akshat Khare for respondent – Bank and learned Counsel Mr. Anand Gogia for respondent in the respective petitions.

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[15] By referring to the pleadings and other material on record, it is contended by learned Counsel for the petitioners that impugned provisions under section 3(2), 3(3) and 10 of the Act 53 of 2003 are arbitrary and illegal. It is submitted that by impugned provisions, the Parliament has permitted the IDBI Bank to function without banking license, as required under Section 22 of the Banking Regulation Act. By virtue of said provisions, 2^nd respondent – Bank has come within the definition of banking company under section 2(1)(c)(i) of the Act. It is

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submitted that there is no banking license, as required under the Banking Regulation Act, 1949. Such provision is whimsical and unreasonable. It is contended that each and every banking company is required to obtain banking license, while IDBI Bank by virtue of impugned provision is not required to obtain banking license. Such provision in the Act operates perpetuity and there are no powers available with the RBI to cancel or stop functioning of IDBI Bank.

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[15.1] It is further submitted by learned Counsel for the petitioners that other Government Banks like SBI, SIDBI etc. are required to take license, however, 2^nd respondent Bank is not required to take license by virtue of impugned provision. Learned Counsel for the petitioners stated that arbitrary is a ground to invalidate the legislation. In support of their submission, they have relied on recent judgment of the Hon'ble Supreme Court in the case of Shayara Bano and ors. v/s. Union of India reported in AIR 2017 SC 4609 .

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[15.2] Learned Counsel for the petitioners have also relied on the judgments in the case of State of Punjab v/s. Kailash Nath reported in (1989) 1 SCC 321 and Dr. K.R.Lakshmanan v/s. State of T.N. And Anr. Reported in (1996) 2 SCC 226.

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[15.3] Learned Counsel for the petitioners further submitted that

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even objects and reasons of the Act 53 of 2003 is silent as to why the IDBI Bank is not required to obtain banking license. It is submitted that objects and reasons merely, state that the object is to covert the earlier institution established under the 1964 enactment to a Bank, but fails to state the reason as to why IDBI Bank is exempted from obtaining license.

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[15.4] Pleading discrimination, it is submitted by learned Counsel for the petitioners that there are no unique / special characteristics to IDBI Bank so as to exempt from banking license as compared with other banks. It is submitted that classification between IDBI Bank and other Banks must be founded on intelligible differentia which distinguishes persons or things that are grouped together from the others left out of the group. It is submitted that such intelligible differentia must evident from the statute itself.

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[15.5] To substantiate argument that exemption from banking license given to IDBI Bank has no nexus to the object and reasons, learned Counsel for the petitioners have relied on following judgments :-

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(i) State of Rajasthan v/s. Rao Manohar Singhji reported in AIR 1954 SC 297.

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(ii) Ameerunnissa Begum and Ors. v/s. Mehboob Begum and Ors. Reported in AIR 1953 SC 91.

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(iii) Ram Prasad Narayan Sahi and anr. v/s. The State of Bihar and Ors. Reported in AIR 1953 SC 215.

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(iv) State of Rajasthan v/s. Mukan Chand and Ors. Reported in

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AIR 1964 SC 1633.

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(v) State of Punjab v/s. Kailash Nath reported in (1989) 1 SCC 321.

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(vi) Deepak Sibal v/s. Punjab University and Anr. Reported in (1989) 2 SCC 145.

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(vii) Dr. K.R. Lakshmanan v/s. State of T.N. and Anr. Reported in (1996) 2 SCC 226.

