Kerala High Court Judgement on Islamic Banking

Kerala High CourtDr.Surbahmaniam Swamy vs State Of Kerala on 27 January, 2011

IN THE HIGH COURT OF KERALA AT ERNAKULAM

WP(C).No. 35180 of 2009(S)

1. DR.SURBAHMANIAM SWAMY, A-77, ... Petitioner

Vs

1. STATE OF KERALA, REPRESENTED BY ... Respondent

2. THE PRINCIPAL SECRETARY TO GOVERNMENT,

3. KERALA STATE INDUSTRIAL DEVELOPMENT

For Petitioner :DR.SUBRAHMANIAM SWAMY (PARTY IN PERSON)

For Respondent :SRI.M.PATHROSE MATTHAI (SR.)

The Hon'ble the Chief Justice MR.J.CHELAMESWARThe Hon'ble MR. Justice P.R.RAMACHANDRA MENON

Dated :27/01/2011

O R D E R J.Chelameswar, C.J. & P.R.Ramachandra Menon, J. ----------------------------------------------- W.P.(C) No. 35180 of 2009 & W.P.(C) No.10662 of 2010 -----------------------------------------------

Dated this the 3rd day of February, 2011

JUDGMENT

J.Chelameswar, C.J.

Dr.Surbahmaniam Swamy vs State Of Kerala on 27 January, 2011

Indian Kanoon - http://indiankanoon.org/doc/1816970/ 1

These two writ petitions are filed in public interest. The petitioner in W.P.(C).No.35180 of 2009 is aformer Minister of the Union of India.

2. W.P.(C).No.35180 of 2009 is filed with the prayers as follows:

"a) call for the records leading to the case and issue a writ of certiorari or any otherappropriate writ, order or direction, quashing Exhibit.P1.

b) issue such other appropriate writ, oder or direction which thisHon'ble Court may deem fit in the circumstances of the case.

c) award costs to the Petitioner".

3. The impugned order-Exhibit P1 is an Order dated 14.10.2009 evidencing a decisiontaken by the Government of Kerala. The relevant portion reads as follows:

"The Islamic Financial Services (IFS) Industry has grown substantiallyover the years forming a significant segment within global financialservices and is generating lot of interest as an WPs(C).35180/2009 &10662/2010

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alternative model of financial intermediation. Growing awareness anddemand for investment and financing in compliance with Shariahprinciples as well as increasing level of affluence have provided a fillipto Islamic Financial Services. With the objective of promoting aninterest-free financing entity that follows Shariah principles,Government had entrusted KSIDC with conducting studies andlooking into various aspects of formation of an Islamic InvestmentCompany in Kerala for attracting investments in a right manner as perthe Shariah of the Muslim Community to the development of thecommon public at large. The professional studies conducted on thisproject have concluded that there is a genuine commercial potentialfor an Islamic Financial Institution based in Kerala that has thepotential to become a global payer.

2. The Minister for Industries convened a meeting of investors atThiruvananthapuram on 15.07.2009 to discuss the formation ofIslamic Financial Institution and decided to incorporate a companywith 11% equity contribution from KSIDC and the remaining 89%from private investors.



3. The Board of KSIDC had approved a share contribution of Rs.110Lakhs (11% of the initial paid up Share Capital) to the proposedCompany and decided to proceed with further steps for registration ofthe Company for promoting the Islamic Financial Institution.

4. Govt. have examined the matter in detail and found that the decision of the Boardof Directors of KSIDC is within the area of their competence and delegation of powersand WPs(C).35180/2009 & 10662/2010

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hence accord sanction for proceeding with further steps for registration of theCompany."

Parties are referred to hereinafter as they are arrayed in W.P.(C). No.35180 of 2009.

4. K.S.I.D.C. (Kerala State Industrial Development Corporation) the third respondentis a wholly owned company of the first respondent that is the State of Kerala, engagedin promotion of industrial development of the State. The objects of the thirdrespondent are "to promote, establish and execute industrial projects and enterprisesfor the economic and industrial development of the State of Kerala" and also "to aid,assist and finance any infrastructure projects or enterprises or other projects and topromote and establish companies and associations of private or public character".

5. The 6th respondent is a company registered under the Companies Act and thesame is evidenced by the certificate of incorporation dated 30th November, 2009. Acopy of the memorandum of association of the 6th respondent is available in therecord from which it appears that the share capital of the company is 1000 crores. Itcan be seen from the said memorandum of association that 8 individuals subscribedto the memorandum of WPs(C).35180/2009 & 10662/2010

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association, the details of which are given in the memorandum. Of the said 8subscribers, 6 are Muslims and 2 are Hindus, a fact which is relevant in the context ofthe dispute in the case. It is also necessary to mention that of the above mentioned 8persons 4 appear to be non-resident Indians as it is certified that they came to Indiaon various dates specified in the said memorandum and under a passport. However,the third respondent stated in its counter that they are Indian citizens. What isimportant is that the third respondent is not a subscriber to the said memorandumthough it is stated in Ext.P1 that the Board of Directors of the third respondentdecided to proceed with further steps for registration of the company for promotingthe Islamic financial institution.



6. In the meanwhile an advertisement inviting applications from eligible persons forfilling up of the posts of Chief Executive Officer, Company Secretary, etc. of anunnamed company came to be issued on-line on a website of the third respondentwhich reads as follows:

"WANTED The following Executives for a Public Limited Companywith an Authorised Share Capital of Rs.1000 Crores and Head Officeat Kochi, promoted with the objective of providingWPs(C).35180/2009 & 10662/2010

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interest-Finance for projects & services. The company will have PanIndia presence to take up activities like PE & Venture Capital Fund,Leasing, Investment in Equity, Mutual Funds, etc.,initially, and will beoperating in a fully Shariah compliant manner.

1. CHIEF EXECUTIVE OFFICER

The candidate should have professional

qualification/Post-graduate degree with sound experience in therelevant field. The CEO shall be responsible for building up theorganisation and co-ordinate the overall functioning. He will report tothe Board of Directors and the Shariah Advisory Board.

2. COMPANY SECRETARY ACS with minimum 5 years'post-qualification experience. He will report to the CEO.

3. ASSISTANT MANAGER (FINANCE & ACCOUNTS) ACA or ICWAwith 1-2 year' post-qualification experience. He will report to the CEO.

The age should not exceed 52 years for post-1, 35 years for post-2 and 28 years forpost-3, as on 1.9.09. There may be relaxation in age by 5 years in case of deservingcandidates. Emoluments will be at part with the best in the industry. Interestedpersons may send their C.V. with copies WPs(C).35180/2009 & 10662/2010

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of certificates, recent passport size photograph, on or before 30th September 2009,super scribing the envelope "APPLICATION FOR THE POST OF CEO/COMPANYSECRETARY/AM (F&A)" to:



The Managing Director, Kerala State Industrial Development Corporation Ltd.,Choice Towers, Manorama Junction, KOCHI - 682 016.

Web Site : www.ksidc.org"

Though it is not very clear from the said document as to the date on which it wasissued it appears that it must have been issued sometime before 30th of September,2009 as that is the date specified in the said advertisement to be the last date forsubmitting the application in response to the advertisement. We may also state thatthe third respondent in his counter affidavit did not choose to rebut to the relevantaverments made at paragraph 3 of the writ petition.

7. One factor which requires to be noticed is that by the date of the above mentionedadvertisement the 6th respondent company was not even incorporated, apart fromthe fact that the decision of the State of Kerala to participate in the equity of acompany/Islamic financial institution evidenced by G.O.Rt.No.1336WPs(C).35180/2009 & 10662/2010

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itself dated 14.10.2009, that is much later than the above mentioned advertisement.These facts may or may not have any bearing on the main issue in the writ petition.We only mention them to indicate the clumsy way in which the matter is handled bythe 1st and 3rd respondents. The relevance of the above mentioned advertisement isthat it also states that the company will be operating in a 'fully Shariah compliantmanner'.

8. In the background of the above mentioned facts the instant writ petition came tobe filed in the month of December, 2009. When the matter came up for admission byan order dated 5th January, 2010 a Division Bench of this Court directed that 'therespondents would ensure that the said company does not commence any operationuntil further orders'. Subsequently the said order came to be modified by anotherorder dated 8th April, 2010 in substance permitting the 6th respondent to carry onsuch activity as it is permissible in accordance with law, however prohibiting theState and its instrumentalities in any way participating in the business of the 6threspondent company.

