Karnataka High Court Quashes CAG Circular, Allowing Deductions from Salaries for Cooperative Banks

The Karnataka High Court has made a significant judgment that will benefit cooperative societies and banks. The court has invalidated Clause-5 of a circular issued by the Comptroller and Auditor General of India (CAG) that prohibited Salary Drawing and Disbursing Officers from deducting amounts owed to cooperative banks from the salaries of employees, even if the employees provided their consent for such deductions.
The decision was made in response to a petition filed by the Accountant General’s Office Employees Cooperative Bank Limited, which challenged Clause-5 of the circular dated October 18, 2019. This clause stated that drawing and disbursing officers are not allowed to make any recoveries, including subscriptions and other liabilities, for Co-operative Housing Societies and Co-operative Banks.
In addition to invalidating Clause-5, the court also nullified the orders issued on January 29 and 30, 2020, and February 6, 2020, under the disputed clause.
The senior counsel representing the petitioner argued that Section 34 of the Karnataka Co-operative Societies Act, 1959, allows for an agreement between the borrower and the cooperative bank, which empowers the borrower’s employer to deduct the agreed amount from the employee’s salary for repayment of the debt owed to the cooperative society. Therefore, the CAG does not have the authority to prohibit such deductions from the salaries of employees.
The counsel representing the CAG defended the policy decision to exclude certain classes of cooperative societies and banks from the scope of Section 34 of the Act, arguing that the petitioner does not have the legal standing to question this decision.
The court observed that when a member of a cooperative society enters into an agreement with the society, with the prior consent of their employer, it creates a right for the society to recover its dues from the employee’s salary. This deduction cannot exceed 50% of the salary and is mandated by Section 34 of the Act. Therefore, the court concluded that the disputed Clause-5 is not a policy decision and is, therefore, unlawful in itself.