Pentakota Srirakulu vs The Co-Operative Marketing Society Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 193 of 1962

Decision Date: 28 August 1964

Coram: N. Rajagopala Ayyangar, P.B. Gajendragadkar, J.C. Shah

In the matter titled Pentakota Srirakulu versus The Co‑Operative Marketing Society Ltd, the Supreme Court of India delivered its judgment on 28 August 1964. The opinion was authored by Justice N. Rajagopala Ayyangar, with Chief Justice P. B. Gajendragadkar and Justice J. C. Shah forming the bench. The case appears in the law reports as 1965 AIR 621 and also in the Supreme Court Reporter as 1965 SCR (1) 186, with the citation record indicating reference R 1991 SC 2254 (5,7). The statutory provision under consideration was Section 49 and Section 51 of the Madras Co‑operative Societies Act, 1932 (Mad. 6 of 1932), dealing respectively with disputes touching the business of a cooperative society and the arbitration of claims made against persons in management of such societies.

The petitioner, who served as President of a cooperative marketing society, explained that the society had been established principally to provide its members with credit facilities and to arrange the sale of their agricultural produce at reasonable prices. After certain complaints were lodged, the Registrar of Co‑operative Societies initiated an enquiry into the society’s affairs. Following due notice and a hearing, the Registrar superseded the existing management committee and appointed a special officer to assume control of the society’s operations. The special officer subsequently filed a claim before the Registrar, alleging that the petitioner, in his capacity as a member of the management, had earned commission on sales of jaggery made by producer members but had failed to credit that commission to the society. The claim asserted that, although the paperwork reflected sales at prices fixed by law, in practice higher prices had been charged. The society was entitled to charge commission on the total price realised, yet only the commission calculated on the legally controlled price had been recorded in the society’s accounts; the excess commission derived from the higher price was said to have been appropriated by members of the management.

In response to the claim, the Registrar, invoking Section 51(2) of the Madras Co‑operative Societies Act, appointed the Deputy Registrar of Co‑operative Societies to act as an arbitrator and adjudicate the matter. Dissatisfied with this appointment, the petitioner instituted a writ petition in the High Court under Article 226 of the Constitution, seeking a prohibition on the Deputy Registrar’s authority to hear the claim. The single judge hearing the petition granted the writ, thereby restraining the Deputy Registrar from proceeding. The respondent appealed this decision, and the Division Bench of the High Court allowed the appeal, set aside the writ, and dismissed the petition. The petitioner then sought special leave to appeal to the Supreme Court, contending that the Registrar ought to have proceeded under Section 49 rather than Section 51 of the Act, that the dispute over the alleged retention of society funds did not constitute “a dispute touching the business of the society,” and that the underlying sale transaction giving rise to the commission was illegal, thereby precluding the society from asserting a claim based on that transaction.

The appellant contended that the Registrar ought to have acted under section 49 rather than section 51 of the Madras Co‑operative Societies Act, that the controversy regarding the appellant’s retention of money belonging to the society did not constitute “a dispute touching the business of the society,” and that the sale transaction which generated the commission alleged to have been improperly retained was illegal; consequently, the society could not, in law, maintain a claim founded on an illegal transaction. The Court held that the case did not fall within the ambit of section 49 of the Act. Because section 49 was inapplicable, and notwithstanding other arguments concerning the alleged illegality of the Registrar’s order, the proceedings instituted under section 51 were not open to objection, as recorded at paragraph 192D. In addition to the factors that the claim was “against a person in management of the society” and “for the fraudulent retention of money or other property of the society,” the Court observed that another condition had to be satisfied before section 49(1) could be invoked. Specifically, the facts giving rise to the charge had to be disclosed during an audit under section 37, an enquiry under section 38, an inspection under section 39, or upon the winding up of the society, as set out at paragraphs 191 G‑H. The Court referred to Sundaram Iyer v. The Deputy Registrar of Co‑operative Societies, I.L.R. (1957) Mad. 371, for this proposition. The Court further held that the claim presented to the arbitrator was indeed “a dispute touching the business of the society.” It could not be disputed that the sale of produce belonging to the society’s members formed part of the society’s business, and that the imposition of commission on such sales was likewise a business matter, as noted at paragraph 192 G‑H. Lastly, the Court found that no illegality attached to the contract between the appellant and the society; the contract was perfectly legal. It arose from the appellant’s position as President of the society, and, by law, he was bound to account for the monies he received on behalf of the society, as indicated at paragraph 193 C and supported by Kedar Nath Motani v. Prahlad Rai, [1960] 1 S.C.R. 861, which was followed. The judgment proceeded to set out the civil appellate jurisdiction: Civil Appeal No. 193 of 1962, filed by special leave against the judgment and order dated 18 August 1959 of the Andhra Pradesh High Court in Writ Appeal No. 111 of 1957. Counsel for the appellant and the respondents were listed, and the judgment was delivered by Ayyangar J. The appellant had been President of the Anakapalli Co‑operative Marketing Society Ltd., a society principally formed to enable its members to obtain credit facilities and to arrange the sale of agricultural products at reasonable prices. Complaints about the society’s functioning led the Registrar of Co‑operative Societies, Madras, to institute an enquiry into its affairs at a time when Anakapalli, now in Andhra Pradesh, lay within the State of Madras, and the Court’s analysis arose as a result of those proceedings.

