SARFAESI Act: Applicable to Souharda Societies in Karnataka?

In the complex landscape of financial recovery in India, cooperative societies play a vital role, especially in states like Karnataka. One pressing question for lenders and borrowers alike is: Whether the SARFAESI Act is applicable to Souharda Societies in Karnataka as per Supreme Court? This query arises amid ongoing debates about the scope of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) over entities registered under the Karnataka Souharda Sahakari Act, 1997.

This blog post delves into judicial precedents, legal interpretations, and related tax implications to provide clarity. Note: This is general information based on available rulings and not specific legal advice. Consult a qualified lawyer for your situation.

Overview of SARFAESI Act and Souharda Societies

The SARFAESI Act empowers secured creditors, such as banks and financial institutions, to recover dues from non-performing assets (NPAs) without court intervention. It streamlines enforcement of security interests, making it a powerful tool for debt recovery. 2016 0 Supreme(Del) 1944 2022 0 Supreme(Del) 1983

Souharda Societies, governed by the Karnataka Souharda Sahakari Act, 1997, are multi-purpose cooperative entities designed to promote self-reliance and economic activities outside traditional government-controlled cooperatives. Unlike societies under the Karnataka Co-operative Societies Act, 1959, Souharda Societies operate with greater autonomy. However, courts have often equated their status for certain legal purposes.

Judicial Precedents: Karnataka High Court's Stance

A pivotal ruling came from a Division Bench of the Karnataka High Court in Karnataka Rajya Kaigarika Sahakara Bank Niyamita vs. V. Krishnaswamy ILR 2012 KAR 4638. The court held that the provisions of the SARFAESI Act are applicable to cooperative banks constituted under the Karnataka Cooperative Societies Act, 1959.

Malleshwaram Co-Operative Bank Ltd. VS Mahesh Kumar Sahu - Current Civil Cases (2018)

Further reinforcing this, the Income Tax Appellate Tribunal (ITAT) in a case noted that society registered under Karnataka Souharda Society Act are at par with the societies registered under Karnataka co-operative society’s Act 1959 by virtue of judgment of Hon’ble Karnataka High Court. 2025 Supreme(Online)(ITAT) 4489 This parity underscores that Souharda Societies can invoke SARFAESI-like mechanisms for recovery.

No Supreme Court judgment has stayed or overturned these findings. As of the latest available rulings, the applicability remains intact, allowing Souharda Societies to initiate SARFAESI proceedings.

Legal Interpretation and Scope

The SARFAESI Act is a complete code for recovery, designed to enable swift action against defaulters. 2022 0 Supreme(Del) 1983 Section 2(1)(za) defines 'secured creditor' broadly, including cooperative banks. Since Souharda Societies often engage in banking-like activities—lending, securing assets—they qualify.

In Saptharushi Souharda Credit Co-operative Limited case, the Karnataka High Court emphasized interpreting statutes as they stand, without adding omissions. 2014 0 Supreme(Kar) 518 This principle supports applying SARFAESI without artificial exclusions for Souharda entities.

Tax Implications and Equivalence to Cooperative Societies

Related tax cases highlight the legal equivalence. Under Income Tax Act Section 80P(2)(a)(i), interest income from statutory deposits in cooperative banks qualifies as business income for deductions. The ITAT ruled: Interest income from statutory deposits in Co-operative Banks is business income, qualifying for deductions under Section 80P(2)(a)(i). 2025 Supreme(Online)(ITAT) 3178

Crucially, this benefit extends to Souharda Societies. In another ruling: Co-operative societies registered under the Souharda Act are eligible for tax benefits under Section 80P and are not liable for TDS under Section 194A. 2025 Supreme(Online)(ITAT) 4489 The tribunal clarified: The assessee, registered under the Karnataka Souharda Society Act, is entitled to tax deduction under Section 80P; hence, cannot be liable for TDS deduction under Section 194A.

However, limitations exist. One case noted: It is applicable only to primary agricultural credit society or primary co-operative agricultural and rural development as per section 80P(4). 2025 Supreme(Online)(ITAT) 7184 Yet, for financial recovery like SARFAESI, the broader cooperative framework prevails.

Challenges and Related Disputes

Disputes involving Souharda Societies often touch governance and recovery. In a membership cancellation case, the court critiqued Section 21 of the Souharda Act: The appeal provided to the General Body under Section 21 of the Souharda Act was hardly an effective and efficacious remedy. 2019 0 Supreme(Kar) 792 This highlights internal misuse but doesn't impact SARFAESI's external enforcement.

SARFAESI proceedings can intersect with civil suits. A Madras High Court observation (relevant by analogy) stated: When the bank has taken SARFESI proceedings under SARFESI Act, no civil suit is maintainable as per Section 34.

V. C. Gnanasekaran VS S. Manugandhi @ Rajeswari

Current Legal Status and Absence of Supreme Court Intervention

As no Supreme Court order prohibits SARFAESI's application to cooperative banks or Souharda Societies, the Karnataka High Court's view holds. Recent ITAT decisions affirm parity: The learned CIT(A) directed the AO to examine the provisions of Karnataka Souharda Sahkari Act, 1997. 2025 Supreme(Online)(ITAT) 7186

Key Takeaways and Recommendations

• Applicability Confirmed: SARFAESI generally applies to Souharda Societies, akin to cooperative banks. 2016 0 Supreme(Del) 1944
• Judicial Backing: Karnataka High Court precedents support this, with no Supreme Court override.
• Tax Parity: Benefits under Section 80P extend, reinforcing legal equivalence. 2025 Supreme(Online)(ITAT) 3178 2025 Supreme(Online)(ITAT) 4489
• Practical Advice: Souharda Societies should comply with SARFAESI for NPA recovery. Legal counsel is essential to navigate specifics.
• For Borrowers: Understand rights under Section 13(3A) notice and DRAT appeals.

In conclusion, while nuances exist, prevailing interpretations favor SARFAESI's applicability to Souharda Societies in Karnataka. This empowers efficient recovery but demands procedural adherence. Stay informed on evolving jurisprudence.

References:- Karnataka High Court: ILR 2012 KAR 4638

Malleshwaram Co-Operative Bank Ltd. VS Mahesh Kumar Sahu - Current Civil Cases (2018)

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