THE STATE OF KARNATAKA & ORS. versus THE KARNATAKA PAWN BROKERS ASSN. & ORS. on 15 March 2018

[2018] 10 S.C.R. 409

THE STATE OF KARNATAKA & ORS.

v.

THE KARNATAKA PAWN BROKERS ASSN. & ORS.

(Civil Appeal No. 5793 of 2008)

MARCH 15, 2018

[MADAN B. LOKUR AND DEEPAK GUPTA, JJ.]

Karnataka Money Lenders Act, 1961 – s.7-A and 7-B –Karnataka Pawn Brokers Act, 1961 – s. 4-A and 4-B – Whether theamendments made to the Karnataka Money Lenders Act (M.L. Act)and Karnataka Pawn Brokers Act (P.B. Act) in 1998 providing thatthe security deposit furnished by the money lenders and pawnbrokers in terms of ss. 7-A and 4-A of the Acts respectively shall notcarry interest, is constitutional, legal and valid – Held: Legal andvalid – Businesses of money lending and pawn broking are usuriousbusinesses and the Government may rightly impose onerousconditions to restrict or even discourage people from entering intosuch businesses – Legislature in its wisdom can decide whether itshould make it more difficult for people to engage in the businessof money lending and pawn broking – A money lender or a pawnbroker applies for licence to do this business knowing fully wellthat the security that he shall deposit shall not earn any interest –Nobody forces a person to engage in the trade of money lending orpawn broking – Therefore, the impugned provisions cannot be heldto be unreasonable – Insofar as constitutionality of payment ofinterest on security is concerned, arbitrariness must be writ large tomake it unconstitutional – Whether the interest should be paid ornot is a matter which parties decide amongst themselves – Contractproviding that no interest will be paid on the amount advanced,such clause cannot be said to be so arbitrary that the contractbecomes void – Contracts providing for non-payment of interest onearnest money and security deposits have been considered in thecontext of the Arbitration Acts – In arbitration cases, the Court hasnot construed the provision of the contract providing for non-payment of interest to be void – The said provision has, in fact,been legally enforced – Therefore, the impugned provisionsprohibiting payment of interest on the amount of security deposits

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Acannot be said to be arbitrary or violative of Art.14 of theConstitution – 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.BAct) and Karnataka Pawn Brokers Act (P.B. Act) providing that thesecurity deposit to be furnished by the money lenders and pawnbrokers in relation to the extent of business carried on by the licensee– Amendments challenged – High Court in case of ManakchandMotilal upheld the validity of ss.7-A and 7-B of M.L. Act and ss.4-A & 4-B of the P.B. Act, however, also held that money lenders/Cpawn 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.4-A of P.B. Act providing for non-payment of interest on securitydeposits – Writ petitions – Constitutional validity of the amendmentschallenged – Single judge dismissed the writ petitions, however,DDivision Bench allowed the writ petitions and held provisionsproviding for non-payment of interest on security depositsunconstitutional – Division Bench further held that the State couldnot nullify the judgment of the High Court in Manakchand Motilalby way of subsequent amendment – On appeal, held: High Court inManakchand Motilal itself observed, that there was no provisionEprohibiting the payment of interest – Court had observed that evenif such a provision prohibiting payment of interest had been therein the statute such provision would be illegal – Therefore, there wasno error pointed out by the Court which could have been correctedby the State Legislature – State first tried to implement the judgmentFby framing rules providing for payment of interest – Later, itincorporated the contentious provisions prohibiting payment ofinterest – These amendments did not in any way alter the basis ofthe judgment – The State, insofar as it has made the amendedprovisions retrospective, has attempted to nullify the writ of mandamus issued by the Court in favour of the respondents – ThisGmandamus could not have been set at naught by making theprovisions retrospective – The State could not have nullified thejudgment passed in Manakchand Motilal’s case by retrospectivelyamending the acts – Therefore, the validating Acts insofar as theyare retrospective, are held to be illegal.

