REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.      2341        of  2011 [ Arising out of  S.L.P.(Civil) No.  7285/2011 ]

[ CC No. 18900/2010 ]

K.K. Baskaran .. Appellant

-versus-

State rep. by its Secretary, Tamil Nadu & Ors. .. Respondents

J U D G M E N T

1. Delay condoned.  Leave granted.

2. Heard learned counsel for the appellant.

3. Financial swindling and duping of gullible investors/depositors is not  

unique to India.  It has been referred to in Charles Dicken’s novel ‘Little  

Dorrit’, in which Mr. Merdle sets up a Ponzi scheme resulting in loss of the  

savings  of  thousands  of  depositors  including  the  Dorrits  and  Arthur  

Clennam.  In recent times there have been many such scandals e.g. the get-

rich-quick scheme of the scamster Bernard Madoff in which the estimated  

losses of investors were estimated to be 21 billion dollars.   

1

4. The present case illustrates what has been going on in India for quite  

some  time.   Non-banking  financial  companies  have  duped  thousands  of  

innocent and gullible depositors of their hard earned money by promising  

high rates of interest  on these deposits,  and then done the moonlight flit,  

often disappearing into another State or even foreign countries leaving the  

depositors as well as the State police high and dry.     

5. This appeal has been filed against the impugned judgment and order  

of  the  Full  Bench  of  the  Madras  dated  02.03.2007  in  writ  petition  No.  

26108/2005.

6. By  means  of  the  aforesaid  writ  petition,  the  petitioner  and  others  

challenged  the  constitutional  validity  of  the  Tamil  Nadu  Protection  of  

Interests of Depositors (in Financial Establishments) Act, 1997 (for short the  

Tamil Nadu Act).  By the impugned judgment the Full Bench of the Madras  

High Court  has  held  the  aforesaid  Act  to  be  constitutional.   Hence,  this  

appeal.

7. Learned  counsel  for  the  appellant  has  relied  on  the  Full  Bench  

decision  of  the  Bombay  High  Court  in  Vijay  C.  Punjal vs.  State  of  

Maharashtra  (2005) 4 CTC 705 by which a similar Act of Maharashtra ,  

being the  Maharashtra  Protection  of  Interests  of  Depositors  (in  Financial  

2

Establishments) Act, 1999 was held to be unconstitutional.  We are of the  

opinion that the impugned judgment of the Full Bench of the Madras High  

Court is correct, while the judgment of the Full Bench of the Bombay High  

Court in Vijay’s case (supra) is not correct.   

8. The  main  submission  of  the  learned  counsel  for  the  appellant  in  

challenging the Tamil Nadu Act,  which was also the main submission in  

challenging the Maharashtra Act, 1999, was that the said Act is beyond the  

legislative competence of the State Legislature as it falls within entries 43,  

44 and 45 of List I of the Seventh Schedule to the Constitution.  It was also  

submitted that the impugned Act is liable to be struck down as the field of  

legislation  is  already  occupied  by  legislation  of  Parliament  being  the  

Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, the Indian  

Companies Act, 1956 and the Criminal Law Amendment Ordinance, 1944  

as made applicable by Criminal Law (Tamil Nadu Amendment) Act, 1977.  

It was also contended that the Tamil Nadu Act was arbitrary, unreasonable  

and violative of Articles 14, 19(1)(g) and 21 of the Constitution.   

9. We are of the opinion that none of these submissions have any merit.   

3

10. A  perusal  of  the  Statement  of  Objects  as  well  as  the  relevant  

provisions of the Tamil Nadu Act shows that its object was to ameliorate the  

situation  of  thousands  of  depositors  from  the  clutches  of  financial  

establishments who had duped the investor public by offering high rates of  

interest  on  deposits  and  committed  deliberate  fraud  in  repayment  of  the  

principal and interest after maturity of such deposits.  The Act provides for  

measures for attachment of the properties of the financial establishments as  

well  as  mala  fide  transferees  and  to  bring  these  properties  for  sale  for  

realization of the dues payable to the depositors speedily.

11. As  per  the  statistics  of  July  2002,  about  Rs.  1945  crores  were  

collected from over 19 lakhs of depositors.  These depositors were either  

poor or middle class persons,  retired government servants and pensioners  

and their dependants, senior citizens or economically backward  sections of  

society etc.   The deposits were either siphoned off or diverted mala fide by  

these fraudulent financial establishments.    The commission and omission of  

these  financial  establishments  was  well-organized,  and  constitute  an  

organized systematic  white  color  crime which  jeopardizes  the  safety  and  

interest of the public.