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[15.6] It is further submitted by learned Counsel for the petitioners that Securitization Act, 2002 has come into force on 21.06.2002 and subsequent enactment i.e. IDBI Repeal Act, 2003 has come into force on 21.07.2004, as such, same cannot be read into Securitization Act, 2002, by incorporation. Reference is made to amendments' made to Securitization Act in 2013, by which, Multi State Cooperative Banks were included in Securitization Act, even though said Banks were governed by Multi State Cooperative Societies Act, 2002. It is the case of the petitioners that though the said Banks were earlier governed by Multi State Cooperative Societies Act, 2002, they are included in the definition of banking company by way of amendment made in the year 2013 to the Securitization Act. It is further submitted that in absence of any amendment to the Securitization Act, 2002, the IDBI Bank cannot be treated as banking company by applying legislation by incorporation. Learned Counsel for the petitioners have relied on judgments in the case of Greater Bombay Cooperative Bank Ltd. v/s. United Yarn Tex (P) Ltd. And Ors. reported in (2007) 6 SCC 236 and Bharat Cooperative Bank (Mumbai) Ltd. v/s. Cooperative

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Bank Employees Union reported in (2007) 4 SCC 685.

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[16] Per contra , it is argued by learned Counsels appearing for the respondents that the legislation can be challenged only on the ground of legislative incompetency or violation of fundamental rights. It is submitted that by virtue of provisions under Entry No.43, List I of Schedule VII of the Constitution of India, the Parliament is empowered to legislate Act 53 of 2003. It is submitted that even with regard to other grounds viz. violation of fundamental rights, there is no basis of such claim by the petitioners. It is submitted that IDBI was initially established as subsidiary institution of Reserve Bank of India by IDBI Act, 1964 and in the year 1976, IDBI was converted into full fledged financial institution under the ownership of Government of India and has been recorded as public financial institution as per Section 4A of the Companies Act, 1956. It is submitted that Government of India provided a financial assistance with a goal of overall industrial development to bolster the economy of country. Further it is submitted that when it was felt that there is need of small saving of the citizen at macro level for sustaining the development activity of the country, in view of recommendations made by Narshimhan Committee, to allow commercial bank to give project finance, their option was given to the financial institutions to get converted into commercial banks or Non Banking Financial Companies. Accordingly, the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 was introduced. The

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said Repeal Act was passed with a objective of smooth transfer and undertaking of erstwhile Public Financial Institution into a newly formed Banking company. It is submitted that Reserve Bank of India has also classified IDBI Bank under new group 'Other Public Sector Bank' vide its letter dated 15.04.2005.

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[16.1] It is further submitted by learned Counsel for the respondents that in view of specific object of legislation, impugned provisions are incorporated in the Repeal Act, as such, it cannot be said that such provisions are arbitrary or discriminatory, so as to seek invalidation on the ground that they are violative of rights guaranteed under Article 14 of the Constitution of India. Having regard to specific object of the enactment makes it clear that the reason for having such provisions in the legislation. It is submitted that IDBI Bank Limited was only Bank in the entire country which provided refinancing facilities to financial institutions across the country, meaning thereby, the IDBI would finance State Finance Corporation and other Corporations which would provide industrial loan to industries. In that view of the matter, the IDBI Bank was a unique bank and therefore, special class / category was created for smooth transfer and vesting of the assets of public financial institution to a Banking Company. It is submitted that therefore, there is no volition of fundamental rights of the petitioners and the impugned provisions intended only smooth transfer of the erstwhile public financial institution into a full fledged banking company. It is further submitted that in any event, the Central Government

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is having power under section 36AE and section 36AF of the Banking Regulation Act, 1949 to make a scheme for smooth transfer and vesting of an undertaking and to exempt the said undertaking from any of the provisions of the Banking Regulation Act, 1949. It is submitted that in view of assurance given by Government of India for retaining more than 51% of share in incorporated company, the RBI by letter dated 15.04.2005 regarded IDBI Bank Limited as 'Other Public Sector Bank'.

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[16.2] In support of their argument that class legislation is permissible on intelligible differentia, learned Counsel for the respondents have relied on judgment in the case of A.P .Dairy Development Corporation Federation v/s. B. Narasimha Reddy reported in (2011) 9 SCC 286 and also judgment in the case of Keshavlal Khemchand Sons Pvt. Ltd. And Ors. v/s. Union of India reported in (2015) 4 SCC 770.