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Partly allowing the appeals, the Court

HELD: 1. The observations by the High Court that if therewas a provision prohibiting payment of interest, the same wouldbe arbitrary and hence illegal, were not necessary in the factsituation of Manakchand Motilal’s case. As observed by the HighCourt itself, there was no provision prohibiting the payment ofinterest. Therefore, the observations in this behalf were not calledfor and were hypothetical and in the nature of obiter. There wasno discussion on the issue as to whether a provision providingthat no interest would be payable on the security deposit wouldbe legally valid or not? A passing observation has no doubt beenmade that there would have been force in the contention of themoney-lenders and pawn brokers that the provisions would beviolative of Article 14 of the Constitution but this, was not theratio decidendi of the case. [Para 14] [422-B-D]

2. It would also be apposite to mention that after makingthe aforesaid observation, the Division Bench again noted thatin the absence of any prohibition in the provisions of the Acts,regarding payment of interest, in view of Article 14, theGovernment while making rules must provide for payment ofinterest. This itself was a clear indicator that the Court decidedthe issue in Manakchand Motilal’s case mainly on the groundthat there was no provision prohibiting the payment of interest.Therefore, the observation made in Manakchand Motilal’s casethat a provision prohibiting payment of interest would be arbitraryand violative of Article 14 of the Constitution of India was apassing observation in the nature of obiter not arising for decisionin the said case. [Para 15] [422-E-F]

3. The Legislature has the power to enact validating lawsincluding the power to amend laws with retrospective effect.However, this can be done to remove causes of invalidity. Whensuch a law is passed the Legislature basically corrects the errorswhich have been pointed out in a judicial pronouncement.Resultantly, it amends the law, by removing the mistakescommitted in the earlier legislation, the effect of which is toremove the basis and foundation of the judgment. If this is done,the same does not amount to statutory overruling. [Para 22][425-F-G]

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A4. However, the Legislature cannot set at naught thejudgments which have been pronounced by amending the law notfor the purpose of making corrections or removing anomaliesbut to bring in new provisions which did not exist earlier. TheLegislature may have the power to remove the basis or foundationof the judicial pronouncement but the Legislature cannot overturnBor set aside the judgment, that too retrospectively by introducinga new provision. The legislature is bound by the mandamus issuedby the Court. A judicial pronouncement is always binding unlessthe very fundamentals on which it is based are altered and thedecision could not have been given in the altered circumstances.CThe Legislature cannot, by way of introducing an amendment,overturn a judicial pronouncement and declare it to be wrong ora nullity. What the Legislature can do is to amend the provisionsof the statute to remove the basis of the judgment. [Para 23][426-A-C]

D5. Applying these principles to the present case it isapparent that when the decision was rendered in ManakchandMotilal’s case there was no provision providing for payment ofinterest or prohibiting payment of interest. The Court hadobserved that even if such a provision prohibiting payment ofinterest had been there in the statute such provision would beEillegal. Therefore, there was no error pointed out by the Courtwhich could have been corrected by the State Legislature. Aspointed out above, the State, in fact, first tried to implement thejudgment by framing rules providing for payment of interest.Later, it incorporated the contentious provisions prohibitingFpayment of interest. These amendments did not in any way alterthe basis of the judgment. [Para 24] [426-D-E]

6. Therefore, the State, in so far as it has made the amendedprovisions retrospective, has attempted to nullify the writ ofmandamus issued by the Court in favour of the respondents. ThisGmandamus could not have been set at naught by making theprovisions retrospective. This would be a direct breach of thedoctrine of separation of powers as laid down in State of TamilNadu. The State Legislature could not have nullified the judgmentpassed in Manakchand Motilal’s case by retrospectively amendingthe Acts. Therefore, the validating Acts in so far as they areHretrospective, are held to be illegal. [Para 25] [426-F-G]

7. The businesses of money lending and pawn broking areusurious businesses and the Government may rightly imposeonerous conditions to restrict or even discourage people fromentering into such businesses. [Para 39] [431-F]

8. It is thus apparent that the courts have frowned uponthe “trade” of money lending. The profession of money lending,may be a trade, but onerous restrictions may be placed on suchtrade which is definitely usurious. These onerous restrictionswould be reasonable keeping in view the nature of the trade.The Legislature in its wisdom can decide whether it should makeit more difficult for people to engage in the business of moneylending and pawn broking. [Para 40] [432-C]