9. In the meanwhile another writ petition, that is W.P.(C) No.10662 of 2010 alsocame to be filed in substance seeking the WPs(C).35180/2009 & 10662/2010

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same reliefs as the one sought in the other writ petition. It was admitted on29.3.2010. Both the writ petitions were heard together as common questions of fact



and in law arise in both the cases. One additional ground raised in the second writpetition is that the decision of the State of Kerala and the K.S.I.D.C. to participate inthe capital structure of the 6th respondent company is an arbitrary decision as such adecision was taken without following any fair and transparent procedure. It is statedin Ground K of the said writ petition as follows:

"K. It is submitted that the State Government or the 3rd respondenthas not followed any fair and transparent method known to law inchoosing the 4th respondent Company as the associate in the venturestipulated in Ext.P1. Therefore the 4th respondent is chosen by the 3rdrespondent as their partner without resorting to any open notificationor public tender for that matter. The very selection of the 4threspondent was done in a secret and clandestine manner without anyelement of transparency whatsoever. The entire deals were donebehind the back and the offer and agreements etc were done secretly."

10. The main ground of the attack in both the writ petitions is that thedecision of the State of Kerala and the K.S.I.D.C.

which is an instrumentality of the State of Kerala to contribute to theWPs(C).35180/2009 & 10662/2010

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share capital of the 6th respondent is inconsistent with the constitutional obligationof these two bodies to function on secular principles. Though it is not clearly pleadedit was specifically argued by Dr.Subramaniam Swamy that the impugned decision ofthe State of Kerala would be directly contrary to the mandate contained under Article27 of the Constitution of India which reads as follows:

"27. Freedom as to payment of taxes for promotion of any particularreligion.- No person shall be compelled to pay any taxes, the proceedsof which are specifically appropriated in payment of expenses for thepromotion or maintenance of any particular religion or religiousdenomination."

11. On the other hand, the State and the K.S.I.D.C.

pleaded in their counter affidavits that the impugned decision was taken in order togarner huge amounts of unutilised funds from the Gulf countries available with thenon-resident Indians working in those countries with a view to utilise such funds forthe investment in the State of Kerala for the development of its people by promotingand providing financial assistance to the industries in the State of Kerala. Insubstance the respondents do not dispute the fact that a decision was taken to



participate in the business of the 6th WPs(C).35180/2009 & 10662/2010

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respondent company. They claim that notwithstanding the references in theGovernment Order dated 14.10.2009 and the advertisement issued by the 3rdrespondent that the intention of the 6th respondent is to function in accordance withthe requirements of Shariah, the motive and object of the State of Kerala and theK.S.I.D.C. is purely secular, i.e. to derive a commercial benefit from the business to becarried on by the 6th respondent. Therefore they cannot be accused of flouting theconstitutional mandate of running a secular State. It is also the case of all therespondents that notwithstanding the fact that the 6th respondent company proposesto run its business in compliance with the principles of Shariah the 6th respondent isbound to function strictly in accordance with the law of this country. So long as the6th respondent company so functions the fact that in addition to compliance with thelaw of the land the company also proposes to comply with a further requirement ofrunning the business in accordance with the principles of Shariah does not make theactivity of the company in any way inconsistent with the requirement of thesecularism mandated under the Constitution. Therefore the State and itsinstrumentalities are not prohibited by the Constitution to be WPs(C).35180/2009 &10662/2010

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associated with such a business activity of the 6th respondent company.

12. The State of Kerala in its counter affidavit had enumerated the various projectsmeant for the welfare of the people of Kerala which were planned but could not beimplemented due to the shortage of funds. The reasons which prompted the State ofKerala to take the impugned decision and the procedure followed by the State ofKerala in taking such a decision are narrated in paragraph 9 of the counter affidavit.

13. At the outset we wish to deal with a preliminary objection raised by Dr.RajeevDhavan, Senior Advocate appearing for the 6th respondent. The substance of thesubmission is that the petitioners are not bona fide public interest litigants andtherefore the writ petitions must be dismissed. In this connection Sri.Dhavan reliedupon the judgment of the Supreme Court reported in State of Uttaranchal v. Balwant[(2010) 3 SCC 402]. At paragraph 181 of the judgment the Supreme Court laid downthe following directions:

"(3) The Courts should prima facie verify the credentials of thepetitioner before entertaining a PIL.



(4) The Courts should be prima facie satisfied regarding thecorrectness of the contents of the petition before entertaining a PIL.

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(5) The Courts should be fully satisfied that substantial public interest is involvedbefore entertaining the petition.

(6) The Courts should ensure that the petition which involves larger public interest,gravity and urgency must be given priority over other petitions.

(7) The Courts before entertaining the PIL should ensure that the PIL is aimed atredressal of genuine public harm or public injury. The Court should also ensure thatthere is no personal gain, private motive or oblique motive behind filing the publicinterest litigation.

(8) The Courts should also ensure that the petitions filed by busybodies forextraneous and ulterior motives must be discouraged by imposing exemplary costs orby adopting similar novel methods to curb frivolous petitions and the petitions filedfor extraneous considerations."

It is argued that: (written submission of Dr.Dhavan) "In the present case,Subramaniam Swamy and R.Babu have not disclosed any antecedents or their realinterest in the case. The fact that Subramaniam Swamy is well known does notobviate giving details. In the case of R.Babu details are missing altogether.

In fact Swamy has filed PIL's which could be taken to be pro- Hindu and Anti-Muslimcause including on Babri Masjid, Ram Setu and now Islamic Banking. R.Babu hashidden the fact that he belongs to a fundamentalist Hindu organization. A PIL cannotbe a vehicle for communal baiting or creating communal disharmony."WPs(C).35180/2009 & 10662/2010

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14. We are of the opinion that the submission is to be rejected for more than onereason. The fact that Dr.Subramaniam Swamy took a particular stand either in thecase of Babri Masjid or Ram Sethu, in our opinion, does not either make him'pro-Hindu' or 'anti-Muslim' ipsofacto. Such a stereotyping would have the effect ofshutting out all discourse in public sphere. The views held or professed by anindividual may or may not be agreeable to others but the cardinal principle on whichall democratic systems are based upon to borrow the words of Thomas Paine:



"I may not agree with a word of what you say but I shall protect your right to say so".

The 6th respondent does not specify any harm or injury to the public which is likelyto result by the examination of the issues projected by the petitioners. On the otherhand, the petitioners are projecting far reaching issues of Constitutional law. If theviews of the petitioners are eventually accepted the impugned action of the State ofKerala would be Constitutionally impermissible. In our view, such impermissibleaction would not only be a mere infraction of a Constitutional obligation but wouldhave the effect of disturbing the very foundation of our Constitutional structure.Secondly, assuming for the sake of argument that either or both of the petitioners areWPs(C).35180/2009 & 10662/2010

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'Hindu fundamentalists' an undefined expression but for the purpose of the presentcase (we adopt the definition of the famous contemporary author Karen Armstrong).It means a person of 'militant piety' we see no reason to reject audience. OurConstitution not only assures in theory but also demonstrated in practice that the dueprocess of law would not be denied even to persons accused of in most heinouscrimes such as 'terrorism'. Therefore to non-suit the petitioners on the ground thatthey are allegedly holding some 'militantly pious' views would neither be legallyjustified nor politically correct.

15. It is not the case of the 6th respondent that the petitioners have some private gainto be derived out of the present litigation. The only submission is that they areresorting to 'communal baiting' or creating 'communal disharmony'. The submissionis to be rejected for three reasons. Firstly, the 6th respondent asserts that it is not acompany exclusively consisting of shareholders of a particular religiousdenomination (be it Muslim or other), but only inspired by certain principles ofSharia. Therefore the objection of the petitioners if accepted eventually would affectall the shareholders of the company. Secondly, a legal objection beforeWPs(C).35180/2009 & 10662/2010

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a Constitutional Court to a particular practice of the State on the ground that it isinconsistent with the obligations of the State under the provisions of the Constitutionin our opinion could never be said to promote communal disharmony. Such a view inour opinion would be 'secular fundamentalism'. Third and the most important reasonis that the debate in the instant case may be centred around the 'Sharia' and thereforeappear to be dealing with the rights of one religious denomination. But the issueraised transcends all religion. The concept of secularism and the fundamental rightsunder Articles 25 to 28 are guaranteed to followers of all religions.



16. Before we examine the various submissions in the writ petitions we deem itappropriate to make a brief survey of the letter of the Constitution in so far as it isrelevant for the purpose of the present case.