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[17] The Banking Regulation Act, 1949, is an Act to consolidate and amend the law relating to banking. From the reading of the Section 2 of the said Act, it makes clear that provision of the said Act are in addition to, and not in derogation of the Companies Act, 1956 or any other law for the time being in force. Section 5(c) of the said Act, defines 'banking company', which means any company which transacts the business of banking in India. As per Section 22 of the said Act, no company shall carry on business in India unless it holds a license issued in that behalf by the

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Reserve Bank of India and such license is to be issued subject to certain conditions which the RBI may think fit to impose.

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[18] By virtue of the provision under Section 3(1) of the The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, the Central Government is empowered to issue notification for appointment and vesting of the company, the undertaking of development bank. As per Section 3(2) of the said Act, notwithstanding anything contained in the Banking Regulation Act, 1949, the company referred to in sub-section (1), is deemed to be a banking company within the meaning of clause (c) of section 5 of the Banking Regulation Act, 1949. By virtue of provision of Section 3(3) of the said Act, the provisions of the Banking Regulation Act, 1949, to the extent they are not repugnant to any provision of the Repeal Act, are made applicable to such company. Under Section 10 of the said Act, overriding effect is given to the provisions under the Repeal Act.

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[19] It is the case of the petitioners that they are borrowers of the credit facilities and loan amount availed from 2^nd respondent Bank. Having availed loan, when they defaulted in repayment and when their account were declared as NPA, proceedings were initiated under the Securitization Act. At that stage, the petitioners have approached this Court by filing the petitions challenging the vires of definition of NPA as defined under Section 2(o) of the Securitisation Act as well as validity of Sections 3(2), 3(3) and

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10 of Act 53 of 2003. So far as challenge to Section 2(o) of the Securitisation Act is concerned, the petitioners have not pressed such relief in view of judgment of the Hon'ble Supreme Court in the case of Keshavlal Khemchand Sons Pvt. Ltd. And Ors. v/s. Union of India and Ors. reported in (2015) 4 SCC 770.

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[20] With reference to validity of Section 3(2), 3(3) and 10 of the Act 53 of 2003, it the case of the petitioners that such provisions are arbitrary, discriminatory and offends Article 14 of the Constitution of India. The petitioners have relied on judgment of the Hon'ble Supreme Court in the case of Shayara Bano (supra) in support of their argument that impugned legislation is fit to be declared illegal on the ground that such provisions are arbitrary. It is true that earlier case law on the subject was that arbitrary was not a ground to invalidate the legislation made by the competent legislature. By reviewing earlier case law on the subject, the Hon'ble Supreme Court in the case of Shayara Bano (supra) has struck down the impugned provisions therein on the ground that such provisions are arbitrary. Whether a particular provision is arbitrary and offends rights guaranteed under Article 14 of the Constitution of India, is to be examined with reference to rights claimed by the petitioners and in the context such provision is used in the legislation. Unless it is held that such provisions are arbitrary, capricious and irrational or without adequate determining principle, only in such event, legislation can be struck down on the ground

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of arbitrariness.

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[21] With regard to plea of discrimination, unless it is found that classification is made without any intelligible differentia which distinguishes persons or things that are grouped together from the others left out of the group, such provision can be struck down on the ground of discrimination.

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[22] From the reply affidavit filed on behalf of respondent – Union of India, it is clear that IDBI was initially established as subsidiary institution of RBI by IDBI Act, 1964 and in the year 1976, IDBI was converted into full fledged financial institution under the ownership of Government of India and has been registered as Public Financial Institution as per section 4(A) of the Companies Act, 1956. The Government of India has supported the bank with a goal of overall industrial development. However, due to changed and complex economic conditions of the country, the financial institutions were falling short of funds, it was felt that there was need for mobilizing the small savings of the citizens of the country at macro level for sustaining the development activities in the country. It appears that with a view to meet the demand of low cost capital in the industrial sector of the country, the commercial banks were allowed to give project finance and the financial institutions were converted into commercial banks or Non