9. A money lender or a pawn broker applies for licence todo this business knowing fully well that the security that he shalldeposit shall not earn any interest. He with open eyes acceptsthe condition which is part of the Acts. Nobody forces a personto engage in the trade of money lending or pawn broking.Therefore, the impugned provisions cannot be held to beunreasonable. [Para 41] [432-D]

10.1 Lastly, the submission to be considered is whether aprovision providing that no interest is payable on the securitydeposit is so arbitrary, as to make it unconstitutional. InIndependent Thought vs. Union of India and Anr. this Court heldthat arbitrariness must be writ large to make it un-constitutional.Whether the interest should be paid or not is a matter whichparties decide amongst themselves. Supposing, there is acontract providing that no interest will be paid on the amountadvanced; it cannot be said that such a clause in the contract isso arbitrary that the contract becomes void or becomesinoperative. [Paras 42 and 43] [432-E-F]

10.2 Supposing, a person’s money lies in the currentaccount for 3-4 years he cannot claim interest only on the groundthat the bank would have utilized this money for commercialpurposes. There are various instances where schools, othereducational institutions, clubs, societies ask for refundabledeposits on which no interest is payable. These are accepted tobe normal routine practices because these bodies are not A

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[2018] 10 S.C.R.

Aengaged in commercial activities. Even a pawn broker pays nointerest 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 onearnest money and security deposits have been considered inBthe context of the Arbitration Acts. The Courts have held that inview of the agreement entered into between the parties, thearbitrator cannot award interest prior to the date of passing ofthe award. In fact, this Court has clearly held that the arbitratorcannot award pendente lite interest. Though these authorities donot directly deal with the issue in hand, it is obvious that in allCthese cases, the Court has not construed the provision of thecontract providing for non-payment of interest to be void. Thesaid provision has, in fact, been legally enforced. However, underthe Arbitration Act of 1940, this Court held that the arbitratorcould award pendente lite interest but under the Arbitration andDConciliation Act, 1996 the arbitrator cannot award interest priorto the date of award. The clause for non-payment of interest hasnot been held void in any case. Therefore, the impugnedprovisions prohibiting payment of interest on the amount ofsecurity deposits cannot be said to be arbitrary or violative ofArticle 14 of the Constitution of India. [Para 44] [433-B-D]EState of Tamil Nadu v. State of Kerala and Another(2014) 12 SCC 696 : [2014] 12 SCR 875; ChevitiVenkanna Yadav v. State of Telangana and Others (2017)1 SCC 283 : [2016] 7 SCR 689; Independent Thoughtv. Union of India and Anr. (2017) 10 SCC 800 – reliedFon.

Manakchand Motilal v. State of Karnataka I.L.R1991 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. andGAnother v. Broach Borough Municipality and Others(1969) 2 SCC 283 : [1970] 1 SCR 388; Cauvery WaterDisputes Tribunal, Re (1993) Supp. 1 SCC 96(II) :[1991] 2 Suppl. SCR 497; S.R. Bhagwat and Othersv. State of Mysore (1995) 6 SCC 16 : [1995] 3 Suppl.H 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/sFatehchand Himmatlal and Others v. State ofMaharashtra (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; SriChittaranjan Maity v. Union of India, (2017) 9 SCC611; Secretary, Irrigation Department, Government ofOrissa & Ors. v. G.C. Roy, (1992) 1 SCC 508 : [1991]3 Suppl. SCR 417; Sayeed Ahmed & Company v. Stateof 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 ofIndia v. Bright Power Projects (India) Pvt. Ltd., (2015)9 SCC 695 : [2015] 6 SCR 488 – referred to.

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Halsbury’s Laws of England, Fourth Edition, Volume32; Law Lexicon, by P. Ramanathan Aiyar 3[rd] Edition(2005) (page 2402) Vol 2; Words And Phrasespermanent editions, Vol 22-page 148; Black’s LawDictionary, Sixth Edition (page 812) – referred to.

