# UTIAR PRADESH CO-OPERATIVE FEDERATION v. THE STATE OF U.P. & ORS

- **Citation:** [1973] 3 S.C.R. 402
- **Court:** Supreme Court of India
- **Decided:** 1973-01-19
- **Bench:** S. M. Sikri, N. Ray, D. G. Palekar, M. H. Beg, S. N. Dwivedi
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/utiar-pradesh-co-operative-federation-v-the-state-of-u-p-ors-5822
- **Pages:** 9

## Headnote

U.P. Cooperative Societies Act, 1965 (Prior to amendment by U.P.
Act No. 1 of 1972) & Rules-Stt.:te Government power
to
nomintile
upfo 2/3rds of total number of .menibers of the committee of the
managemenr.
U.P. Cooperative Societies Rules 1968-Reduction- of share
capital
u~less a member is removed acco;ding to Rules share clipit(,ll not affected.-Shares ke,pt in ~ecurity remained in specie-No reduction of share
capitc .. l.
The petitioner challenged the order passed by the U.P. State GoVi:rn-
·ment ·an 26-1-1971
nominating 2/3rds of the total number of members
of the committee of the management of the petitioner purp6rting to act
under section 34 of the U .P. Cooperative Societies Act,
1965. The
subscribed paid up capital
of
the
Federation
o,n
30-6-1969
was
Rs. 34. 04 lakhs.
Of this, the Slate Government owned shares of the
value of Rs. 20 lakhs. The percentage of the State Government in the
share holding was 58. 75%.
The State Government's contention
was
that the membership of some co-operative bank had
been
U!rmioated
a!Dd. thel'efore the share capital was
reduced
by Rs. 53,000/-. The
State Government also contended that another member.
District
C.ooperative Federation, Saharanpur retired Rs. 50,000/- out of his share
capital with the Federation. The State Government, therefore, claimed
that its share holding had gone to 60% and, thel'efore,
had
a right
under s. 34 to nominate its nominees to .the comqiittee of the management.
The petitioner challenged the order on the
ground
that
the
condition precedent of the State Government holding 60% of the sh-ares
in the share capital of the Federation was :not fulfilled.
It also raised
several other grounds including tbe constitutional validity of Sec. 34
of the Act.
Allowing the writ petition,
HELD : (i) The p'rovisions of the Act and Rules indicate that the
co-operative banks did not cease to be the members. as there Was no
resolution removing the b3!1>ks from membership. Rule
3 2
indicates
that there is no reduction of share capital as the shares of the bank&
were not transferred to any other pel'son. The shares· still stood in the
name of the co-operative banks and the share capital was not reducod
by Rs. 53,000/-.
[408H; 409A-CJ
B
c
D
E
F
G
H
t
U.P. CO·OPERATIVE FEDERATION .v. U.P. STATE (Ray,].) 40,3
A
(ii) Saharanpur District Cooperatiye Federation was still a member,
8
as it was no't removed from membeTship.
It share mQOCy cannot . be
taken out of share capital fund god treated as security money. The
shares were not kept in security.
Even if the shares were in se~ity,
the shares remained in specie. The share capital of the petitioner. was
not reduced by Rs. 50,000/·. [409F-H; 410A--C]
(iii) As the shares in both the cases were still part of the
share
capitlll, the State Government was not justified to exercise right ilnder
section 34 of the Act.
[410D-F]
ORIGINAL/CIVIL APPELLATE JURISDICTION : Writ Petition
C
No. 243 of 1971 and Civil Appeal No. 592 of 1972.
D
E
Writ Petition No. 243 of 1971
Petition 11nder Article 32 of the Constitution of India for the
enforcement of fundamental rigbts and Civil Appeal No. 592 of
1972.
Appeal py a special leave from the judgment and order dailed
December 8, 1970 of the Allahabad High Court Civil Misc. Writ
No. 4700.
A. K. Sen, A. P. Singh Chauhan, V. C. Prashar and Dluiram
Pal Singh Chauhan, for the petitioner .and appellant.
C. K. Daphtary, B. Sen and 0. P. Rana, for respondents Nos.
1-4, 10-11 (in W.P. No. 243) and respondents Nos. 1 & 2 (in
F
C.A. No. 592).

