Karnataka Money Lenders Act, 1961 – s.7-A and 7-B – Karnataka Pawn Brokers Act, 1961 – s. 4-A and 4-B – Whether the amendments made to the Karnataka Money Lenders Act (M.L. Act) and Karnataka Pawn Brokers Act (P.B. Act) in 1998 providing that the security deposit furnished by the money lenders and pawn brokers in terms of ss. 7-A and 4-A of the Acts respectively shall not carry interest, is constitutional, legal and valid – Held: Legal and valid – Businesses of money lending and pawn broking are usurious businesses and the Government may rightly impose onerous conditions to restrict or even discourage people from entering into such businesses – Legislature in its wisdom can decide whether it should make it more difficult for people to engage in the business of money lending and pawn broking – A money lender or a pawn broker applies for licence to do this business knowing fully well that the security that he shall deposit shall not earn any interest – Nobody forces a person to engage in the trade of money lending or pawn broking – Therefore, the impugned provisions cannot be held to be unreasonable – Insofar as constitutionality of payment of interest on security is concerned, arbitrariness must be writ large to make it unconstitutional – Whether the interest should be paid or not is a matter which parties decide amongst themselves – Contract providing that no interest will be paid on the amount advanced, such clause cannot be said to be so arbitrary that the contract becomes void – Contracts providing for non-payment of interest on earnest money and security deposits have been considered in the context of the Arbitration Acts – In arbitration cases, the Court has not construed the provision of the contract providing for nonpayment of interest to be void – The said provision has, in fact, been legally enforced – Therefore, the impugned provisions prohibiting payment of interest on the amount of security deposits cannot be said to be arbitrary or violative of Art.14 of the Constitution – Constitution of India – Art.14. Karnataka Money Lenders Act, 1961 – s.7-A and 7-B – Karnataka Pawn Brokers Act, 1961 – s. 4-A and 4-B – In 1985, amendments were made to the Karnataka Money Lenders Act (M.L. Act) and Karnataka Pawn Brokers Act (P.B. Act) providing that the security deposit to be furnished by the money lenders and pawn brokers in relation to the extent of business carried on by the licensee – Amendments challenged – High Court in case of Manakchand Motilal upheld the validity of ss.7-A and 7-B of M.L. Act and ss.4A & 4-B of the P.B. Act, however, also held that money lenders/pawn brokers were entitled to interest on security deposits – In 1998, another amendment made by the State in s.7-A of M.L. Act and s.4A of P.B. Act providing for non-payment of interest on security deposits – Writ petitions – Constitutional validity of the amendments challenged – Single judge dismissed the writ petitions, however, Division Bench allowed the writ petitions and held provisions providing for non-payment of interest on security deposits unconstitutional – Division Bench further held that the State could not nullify the judgment of the High Court in Manakchand Motilal by way of subsequent amendment – On appeal, held: High Court in Manakchand Motilal itself observed, that there was no provision prohibiting the payment of interest – Court had observed that even if such a provision prohibiting payment of interest had been there in the statute such provision would be illegal – Therefore, there was no error pointed out by the Court which could have been corrected by the State Legislature – State first tried to implement the judgment by framing rules providing for payment of interest – Later, it incorporated the contentious provisions prohibiting payment of interest – These amendments did not in any way alter the basis of the judgment – The State, insofar as it has made the amended provisions retrospective, has attempted to nullify the writ of mandamus issued by the Court in favour of the respondents – This mandamus could not have been set at naught by making the provisions retrospective – The State could not have nullified the judgment passed in Manakchand Motilal’s case by retrospectively amending the acts – Therefore, the validating Acts insofar as they are retrospective, are held to be illegal.