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Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5793of 2008

CFrom the Judgment and Order dated 10.02.2006 of the High Courtof Karnataka at Bangalore in Writ Appeal No. 4084 of 2001, c/w. W. A.No. 3372 of 2001 and W. A. No. 4918 of 2001(GM, ML/PB)

WITH

C. A. No. 2874-2878 of 2018.D

Devadatt Kamat, AAG, V. N. Raghupathy, Rajesh Inamdar,Parikshit P. Angadi, Aditya Bhat, Md. Apzal Ansari, Advs. for theAppellants.

Gurukrishna Kumar, Sr. Adv., S. R. Setia, H. Chandra Sekhar,EMs. Rekha Chandra Sekhar, Advs. for the Respondents.

The Judgment of the Court was delivered by DEEPAK GUPTA J. 1. Leave granted in SLP(C) Nos. 8652-8656 of 2012.

2. The main issue raised in these appeals is whether theFamendments made to the Karnataka Money Lenders Act, 1961 and theKarnataka Pawn Brokers Act, 1961 in the year 1998 providing that thesecurity deposit furnished by the money lenders and pawn brokers interms of Sections 7-A and 4-A of the Acts respectively shall not carryinterest, is constitutional, legal and valid.

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Background

3. The State of Karnataka enacted the Karnataka Money LendersAct, 1961 (for short the M.L. Act) with a view to regulate and controlthe transactions of money lending in the State. Section 5 of the M.L. Actmakes it obligatory for any person carrying on the business of money H

lending to procure licence before carrying on the business of moneylending.

4. The State of Karnataka simultaneously enacted the KarnatakaPawn Brokers Act, 1961 (for short the P.B Act) to regulate and controlthe business of pawn brokers. Section 3 of the P.B. Act makes itobligatory for every person desirous of carrying on the business as apawn broker to conduct his business only after he obtains a licence inaccordance with the provisions of the Act.

5. The main business of both money lenders and pawn brokers isto advance or lend money to individuals who approach them for loans.The only difference is that a pawn broker is authorized to accept valuablearticles like gold, gold ornaments etc. as pledge for security of thepayment.

6. In the year 1985, amendments were brought out to both theActs. Section 7-A & 7-B were introduced in the M.L. Act andcorresponding Sections 4-A & 4-B were introduced in the P.B. Act.These amendments provided that the persons desirous of obtaining alicence had to deposit a security and the rate of security was fixed slab-wise in relation to the extent of business carried on by the licensee.These amendments were challenged by a large number of pawn brokersand money lenders. A Division Bench of the Karnataka High Court inManakchand Motilal vs. State of Karnataka[1]upheld the validity ofSections 7-A & 7-B of the M.L. Act and Sections 4-A & 4-B of the P.B.Act. It would be pertinent to mention that in this case one of the groundsraised to challenge the validity of the aforesaid provisions was that thereis no provision for payment of interest on the security amount. TheDivision Bench relying upon the judgment of this Court in JagdambaPaper Industries (P) Ltd. vs. Haryana State Electricity Board[2] heldthat the money lenders / pawn brokers were entitled to interest on thesecurity deposits at the prevailing rate of interest payable by the scheduledbanks on a fixed deposit for a period of one year. The State Governmentwas also directed to make proper rules in this behalf. The relevant portionof the judgment reads as follows :- “16.…..It is true that the Sections do not make a provision forgiving interest but at the same time the Sections do not prohibit 1 I.L.R 1991 KAR 1928