4

12. As noted in the impugned judgment,  the Tamil  Nadu Act was not  

focused on the transaction of banking or acceptance of deposits,  but it  is  

designed to protect the public from fraudulent financial establishments who  

defraud  the  public   by  offering  lucrative  returns  on  deposits  and  then  

disappear  with  the  depositors’  money  or  refuse  to  return  the  same  with  

interst.   In  our  opinion,  the  impugned  Tamil  Nadu  Act  is  in  pith  and  

substance relatable to Entries 1, 30 and 32 of the State List (List II) of The  

Seventh Schedule.

13. The Statement of Objects And Reasons of the Tamil Nadu Act states :  

“There is mushroom growth of Financial Establishments  not  covered  by  the  Reserve  Bank  of  India  Act,  1934  (Central Act II of 1934) in the State in the recent past  with  the  sole  object  of  grabbing  money  received  as  deposits from the public, mostly middle class and poor,  on the promise  of  unprecedented high rates  of  interest  and without any obligation to refund the deposits to the  investors  on  maturity.   Many  of  these  Financial  Establishments have defaulted to return the deposits on  maturity  to  the public  running to crores  of  rupees  and  thereby inviting the public resentment, which created law  and order problems in the State.  The Government has,  therefore,  decided  to  undertake  suitable  legislation  ,  in  the public interest,  in order to regulate the activities of  such Financial Establishments, other than those covered  by the Reserve Bank of India Act, 1934 (Central Act II of  1934).

2. The Bill seeks to give effect to the above decision.”  

5

14. A reading of the Statement of Objects and Reasons of the Tamil Nadu  

Act  would  go  to  show  that  it  does  not  concentrate  on  incorporation,  

regulation or winding up of banking corporations  but, on the other hand, is  

basically concerned with returning money of the gullible depositors who had  

been defrauded.  The words found in the Statement of Objects and Reasons,  

viz.,  “in  the  public  interest,  in  order  to  regulate  the  activities  of  such  

Financial Establishments” would mean that the Tamil Nadu Act has been  

enacted to protect the interests of depositors.

15. An amendment was brought to the Tamil Nadu Act by the Protection  

of Interests of Depositors (In Financial Establishments)  Amendment Act,  

2003, Tamil Nadu Act 30 of 2003, the object being:   

“The Tamil Nadu Protection of Interest of Depositors (in  financial establishments) Act, 1977 (Tamil Nadu Act 44  of 1997) was enacted by the Government of Tamil Nadu  to  protect  the  interest  of  the  depositors  who  have  lost  their  hard earned money with the financial  institutions.  At  present,  there  is  no  provision  in  the  said  Act  for  attaching  the  properties  of  the  persons  who  borrowed  money from the financial establishments and for the sale  of attached property in public action and for the equitable  distribution  of  the  sale  proceeds  to  the  depositors.   In  order to overcome the shortcomings and to make the said  Tamil  Nadu  Act  44  of  1997  more  effective,  the  Government have decided to amend the said Act so as to-

6

(1)  bring a company registered under the Companies  Act,  1956  (Central  Act  1  of  1956)  and  non- banking financial company within the purview of  the Act;

(2) make the non-payment  of  interest  and failure  to  render service for which deposit has been made, as  offences under the Act;  

(3) attach  the  properties  of  the  person  who  has  borrowed money from the financial establishments  and failed to return the money;

(4) appoint more than one competent authority under  the Act;

(5) constitute  Special  Courts  for  different  areas  and  for different cases and to appoint Special  Public  Prosecutors for each of the Special Courts;

(6) specify  the  time  limit  within  which  the  Special  Court shall pass the final order;

(7) compound the offences punishable under the Act;  and  

(8) to sell the attached properties in public auction and  to  distribute  the  sale  proceeds  among  the  depositors.  

2. The Bill seeks to give effect to the above decision.”

16.   By section 2 of the Tamil Nadu Act 30 of  2003, the definitions of  

“deposit” and “financial establishments” were amended as follows:  

7

(1)…….