## Text

402
UTIAR PRADESH CO-OPERATIVE FEDERATION
A
v.
THE STATE OF U.P. & ORS.
January 19, 1973
[S. M. SIKRI, C.J., A, N. RAY, D. G. PALEKAR, M. H. BEG AND
S. N. DWIVEDI, JJ.J
U.P. Cooperative Societies Act, 1965 (Prior to amendment by U.P.
Act No. 1 of 1972) & Rules-Stt.:te Government power
to
nomintile
upfo 2/3rds of total number of .menibers of the committee of the
managemenr.
U.P. Cooperative Societies Rules 1968-Reduction- of share
capital
u~less a member is removed acco;ding to Rules share clipit(,ll not affected.-Shares ke,pt in ~ecurity remained in specie-No reduction of share
capitc .. l.
The petitioner challenged the order passed by the U.P. State GoVi:rn-
·ment ·an 26-1-1971
nominating 2/3rds of the total number of members
of the committee of the management of the petitioner purp6rting to act
under section 34 of the U .P. Cooperative Societies Act,
1965. The
subscribed paid up capital
of
the
Federation
o,n
30-6-1969
was
Rs. 34. 04 lakhs.
Of this, the Slate Government owned shares of the
value of Rs. 20 lakhs. The percentage of the State Government in the
share holding was 58. 75%.
The State Government's contention
was
that the membership of some co-operative bank had
been
U!rmioated
a!Dd. thel'efore the share capital was
reduced
by Rs. 53,000/-. The
State Government also contended that another member.
District
C.ooperative Federation, Saharanpur retired Rs. 50,000/- out of his share
capital with the Federation. The State Government, therefore, claimed
that its share holding had gone to 60% and, thel'efore,
had
a right
under s. 34 to nominate its nominees to .the comqiittee of the management.
The petitioner challenged the order on the
ground
that
the
condition precedent of the State Government holding 60% of the sh-ares
in the share capital of the Federation was :not fulfilled.
It also raised
several other grounds including tbe constitutional validity of Sec. 34
of the Act.
Allowing the writ petition,
HELD : (i) The p'rovisions of the Act and Rules indicate that the
co-operative banks did not cease to be the members. as there Was no
resolution removing the b3!1>ks from membership. Rule
3 2
indicates
that there is no reduction of share capital as the shares of the bank&
were not transferred to any other pel'son. The shares· still stood in the
name of the co-operative banks and the share capital was not reducod
by Rs. 53,000/-.
[408H; 409A-CJ
B
c
D
E
F
G
H
t
U.P. CO·OPERATIVE FEDERATION .v. U.P. STATE (Ray,].) 40,3
A
(ii) Saharanpur District Cooperatiye Federation was still a member,
8
as it was no't removed from membeTship.
It share mQOCy cannot . be
taken out of share capital fund god treated as security money. The
shares were not kept in security.
Even if the shares were in se~ity,
the shares remained in specie. The share capital of the petitioner. was
not reduced by Rs. 50,000/·. [409F-H; 410A--C]
(iii) As the shares in both the cases were still part of the
share
capitlll, the State Government was not justified to exercise right ilnder
section 34 of the Act.
[410D-F]
ORIGINAL/CIVIL APPELLATE JURISDICTION : Writ Petition
C
No. 243 of 1971 and Civil Appeal No. 592 of 1972.
D
E
Writ Petition No. 243 of 1971
Petition 11nder Article 32 of the Constitution of India for the
enforcement of fundamental rigbts and Civil Appeal No. 592 of
1972.
Appeal py a special leave from the judgment and order dailed
December 8, 1970 of the Allahabad High Court Civil Misc. Writ
No. 4700.
A. K. Sen, A. P. Singh Chauhan, V. C. Prashar and Dluiram
Pal Singh Chauhan, for the petitioner .and appellant.
C. K. Daphtary, B. Sen and 0. P. Rana, for respondents Nos.
1-4, 10-11 (in W.P. No. 243) and respondents Nos. 1 & 2 (in
F
C.A. No. 592).