17. The preamble of the Constitution declares that the aim of the Constitution is toconstitute India into a sovereign socialist secular democratic republic and also tosecure all its citizens justice, liberty, equality and fraternity. In Part III of theConstitution various fundamental rights are guaranteed. Some of these fundamentalrights are guaranteed only to the citizens of India while WPs(C).35180/2009 &10662/2010

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some are guaranteed to all persons who are subject to the sovereignty of India.Articles 15 and 16 prohibit the State from discriminating against any citizen on theground only of religion in the matters of access to various public facilities or publicemployment. Articles 25 to 28 guarantee freedom of religion in its various facets.Clause (1) of Article 25 declares that all persons are equally entitled to freedom ofconscience and the right to freely profess, practise and propagate religion. Article 26guarantees to every religious denomination the rights to acquire and administerproperty in accordance with law to manage its own affairs in matters of religion andto establish and maintain institutions for religious and charitable purposes. Article 27prohibits the State not to subject any person to any tax the proceeds of which are tobe utilised for the promotion or maintenance of any particular religion. Article 28 onthe one hand prohibits any kind of religious instruction in any educational institutionwholly maintained out of the State funds, but recognises the right of a privatelyestablished institution to provide religious instruction, etc. A minute examination ofthese various provisions dealing with the freedom of religion is not necessary at thisstage. It is sufficient to notice that the Constitution guarantees WPs(C).35180/2009& 10662/2010

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to all the Subjects the freedom of conscience and the right to freely profess, propagateand practise religion while prohibiting the State in any way subjecting any person todiscrimination only on the basis of his/her religion. The Constitution restricts theState's interaction with the religion.

18. It must be noticed that Articles 25 to 28 deal with the fundamental rightsregarding the freedom of religion irrespective of the fact whether the religion is thereligion of the minority or majority population of this country. In fact the rightsguaranteed under the above mentioned Articles are extended even to persons otherthan citizens.



19. All the promoters of the 6th respondent company are asserted to be citizens ofthis country. They assert that they are entitled to the fundamental rights guaranteedunder Article 19(1)(g) of the Constitution of India to carry on any trade, occupation orbusiness. They admit that such a right is subject to the law of the land. The 6threspondent claims that the business proposed to be undertaken by it is the businessof non-Banking Financial Service as defined under Section 45-I(a) of The ReserveBank of India Act. It is admitted at the Bar that the 6th respondent's application tothe WPs(C).35180/2009 & 10662/2010

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Reserve Bank of India (R) is returned on some preliminary objection, i.e., the 6threspondent did not make a deposit of Rs.2.00 crores as required under Section 45-IAof the Act. The 6th respondent is willing to comply with the said requirement andresubmit the application.

20. Chapter IIIB of the Reserve Bank of India Act, 1934 was introduced by theamendment Act 55 of 1963. It deals with various aspects of the regulation of thebusiness of "non-banking financial institutions".

21. Though an attempt is made by the petitioners to argue that the business such asthe one proposed by the 6th respondent is impermissible under the provisions ofChapter III-B of the RBI Act, we decline to examine the said question for two reasons.Firstly, there is no pleading at all on the said aspect and, therefore, it would be unjustto examine the said issue and secondly it is primarily for the RBI to decide the saidissue. Any examination of the said issue by this Court would have the effect ofpre-empting the examination by the RBI. More particularly in the light of thefundamental rights under Articles 19(1)(g) and 25 and 26, the claims of the 6threspondent and its shareholders, the issue requires a more WPs(C).35180/2009 &10662/2010

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critical examination on appraisal of the full facts. It is the duty of the Reserve Bank ofIndia as a body entrusted with the regulation of the business proposed to beundertaken by the 6th respondent to undertake such an examination.

22. Two submissions made by the petitioners are required to be examined. The first isthat the decision of the State to associate itself with the business of the 6threspondent is contrary to the Constitutional requirement that the State should be asecular State. The 6th respondent Company, which professes to run the business ofnon-banking financial institution in a manner which is compliant with Shariah is inessence a Company mixing the business with religion. Shariah is a body of law basedon the religious principles enunciated in Koran, the holy book followed and venerated



by "Umma", i.e., the Muslim brotherhood around the world. Therefore, anyassociation of the State with the 6th respondent would amount to actively promotingor assisting the religion. Such an activity would be inconsistent with the principles ofsecularism, which is one of the goals sought to be achieved by the Constitution.

WPs(C).35180/2009 & 10662/2010

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23. On the other hand, it is the case of the respondents that though the 6threspondent proposes to conduct the business complying with the dictates of Shariah,the 6th respondent is bound by the law of the land and is obliged to comply with allthe requirements of the laws made under the Constitution of India. Therefore, such abusiness is purely a secular aspect of the Muslim Canon law. Hence, the State is notprohibited from associating with such a business.

24. To resolve the above issue, we are of the opinion that a clear understanding of theexpressions "secularism", "religion", "secular activity associated with religiouspractice" is necessary.

25. The ambit and meaning of the expression "secularism" contained in the preambleof the Constitution fell for the consideration of the Supreme Court in S.R.Bommai v.Union of India [(1994) 3 SCC 1]. A Larger Bench of the Supreme Court, of nineJudges, considered the issue. Six separate opinions were delivered. Four Judges -Justice P.B.Sawant, Justice K.Ramaswamy, Justice B.P.Jeevan Reddy who spoke forhimself and Justice S.C.Agrawal - made an elaborate enquiry into theWPs(C).35180/2009 & 10662/2010

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meaning of the expression "secularism". Justice Sawant, on an analysis of Articles 25to 30 and also Articles 14 to 16, the preamble of the Constitution and Article 51A ofthe Constitution, opined at para 146 as follows:

"These provisions by implication prohibit the establishment of atheocratic State and prevent the State either identifying itself with orfavouring any particular religion or religious sect or denomination.The State is enjoined to accord equal treatment to all religions andreligious sects and denominations.", and again at para 148 the learnedJudge held as follows:

"One thing which prominently emerges from the above discussion onsecularism under our Constitution is that whatever the attitude of theState towards the religions, religious sects and denominations,



religion cannot be mixed with any secular activity of the State. In fact,the encroachment of religion into secular activities is strictlyprohibited. This is evident from the provisions of the Constitution towhich we have made reference above. The State's tolerance of religionor religions does not make it either a religious or a theocratic State.When the State allows citizens to practise and profess their religions, itdoes not either explicitly or implicitly allow them to introduce religioninto non-religious and secular activities of the State. The freedom andtolerance of religion is only to the extent of permitting pursuit ofspiritual life which is different from the secular life. The latter falls inthe exclusive domain of the affairs of the State".

WPs(C).35180/2009 & 10662/2010

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Justice Ramaswamy in his judgment at para 178 held as follows:-

"Though the concept of "secularism" was not expressly engrafted while making theConstitution, its sweep, operation and visibility are apparent from fundamentalrights and directive principles and their related provisions. It was made explicit byamending the preamble of the Constitution 42nd Amendment Act. The concept ofsecularism of which religious freedom is the foremost appears to visualise not only ofthe subject of God but also an understanding between man and man. Secularism inthe Constitution is not anti-God and it is sometimes believed to be a stay in a freesociety. Matters which are purely religious are left personal to the individual and thesecular part is taken charge by the State on grounds of public interest, order andgeneral welfare. The State guarantee individual and corporate religious freedom anddealt with an individual as citizen irrespective of his faith and religious belief anddoes not promote any particular religion nor prefers one against another".

The learned Judge after taking notice of the position obtaining in the United States of Americaopined at para 180 as follows:

"Thereby this Court did not accept the wall of separation between law and thereligion with a wider camouflage to impress control of what may be describedexploitative parading under the garb of religion".

WPs(C).35180/2009 & 10662/2010

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Justice Jeevan Reddy, once again, on a consideration of the relevant Articles of the Constitution, atpara 304 opined as follows:



"While the citizens of this country are free to profess, practice and propagate suchreligion, faith or belief as they choose, so far as the State is concerned, i.e., from thepoint of view of the State, the religion, faith or belief of a person is immaterial. To it,all are equal and all are entitled to be treated equally. How is this equal treatmentpossible, if the State were to prefer or promote a particular religion, race or caste,which necessarily means a less favourable treatment of all other religions, races andcastes. How are the constitutional promises of social justice liberty of belief, faith orworship and equality of status and of opportunity to be attained unless the Stateeschews the religion, faith or belief of a person from its consideration altogetherwhile dealing with him, his rights, his duties and his entitlements? Secularism is thusmore than a passive attitude of religious tolerance. It is a positive concept of equaltreatment of all religions. This attitude is described by some as one of neutralitytowards religion or as one of benevolent neutrality. This may be a concept evolved bywestern liberal thought or it may be, as some say, an abiding faith with the Indianpeople at all points of time.