2 (1983) 4 SCC 508

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Athe payment of interest. If the Sections prohibited the payment ofinterest, such a provision would be arbitrary and therefore therewould have been force in the contention of the petitioners that theprovisions were violative of Article 14 on the ground that it isarbitrary, for, Article 14 strikes at arbitrariness in State action.(See: E.P. ROYAPPA v. STATE OF TAMIL NADU, andBMANEKA GANDHI v. UNION OF INDIA). Further, therewould have been also force in the contention of the petitionersthat such a provision which compelled them to deposit considerableamount in cash with the Government without any provision forpayment of interest was an unreasonable restriction on theirCfundamental right to carry on business guaranteed under Article19(1)(g) of the Constitution, It is indisputable that by such depositnot only the petitioners lose the opportunity of earning profit onthe said amount but the value of the money also goes down asyears pass and thereby the petitioners would be forced to incurlosses instead of earning profit out of the money, which they wouldDhave invested in their business, but for the compulsion to deposit aportion of it in the Government. Therefore, it appears to us that inthe absence of any prohibition in the provisions of the Act regardingpayment of interest, in view of Article 14, the Government whilemaking Rules for the purposes of the Act under Section 44 of theEMoney Lenders Act and Section 22 of the Pawn Brokers Act hasnot only the power but also a duty to provide for payment ofinterest. As far as the rate of interest is concerned, in our opinion,as the deposit prescribed under Section 7A of the Money LendersAct and Section 4A of the Pawn Brokers Act is for a period ofone year, as the duration of the licence on, each occasion beingFone year, the Government should pay interest on the amount ofsecurity deposit made by a licensee at the rate at which the interestis paid by any Scheduled Bank on a fixed deposit for one year.”

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No appeal was filed by the State of Karnataka against thisjudgment. However, the money lenders and pawn brokers filed an SLPGwhich was dismissed. It appears that thereafter the State framed certainrules pursuant to the directions of the Division Bench of the KarnatakaHigh Court. These Rules were also challenged by the money lenders/pawn brokers. It appears that the High Court of Karnataka approvedsome portions of the Rules but, at the same time, directed that the RulesHbe reframed in compliance with the earlier judgment.

7. Thereafter, the State of Karnataka enacted the KarnatakaMoney Lenders (Amendment) Act, 1998 and a similar amendment wasalso made to the P.B. Act. In this case we are not concerned with theother amendments. We are restricting our discussion only to sub-section3 of Section 7-A and 4-A of the M.L. Act and the P.B. Act respectively.Sub-section 3 of Section 7-A and 4-A of the M.L. and the P.B. Acts,after amendment, read as follows:

“Section 7-A. Conditions of licence.-

xxx xxx xxx

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(3) For the purposes of sub-section(2), the amount of the securitypayable in a year by a licensee shall be determined on the basis ofthe [the amount invested by him in the business during the previousyear [and such security deposit shall not carry anyinterest:]”[3]

“Section 4-A. Conditions of licence.-

xxx xxx xxx

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(3) For the purposes of sub-section(2), the amount of the securitypayable by a licensee in a year shall be determined on the basis ofthe [the amount invested by him in the business during the previousyear] [and such security deposit shall not carry anyinterest]:”[4]

The highlighted parts of the above Sections were introduced by theamendments of 1998 but were deemed to be inserted from 31.05.1985making it retrospective in application.

8. The association of pawn brokers and money lenders filed writpetitions in the High Court of Karnataka challenging the constitutionalvalidity of these amendments. The learned Single Judge dismissed thewrit petitions. However, the Division Bench allowed the writ petitionsand held that though all other amendments made to Sections 7-A and 7-B of the M.L. Act and Sections 4-A and 4-B of the P.B. Act are 3 Introduced vide Act No.14 of 1998

4 Introduced vide Act No.9 of 1998

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Aconstitutionally valid and legal, the provisions providing for non-paymentof interest on security deposits were held to be constitutionally bad andwere accordingly set aside.

9. The Division Bench held that as far as interest is concerned, inthe earlier judgment in Manakchand Motilal’s case, the KarnatakaBHigh Court had held that the money lenders and pawn brokers wereentitled to interest on the amount of deposit and the said judgment hadbecome final since the SLP against the same was dismissed. The DivisionBench further held that the judgment of the Apex Court in Ferro AlloysCorpn. Ltd. vs. A.P. State Electricity Board[5]was not applicable andwas wrongly relied upon by the learned Single Judge. It was also observedCthat the High Court in Manakchand Motilal’s case (supra) had clearlyheld that in case there was a provision for non-payment of interest thensuch provision would be un-constitutional. It was further held that theState Government could not nullify the judgment of the High Court inManakchand Motilal’s case by way of subsequent amendment.