The Judgment of the Court was delivered by
RAY, J.-The Civil Appeal is by
special leave from the
judgment dated 8 December, 1970 of llhe High Court at Allahabad
G
dismissing the petition of the appellants. The appellants in 'the
Allahabad High Court impeac!ted the first order dated 19 September, 1970 passed under section 34 of the Uttar Pradesh Cooperative Societ.ies Act, 1965 referred to as the Act nominating
two-thirds o( the total number of members of the committee of
management of the Uttar Pradesh Co-operative Federation. The
H
apiJellants are the Uttar, Pradesh Co:operative Peileration. itd.,
Luckn9w referred to as the .Federation and.Veerpal Singh w)!O are
both also· the petitioners. in the writ petitio~
.
404
SUPREME COURT REPORTS
[1973] 3 S.C.R.
This writ petition is directed. against the second order of. the
Uttar Pradesh State Government dated 26 June, 1971 passed
under section 34 of the Act nominating two-thirds of the total
number of members of the committee of management of the Federation.
The question which falls for determination in the writ petition
and the civil appeal is whether the State Government under section
34 of the Act could nominate two-thirds of the total number of
members of the committee of management of the Federation.
The annual general meeting of the Federation was held on
30th March 1970. The committee of management of the Federa-
\
A
tion was elected at the annual general meeting.
The· appellant c
petitioner Veerpal Singh on 8 April 1970 was unanimously elected
as Chairman of the Federation.
On 19 September, 1970 the State Government passed an order
under section 34 of the Act and nominated two-thirds of the
members of the committee of management of the Federation. It
may be stated here that under section 34 of the Act where the
D
share capital subscribed to by tho State Goveinment is ,60 per tent
or more of the total share capital of the co-operative society the
State Government shall have the right to nominate up to two-thirds
of the total numbers of members ot the. committee of management.
The State Government passed the order on that basis that it had
share capital of more than 60 per cent in the Federation.
ll:
The Federation moved the Allahablad High Court against the
said order of. the State Government. The High Court stayed the
operation of the said order nominating two-thirds of the members
of the committee of management. The High CoUtt dismissed the
petition of the Federation on 8 December, 1970. On 18 December,
1970 the State Government cancelled the order dated 19 Septem1
ber, 1970.
The Additional Registrar, Co-operative Societies, Uttar Pradesh submitted an inspection report to the effect that the State
Govtrnment had been misi)Jformed about the share capital of the
Slate Government in the Federation. The report stated that in
fabt the share capital of the State Government in the Federation
G
was never 60 per cent. The report further stated that the mMter
should be thoronghly investigated and guilty persons should be
punished.
The appellallt petitioner Veerpal Singh wrote a letter on 12
June, 1971 to the Chief Minister of Uttar Pradesh and asked for
immediate acition pursuant to the report of the Additional Registrar
ot Co-operative Societies. In that letter V eerpal Singh stated that
Om Prakash Tyap, DOputy Registrar, Co-cperative Societies had
R
A
B
c
D
E
F
..
U.P. CO-OPERATWE FEDERATION V. U.P. STATE (Ray,].) 40S
been working as Secretary of the Federation Since 1970. Veerpal
Singh also !lated in the letter that on being elected Chairman he
examined the accounts and found that Om Prakash Tyagi had
been responsible for mal-practices.
On 26 June, 1971 the Stale Government passed the second
orders under section 34 of the Act nominating two-thirds of the
total number of members of the committee of management
of the Federation. After the State Gov~ent had passed the said
order nominating two-thirds of the total number of members of
the committee of management the elected members of the committee under rule 38 (b) of the by-laws of the Federation were moved
by draw of lots to accommodate the nominated members. The
appellant petitioner Veerpal Singh survived the process of draw
by lots and retained his membership of the committee of management of the Federation.
In the Allahabad High Court the appellants challenged the
first order of the State Government dated 19 September, 1970 on
inter alia the ground thait the share holding of the State Government on facts and in law was not 60% and therefore the State
Government was not competent to pass an order under section 34
of the Act. The Allahabad High Court held that if the appellants .
denied and disputed facts as to ownership biy the State Government of 60 per cent or more of the Capital of the Federation the
High Court could not normally decide controverted facts and the
petition would fail. The High CoUit however held that the State
Government was justified in taking the view that the· share holding
had crossed the mark of 60 per cent and therefore the order was
valid.