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Banking Financial Companies (NBFC). Accordingly, the Industrial Development Bank (Transfer of Undertaking and Repeal) Bill, 2002 was introduced. Thereafter, the Reserve Bank of India has also classified the IDBI Bank under new sub-group “Other Public Sector Banks” vide letter dated 15.04.2005. Further the Government of India has issued letter dated 17.02.2006 for treating IDBI Bank on par with other nationalized banks and has categorized it under new sub group of “Other Public Sector Banks”. It is clear from the material placed on record that the impugned Act was incorporated with a main object of smooth transfer of assets of already existing financial institutions into newly formed banking company and to achieve such objective, provisions under Section 3(2) and 3(3) of the Act 53 of 2003 are incorporated. Consequently, the respondent No.2 – Bank was not required to take license under Section 22 of the Banking Regulation Act, 1949. The Act 53 of 2003 has come into force on 02.07.2004 and the Act was in force when the petitioners have availed the loan facilities. But when demand notices were issued after declaring the petitioners' account as NPA, these petitions are filed challenging the vires of the impugned provisions. It is clearly stated in the reply affidavit filed by the respondent that only to remove legal hurdles and to have smooth transfer of assets for creating erstwhile financial institution into a banking company, Act 53 of 2003 is brought into force.

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[23] Having regard to objectives of the Act 53 of 2003, and in absence of placing on record material to show that impugned provisions are either capricious or irrational, plea of the petitioners that such provisions are arbitrary, cannot be accepted. No factual foundation is made out to show as to how the impugned provisions and Act is arbitrary and offends Article 14 of the Constitution of India. Having regard to reasons stated in the reply affidavit filed by the respondents and keeping object of legislation in mind, it cannot be said that the impugned provisions are manifestly arbitrary, capricious and irrational, so as to accept the plea of the petitioners that same are to be declared illegal. Even the plea of the petitioners with regard to discrimination cannot be accepted and is found to be totally baseless.

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[24] So far as IDBI Bank is concerned, it was the only Bank which functioned as subsidiary to Reserve Bank of India after IDBI Act, 1964 came into force. Thereafter, in the year 1976, it was declared as public financial institution, and by impugned provision as a Banking Company. If the reasons which are stated in the reply affidavits for taking such steps are looked at, it is clear that such steps are taken in public interest. Having regard to unique feature of bank, and steps taken by the respondents to incorporate impugned provisions, with a object of smooth transfer of erstwhile public financial institution into banking

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company, it cannot be said that there is discrimination. In any event, if at all any bank which is having similar characteristic earlier is not granted same benefit, it can question the same, but at the same time, it is not open for the petitioners who have availed the loan facilities from the bank to plead discrimination. The petitioners, at any rate cannot be heard to complain about the same.

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[25] In view of objectives of impugned Act and material placed on record, we are of the view that judgment in the case of Shayara Bano (supra) would not render any assistance to the case of the petitioners.

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[26] The petitioners have relied on the judgment in the case of State of Rajasthan v/s. Mukan Chand and Ors. reported in AIR 1964 SC 1633 . In the aforesaid Judgment, Hon'ble Supreme Court has considered validity of certain provisions of Rajasthan Jagirdars Debt Reduction Act. In the aforesaid judgment, the Hon'ble Supreme Court has held that restriction under Section 7(2) of the said Act is reasonable restriction and while confirming the judgment of the High Court in part, reversed opinion with regard to Section 7(2) of the said Act having regard to object of the Act.