Partly allowing the appeals, the Court
HELD: 1. The observations by the High Court that if there was a provision prohibiting payment of interest, the same would be arbitrary and hence illegal, were not necessary in the fact situation of Manakchand Motilal’s case. As observed by the High Court itself, there was no provision prohibiting the payment of interest. Therefore, the observations in this behalf were not called for and were hypothetical and in the nature of obiter. There was no discussion on the issue as to whether a provision providing that no interest would be payable on the security deposit would be legally valid or not? A passing observation has no doubt been made that there would have been force in the contention of the money-lenders and pawn brokers that the provisions would be violative of Article 14 of the Constitution but this, was not the ratio decidendi of the case. [Para 14] [422-B-D]
2. It would also be apposite to mention that after making the aforesaid observation, the Division Bench again noted that in the absence of any prohibition in the provisions of the Acts, regarding payment of interest, in view of Article 14, the Government while making rules must provide for payment of interest. This itself was a clear indicator that the Court decided the issue in Manakchand Motilal’s case mainly on the ground that there was no provision prohibiting the payment of interest. Therefore, the observation made in Manakchand Motilal’s case that a provision prohibiting payment of interest would be arbitrary and violative of Article 14 of the Constitution of India was a passing observation in the nature of obiter not arising for decision in the said case. [Para 15] [422-E-F]
3. The Legislature has the power to enact validating laws including the power to amend laws with retrospective effect. However, this can be done to remove causes of invalidity. When such a law is passed the Legislature basically corrects the errors which have been pointed out in a judicial pronouncement. Resultantly, it amends the law, by removing the mistakes committed in the earlier legislation, the effect of which is to remove the basis and foundation of the judgment. If this is done, the same does not amount to statutory overruling. [Para 22] [425-F-G]
4. However, the Legislature cannot set at naught the judgments which have been pronounced by amending the law not for the purpose of making corrections or removing anomalies but to bring in new provisions which did not exist earlier. The Legislature may have the power to remove the basis or foundation of the judicial pronouncement but the Legislature cannot overturn or set aside the judgment, that too retrospectively by introducing a new provision. The legislature is bound by the mandamus issued by the Court. A judicial pronouncement is always binding unless the very fundamentals on which it is based are altered and the decision could not have been given in the altered circumstances. The Legislature cannot, by way of introducing an amendment, overturn a judicial pronouncement and declare it to be wrong or a nullity. What the Legislature can do is to amend the provisions of the statute to remove the basis of the judgment. [Para 23] [426-A-C]
5. Applying these principles to the present case it is apparent that when the decision was rendered in Manakchand Motilal’s case there was no provision providing for payment of interest or prohibiting payment of interest. The Court had observed that even if such a provision prohibiting payment of interest had been there in the statute such provision would be illegal. Therefore, there was no error pointed out by the Court which could have been corrected by the State Legislature. As pointed out above, the State, in fact, first tried to implement the judgment by framing rules providing for payment of interest. Later, it incorporated the contentious provisions prohibiting payment of interest. These amendments did not in any way alter the basis of the judgment. [Para 24] [426-D-E]
6. Therefore, the State, in so far as it has made the amended provisions retrospective, has attempted to nullify the writ of mandamus issued by the Court in favour of the respondents. This mandamus could not have been set at naught by making the provisions retrospective. This would be a direct breach of the doctrine of separation of powers as laid down in State of Tamil Nadu. The State Legislature could not have nullified the judgment passed in Manakchand Motilal’s case by retrospectively amending the Acts. Therefore, the validating Acts in so far as they are retrospective, are held to be illegal. [Para 25] [426-F-G]
7. The businesses of money lending and pawn broking are usurious businesses and the Government may rightly impose onerous conditions to restrict or even discourage people from entering into such businesses. [Para 39] [431-F]