In the inquiry, the Committee disclosed facts that led the Registrar to supersede the existing management of the Society after giving due notice to show cause and conducting a hearing. The supersession order, dated 15 February 1952, was made under section 43 of the Madras Co‑operative Societies Act (Act 6 of 1932), hereinafter called die Act. Following this, a special officer was appointed to take charge of the Society’s affairs. The special officer subsequently filed a claim before the Registrar, among other matters, against the appellant. The amount claimed was slightly more than Rs 13,000 and the claim set out a detailed calculation of that sum. The principal component of the claim was commission that the Society alleged it had actually earned on the sale of jaggery belonging to its producer‑members but that had not been credited to the Society’s accounts. Upon receiving the claim, the Registrar, invoking section 51(2) of the Act, appointed the Deputy Registrar of Co‑operative Societies, Visakhapatnam, to act as an arbitrator to adjudicate the dispute. Immediately after this appointment, the appellant filed a petition in the High Court of Andhra Pradesh seeking a writ of prohibition under article 226 of the Constitution, asking that the Deputy Registrar be barred from dealing with the claim. The learned single judge who heard the petition allowed it and granted the relief sought by the appellant. The Co‑operative Society then appealed to the division bench of the High Court; that bench allowed the Society’s appeal and dismissed the writ petition. Subsequently, the appellant applied to this Court for special leave, after the High Court had refused a certificate of fitness, and thereby preferring the present appeal.

Before addressing the arguments presented by counsel for the appellant, the Court found it necessary to set out the factual background that gave rise to the proceedings. The Co‑operative Society, of which the appellant had been President until November 1951, held a licence under the Madras General Sales Tax Act to operate as a commission agent, and it earned commission on the turnover of sales of agricultural produce of its members and other sellers. In October 1950, the Government of India issued the Gur Control Order, which fixed the maximum price at which gur could be sold in various States, with the fixed prices varying from State to State. The price fixed for sales at Anakapalli, then situated in the State of Madras, was somewhat lower than the prices fixed in other States. This price differential created an opportunity for the Society’s members to sell their jaggery at prices above the controlled rate because merchants were willing to purchase at higher rates. It was alleged that, although the documentary records of transactions between the Society’s members and the purchasers showed sales at the legally fixed prices, in reality the members had charged higher prices. These allegations formed the basis of the claim against the appellant and others, the correctness of which was to be examined in the arbitration proceedings.

In this case, the Court observed that the Society was authorized to levy a commission on every sale it effected. It was explained that the commission was calculated on the full price at which the gur was sold; consequently, the portion of commission corresponding to the price fixed by the Gur Control Order was credited to the Society’s accounts, whereas the commission arising from any excess price obtained by the members was alleged not to have been entered into the Society’s books but to have been taken by members of the management. These allegations formed the basis of the claim made against the appellant and other individuals, and the veracity of those allegations had not yet been examined in the arbitration proceedings. When the claim was lodged, among other allegations, the appellant was accused of failing to credit to the Society the monies earned through sales conducted by the Society. In response, the appellant filed a writ petition, as previously described, and raised three specific challenges to the legality of referring the matter to the Deputy Registrar for investigation and determination. The first challenge asserted that the underlying transaction was illegal because it contravened the Gur Control Order issued under the Essential Supplies Act, and therefore such a transaction could not be characterised as a “dispute touching the business of the Society,” which alone would permit referral to arbitration under section 51 of the Act. The second challenge contended that the Registrar’s reference of the dispute to the Deputy Registrar was contrary to natural justice, on the basis that (a) the Deputy Registrar had already conducted an enquiry that resulted in the supersession of the Society’s management under section 43 of the Act, and (b) the Deputy Registrar, being a subordinate official of the Registrar, could not be expected to act impartially in the matter. The third challenge argued that the Registrar ought to have proceeded under section 49 of the Act rather than section 51, because section 49 would have afforded the Registrar the advantage of being able to contest any final order in a civil court, whereas an award rendered under section 51 was limited to departmental appeals and could not be reviewed by a civil court. The learned Single Judge dismissed the second and third challenges but upheld the first, reasoning that the sale above the controlled price was illegal and that such illegality barred the Society from seeking an accounting claim against its officer or agent, even though the agency contract itself was not illegal. On appeal, the learned Judges of the High Court, as mentioned earlier, rejected all three challenges raised on behalf of the appellant. The counsel for the appellant subsequently raised before this Court three points, the first of which was that the Registrar should have proceeded under section 49.