D10. In the appeal filed by the State of Karnataka , Shri DevadattKamath, learned AAG, has raised the following issues :-

(i) Business of money lending or pawn broking is an usuriousbusiness and, therefore, the State wanted to frame a policy todiscourage the business of money lending and pawn broking andEhence stringent conditions have been laid down including thecondition that no interest would be payable on the security. Healso contends that nobody is forced to do the business of moneylending or pawn broking and if persons want to obtain licencethen they will have to submit the security deposits in terms of theActs.F

(ii) The amendments of 1998 are in the nature of validating Acts.He submits that the State of Karnataka is fully competent to enactsuch a provision and, therefore, the State was within its powers tomake the amendments to effectively negate the judgment inGManakchand Motilal’s case (supra).

(iii) The observations made in Manakchand Motilal’s case(supra) were in the nature of obiter and were not called for in thefacts of the said case.

5 1993 Supp (4) SCC 136H

(iv) Lastly, that there is no fundamental right or legal right to claiminterest and the State is legally competent to enact a provisionthat no interest shall be paid on the amount of security deposited.

11. On the other hand Mr. Gurukrishna Kumar, learned seniorcounsel appearing for the respondents contended that the matter inter-se parties was settled by the judgment rendered in ManakchandMotilal’s case (supra). He also contended that the statute cannot nullifythe mandamus issued in the earlier judgment without removing the basisof the judgment. He further contended that the judicial decisions whichhave become final, cannot be set at naught by the legislature. The maincontention was that both under law and equity a person whose money,which is property, is kept by another, is entitled to compensation by wayof interest for the period for which the money has been retained by theother party. He, therefore, submitted that the provisions prohibiting thepayment of interest are arbitrary and liable to be set aside.

12. The following points arise for decision:-

(i) What is the scope, ambit and effect of the judgment of theKarnataka High Court in Manakchand Motilal’s case (supra)?;

(ii) Whether the amendments brought into Section 7-A and 4-A ofthe M.L. Act and the P.B. Act respectively providing that security depositwould not carry any interest is contrary to the judgment in ManakchandMotilal’s case (supra) and the State was not competent to introducesuch amendments; and

(iii) Whether the provisions providing that no interest is payableare arbitrary and hence violative of Article 14 of the Constitution ofIndia.

Issue No.1

13. As far as the first issue is concerned, at the outset, we maynote that the main issue raised in Manakchand Motilal’s case (supra)was with regard to the validity of Section 7-A and 4-A of the M.L. Actand the P.B. Act respectively, in so far as they made a provision fordeposit of security as a pre-requisite to the grant of licence. At that time,there was no provision with regard to the payment of interest. The Courtheld that the State Government was entitled to introduce a condition forpayment of deposit. The Court, however, felt that for the provision to be A

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Aconstitutionally valid, the deposit must carry interest. We have quotedthe relevant portion of the judgment in Manakchand Motilial’s casein the earlier part of this judgment. The Division Bench noticed that theActs do not have any provision for payment of interest and observedthat, at the same time, there was also no prohibition for the payment ofinterest.B

14. In our view, the observations that if there was a provisionprohibiting payment of interest, the same would be arbitrary and henceillegal, were not necessary in the fact situation of Manakchand Motilal’scase (supra). As observed by the High Court itself, there was no provisionprohibiting the payment of interest. Therefore, the observations in thisCbehalf were not called for and were hypothetical and in the nature ofobiter. We may also point out that there was no discussion on the issueas to whether a provision providing that no interest would be payable onthe security deposit would be legally valid or not? A passing observationhas no doubt been made that there would have been force in theDcontention of the money-lenders and pawn brokers that the provisionswould be violative of Article 14 of the Constitution but this, in our opinion,was not the ratio decidendi of the case.