8. It is thus apparent that the courts have frowned upon the “trade” of money lending. The profession of money lending, may be a trade, but onerous restrictions may be placed on such trade which is definitely usurious. These onerous restrictions would be reasonable keeping in view the nature of the trade. The Legislature in its wisdom can decide whether it should make it more difficult for people to engage in the business of money lending and pawn broking. [Para 40] [432-C]
9. A money lender or a pawn broker applies for licence to do this business knowing fully well that the security that he shall deposit shall not earn any interest. He with open eyes accepts the condition which is part of the Acts. Nobody forces a person to engage in the trade of money lending or pawn broking. Therefore, the impugned provisions cannot be held to be unreasonable. [Para 41] [432-D]
10.1 Lastly, the submission to be considered is whether a provision providing that no interest is payable on the security deposit is so arbitrary, as to make it unconstitutional. In Independent Thought vs. Union of India and Anr. this Court held that arbitrariness must be writ large to make it un-constitutional. Whether the interest should be paid or not is a matter which parties decide amongst themselves. Supposing, there is a contract providing that no interest will be paid on the amount advanced; it cannot be said that such a clause in the contract is so arbitrary that the contract becomes void or becomes inoperative. [Paras 42 and 43] [432-E-F]
10.2 Supposing, a person’s money lies in the current account for 3-4 years he cannot claim interest only on the ground that the bank would have utilized this money for commercial purposes. There are various instances where schools, other educational institutions, clubs, societies ask for refundable deposits on which no interest is payable. These are accepted to be normal routine practices because these bodies are not engaged in commercial activities. Even a pawn broker pays no interest on the value of the security pledged with him. [Para 43] [432-G-H; 433-A]
10.3 Contracts providing for non-payment of interest on earnest money and security deposits have been considered in the context of the Arbitration Acts. The Courts have held that in view of the agreement entered into between the parties, the arbitrator cannot award interest prior to the date of passing of the award. In fact, this Court has clearly held that the arbitrator cannot award pendente lite interest. Though these authorities do not directly deal with the issue in hand, it is obvious that in all these cases, the Court has not construed the provision of the contract providing for non-payment of interest to be void. The said provision has, in fact, been legally enforced. However, under the Arbitration Act of 1940, this Court held that the arbitrator could award pendente lite interest but under the Arbitration and Conciliation Act, 1996 the arbitrator cannot award interest prior to the date of award. The clause for non-payment of interest has not been held void in any case. Therefore, the impugned provisions prohibiting payment of interest on the amount of security deposits cannot be said to be arbitrary or violative of Article 14 of the Constitution of India. [Para 44] [433-B-D] State of Tamil Nadu v. State of Kerala and Another (2014) 12 SCC 696 : [2014] 12 SCR 875; Cheviti Venkanna Yadav v. State of Telangana and Others (2017)
1 SCC 283 : [2016] 7 SCR 689; Independent Thought v. Union of India and Anr. (2017) 10 SCC 800 – relied on.
Manakchand Motilal v. State of Karnataka I.L.R 1991 KAR 1928; Jagdamba Paper Industries (P) Ltd. v. Haryana State Electricity Board (1983) 4 SCC 508 : [1984] 1 SCR 165; Shri Prithvi Cotton Mills Ltd. and Another v. Broach Borough Municipality and Others (1969) 2 SCC 283 : [1970] 1 SCR 388; Cauvery Water Disputes Tribunal, Re (1993) Supp. 1 SCC 96(II) : [1991] 2 Suppl. SCR 497; S.R. Bhagwat and Others v. State of Mysore (1995) 6 SCC 16 : [1995] 3 Suppl. SCR 545; Sheikh Mehtab S/o Sheikh Farid Mussalman v. Dharamrao Bhujangrao AIR (31) 1944 Nagpur 330; Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board (1993) Supp 4 SCC 136 : [1993] 3 SCR 199; M/s Fatehchand Himmatlal and Others v. State of
Maharashtra (1977) 2 SCC 670 : [1977] 2 SCR 828; Monarch Investments St. Thomas Road, Trichur and Ors. v. State of Kerala & Ors. AIR (1989) KER.177; Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611; Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy, (1992) 1 SCC 508 : [1991]
3 Suppl. SCR 417; Sayeed Ahmed & Company v. State of Uttar Pradesh & Ors., (2009) 12 SCC 26 : [2009]
10 SCR 841; Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors., (2010) 8 SCC 767 : [2010] 10 SCR 487; Union of India v. Bright Power Projects (India) Pvt. Ltd., (2015)
9 SCC 695 : [2015] 6 SCR 488 – referred to.
Halsbury’s Laws of England, Fourth Edition, Volume 32; Law Lexicon, by P. Ramanathan Aiyar 3rd Edition (2005) (page 2402) Vol 2; Words And Phrases
permanent editions, Vol 22-page 148; Black’s Law Dictionary, Sixth Edition (page 812) – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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