The petitioners in the writ petition challenged the second order
dated 26 June, 1971 passed by the State Government under section
34 of the Act nominating two-thirds of the total number of members of the committee of management. The contentions ·are four.
F~t, that section 34 of the Act gives a naked power without any
guidance as to when that power is to be exercised and under what
circumstance~. Secondly, it is said that the naked power under
G section 34 infringes Article 14 of the Constitution by subjecting
societies to directors of societies being picked and chosen by the
G?verrunent without ·any principle being involved. Thirdly, it is
said that the exercise of power was arbitrary and on extraneous
grounds without any hearing being given. Fourthly the condition
precedent of the, State Government holding 60 per 'cent of shares
m the share capital of the Federation was not tulfllled.
H
It i~ not necessary to express any opinion . on the first three
c0ntent1ons because in our OPinion the fourth contentiou 111cceeds:
406
SUPREME COURT REPORTS
(1973] 3 S.C.R.
The subscribed and paid up share capital of the federation on
30 June, 1969 was Rs. 34.04 lakhs.
Of this the State Government owned shares of the value of Rs. 20 Jakhs. The percentage
of the State Government in the share holding was 58. 75 per cent.·
The State Government case was that in January, 1970 the Federa-
.ti001 terminated the membership of the co-operative banks.
The
co-operative banks at that time held shares worth Rs. 53,000.
Subsequently, an individual co-operative society brought shares
worth Rs. 1,000 in the Federation. Thus, the total paid up share
·Capital of the Federation came down to Rs. 33.52 lakhs, according
to the version of 1the Government. The further Government case
is that in the first week of September, 1970 the District Co-operative Federation, Saharanpur retired Rs. 50,000 out of its share
capital ol Rs. 1,51,000 in the Federation. The result, according
to the Government, was that the total paid up share capital of
the Federation was further reduced to Rs. 33.01 lakhs. On this
basis the State Government contended that the share capital of
the State Government worth Rs. 20 lakhs was more than 60 per
cent. The State Government on this footing of ownership of 60
per cent or more of the share caprtal of the Federation passed
order under section 34 of the Act and nominated two-thirds of the
total number of members of the committee of management of •the
Federation.
The petitioners as well as the appellants on the other hand
contended that neither the shares owned by the co-operative banks
to the extent of Rs. 53,000 nor the shares worth Rs. 50,000 owned
by the District Co-operative Federation. Saharanpur could be said
by the Government 'lo be reduced. from the total share capital
to allow the State Government to take the plea that the State
Government owned 60 per cent' or more of the total share capital
in the Federation. It is further contended by the petitioners as well
as the appellants that on 26 June, 1971 the total share capital
of the Federation was Rs. 40,17,000. According to them, this
share capital included the share holdings of the co-operative banks
at Rs. 53,000 and the further share holdings of Rs. 50,000 be1onging to the Saharanpur Federation. The petitioners therefore
contended that the share capital of the State Government at Rs. 20
lakhs was not more than 49.81 per cent at the relevant date on
26 June, 1971.
Two .questions arise. First, whether it could be said that the
share holding ol the co-operative banks at Rs. 53,000 was reduced
from the share capital on the relevant dates in ,September, 1970
·or in the month of June, 1971. Second, whether the sum of
A
n
c
D'
E
F
G
Rs. 50,000 out of share capital held by the District Co-operative
H
Federation, Saharanpur in .the share capital of the Federation had
been retired with the resuk of reduction of the share capital of
the Federation.
,
U.P. CO-OPERATIVE FEDERATION V. U.P. STATE (Ray, J.) 407
A
Under section 34 of the Act where the share capital subscribed
by the State Government is 60 per cent or morll of the total share
capital of a co-operative society the State Government shall have
the right to nominate up to two-thirds of the total number of
members of the committee of management.
Und~r section 34 of
the Act the State Government in such a cas~_has also the pawer
to nominate a Government servant or a non-official as a Chairman
B
of the commitee. This power of nominating a Chairman i&
notwithstanding the provisions contended in section 30 of the ActSection 30 of the Act speaks of Chairman, Vice-Chairman of the
society elected, nominated or appointed in accordance with the
provisions of the Act, rules and -bye-laws.