That is not material. What is material is that it is a constitutional goal and basic feature of theConstitution as affirmed in Kesavananda Bharati [(1973) 4 SCC 225] and Indira N. Gandhi v. RajNarain [1975 Supp SCC1]. Any step inconsistent with this constitutional policy is, in plain words,unconstitutional. This does WPs(C).35180/2009 & 10662/2010

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not mean that the State has no say whatsoever in matters of religion. Laws can be made regulatingthe secular affairs of temples, mosques and other places of worships and maths (See S.P.Mittal v.Union of India [(1983) 1 SCC 51]". Again at para 307, the learned Judge observed as follows:

"In short, in the affairs of the State (in its widest connotation) religion is irrelevant; itis strictly a personal affair. In this sense and in this behalf, our Constitution isbroadly in agreement with the U.S. Constitution, the First Amendment whereofdeclares that "Congress shall make no laws respecting an establishment of religion orprohibiting the free exercise thereof..." (generally referred to as the "establishmentclause"). Perhaps, this is an echo of doctrine of the separation of Church and State;may be it is the modern political thought which seeks to separate religion from theState - it matters very little".

The substance of Bommai's judgment, as can be culled out from the above extracted portions of thejudgment in so far as it deals with the meaning of the expression "secularism" obtaining in thepreamble of the Constitution and the secular nature of the State emerging from the scheme ofvarious provisions of the Constitution, is that there is no wall of separation between the State andthe religion as understood in the context of the American Constitution. WPs(C).35180/2009 &10662/2010

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The expression "wall of separation" originally employed by Thomas Jafferson in the context of the1st amendment to the American Constitution, which declares:

"Congress shall make no laws respecting an establishment of religion or prohibiting the free exercisethereof............" The question whether the framers of the Indian Constitution imported the theory of"wall of separation" into Indian Constitution initially fell for consideration of the Madras High CourtKidangazhi Manakkal Narayanan Nambudiripad v. State of Madras [AIR 1954 Madras 385]. JusticeVenkatarama Aiyar, speaking for the Bench, on an elaborate examination of the scheme of theAmerican Constitution as expounded by the various decisions of the American Supreme Court andthe scheme of the Indian Constitution, opined:

"Apart from making provisions in respect of particular subjects, the Constitution doesnot enact a general prohibition of legislation in respect of "establishment of religion".In this respect our Constitution makes a substantial departure from the AmericanConstitution".

He further held:

"On the other hand, there are provisions in our Constitution which are inconsistentwith the theory that there should be a wall of separation between Church and State".

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The Bench concluded that:

"It is difficult in the face of these provisions to accede to the contention that ourConstitution has adopted the American view that the State should have nothing to dowith religious institutions and endowments. It would, therefore, not be safe to buildany argument based on the "establishment of religion" clause in the first Amendmentand the decisions interpreting the same.", a conclusion which found acceptance bythe apex Court in Bommai's case, as already noticed earlier.

26. Our Constitution does not create an absolute embargo on the State's association with every andany religious activity; nor does the Constitution permit the establishment of a theocratic State. Asobserved in Bommai's case (supra), the State's attitude is one of the benevolent neutrality towardsreligion. While the Constitution grants a great degree of freedom of conscience and guarantees afundamental right to freely profess, practice and propagate any religion, such a right is made subjectto the requirements of public order, morality and health. Our Constitution also recognise adistinction between practices which are essentially religious and activities which are secular, butassociated with religious practice. Such activities include the economic, financial,WPs(C).35180/2009 & 10662/2010



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political activities associated with religious practices. They are expressly made amenable toregulation by law. The distinction is recognised by the Supreme Court in The Commissioner, HinduReligious Endowments, Madras v. Sri.Lakshmindra Thirtha Swamiar of Sri Shirur Mutt [1954S.C.R.1005=AIR 1954 S.C.282].

27. To understand the distinction, it is necessary to understand the meaning of the expression"religion". The Supreme Court in Shirur Mutt's case (supra) at pages 1023 and 1023 held as follows:

"What then are matters of religion? The word "religion" has not been defined in theConstitution and it is a term which is hardly susceptible of any rigid definition. In anAmerican case [Davis v. Benson, 133 U.S.333 at 342], it has been said "that the term'religion' has reference to one's views of his relation to his Creator and to theobligations they impose of reverence for His Being and character and of obedience toHis will. It is often confounded with cultus of form or worship of a particular sect, butis distinguishable from the latter." We do not think that the above definition can beregarded as either precise or adequate. Articles 25 and 26 of our Constitution arebased for the most part upon article 44(2) of the Constitution of Eire and we havegreat doubt whether a definition of "religion" as given above could have been in theminds of our Constitution-makers when they framed the Constitution. Religion iscertainly a matter of faith with individuals or communities and it is not necessarilytheistic. There are well known religions in India like Buddhism WPs(C).35180/2009& 10662/2010

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and Jainism which do not believe in God or in any Intelligent First Cause. A religionundoubtedly has its basis in a system of beliefs or doctrines which are regarded bythose who profess that religion as conducive to their spiritual well being, but it wouldnot be correct to say that religion is nothing else but a doctrine or belief. A religionmay not only lay down a code of ethical rules for its followers to accept, it mightprescribe rituals and observances, ceremonies and modes of worship which areregarded as integral parts of religion, and these forms and observances might extendeven to matters of food and dress.

The guarantee under our Constitution not only protects the freedom of religiousopinion but it protects also acts done in pursuance of a religion and this is made clearby the use of the expression "practice of religion" in article 25".

It was argued by the Attorney General that the right of freedom of religion guaranteed under theConstitution is limited only to the religious activities proper and does not extend to the secularactivities associated with religious practice which are not essential part of the religion. Suchauthority of the State to restrict the fundamental rights guaranteed under Articles 25 and 26 flows



from the opening clauses of both the Articles which state that the rights guaranteed therein aresubject to "public order, morality and health", Dealing with the submission, the Supreme Court heldat page 1025 as follows:

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"In the first place, what constitutes the essential part of a religion is primarily to be ascertained withreference to the doctrines of that religion itself. If the tenets of any religious sect of the Hindusprescribe that offerings of food should be given to the idol at particular hours of the day, thatperiodical ceremonies should be performed in a certain way at certain periods of the year or thatthere should be daily recital of sacred texts or oblations to the sacred fire, all these would beregarded as parts of religion and the mere fact that they involve expenditure of money oremployment of priests and servants or the use of marketable commodities would not make themsecular activities partaking of a commercial or economic character; all of them are religiouspractices and should be regarded as matters of religion within the meaning of article 26(b). Whatarticle 25(2)(a) contemplates is not regulation by the State of religious practices as such, thefreedom of which is guaranteed by the Constitution except when they run counter to public order,health and morality, but regulation of activities which are economic, commercial or political in theircharacter though they are associated with religious practices".

28. Thus it can be seen that the Constitution guarantees the fundamental right to freely profess,practice and propagate any religion. However, every activity undertaken by the followers of areligion or religious denomination is not protected or free from the interference of the State on theground that it forms part of a fundamental right guaranteed under the Constitution. TheConstitution expressly recognises that there can be secular activities associated with a religiouspractice, such as economic, financial and WPs(C).35180/2009 & 10662/2010

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political activities associated with a religious practice. Further the Constitution recognises theauthority of the State to regulate such secular activities associated with a religious practice. Evenwith reference to the non-secular aspects of the religious practices the Constitution declares that thefundamental rights guaranteed under Articles 25 and 26 are subject to the demands of public order,morality and health. In other words, by necessary implication even those activities which can becalled "purely religious" are also amenable to regulation by the State's law making authority if theState rationally comes to a conclusion that such practices are not conducive to the public order orrequirements of morality of the society or harmful to the health of the society.

29. The resolution in the preamble to constitute a SECULAR REPUBLIC thus has two facets, i.e.,that the State shall not unduly (i) interfere with the fundamental rights of the subjects to freelyprofess, practice and propagate any religion; (ii) unduly associate itself with any religious activity orfavour in any way one religion over the other.



30. The complaint in the instant case is that the impugned action of the State of Kerala isobjectionable on the WPs(C).35180/2009 & 10662/2010

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ground that it amounts to undue association with a religious activity amounting to favouring orpromoting a religion.

31. We have already examined the scheme of the Constitution in the context of the authority of theState to regulate the fundamental right to religious freedom. However the permissible limits of theState's association/entanglement with the religious activity is required to be examined.