The counsel for the appellant argued that the Registrar ought to have acted under section 49 of the Act instead of under section 51. He quoted the material part of section 49, stating: “49. (1) Where in the course of an audit under section 37 or an inquiry under section 38 or an inspection under section 39 or the winding up of a society, it appears that any person who has taken part in the organization or management of the society or any past or present officer of the society has misappropriated or fraudulently retained any money or other property or been guilty of breach of trust in relation to the society, the Registrar may, of his own motion or on the application of the committee or liquidator or of any creditor or contributory, examine, into the conduct of such person or officer and make an order requiring him to repay or restore the money or property or any part thereof with interest at such rate as the Registrar thinks just or to contribute such sum to the assets of the society by way of compensation in respect of the misappropriation, fraudulent retention or breach of trust as the Registrar thinks just. (2) The order of the Registrar under sub‑section (1) shall be final unless it is set aside by the District Court having jurisdiction over the area in which the headquarters of the society are situated or if the headquarters of the society are situated in the City of Madras, by the City Civil Court, on application made by the party aggrieved within three months of the date of receipt of the order by him.” The citation accompanying this quotation read “Sup/64----13”.

The counsel also reproduced the provision of section 51, describing it as the other relevant clause. He recited: “Arbitration: Disputes: 51. If any dispute touching the business of a registered society (other than a dispute regarding disciplinary action taken by the society or its committee against a paid servant of the society) arises— (a) (b) (c) between the society or its committee and any past committee, any officer, agent or servant, or any past officer, past agent or past servant, or the nominee, heirs or legal representatives of any deceased officer, deceased agent or deceased servant, of the society, or (d) Explanation.—A claim by a registered society for any debt or demand due to it from a member, past member or the nominee, heir or legal representative of a deceased member, whether such debt or demand be admitted or not, is a dispute touching the business of the society within the meaning of this sub‑section. (2) The Registrar may, on receipt of such reference— (a) decide the dispute himself, or (b) transfer it for disposal to any person who has been invested by the State Government with powers in that behalf, or (c) subject to such rules as may be prescribed, refer it for disposal to an arbitrator or arbitrators.”

In making this argument, the counsel relied on a decision of the Madras High Court in the case of Sundaram Iyer v. The Deputy Registrar of Co‑operative Societies. He pointed out that the High Court had held that the provisions of section 49 were applicable only when section 51 could not be invoked, and that where both sections might appear to apply, section 51 was to be excluded because it barred civil‑court intervention, whereas section 49 permitted such recourse.

The Court observed that recourse to section 51 could be made only when the provisions of section 49 were not applicable. It held that when a matter fell within both sections 49 and 51, the two provisions were not meant to operate side by side. Because section 51 excluded the jurisdiction of civil courts, the provision had to be given a strict construction; consequently, whenever section 49 applied, section 51 was excluded. The Court further explained that section 51 was of a general character, covering a wide range of matters and almost exhaustively defining the parties and disputes that could arise in cooperative societies. In contrast, section 49 dealt with special types of disputes that arose in exceptional circumstances and were carved out from the broader class covered by section 51. When the terms of both sections overlapped, the Court held that only the provisions of section 49 would apply. On this basis, learned counsel submitted that the present claim was “against a person in management of the Society” and was for “the fraudulent retention of money or other property of the Society,” and therefore fell wholly within section 49. Accordingly, counsel argued that the Registrar lacked jurisdiction to direct an enquiry by the Deputy Registrar under section 51 of the Act. The Court noted that this argument ignored an additional essential requirement for the operation of section 49(1). Apart from the two factors identified by counsel, the Court stated that the facts giving rise to the charge must be disclosed in the course of an audit under section 37, an enquiry under section 38, an inspection under section 39, or during the winding up of the Society. While counsel for the respondent, Mr Ram Reddy, did not dispute that the absence of this condition would preclude the operation of section 49, he submitted that an enquiry under section 38 had been held before the supersession and therefore the condition was satisfied. The Court accepted that an enquiry under section 38 had indeed been conducted concerning the Society’s affairs, but stressed that this alone was insufficient. It required proof that the specific facts alleged in the claim were disclosed in that enquiry. Such proof could be established only if the enquiry report submitted to the Registrar were placed before the Court and if the facts disclosed therein corresponded with those set out in the statement of claim. Mr Ram Reddy admitted that the enquiry report was not before the Court and was not part of the record of these proceedings. Consequently, the Court concluded that it could not be said that there was any correspondence between the facts disclosed in the report and the facts alleged in the claim.