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[27] In the case of State of Punjab v/s. Kailash Nath reported in (1989) 1 SCC 321 , relied by the petitioners, same is the case under service law, where certain immunity are provided from prosecution keeping in mind, old age retired persons', same is not accepted by the Hon'ble Supreme Court. Paragraph No.8 of the said judgment reads as under :-

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“8. There is another cogent ground on account of which the submission that giving a government servant peace of mind after his retirement in his old age can be a good ground to grant him immunity from prosecution cannot be accepted. This would on the face of it be discriminatory and thus arbitrary inasmuch as if peace of mind in old age can be a good ground for immunity from prosecution for offences committed by a person, there seems to be no reason why such immunity may not be available to all old persons and should be confined only to government servants. On the face of it, the government servants cannot constitute a class by themselves so as to bring their case within the purview of reasonable classification, if the purpose of granting immunity from prosecution is ensuring peace of mind in old age.”

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[28] The petitioners have also relied on the judgment in the case of Dr. K. R. Lakshmanan v/s. State of T. N. and Another reported in (1996) 2 SCC 226 , wherein, validity of Madras Race Club (Acquisition and Transfer of Undertaking) Act, 1986 was held to be arbitrary and discriminatory. Paragraphs No.47, 48 and 49 of the said judgment reads

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as under :-

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“47. There is no material on the record to show that an inquiry or investigation was held by the State Government in the affairs of the club. In the facts and circumstances of this case, it was of considerable importance that there should be a proper inquiry held by the Government before such an action is taken. The inquiry should show that the management have so misbehaved and mismanaged that they are no longer fit and proper persons to be permitted to manage the affairs of the club. Even if the mismanagement on the part of the club is assumed, it is not open to single-out a club of the type of discriminatory treatment. May be that a race-club of national importance or of considerable importance in the State can be taken over in the interest of the State, but the club is an ordinary race-club which has no impact whatsoever on the material resources of the community of the economic system of the State. There are no special circumstances or reasons to single out the club as a class for the purposes of the impugned Act. Even if we were to accept the recitation in the objects and reasons that the company was being mismanaged, we are of the view that the Companies Act provide for ample machinery to deal with the mismanagement in the companies registered under the Companies Act. It is true that the presumption is in favour of the constitutionality of a legislative enactment and it is to be presumed that a legislature understands and appreciates the needs of its own people, but when on the face of the Statute there is no classification and no attempt has been made to select an individual with reference to any differentiating attributes peculiar to that individual and not possessed by others, the presumption is of the assistance to the State. In the present case the petitioner club is a company like any other

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company registered under the Companies Act. Elaborate machinery and well established procedural safeguards have been provided under the Companies Act for dealing with the mismanagement in the companies registered under the Companies Act. We see no reasonable basis for classifying the race-club for the purposes of acquiring and transfer of its undertaking on the ground of mismanagement.

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48. We see considerable force in the contention of Mr. Parasaran that the acquisition and transfer of the undertaking of the club is arbitrary. The two Acts were amended by the 1949 Act and the definition of "gaming" was amended. The object of the amendment was to include horse racing in the definition of "gaming". The provisions of the 1949 Act were, however, not enforced till the 1974 Act was enacted and enforced with effect from March 31, 1975. The 1974 Act was enacted with a view to provide for the abolition of wagering or betting on horse races in the State of Tamil Nadu. It is thus obvious that the consistent policy of the State Government, as projected through various legislations from 1949 onwards, has been to declare horse racing as gambling and as such prohibited under the two Acts. The operation of the 1974 Act was stayed by this Court and as a consequence the horse races are continuing under the orders of this Court. The policy of the State Government as projected in all the enactments on the subject prior to 1985 shows that the State Government considered horse racing as gambling and as such prohibited under the law. The 1985 Act on the other hand declares horse racing as a public purpose and in the interest of the general public. There is apparent contradiction in the two stands. We do not, agree with the contention of Mr. Parasaran that the 1985 Act is a colourable piece of legislation, but at the same time we are of the view that no public purpose is being served by acquisition and

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transfer of the undertaking of the club by the Government. We fail to understand how the State Government can acquire and take over the functioning of the race club when it has already enacted the 1974 Act with the avowed object of declaring horse racing as gambling? Having enacted a law to abolish betting on horse racing and stoutly defending the same before this Court in the name of public good and public morality, it is not open to the State Government to acquire the undertaking of horse racing again in the name of public good and public purpose. It is ex-facie irrational to invoke "public good and public purpose" for declaring horse racing as gambling and as such prohibited under law, and at the same time speak of "public purpose and public good" for acquiring the race club and conducting the horse racing by the Government itself. Arbitrariness is writ large on the face of the provisions of the 1986 Act.