32. The Constitution does not totally prohibit the association of the State with all the religiousactivity. Article 28*

------------------------------------------------------------------------------ * Art.28. Freedom as toattendance at religious instruction or religious worship in certain educational institutions.- (1) Noreligious instruction shall be provided in any educational institution wholly maintained out of Statefunds.

(2) Nothing in clause (1) shall apply to an educational institution which is administered by the Statebut has been established under any endowment or trust which requires that religious instructionshall be imparted in such institution.

(3) No person attending any educational institution recognised by the State or receiving aid out ofState funds shall be required to take part in any religious instruction that may be imparted in suchinstitution or to attend any religious worship that may be conducted in such institution or in anypremises attached thereto unless such person or, if such person is a minor, his guardian has givenhis consent thereto. WPs(C).35180/2009 & 10662/2010

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categorically prohibits any kind of religious instruction in any educational institution whollymaintained out of State funds. However, sub-Articles (2) and (3) thereof carve out exception to theabove rule. Sub-Article (2) recognises the possibility of the existence of educational institutionsestablished under any endowment or trust but under the administration of the State which areobliged by virtue of the mandates of the endowment or trust to impart religious instruction.Sub-Article (3) recognises the possibility of the experience of educational institutions which areestablished and administered by private parties which are recognised by the State and receive aidfrom the State, where religious instruction is imparted or religious worship is conducted. Article 28does not prohibit the association of State with such institutions, either by way of administering suchinstitutions or granting aid to such institutions or recognising such institutions, provided thestudent or his guardian, wherever the student is a minor, consents to attend such a religiousinstruction or worship. In our opinion, sub-Articles (2) and (3) clearly establish the fact that our



Constitution does not adopt the American doctrine of "wall of separation". The kind of association ofthe State contemplated under sub-Articles (2) and (3) of Article 28 WPs(C).35180/2009 &10662/2010

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perhaps would be wholly impermissible under the scheme of American Constitution.

33. Even on the face of an express prohibition of the establishment of a religion by the State someinterface between the State and religion is inevitable. Various activities of the State are challengedon the ground that they are inconsistent with the prohibition under the establishment clause. TheUS Supreme Court over a period of time recognised that there is a "zone of requiredaccommodation". The Supreme Court formulated various tests to determine whether a particularState action is within the zone of required accommodation or not; such as the test of 'politicalneutrality', 'secular purpose', 'secular effect' and 'excessive entanglement'.

34. Another major difference between the Constitution of India and U.S. is that Article 30guarantees a fundamental right in favour of the minorities, whether based on religion or language,to establish and administer educational institutions of their choice. Such express provision is absentin U.S. Constitution. The ambit of the said right has been the subject matter of debate before theSupreme Court in the case of St.Stephen's College v. University WPs(C).35180/2009 & 10662/2010

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of Delhi [AIR 1992 SC 1630]. The majority of the Supreme Court, speaking through JusticeK.Jagannatha Shetty, held* that "minorities cannot be treated in a religious neutral way".The Stateis prohibited from discriminating against such educational institutions established andadministered by a religious minority in the matter of granting aid to them. A Constitutionalguarantee of the minority religious denomination's right to establish and administer educationalinstitutions of their choice coupled with the guarantee of non-discrimination in the matter ofgranting aid is unknown to American constitutional system. Similarly, Article 290A mandates

----------------------------------------------------------------------------- * The minorities cannot be treatedin a religious neutral way in the educational institutions established and administered by them.Clearly that was not the aim of Article 30(1). Article 30(1) was incorporated to secure to theminorities a fair deal in the name of religion only. It was guaranteed to them as a fundamental rightafter a great deal of deliberation of the Framers. It should not be nullified by narrow judicialinterpretation or crabbed pendantry. There must be a broad approach and the Satesman-like vision.The catholic approach that led to the drafting of the provisions dealing with the minority rights, asdiscussed earlier, should not be set at naught. It must be ensured that nothing is done to deprive theminorities of a sense of belonging and of a feeling of security.

WPs(C).35180/2009 & 10662/2010



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the payment of certain amounts from out of the Consolidated Funds of the States of Kerala andTamil Nadu for the maintenance of certain Hindu temples and shrines, a Constitutional obligationnecessitated by some historical compulsion. These Articles, in our opinion, clearly indicate that theState is not totally prohibited from having any association with religion or a religious denomination.

35. The question is, whether these provisions of the Constitution are to be understood as exhaustiveof the permissible limits of the State's association with religion or a religious denomination or onlyindicative of the permissible limits of the State's association. In view of the Constitution Benchdecision of the Supreme Court in Bommai's case (supra) declaring that the State's attitude is one ofthe benevolent neutrality in the matter of religion, we find it difficult to come to the conclusion thatthe abovementioned provisions are exhaustive of the permissible limits of the State's associationwith religion.

36. Then the question would be, whether the kind of association which the State of Kerala proposesto pursue and the impugned action is Constitutionally permissible? To answer the question, we alsodeem it appropriate to advert to another aspect of WPs(C).35180/2009 & 10662/2010

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the Constitution. Under Article 298, it is declared that the executive power of the Union and of eachState extends to carrying on of any trade or business and also to acquire, hold and dispose ofproperty and making of contracts for any purpose. If the State has the freedom or the authority tocarry on any trade or business or acquire, hold or dispose of property by entering into any contractfor any purpose, to believe that the State is prohibited from carrying on any trade or business eitherwith a religious organisation or denomination or an organisation though not religious but proposesto carry on its business in a manner compliant with a set of beliefs based on a religion, in ouropinion, would be inconsistent with the established rules of interpretation of Constitutionaldocuments. It is well settled that a broad and liberal spirit should inspire those who are entrustedwith the duty of interpreting the Constitution. The complexity of administration of a modern Statedemands a great deal of 'play in the joints' of the State to secure the goal of maintaining benevolentneutrality with regard to religion. To disable the State by imposing fetters on the power of the Statewould neither be in accordance with the settled principles of Constitutional interpretation oreconomic health of the State. Therefore, to restrict WPs(C).35180/2009 & 10662/2010

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the commercial interaction of the State even with a religious denomination, on the ground that it isinconsistent with the declaration that the State should be a 'Secular Republic' would be illogicalhaving regard to the scheme of the Constitution. In our opinion, such interpretation of theConstitution is not warranted.



37. Whether the impugned decision of the State has the effect of promoting a religion: To find aconstitutionally viable answer to the said question the principle that even religious associations arerequired to be treated with political equality and accorded equal civil opportunities for theirdevelopment on par with other voluntary associations must be kept in mind. Such a principleemerges from the fundamental rights guaranteed under Articles 14 to 16, 19 and 25 to 30.

38. The grievance of the petitioners is that since the 6th respondent Company is proposed to be runin a Shariah compliant manner, association of the State with such a Company would have the effectof either promoting or aiding a religion. It is not very clear from the record nor the respondents,either the State of Kerala or the 6th respondent Company or its promoters, offer any explanation asto what exactly is meant by them when they proclaimed that the WPs(C).35180/2009 & 10662/2010

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6th respondent would carry on its business in a Shariah compliant manner.

39. Sharia, we understand, is the legal system based on the Koran and teachings of the ProphetMohammed.

"Law in the eyes of the Muslim scholars was not in fact an independent or empiricalstudy. It was the practical aspect of the religious and social doctrine preached byMohammed. For the early Muslims there was little or no distinction between 'legal'and 'religious'. In the Koran the two aspects are found side by side, or ratherinterwoven one with the other, and so likewise in the Hadith.

The study and interpretation of the Koran involved sometimes the one and sometimes the other,and nearly a century elapsed before scholars began to specialize in one or the other aspect.Ultimately they were distinguished by relative terms: 'ilm - `positive knowledge', denoting theology(though not excluding law), and fiqh, `understanding', denoting law (based on theology). Only at amuch later date was Greek word `canon' (qanun) adopted to denote administrative rule as distinctfrom revealed law. (Thus `canon law' in Arabic should mean the exact opposite of canon inEuropean usage.) The connexion between law and religion thus established by Mohammed andadopted by his followers persisted throughout all later centuries. Characteristically, all expositionsof Muslim law begin with the `religious duties' or `acts of worship', such as ablution, prayer, andpilgrimage. As in other Semitic religions, law is thought WPs(C).35180/2009 & 10662/2010

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of, not as a product of human intelligence and adaptation to changing social needs and ideals, but ofdivine inspiration hence immutable. For Muslims its proof-texts were to be found in the Koran andProphetic Tradition; and on this assumption the jurists and theologians of the second centuryelaborated a structure of law that is, from the point of view of logical perfection, one of the mostbrilliant essays of human reasoning.