15. It would also be apposite to mention that after making theaforesaid observation, the Division Bench again noted that in the absenceEof any prohibition in the provisions of the Acts, regarding payment ofinterest, in view of Article 14, the Government while making rules mustprovide for payment of interest. This itself was a clear indicator that theCourt decided the issue in Manakchand Motilal’s case (supra) mainlyon the ground that there was no provision prohibiting the payment ofinterest. We are, therefore, of the considered view that the observationFmade in Manakchand Motilal’s case (supra) that a provision prohibitingpayment of interest would be arbitrary and violative of Article 14 of theConstitution of India was a passing observation in the nature of obiternot arising for decision in the said case.

Issue No.2

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16. The second issue is whether the effect of the judgment inManakchand Motilal’s case (supra) can be undone by bringing outamendments in question. A large number of authorities have been citedin this regard. We may refer to a few of them.

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17. In Shri Prithvi Cotton Mills Ltd. and Another vs. BroachBorough Municipality and Others[6], a Constitution Bench of this Court,dealing with the question of validity of a validation Act passed with aview to get over the judgment of this Court, held that even it hascompetence, the Legislature cannot merely pass a law that a decision ofthis Court shall not bind. This Court held as follows :- “4.…….Granted legislative competence, it is not sufficient todeclare merely that the decision of the Court shall not bind forthat is tantamount to reversing the decision in exercise of judicialpower which the Legislature does not possess or exercise. Acourt’s decision must always bind unless the conditions on whichit is based are so fundamentally altered that the decision could not have been given in the altered circumstances…….”

18. In the matter of Cauvery Water Disputes Tribunal, Re[7] aConstitution Bench of this Court after referring to a large number ofauthorities held as follows :- “76.The principle which emerges from these authorities is thatthe legislature can change the basis on which a decision is givenby the Court and thus change the law in general, which will affecta class of persons and events at large. It cannot, however, setaside an individual decision inter parties and affect their rightsand liabilities alone. Such an act on the part of the legislatureamounts to exercising the judicial power of the State and tofunctioning as an appellate court or tribunal.”

19. In S.R. Bhagwat and Others vs. State of Mysore[8], a three-Judge Bench was dealing with a case where the petitioners were heldentitled to certain promotions and service benefits from a particular date.Even though these benefits were given to them the State did not givethem the monetary benefits and, in fact, passed a law which had theeffect of denying the monetary benefits due to the petitioners, in termsof the judgments earlier passed in their favour. After dealing with theentire law on the subject this Court held as follows :- “12. It is now well settled by a catena of decisions of this Courtthat a binding judicial pronouncement between the parties cannot 6 1969(2) SCC 283

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be made ineffective with the aid of any legislative power byenacting a provision which in substance overrules such judgmentand is not in the realm of a legislative enactment which displacesthe basis or foundation of the judgment and uniformly applies to aclass of persons concerned with the entire subject sought to becovered by such an enactment having retrospective effect………

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15. We may note at the very outset that in the present case theHigh Court had not struck down any legislation which was soughtto be re-enacted after removing any defect retrospectively by theimpugned provisions. This is a case where on interpretation ofexisting law, the High Court had given certain benefits to thepetitioners. That order of mandamus was sought to be nullified bythe enactment of the impugned provisions in a new statute. Thisin our view would be clearly impermissible legislative exercise.”

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20. In State of Tamil Nadu vs. State of Kerala and Another [9],the Constitution Bench of this Court again dealt with the question as towhether the Legislature could set at naught the decision of the superiorcourts. After referring to a large number of judgments, this Court laiddown the following principles:- E

(i) that the doctrine of separation of powers is an entrenchedprinciple in the Constitution of India even though there is no specificprovision in the Constitution;

(ii) Independence of Courts from Executive and Legislature isFfundamental to the rule of law and one of the basic tenets of theIndian Constitution;

(iii) the doctrine of separation of powers between the three organsof the State – Legislature, Executive and the Judiciary is aconsequence of principles of equality enshrined in Article 14 ofthe Constitution of India. Consequently, a law can be set aside onthe ground that it breaches the doctrine of separation of powerssince that would amount to negation of equality under Article 14of the Constitution of India; G

(iv) the High Courts and the Supreme Court are empowered bythe Constitution of India to determine whether a law made by theParliament or State Legislature is void;

(v) the doctrine of separation of powers applies to the finaljudgments of the courts. The Legislature cannot declare anydecision of a court of law to be void or of no effect. It can, however,pass an amending Act to remedy the defects pointed out by acourt of law or on coming to know of it aliunde;

(vi) if the Legislature has the power and competence to make avalidating law it can make the law retrospective;

(vii) even where the law is enacted by the Legislature appearswithin its competence but if in substance it is shown as an attemptto interfere with the judicial process, such law can be invalidatedbeing in breach of the doctrine of separation of powers.