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49. We, therefore, hold that the provisions of 1986 Act are discriminatory and arbitrary and as such violate and infect the right to equality enshrined under Article 14 of the Constitution.”

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From the reasons assigned in the above said paragraphs demonstrate that the aforesaid case has no application to the case on hand. In the aforesaid judgment, it is clearly held that no public purpose will be served by acquisition and transfer of the undertaking of the Club by the Government. Said finding is sufficient to hold that such case will not apply to the facts of the case on hand.

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[29] Various judgments are referred by the petitioners in support of their plea that the impugned provisions which exempts banking

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license to IDBI Bank have no nexus to objects and reasons. If we look at the preamble, objects and reasons of Act 53 of 2003, it makes clear that said Act is enacted for transfer and vesting of undertaking of the Industrial Development Bank of India to, and in, the Company to be formed and registered as a Company under the Companies Act, 1956 to carry on banking business and for the matters connected therewith. The objects and reasons of the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 reads as under :-

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“ Statement of Objects and Reasons - The Industrial Development Bank of India (IDBI) was established in 1964 by the Industrial Development Bank of India, 1964, (IDBI Act) as the principal financial institution (FI) for co-ordinating, in conformity with national priorities, the working of institutions engaged in financing, promoting or developing industry, for assisting the development of such institutions for providing credit and other facilities for the development of industry and for matters connected therewith. The IDBI was a subsidiary of the Reserve Bank of India (RBI) until 1976 when the Central Government subscribed to its entire share capital.

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2. The IDBI Act was amended in 1994 which, inter alia, enabled the IDBI to enlarge its shareholder's base and access the captial market for resources. Due to enlargement of shareholder's base, the shareholding of th Central Government has become 58.5%.

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3. With the changes in economic environment in the last decade, the flow of funds to FIs from RBI's National Industrial Credit Long Term Operations (NIC-LTO) and allocation of Statutory Liquidity Ratio (SLR) bonds dried up and it became necessary for the FIs to raise funds mainly from the markets. Simultaneously, commercial banks also began to provide project finance and these commercial Bank have lower cost of funds than FIs. With lower cost of funds for banks, the business model of FIs came under strain. Thus, the average cost of borrowing for IDBI which was below 10% at the beginning of the last decade has gone up to 11.5% during 2001-2002 while average return has gone down from 14% to 10.4% over the same period.

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4. The Narsimhan Committee II suggested that the FIs should convert ultimately into commercial bank or nonbanking financial companies. The Khan Working Group set up by the RBI also recommended that development financial institutions should be allowed to convert into banks at the earliest. Accordingly, the Finance Minister in his speech on the Budget for the financial year 2002-2003 proposed to make legislative changes to corporatise the IDBI within the coming year to provide it flexibility.

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5. In pursuance of the announcement, it is now proposed to repeal the Industrial Development Bank of India Act, 1964 by a Bill. The Bill contains the provisions which have been incorporated after deliberating the available options to give effect to the proposal to corporatise the IDBI and to give the emerging corporate entity the appropriate flexibility and

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leeway to structure itself into a viable and effective organisation. The salient features of the Bill are as follows:-

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(a) repealing the Industrial Development Bank of India Act, 1964;

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(b) transferring and vesting of the undertaking of the Industrial Development Bank of India to the Company to be formed and registered under the Companies Act, 1956;

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(c) allowing such Company to carry on banking business in accordance with the provisions of the Banking Regulation Act, 1949;

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(d) exempting the Company from obtaining license under section 22 of the Banking Regulation Act, 1949;

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(e) exempting from maintaining for a period of five years from the appointed day the percentage of assets required to be maintained under section 24 of the Banking Regulation Act, 1949;

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(f) conferring power upon the Central Government to direct, in consultation with RBI, by notification, that provisions of the Banking Regulation Act, 1949 shall not apply or apply with exceptions, modifications and adaptations and such notification shall be required to be placed in draft before each House of Parliament.