Before examining the product of this activity, it is of some importance to look a little more closelyinto the methods followed by the jurists in their endeavour to systematize their material, for theinsight which it affords into the character of Muslim epistemology and reasoning.

The Koran and the Tradition are not, as it is often said, the basis of Islamic legal speculation, butonly its sources. The real foundation is to be sought in the attitude of mind which determined themethods of utilizing these sources. The first question, then, is not `What is laid down in the Koranand the Hadith?', but `Why are the Koran and the Hadith accepted as sources of law?', and thesecond is `How are their prescriptions to be understood and applied?' To answer the first questionby saying that Koran and the Hadith are accepted as infallible sources because they are thefoundations and title-deeds of the religion of Islam is to argue in a circle. The ultimate reason ismetaphysical and a priori. It is a conviction of the imperfection of human reason and its inability toapprehend by its sole powers the real nature of the Good or indeed any reality whatsoever. Absolutegood and evil can therefore be known to men WPs(C).35180/2009 & 10662/2010

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only through a divine revelation mediated through Prophets. By Divine Providence there has been asuccession of such Prophets ever since, by the creation of Adam (who was the first of them),mankind has existed on this earth. The revelations accorded to these Prophets were all identical inprinciple, but formed a gradually developing series adapted to the stages of man's development.Each in turn expanded, modified, and abrogated the preceding revelations. The Koran is the finalrevelation and therefore contains the final and most perfect solutions for all questions of belief andconduct.

(Quoted from HAR Gibb............) It is claimed to be the municipal law followed by some countries inthe Middle East. The principle of the private international law followed by all the countries whichfollow the Anglo-Saxon jurisprudence is that foreign law is always a question of fact in so far asmunicipal Courts are concerned. Therefore the question as to what are those principles of the law ofShariah which regulate the business such as the one proposed to be carried on by the 6th respondentCompany is required to be clearly pleaded and proved.

40. In the absence of any clear pleading much less the proof of those principles of Shariah which therespondents propose to comply with while carrying on the business, we can only proceed on theview that the respondents proposed to carry on the business WPs(C).35180/2009 & 10662/2010

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in accordance with some principles based on certain teachings of the Prophet. We must also make itclear that the respondents made an emphatic statement at the Bar that they are bound to followeach and every prescription of law of this country. In addition, they also intend to observe certainprinciples of Shariah.



41. In response to a specific query of the Court as to what are those principles of the law of Shariahwhich are inconsistent with the mandate of secular State contemplated by the Constitution of Indiaor the laws of India, the petitioner rightly answered that unless the respondents plead clearly as towhat are the principles of Sharia they propose to follow, it is not possible to answer the question.

42. In the circumstances we are only left with a situation that the respondents propose to carry onthe business of a 'non-banking financial institution' in accordance with the laws of the land and inaddition follow some principles of Shariah in carrying on such business.

43. Every legal system has some basis in some religion or religious beliefs. For example, all legalsystems known to a civilized world disapprove activities such as theft, causing harm toWPs(C).35180/2009 & 10662/2010

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fellow human beings,licentiousness, etc. It is also equally true that no major religion known tohumanity approves any one of the above activities. Therefore, to categorize laws which disapproveor prohibit such activities as non-secular merely because the prescription of such laws also coincideswith certain religious beliefs and avoid such State action that it should be non-secular would not beconducive to the promotion of an orderly society either secular or non-secular. If the purposes of theState are to be classified as "non-secular" simply because the mandate of the law made by the Statecoincided with the beliefs of a religion or originated in a religion, virtually no law can be made. Inour opinion it is for the above mentioned reason both Articles 25 and 26 open with the clause:

"subject to public order, morality and health......" The makers of the Constitution realised that therecan always be claims that either a belief or conduct based on a belief is a part of the fundamentalright to practice and profess a religion. If such a right were to be absolute most of the modern lawwould be offending the fundamental right to practice some religion or the other. The same principlein our opinion should apply in deciding the question WPs(C).35180/2009 & 10662/2010

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whether the association of the State with any activity is to be classified as aimed at a non-secularpurpose or promoting a religion.

44. It is not in dispute that whatever the basis of Shariah, the principles of Shariah are meant toregulate the conduct of human beings adhering to the said system of law. Such an adherence may bewith a view to either secure the establishment of an orderly society and maintain the same or tosecure the devine approval for the human conduct or both. Whatever be the motive of the adherent,so long as the belief results in regulating the interaction between human beings, in our opinion, it isrequired to be treated as a secular aspect of a religious belief.

45. Looked at from the above angle, when the respondents propose to carry on the business of the6th respondent Company in a Shariah compliant manner in addition to complying with the law of



this country, that cannot be condemned as either promoting a religion or aiding a religion.

46. The other submission made by the petitioners is that the action of the State to participate inequity of the 6th respondent Company would necessarily involve expenditure of money from theexchequer, which in turn is money collected, by way of tax, from WPs(C).35180/2009 &10662/2010

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the people and therefore is violative of Article 27* of the Constitution.

47. In Shirur Mutt's case (supra), the Supreme Court held:

"What is forbidden by the article is the specific appropriation of the proceeds of anytax in payment of expenses for the promotion or maintenance of any particularreligion or religious denomination. The reason underlying this provision is obvious.Ours being a secular State and there being freedom of religion guaranteed by theConstitution, both to individuals and to groups, it is against the policy of theConstitution to pay out of public funds any money for the promotion or maintenanceof any particular religion or religious denomination".

48. In T.M.A.Pai Foundation and others v. State of Karnataka and others [(2002) 8 SCC 481]dealing with Article 27 of the Constitution, per Kirpal, C.J. observed at paragraph 85 as follows:

"Secularism being one of the important basic features of our Constitution, Article 27provides that no person shall be compelled to pay any taxes, the proceeds of whichare specifically appropriated for

--------------------------------------------------------------------------------------------------------

*Art.27. Freedom as to payment of taxes for promotion of any particular religion.- No person shallbe compelled to pay any taxes, the proceeds of which are specifically appropriated in payment ofexpenses for the promotion or maintenance of any particular religion or religious denomination.

WPs(C).35180/2009 & 10662/2010

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the payment of expenses for the promotion and maintenance of any particular religion or religiousdenomination. The manner in which the article has been framed does not prohibit the State fromenacting a law to incur expenses for the promotion or maintenance of any particular religion orreligious denomination, but specifies that by that law, no person can be compelled to pay any tax,the proceeds of which are to be so utilized. In other words, if there is a tax for the promotion ormaintenance of any particular religion or religious denomination, no person can be compelled to



pay any such tax." Such an observation came to be made in the context of the question whether aminority educational institution which received financial aid from the State can prefer candidates oftheir own community in the matter of admission to the various courses and whether State's financialaid to such an institution which insists upon the maintenance for preference is violative of Article 27of the Constitution of India.

49. The scope of Article 27 vis-a-vis the utilization of State's funds fell for consideration of thevarious courts in the following cases. In Surksh Chandra Chiman Lal Shah v. Union of India andothers (ILR 1975 Delhi 32) a Division Bench of the Delhi High Court considered the legality of aprogramme of the Union of India involving an expenditure of about Rupees fifty lakhs inWPs(C).35180/2009 & 10662/2010

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connection with the celebration of the 2500th Anniversary of Bhagwan Mahavir's Nirvan. Under theprogramme various activities including arrangement for imparting of knowledge about the life andteachings of Bhagwan Mahavir to the children were undertaken. Such an expenditure came to bechallenged as violative of Article 27 of the Constitution on various grounds. A Division Bench of theDelhi High Court came to the conclusion that the various activities undertaken in the aboveprogramme do not constitute promotion or maintenance of the Jain religion.

50. In Mahanagar Gaziabad Chetna Munch v. State of U.P. (2007 (2) AWC 1113) a Division Bench ofthe Allahabad High Court had occasion to consider the legality of the decision of the State of U.P. tolease out a piece of land to the Haj Samithy of U.P. for a period of 30 years and also the payment ofan amount of Rupees two crores from out of the State fund for construction of the Haj House. Thechallenge was repelled by the High Court. At paragraph 41 of the judgment the Court held asfollows:

"From the aforesaid discussion it is crystal clear that promotion or maintenance ofany particular religion or religious denomination by a State and administrativeexigency to protect the interest of the citizen belonging to one religion of the secularState WPs(C).35180/2009 & 10662/2010

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are two distinct and different features. No public fund can be misutilized for thepurpose of promotion or maintenance of any particular religion or religiousdenomination. But there is no bar to the administration to protect the interest of thepilgrims of one religion because such pilgrims are the citizens of the secular State."