(2) “ deposit means the deposit of money either in one  lump  sum  or  by  installments  made  with  financial  establishments for a fixed period, for interest or for return  in any kind or for any service;

(3)“financial  establishment”  means  an  individual,  an  association of individuals, a firm or a company registered  under the Companies Act, 1956 (Central Act 1 of 1956)  carrying on the business of receiving deposits under any  scheme or arrangement or in any other manner but does  not include a corporation or a co-operative society owned  or  controlled  by  any  State  Government  or  the  Central  Government or a banking company as defined in Section  5 (c) of the Banking Regulation Act, 1949 (Central Act X  of 1949)”

17.  Thus, by the Amendment Act 30 of  2003,  the companies registered  

under the Companies Act, 1956 and the non banking financial companies,  

were also brought within the purview of the Act.  

18. Learned counsel for the appellant relied on the Full Bench decision of  

the Bombay High Court in Vijay C. Punjal’s case (supra) in support of his  

contention  that  the  Tamil  Nadu  Act,  like  the  Maharasthra  Act,  was  

unconstitutional  being  beyond  the  legislative  competence  of  the  State  

Legislature.  We do not agree.

8

19. We have  carefully  perused the  judgment  of  the  Full  Bench of  the  

Bombay High Court in  Vijay’s  case (supra) and we respectfully disagree  

with the view taken by the Bombay High Court.

20. It may be noted that though there are some differences between the  

Tamil Nadu Act and the Maharashtra Act, they are minor differences, and  

hence  the  view  we  are  taking  herein  will  also  apply  in  relation  to  the  

Maharashtra Act.

21. The Bombay High Court has taken the view that the Maharashtra Act  

transgressed into the field reserved for Parliament.  We do not agree.  It is  

true that Section 58A of the Companies Act has been upheld by this Court in  

Delhi  Cloth  Mills  Ltd vs.  Union  of  India (1983)  4  SCC  166  and  the  

provisions  of  Chapter  IIIC of  the  Reserve  Bank of  India  Act,  1934 was  

upheld by this Court in T. Velayndhan Achari vs. Union of India (1993) 2  

SCC 582.  However, we are not in agreement with the Full Bench decision  

of the Bombay High Court that the subject matter covered by the said Act  

falls squarely within the subject matter  of Section 58A and 58AA of the  

Companies Act.

9

22. We are of the opinion that the impugned Tamil Nadu Act enacted by  

the State Legislature is not in pith and substance referable to the legislative  

heads contained in List I of the Seventh Schedule to the Constitution though  

there may be some overlapping.  In our opinion, in pith and substance the  

said Act comes under the entries in List II (the State List) of the Seventh  

Schedule.  

23. It often happens that a legislation overlaps both Lists I as well as List  

II of the Seventh Schedule.  In such circumstances, the doctrine of pith and  

substance is applied.  We are of the opinion that in pith and substance the  

impugned State Act is referable to Entries 1, 30 and 31 of List  II of the  

Seventh Schedule and not Entries 43, 44 and 45 of List I of the Seventh  

Schedule.

24. It  is  well-settled  that  incidental  trenching  in  exercise  of  ancillary  

powers into a forbidden legislative territory is permissible vide Constitution  

Bench decision of this  court  in  State of  West Bengal etc.  vs.  Kesoram  

Industries Ltd & Ors etc. (2004) 10 SCC 201 (vide paras 31(4), (5) and (6)  

and 129 (5).   Sharp and distinct lines of demarcation are not always possible  

and it is often impossible to prevent a certain amount of overlapping vide  

ITC Ltd. vs.  State of Karnataka, 1985 (Supp) SCC 476 (para 17).    We  

1

have to look at the legislation as a whole and there is a presumption that the  

legislature does not exceed its constitutional limits.   

25. The ‘financial companies’ in the present case had not obtained any  

licence from the Reserve Bank of India.  Hence they are not governed by the  

Reserve Bank of India Act nor the Banking Regulation Act, 1949.

26. The doctrine of pith and substance means that an enactment which  

substantially falls within the powers expressly conferred by the Constitution  

upon a Legislature  which enacted it  cannot be held to be invalid merely  

because it incidentally encroaches on matters assigned to another legislature.  