Section 34 further
provides that the State Government may exercise right mentioned·
C
therein during the period oi five years from the time the share of
the State Government in the share capital of the Federation becomes 60 per cent or more or until such share in the capital goes.
down to less than 50 per cent whichever is earlier.
It may be noticed here that section 34 of the Act has been
D
amended by Uttar PradCl!h Act I of 1972. The rights of the parties
in the present appeal as well as the petition are governed by section
34 of the Act as it stood prior to the amendment.
E
F
G
H
In view of the fact that the first order of the State Government
dated 19 September, 1970 which was challenged in the Allahabad
High Court was cancelled by the State Government ii! the month
Of December, 1970 only the validity of the second order. dated'.
26 June, 1971 requires consideration.
The case of the Government is that under the Act a cooperative bank cannot be a member oi a co-operative society.
Prior to the Act co-operative banks could be share-holders of a
co-operative society.
It is said on behalf of the Government
that the Federation modified its bye-laws and made them consistent
with the Act by deletfug the co-operative bank from the category
of persons who could become members of the Federation.
On
30 June, 1970 it is said that Rs. 53,000 befug the share money of
the co-operative bank was transferred from the share capital
account into the suspense account in the books of the Federation.
Therefore, the case oi the Government is th'at the share capital of
the Federation stood_ reduced by Rs. 53,000 on 30 June, 1970.
It appears that prior to the comfug into force of the Act the
District Co-operative Banks were members of the
Federation.
After the Act came into force the bye-laws of the Federation were
amended.
Under bye-law 5 of the Federation the membershipwas limited to two classes, viz., the District Co-operative Fe~ation
and the Marketing Societies.
The District Co-operative Banks
therefore were not eligible to be members under the amended
'
408
SUPREME COURT REPORTS
[1973] 3 s.c.R.
bye-laws.
The question therefore arises as to what would happen
to the shares of the cc>-operative banks who had become members
prior to the coming into force of the Act.
Section 17 of the Act speaks of persons who may be members
of a co-operative society.
Such persons are an individual, any
other cc>-operative society, the State
QQvemment, the Central
Govermnent, the State Warehousing Corporation and a body
corporate not covered by any other clause and approved by the
Registrar. It is also enacted that a joint stock company or an
individual shall not be admitted as an ordinary member. Seotion
22 of the Act contemplates restriCtions on individuals in regard
to holding of shares. Section 23 of the Act speaks of restrictions
on transfer of shares or of intere&t. Section 24 of the Act deals
with transfer of interest on death of a member. Section 27 of the
Act speaks of removal or expulsion of a member by the Registrar
of the Society.
Rule 56 .of the Uttar Pradesh Co-operative Societies Rules,
1968 referred to as the Rules broadly deals with removal of members from membership of the society and expulsion of a member
from the membership of the society. Rule 56(a)(i) states that a
person may be removed from membership if he has ceased to fulfil
the qualifications laid down under the Aot, rules and bye-laws of
the society or (iv) his membership of the society is inconsistent
with the provisions of rule 8 (b). Rule 57 states that a person
sought to be removed or expelled under Rule 5 6 shall be called
upon by the committee of management to show cause why he·
should not be removed or expelled. Rule 58 states that the committee of management may by a resolution p11$sed in the meeting
remove or expel a memb:er, Rule 59 states that no resolution for
removal or expulsion shall be effective unless it is carried by a
majority of twc>-thirds of the members present and voting.
Rule
63 states that a member of the cc>-operative society shall cease to
be a member inter alia on his removal or expulsion from society
or retirement, transfer or forfeiture of all the shares held by him.
The provisions in the Act and the Rules iridicate that the removal can only be under a resolution. There is no provision for
.automatic cessation of membership. In the absence of a resolution
there is no valid removal of cc>-operative bank from membership.
In the ·case of removal of a member the shares of such a memb\er may under section 23 ( 3) of the Act be transferred to or
acquired or retained by a member. Chapter VI ot the Rules con1isting of Rules 6S to 82 deals with shares. Rule 82 states that
where ~ member of a co-operative society ceases to be such a
member th~ value ol his share or interest in the share capital of
A
B
c
D
E
F
G
H
A
B
c
D
E
F
U.P., CO-OPERATIVE FEDERATION V. U.P. STATE (Ray, J.) 409
the society to be p'aid ito him or his nominee shall be equal to the
actual amount paid by the member to the society. These provisions indicate that there is no reduction of the share capital. There
was no removal of co-operative banks from the membership of
the Federation. There was no resolution to that effect. The shares
owned by the co-operative banks are 1'till in existence.