The Court on an elaborate consideration of the matter concluded as follows:

".............we do not find that any sum from the State exchequer is proposed to beutilized for the promotion or maintenance of any particular religion or religious



denomination but to facilitate pilgrims for going Haj. Facilitating the pilgrims is anadministrative action, which can not be held to be religious action for its promotionor maintenance."

51. In Vijay Harishchandra Patel v. Union of India [(2009) 3 GLR 2153] a Division Bench of theGujarat High Court had occasion to deal with the question whether certain steps taken by the Unionof India and the Planning Commission to utilize the national resources in favour of a particularminority community was legal. The challenge was on various grounds. One of the grounds iswhether such an expenditure is violative of Article 27 of the Constitution. At paragraph 12 of thejudgment the Court held as follows:

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"Petitioner has raised the contention that national resources are being utilised for betterment of aparticular religion which is impermissible in law. Law is well settled that a State is prohibited topatronage any particular religion. Ours is a Secular nation and it has no religion of its own and noparticular religion can receive any special patronage from the State. State's endeavour to improvehealth, family welfare, safety recreation and general well-being of the citizens of the minoritycommunity may indirectly impose burden on the State exchequer, but it cannot be said that thoseactions of the State would amount to patronizing any particular religion. Article 27 of theConstitution states that no person shall be compelled to pay any taxes, the proceeds of which arespecifically appropriated in payment of expenses for the promotion or maintenance of any particularreligion or religious denomination. Funds utilised by the States for improving the basic amenities,providing infrastructure facilities to minority concentrated areas, improvement of their health,family welfare, safety, general well-being, spreading literacy, providing education, etc. would notviolate Article 27 of the Constitution. Funds are not utilised for inculcating any religion oradvancement of any particular religion affecting the constitutional requirement of neutrality."

52. The decisions demonstrate that the courts examined the dominant purpose behind the Stateaction in deciding whether the State action is in violation of Article 27. The principle that emergesfrom the above decisions is that the spending of money by WPs(C).35180/2009 & 10662/2010

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the State on an activity which has a basis in some religion does not by itself attract the prohibitioncontained in Article 27. If that were to be so, all the policies of the State which provide subsidizationof the food to poor people would also attract the prohibition contained in Article 27 as such apractice not only coincides but also is rooted in religious belief common to all major religions thatfeeding the poor is a meritorious activity. In our opinion to attract the prohibition of Article 27 theState action must have the effect of intentionally and directly promoting or maintaining anyparticular religion. To ascertain the same the purpose behind the expenditure and the primary resultof such an activity are required to be examined.



53. In the instant case, the State has clearly explained in its affidavit the reasons which promptedthe State to take the impugned decision. In paragraphs 7, 8 and 9 of the affidavit filed on behalf ofthe State of Kerala, the purpose behind the decision of the State is explained as follows:

"7. At present there is considerable dearth of Industrial and Infrastructural projectsin the State of Kerala which without the availability of sufficient finance will remainan insurmountable problem, hindering to a great extend, the overall progress of theState in general, and its advancement in the industrial and infrastructural sectors, inparticular. To add to this adverse situation, the refinancing scheme ofWPs(C).35180/2009 & 10662/2010

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the Industrial Development Bank of India, which was the main source of finance forthe 3rd respondent, has also been discontinued with the conversion of the IndustrialDevelopment Bank into a Commercial Bank resulting in the 3rd respondent ceasingto have its principal source of finance for Industrial financing.

8. In the meantime, it was in the scheme of the 1st respondent-State to have a few ofthe major infrastructure projects to be implemented which would have resulted in anunprecedented advancement in the industrial and infrastructural sectors of the Stateleading the State and its people a long way to well-being and prosperity. This couldnot be achieved only for the reason of want of sufficient funds. To name a few of suchprojects, a Rail Corridor Project from Kasargode to Thiruvananthapuram and fromCochin to Coimbatore which for its implementation requires approximatelyRs.50000 Crores in capital investment and an ultra Mega Power Project of 2400MVA at Cheemeni in Kasargode involving Rs.13000 Crores investment, could noteither be implemented or remain delayed for want of funds. Apart from the above,the 3rd respondent is also promoting Industrial Growth Centers at various locations,Life Science Park at Thiruvananthapuram, Electronic Hub, City Gas DistributionProjects, Trade and Convention Centre at Kochi, Petrochemical Project at Kochi etc.all of which require for their establishment and implementation, substantial funds.

9. On a consideration of the matter, and studying the situation in detail, it came to the notice of theGovernment that there were huge unutilized funds in Gulf countries as also with non-residentIndians and if only such funds could be availed of, the situation confronted by them which operatesto the great detriment in progress and advancement of WPs(C).35180/2009 & 10662/2010

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the State and its people could be tied over. But such sources were averse to collecting or receivinginterest on deposits or loans of any kind in accordance with the Shariah Principles followed by them.In such a state of affairs, the Government entrusted KSIDC with conducting studies and looking intovarious aspects of formation of a Company in Kerala for attracting investments for the development



of the common public at large. The 3rd respondent with a view to explore the possibility of securingfresh source of finance arranged to get a feasibility report prepared by M/s.Ernst & Young (P) Ltd.,Mumbai, a reputed International Financial and Professional Consultant. The said consultantconducted an elaborate study of the matter and submitted a detailed project report to the 3rdrespondent wherein they have recommended the incorporation of a company for carrying on thebusiness of leasing and hire purchase, investment in shares and to act as financiers, portfoliomanagers, finance brokers and guarantors. The business activities thus proposed which were of awide range required huge financial investments. One of the recommendations in the project reportwas that the business activities of the company shall not embark or undertake any interest basedfinancing. It was pursuant to the said project report that a company with the name Al BarakhFinancial Services Ltd. was registered under the companies Act, the Memorandum and Articles ofAssociation together with the certificate of Incorporation of which have been produced and markedas Ext.R3(a) along with the counter-affidavit filed by the 3rd respondent. It is submitted that thesaid company has been promoted and incorporated as a joint initiative of KSIDC and privatepromoters. The private promoters include Industrialists and business belonging to differentreligions, who have big and substantial WPs(C).35180/2009 & 10662/2010

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industrial and business enterprises in Gulf Countries as well as in India. The 3rd respondent is onlya minority share holder in the said company with 11% share capital contribution".

It can be seen from the above that the purpose and intention of the State in taking the impugneddecision is to secure a commercial benefit from the activity proposed to be carried on by the 6threspondent Company by generating adequate funds for the development of the State.

54. Coming to the question whether the impugned action has the direct and primary effect ofpromoting or maintaining the religion, it is not demonstrated before us as to how such a result isachieved by the impugned action. The money from the exchequer would not be paid to anyinstitution whose primary purpose is to carry on religious activity like preaching of or propagating areligion. The payment of money from the exchequer is proposed to be made with a view to achieve acommercial benefit. Such payment would be made to a corporate body which proposes to carry onthe business in compliance with certain principles based on the religious text of a particular religion,but not to propagate religion. In our view such a payment would not have the primary and directeffect of supporting or maintaining the religion. The main and primary purpose of the 6thWPs(C).35180/2009 & 10662/2010

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respondent is commerce but not propagation of religion. On the other hand, the denial of the Stateto participate only on the ground that the 6th respondent proposes to carry on the business incompliance with Shariah may amount to discrimination on the basis of religion. Our conclusion isfurther fortified by the order of the Supreme Court in Writ Petition (Civil) No.1 of 2007 dated28.01.2011 (Prafull Goradia v. Union of India). The Supreme Court was considering the



Constitutionality of the Government of India's granting subsidy in the air fare of the Haj pilgrims,specifically in the context of Article 27 of the Constitution of India. The Supreme Court rejected thechallenge and observed as follows:-

"In our opinion Article 27 would be violated if a substantial part of the entire incometax collected in India, or a substantial part of the entire central excise or the customsduties or sales tax, or a substantial part of any other tax collected in India, were to beutilized for promotion or maintenance of any particular religion or religiousdenomination. In other words, suppose 25 per cent of the entire income tax collectedin India was utilized for promoting or maintaining any particular religion or religiousdenomination, that, in our opinion, would be violative of Article 27 of theConstitution".

55. One more submission of the petitioners which is required to be examined is the submissionmade on the basis of paragraph 4 of the counter affidavit filed on 07.09.2010 by the UnionWPs(C).35180/2009 & 10662/2010

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of India. Paragraph 4 of the counter affidavit reads as follows:

"Government of India have always maintained that in the current statutory andregulatory frame work, it is not legally feasible for banks in India to undertakeIslamic Banking activities in India or for branches of Indian Banks abroad toundertake Islamic Banking outside India. This has been the stance of theGovernment of India even while giving reply to Questions in the Parliament as well asin response to various VIP correspondences on the subject. The said stance of theGovernment of India is applicable mutatis mutandis to the activities of NBFCs also."