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6. The Bill seeks to achieve the above objects.”

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[29.1] From the above, it is clear that objectives are definite and two fold viz. to transfer and vesting of undertaking of the IDBI Bank to

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Company, registered under the Companies Act, 1956 and to allow such company to carry on banking business in accordance with the Banking Regulation Act, 1949. It is to be noticed that the subject banking is concerned, it is covered by Entry 43, List -1 of Schedule VII of Constitution of India and impugned Act is central piece of legislation. If impugned provisions are examined with preamble and objects and reasons, we do not find any substance in the submission made by the petitioners that impugned provisions have no nexus with objects and reasons.

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[29.2] In any event, by applying ratio of the judgment in the case of Keshavlal Khemchand and Sons Pvt. Ltd. And Ors. v/s. Union of India reported in (2015) 4 SCC 770 , we do not find any merit in the plea of the petitioners. It is profitable to extract paragraph 62 of the said judgment, which reads as under :-

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“62. Before closing these matters, we may also deal with one aspect of the judgment of the Gujarat High Court. The Gujarat High Court recorded that the impugned amendment is ultra vires the object of the Act. We presume for the sake of this judgment that the impugned amendment is not strictly in consonance with the objects enunciated when the Act was initially made. We fail to understand as to how such inconsistency will render the Act unconstitutional. The objects and reasons are not voted upon by the legislature. If the enactment is otherwise within the constitutionally permissible limits, the fact that

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C/SCA/17966/2013 CAV JUDGMENT

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there is a divergence between the objects appended to the Bill and the tenor of the Act, in our opinion, cannot be a ground for declaring the law unconstitutional.”

¶275

From the aforesaid judgment, it is clear that if the enactment is otherwise within the constitutionally permissible limits, the fact that there is a divergence between the objects appended to the Bill and the tenor of the Act, cannot be a ground for declaring the law unconstitutional.

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[30] Further plea of the petitioners that Securitization Act is of 2002 and Act 53 of 2003 which came into force on 02.07.2004 fails to affect definition of banking company in Securitization Act, 2002, which is case of incorporation by reference and in absence of any amendment to the Securitization Act, 2002, no steps can be allowed to be taken, also cannot be accepted.

¶277

[31] In view of specific object of legislation and provisions incorporated in it, makes it clear that by operation of law, a company under section 3(1) of the Act 53 of 2003, by which the assets were to be transferred from erstwhile IDBI Bank Ltd., is treated as banking company under section 3(2) and as per Section 3(3) of the Act 53 of 2003, provisions of Banking Regulation Act, 1949 are made applicable to

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the extent they are not repugnant to the provisions of Repeal Act, we are of the view that no further amendment is necessary in Secuirtization Act, 2002 to bring 2^nd respondent Bank within its fold. Once by impugned provision, IDBI Bank is banking company within the meaning of Section 5(1)(c) of the Banking Regulation Act, 1949, Securitization Act, 2002 automatically covers, as much as, 2^nd respondent – Bank stands included as banking company.

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[32] For the aforesaid reasons, we do not find any merit in the petitions and this batch of petitions is required to be dismissed. Accordingly, all the petitions are dismissed. No order as to costs. Consequently, all connected Civil Applications stand disposed of. Interim relief, if any, stands vacated.

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(R.SUBHASH REDDY, CJ)

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(VIPUL M. PANCHOLI, J)

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SATISH

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Page 45 of 45

Om Shree Nagraj Gining Factory v. Union of India

Case brief

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Om Shree Nagraj Gining Factory v. Union of India

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