These
shares have not been yet transferred to tiny one. The shares have
not been transferred to, acquired or retained by any person. The
shares still stand in the name of the co-operative banks. The
share capital is not reduced. It is therefore not valid on the part
of pie State Government to reduce the shares worth Rs. 53,000
owned by the co-operative banks, and not to take the same into
consideration in calculating the total share capital.
The other plea of the St11te Government is that shares worth
Rs. 50,000 belonging to the Saharanpur District Co-operative
Federation were retired with the result that there was reduction
of total share capital by a sum of. Rs. 50,000. Retirement of
shares is dealt w.ith by rule 66 of the Rules. It is stated in the
rule that under section 23 ( 3) of the Act a co-operative society
may retire the shares 'Of a member in the instances mentioned
therein. The fourth instance in rule 66 is that if a member of a
co-operative society has ceased to be a shareholder on account
of adjustment of his membership to any other class under rule
44( c) or if he has been removed from membership under rule
56(a), his shares may be retired. Again under Rule 70 a Central
Co-operative Society may reduce the share capital according to a
scheme approved by the Registrar. Such a scheme may provide
for (~) extinguishing or reducing the liability on any of its Ghares
in respect of share capital not paid up, or (ii) cancelling any
paid up share capital or (iii) paying back any paid up share capital
which is in excess of the needs of the central society.
The Saharanpur District Co-opera1tive Federation never ceased
to be a member.
There has been no removal or expulsion. If
the Saharanpur District Co-operative Federation is still a member
its share money cannot be taken out of share capital fund and
treated as security money.
Retirement of sh.are money under
G
Rule 66 is in four cases. First, if a member at the time of his
admission to memb!:rship enters into share participation agreement between the society and the membler his share may be retired,
Secondly, the shares of a member in a salary earning co-operative
society in the event of. transfer of such member from the . area of
operation of the society or cessat:on of his service by virtue of
which he held membership of the society may be retired. Thirdly,
H
the shares of a member of a co-operative socJety organised in
educational institutions if the member ceases to be a stude~t or a
member of the sta!f of the institution by the virtue of which he
410
SUPREME COURT REPORTS
(1973] 3 S.C.R.
was holding membership of the society may be retired. None ol
these three contingencies of retirement of shares applies to the case
of the Saharanpur District Co-operative Federation. The fourth
instance mentioned in rule 66 is the retirement of a member who
has been removed from membership or has ceased to be a shareholder on account of adjustment of membership under rule 44( c) _
The District Co-operative Federation, Saharanpur does not fall
in thi>. class also.
The amount of Rs. 50,000 representing the shares of the District Co-operative Federation, Saharanpur was said by the State
Government to be kept in security. If the shares were in security
the shares remained in specie. It could not be said that the shares
were :onverted by sale into money. Rule 75 forbids by pothecation of shares as security for any loan. It is therefore not open
to· the State Government to contend that the
shares
worth
Rs. 50,000 belonging
to the District Co-operative Federation,
Saharanpu'r were taken off the share capital of the Federation.
The condition precedent to the exercise of rights_ of the State
Government under section 34 is that the State Government owns
60 per cent or more of the share capital of the Federation. The
entire basis of exercise of right of the Government was that shares
worth Rs. 53,000 owned by the Co-operative ~anks and shares
worth Rs. 50,000 owned by the District Co-operative Federation,
Saharanpur were no longer part of the share capital. There is no
foundation for the State Government to take up that plea. The
shares in both the cases are still part of the share capital. The
result is that it could not be said th~t the State Government was
justllied to exercise right under section 34 of the Act.
For the foregoing reasons the petition succeeds. The order of
the State Government dated 26 June, 1971 is quashed.
The appeal is also allowed and the judgment of the High Court
is set aside for the reasons indicated hereinbefore.
Each party will pay and bear its own costs.
S.B.W.
Appeal allowed.
A
B
c
D
E
F