The petitioners argued that in view of the stand taken by the Government of India, the State ofKerala cannot be a shareholder in a company which proposes to carry on the business in Shariacompliant manner.

56. On the other hand, it is argued by Dr.Dhavan that the opinion such as the one contained in theaffidavit filed by the Under Secretary of the Government of India in the Ministry of Finance is notdeterminative of the Constitutional interpretation. Secondly, even on the examination of thelanguage of the statement of Mr.M.M.Dawla (Under Secretary), it is his opinion that the activities ofthe Islamic Banking are not legally feasible "in the current statutory and regulatory frame work".Dr.Dhavan submitted that the issue before this Court is the Constitutionality of the action of theWPs(C).35180/2009 & 10662/2010

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State of Kerala, but not whether the existing statutory framework permits the carrying on of "IslamicBanking" activity. He further submitted that except making such an omnibus statement no specificprohibition contained in any statute which makes it impermissible to carry on the Islamic Banking isbrought to our notice.

57. We see substantial force in the submission made by Dr.Dhavan. The Supreme Court in SanjeevCoke Manufacturing Co. v. M/s.Bharat Coking Coal Limited [(1983) 1 SCC 147] at paragraph 25 heldas follows:

"But, in the ultimate analysis, we are not really to concern ourselves with thehollowness or the self-condemnatory nature of the statements made in the affidavitsfiled by the respondents to justify and sustain the legislation. The deponents of theaffidavits filed into court may speak for the parties on whose behalf they swear to thestatements. They do not speak for the Parliament. No one may speak for theParliament and Parliament is never before the court. After Parliament has said whatit intends to say, only the court may say what the Parliament meant to say. None else.Once a statute leaves Parliament House, the Court is the only authentic voice whichmay echo (interpret) the Parliament. This the court will do with reference to thelanguage of the statute and other permissible aids. The executive Government mayplace before the court their understanding of what Parliament has said or intended tosay or what they think was Parliament's WPs(C).35180/2009 & 10662/2010

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object and all the facts and circumstances which in their view led to the legislation.When they do so, they do not speak for Parliament. No Act of Parliament may bestruck down because of the understanding or misunderstanding of parliamentaryintention by the executive Government or because their (the Government's)spokesmen do not bring out relevant circumstances but indulge in empty andself-defeating affidavits. They do not and they cannot bind Parliament. Validity oflegislation is not to be judged merely by affidavits filed on behalf of the State, but byall the relevant circumstances which the court may ultimately find and moreespecially by what may be gathered from what the legislature has itself said."

In other words, the Supreme Court held that while interpreting the Constitution or determining theconstitutional validity of the statutes the court cannot be guided by the views expressed byindividual officers of the State as the court has to ascertain the true meaning of the statutes made bythe legislature. In our opinion, the principle applies with a greater vigour in determining theconstitutionality of the State action.

58. We do not propose to deal with this question any further for the reason that whether the 6threspondent company can carry on the business such as the one proposed by the Union of India orwhether such a business is prohibited by any statute are questions which in our opinion areprimarily to be dealt with by the Reserve Bank of India. The Reserve Bank of India is yet to examine



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this question and we do not propose to preempt such an examination. We are also conscious of thefact, assuming for any reason, that there is some provision in law which either seek to regulate orprohibit such an activity of the 6th respondent, the right of the 6th respondent or its shareholders toquestion the constitutionality of such a regulation or prohibition cannot be ignored or jeopardised.

59. Lastly, we come to the submission made by Sri.Kaleeswaram Raj appearing for the petitioner inW.P.(C) No.10662 of 2010 that the impugned decision of the State of Kerala is violative of Article 14of the Constitution as the said decision was taken in an arbitrary manner without following anytransparent procedure. The learned counsel for the petitioner heavily relied upon paragraphs 10 and11 of the decision of the Supreme Court in M/s.Kasturi Lal Lakshmi Reddy,etc. v. the State ofJammu & Kashmir and another (AIR 1980 SC 1992) which reads as follows:

"10. It was pointed out by this Court in "Ramana Dayaram Shetty v. TheInternational Airport Authority of India (1979) 3 SCC 489: (AIR 1979 SC 1628)" thatwith the growth of the welfare State, new forms of property in the shape of Govt.largess are developing, since the Government is increasingly assuming the rule ofregulator and dispenser of social WPs(C).35180/2009 & 10662/2010

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services and provider of a large number of benefits including jobs, contracts, licences,quotas, mineral rights etc. There is increasing expansion of the magnitude and rangeof governmental functions, as we move closer to the welfare State, and the result isthat more and more of our wealth consists of these new forms of property. Some ofthese forms of wealth may be in the nature of legal rights but the large majority ofthem are in the nature of privileges. The law has however not been slow to recognisethe importance of this new kind of wealth and the need to protect individual interestin it and with that end in view, it has developed new forms of protection. Someinterests in Government largess, formerly regarded as privileges, have beenrecognised as rights, while others have been given legal protection not only by forgingprocedural safeguards but also by confining, structuring and checking Governmentdiscretion in the matter of grant of such largess. The discretion of the Governmenthas been held to be not unlimited in that the Government cannot give largess in itsarbitrary discretion or at its sweet will or on such terms as it chooses in its absolutediscretion. There are two limitations imposed by law which structure and control thediscretion of the Government in this behalf. The first is in regard to the terms onwhich largess may be granted and the other, in regard to the persons who may berecipients of such largess.



11. So far as the first limitation is concerned, it flows directly from the thesis that,unlike private individual, the State cannot act as it pleases in the matter of givinglargess. Though ordinarily a private individual would be guided by economicconsiderations of self-gain in any action taken by him, it is always open to him underthe law to act contrary to his self-interest or to oblige another in entering into acontract or dealing with his property. But the Government is not free to act as it likesin granting largess such as awarding a contract or selling or leasing out its property.

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Whatever be its activity, the Government is still the Government and is, subject to restraintsinherent in its position in a democratic society. The constitutional power conferred on theGovernment cannot be exercised by it arbitrarily or capriciously or in an unprincipled manner, ithas to be exercised for the public good. Every activity of the Government has a public element in itand it must, therefore, be informed with reason and guided by public interest. Every action taken bythe Government must be in public interest; the Government cannot act arbitrarily and withoutreason and if it does, its action would be liable to be invalidated. If the Government awards acontract or leases out or otherwise deals with its property or grants any other largess, it would beliable to be tested for its validity on the touchstone of reasonableness and public interest and if itfails to satisfy either test, it would be unconstitutional and invalid."

60. On the other hand, Dr.Dhavan, learned counsel appearing for the 6th respondent relied upon adecision reported in Sachidanand Pandey v. West Bengal [(1987) 2 SCC 324]. At paragraph 40 of thesaid judgment the Supreme Court held as follows:-

"Public auction is the ordinary rule, it is not an invariable rule. There may besituations where there are compelling reasons necessitating departure from the rulebut then the reasons for the departure must be rational and should not be suggestiveof discrimination. Appearance of public justice is as important as doing justice.Nothing should be done which gives the appearance of bias, jobbery or nepotism."

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61. In our opinion, calling of tenders is not the only procedure which answers the requirement ofnon-arbitrariness on the part of the State. When the State is intending to purchase or sell propertyor goods or seeking to have certain work like construction of a building or a project, etc. to be doneby private parties inviting competitive bids from persons interested is generally a rational andtransparent process, but even in such cases courts have recognised exceptions to the rule. However,in a case like the one on hand where the State is proposing to carry on some business byparticipating in a venture jointly with others, the decision cannot in any way be called distribution of



largess. It is not the case of either of the petitioners that they are also interested in carrying on thesame business that is to be carried on by the 6th respondent, nor some other persons would beinterested in such business and if only the State of Kerala advertised its intention to participate insuch business venture there would have been more competition enabling the State of Kerala to takea decision which would be economically more beneficial to the State. We are of the opinion that bythe very nature of the impugned decision it is incompatible with the process of inviting tenders. Wetherefore reject this submission. WPs(C).35180/2009 & 10662/2010

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For all the above mentioned reasons we do not see any merit in these writ petitions. Therefore, thewrit petitions are dismissed.

Sd/-

J.Chelameswar, Chief Justice Sd/-

P.R.Ramachandra Menon, Judge vns/vku.



Documents

Kerala High Court Judgement on Islamic Banking