In this case the Court observed that the facts disclosed in the enquiry conducted under section 38 did not correspond with the facts set out in the Statement of Claim that the Registrar had referred to the Deputy Registrar for arbitration under section 51. Consequently, the Court held that the matter could not be said to fall within the scope of section 49 of the Act. The Court emphasized that, where section 49 was inapplicable, the order made by the Registrar in exercise of the power conferred by section 51 could not be challenged on that ground. Accordingly, the first contention raised by counsel was rejected.

The second contention advanced by counsel was that the dispute concerning the retention of money belonging to the Society by the appellant did not constitute “a dispute touching the business of the Society.” Counsel argued that the phrase “business of the Society” should be limited to activities that were legally permissible, and because the alleged transaction involved a contravention of the Gur Control Order, it could not be regarded as a business dispute. The Court did not accept this argument. While the Court noted that the maxim “ex turpi causa non oritur actio” would be examined in relation to the third point raised, it nevertheless found no basis for the claim that the matter before the arbitrator was unrelated to the Society’s business. The Court pointed out that the sale of produce belonging to the Society’s members formed part of the Society’s ordinary business, and that charging a commission on such sales and crediting the Society’s accounts with that commission were also business activities. Apart from the question of illegality arising from the sale price exceeding the controlled price, the Court held that the appellant’s failure to credit the full commission due to the Society and his resistance to that demand clearly fell within the ambit of a business dispute. This objection was therefore dismissed as lacking merit.

The final point raised by counsel alleged that the sale transaction which gave rise to the disputed commission was illegal, and that consequently the Society could not maintain a claim based on an illegal transaction. The Court found no substance in this argument. It held that the contract between the appellant and the Society was lawful, having arisen from the appellant’s role as President of the Society, which imposed upon him a legal duty to account for monies received on behalf of the Society. The Court concluded that any illegality on the part of the appellant in other transactions did not affect the Society’s right to recover the commission that he had improperly retained.

The Court observed that even if the appellant had engaged in unlawful transactions, such conduct did not affect the Society’s entitlement to claim the commission that the appellant had improperly retained. The Court agreed with the Division Bench’s reasoning that rejected the appellant’s argument on this point. The Court further noted that this issue had already been examined in a previous decision reported as Kedar Nath Motani v. Prahlad Rai (1) and, in view of that decision, counsel for the appellant had not vigorously pursued the argument. Before concluding the case, the Court felt it necessary to address another matter. The learned Judges, after allowing the Society’s appeal, had remarked in their judgment: “Lastly, we must observe that this Court is averse to lend its helping hand to persons who want to defraud others. Even assuming that any error of law was committed by Tribunals, that would not be a ground for invoking the extraordinary jurisdiction of this Court under Art. 226 of the Constitution, when it is not in furtherance of justice but tends to encourage dishonesty.” Counsel for the appellant pointed out that the allegations contained in the claim before the arbitrator had not yet been determined, and therefore the learned Judges should not have assumed that the facts were proved or that the appellant was guilty of fraud or dishonesty in his conduct of the Society’s business. The Court found merit in this objection. Accordingly, the Court held that, considering the stage at which the matter was before it, the learned Judges erred in making those observations. While it was clear that the Judges did not intend to prejudice the appellant’s defence before the Deputy Registrar in the arbitration proceedings under section 51 of the Act, the Court recognized that the remarks could potentially have such an effect. The Court stated that its earlier comments should sufficiently dispel any such apprehension. Consequently, the appeal was dismissed, with costs awarded to the Society on a one‑set basis.