The Court  must  consider  what  constitutes  in  pith  and substance  the  true  

subject matter of the legislation.  If on such examination it is found that the  

legislation is in substance one on a matter assigned to the legislature then it  

must  be held to be valid even though it  incidentally  trenches on matters  

beyond  its  legislative  competence  vide  Union  of  India vs.  Shah  

Goverdhan L. Kabra Teachers’ College (2002) 8 SCC 228 (vide para 7).   

27. For applying the doctrine of pith and substance regard is to be had to  

the enactment as a whole, its main objects and the scope and effect of its  

provisions vide  Bharat Hydro Power Corporation vs.  State of Assam  

(2004) 4 SCC 489 (vide para 15).  

1

28. For this purpose the language of the Entries in the Seventh Schedule  

should be given the widest scope of which the meaning is fairly capable vide  

State  of  West  Bengal vs.  Kesoram Industries  Ltd  (supra)  (para  31(4),  

Union  of  India vs.  Shah Goverdhan  Kabra  Teachers  College (supra)  

(para 6), ITC Ltd. vs. State of Karnataka (supra) (para 17).

29. Learned counsel for the appellant submitted that the subject-matter of  

the Tamil Nadu Act being banking, falls within the legislative competence  

of Parliament under Entry 45 of List I.  We do not agree.  Admittedly, none  

of the financial companies in question obtained any licence from the Reserve  

Bank of India.  Hence they are not governed by the Reserve Bank of India  

Act  or  the  Banking  Regulation  Act.   The  activities  of  these  financial  

companies  do not,  in  our opinion,  come within the  meaning  of  the term  

‘banking’ as defined in the Banking Regulation Act, 1949 or the Reserve  

Bank of India Act, 1934.

30. The  Tamil  Nadu  Act  was  enacted  to  find  out  a  solution  for  the  

problem  of  the  depositors  who  were  deceived  on  a  large  scale  by  the  

fraudulent  activities  of  certain  financial  establishments.   There  was  a  

disastrous consequence both in the economic as well as social life of such  

depositors who were exploited by false promise of high return of interest.  

1

These  financial  institutions/establishments  did  not  come  either  under  the  

Reserve Bank of India Act or the Banking Regulation act, and hence they  

escaped from public control.

31. By  the  impugned  Act  the  State  not  only  proposed  to  attach  the  

properties of such fraudulent establishments and the mala fide transferees,  

but also provided for the sale of such properties and for distribution of the  

sale proceeds amongst the innocent depositors.   Hence, in our opinion, the  

doctrine of occupied field or repugnancy, has no application in the present  

case.

32. The object of the Tamil Nadu Act was to give a speedy remedy to the  

innocent depositors who were vulnerable to the temptation of earning high  

rates  of  interest  and  were  victimized  by  the  financial  establishments  

fraudulently.

33. As regards  Section 58A of  the  Companies  Act,  this  prescribes  the  

conditions  under  which  the  deposits  may  be  invited  or  accepted  by  the  

companies.  On the other hand, the aim and object of the Tamil Nadu Act is  

totally different.  

1

34. The  Tamil  Nadu  Act  was  enacted  to  ameliorate  the  conditions  of  

thousands  of  depositors  who  had  fallen  into  the  clutches  of  fraudulent  

financial establishments who had raised hopes of high rate of interest and  

thus duped the depositors.    Thus the Tamil Nadu Act is not focused on the  

transaction  of  banking  or  the  acceptance  of  deposit,  but  is  focused  on  

remedying  the  situation  of  the  depositors  who  were  deceived  by  the  

fraudulent  financial  establishments.   The impugned Tamil  Nadu Act  was  

intended to deal with neither the banks which do the business or banking and  

are governed by the Reserve Bank of India Act and Banking Regulation Act,  

nor the non-banking financial companies enacted under the Companies Act,  

1956.    

35. The Reserve Bank of India Act, the Banking Regulation Act and the  

Companies Act do not occupy the field which the impugned Tamil Nadu Act  

occupies, though the latter may incidentally trench upon the former.   The  

main object of the Tamil Nadu Act is to provide a solution to wipe out the  

tears  of  several  lakhs  of  depositors  to  realize  their  dues  effectively  and  

speedily from the fraudulent financial establishments which duped them or  

their vendees, without dragging them in a legal battle from pillar to post.  

Hence,  the  decision  of  this  Court  in  Delhi  Cloth  Mills (supra)  has  no  

bearing on the constitutional validity of the Tamil Nadu Act.

1

36. In the case of the Tamil  Nadu Act,  the attachment of properties  is  

intended  to  provide  an  effective  and  speedy  remedy  to  the  aggrieved  

depositors for the realization of their dues.  The offences dealt with in the  

impugned Act are unique and have been enacted to deal with the economic  

and social disorder in society,  caused by the fraudulent activities of such  

financial establishments.

37. Under Section 3 & 4 of the Tamil Nadu Act, certain properties can be  

attached, and there is also provision for interim orders for attachment after  

which a post decisional hearing is provided for.   In our opinion this is valid  

in view of the prevailing realities.

38. The Court  should interpret  the constitutional  provisions against  the  

social setting of the country and not in the abstract.  The Court must take  

into consideration the economic realities and aspirations of the people and  

must further the social interest which is the purpose of legislation, as held by  

Justices Holmes, Brandeis and Frankfurter of the U.S. Supreme Court in a  

series of decisions.  Hence the Courts cannot function in a vacuum.  It is for  

this reason that Courts presume in favour of constitutionality of the statute  

because there is always a presumption that the legislature understands and  

1

correctly appreciates the needs of its own people,  vide  Govt. of Andhra  

Pradesh vs. P. Laxmi Devi (2008) 4 SCC 720.  

39. We fail to see how there is any violation of Article 14, 19(1)(g) or 21  

of the Constitution.  The Act is a salutary measure to remedy a great social  

evil.  A systematic conspiracy was effected by certain fraudulent financial  

establishments which not only committed fraud on the depositor, but also  

siphoned off or diverted the depositor’s funds mala fide.   We are of the  

opinion  that  the  act  of  the  financers  in  exploiting  the  depositors  is  a  

notorious abuse of  faith of  the depositors who innocently  deposited their  

money with the former for higher rate of interest.   These depositors were  

often given a small pass book as a token of acknowledgment of their deposit,  

which they considered as a passport of their children for higher education or  

wedding of their daughters or as a policy of medical insurance in the case of  

most of the aged depositors, but in reality in all cases it was an unsecured  

promise executed on a waste paper.   The senior citizens above 80 years,  

senior citizens between 60 and 80 years, widows, handicapped, driven out  

by wards, retired government servants and pensioners, and persons living  

below the poverty line constituted the bulk of the depositors.  Without the  

1

aid of the impugned Act,  it  would have been impossible to recover their  

deposits and interest thereon.   

40. The conventional legal proceedings incurring huge expenses of court  

fees, advocates’ fees, apart from other inconveniences involved and the long  

delay in disposal of cases due to docket explosion in Courts,  would not have  

made it possible for the depositors to recover their money, leave alone the  

interest thereon.   Hence, in our opinion the impugned Act has rightly been  

enacted to enable the depositors to recover their money speedily by taking  

strong steps in this connection.

41. The State being the custodian of the welfare of the citizens as parens  

patriae  cannot  be  a  silent  spectator  without  finding  a  solution  for  this  

malady.   The financial swindlers, who are nothing but cheats and charlatans  

having no social responsibility, but only a lust for easy money by making  

false promise  of attractive returns for the gullible  investors, had to be dealt  

with strongly.

42. The small amounts collected from a substantial number of individual  

depositors culminated into huge amounts of money.  These collections were  

diverted  in  the  name of  third  parties  and  finally  one  day  the  fraudulent  

1

financers  closed  their  financial  establishments  leaving  the  innocent  

depositors in the lurch.   

43. Learned counsel  for the appellant  submitted that  the  appellant  was  

only a bona fide purchaser of some plots of land from one Arun Kumar and  

Smt. Sulochana, and not from any financial establishment.  We are not going  

into this question as it can be raised in appropriate proceedings.  In this case  

we are only concerned with the constitutional validity of the Tamil Nadu  

Act.  

44. We are  of  the  opinion  that  there  is  no  merit  in  this  petition.  The  

impugned Tamil Nadu Act is constitutionally valid.  In fact, it is a salutary  

measure which was long overdue to deal  with these scamsters  who have  

been thriving like locusts in the country.

45. The Appeal is, therefore, dismissed.  No costs.

………………………………..J. (Markandey Katju)

……………………………….J. (Gyan Sudha Misra)

New Delhi; 4th March, 2011       

1