21. The same principle has been reiterated in Cheviti VenkannaYadav vs. State of Telangana and Others[10]in the following terms:- “30.……The legislature has the power to enact laws includingthe power to retrospectively amend laws and thereby removecauses of ineffectiveness or invalidity. When a law is enactedwith retrospective effect, it is not considered as an encroachmentupon judicial power when the legislature does not directly overruleor reverse a judicial dictum. The legislature cannot, by way of anenactment, declare a decision of the court as erroneous or a nullity,but can amend the statute or the provision so as to make itapplicable to the past……”

22. On analysis of the aforesaid judgments it can be said that theLegislature has the power to enact validating laws including the powerto amend laws with retrospective effect. However, this can be done toremove causes of invalidity. When such a law is passed the Legislaturebasically corrects the errors which have been pointed out in a judicialpronouncement. Resultantly, it amends the law, by removing the mistakescommitted in the earlier legislation, the effect of which is to remove thebasis and foundation of the judgment. If this is done, the same does notamount to statutory overruling.

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A23. However, the Legislature cannot set at naught the judgmentswhich have been pronounced by amending the law not for the purposeof making corrections or removing anomalies but to bring in new provisionswhich did not exist earlier. The Legislature may have the power to removethe basis or foundation of the judicial pronouncement but the Legislaturecannot overturn or set aside the judgment, that too retrospectively byBintroducing a new provision. The legislature is bound by the mandamusissued by the Court. A judicial pronouncement is always binding unlessthe very fundamentals on which it is based are altered and the decisioncould not have been given in the altered circumstances. The Legislaturecannot, by way of introducing an amendment, overturn a judicialCpronouncement and declare it to be wrong or a nullity. What the Legislaturecan do is to amend the provisions of the statute to remove the basis ofthe judgment.

24. Applying these principles to the present case it is apparentthat when the decision was rendered in Manakchand Motilal’s caseD(supra) there was no provision providing for payment of interest orprohibiting payment of interest. The Court had observed that even ifsuch a provision prohibiting payment of interest had been there in thestatute such provision would be illegal. Therefore, there was no errorpointed out by the Court which could have been corrected by the StateLegislature. As pointed out above, the State, in fact, first tried to implementEthe judgment by framing rules providing for payment of interest. Later, itincorporated the contentious provisions prohibiting payment of interest.These amendments did not in any way alter the basis of the judgment.

25. Therefore, the State, in so far as it has made the amendedprovisions retrospective, has attempted to nullify the writ of mandamusFissued by the Court in favour of the respondents. This mandamus couldnot have been set at naught by making the provisions retrospective. Thiswould be a direct breach of the doctrine of separation of powers as laiddown in State of Tamil Nadu (supra). We are clearly of the view thatthe State Legislature could not have nullified the judgment passed inGManakchand Motilal’s case (supra) by retrospectively amending theActs. Therefore, the validating Acts in so far as they are retrospective,are held to be illegal.

26. However, since we have clearly held that the observationsmade in Manakchand Motilal’s case (supra) that if the provision prohibitsHpayment of interest then such a provision would be violative of Article 14 of the Constitution, is obiter, the issue whether such an amendmentis valid or not will have to be decided on its own merits.

Issue No. 3

27. To decide this issue we must first understand the concept ofinterest. It has been repeatedly held that interest is basically compensationfor the use or retention of money. In Halsbury’s Laws of England,Fourth Edition, Volume 32, interest has been defined as follows:- “127. Interest in general. Interest is the return or compensationfor the use or retention by one person of a sum of money belongingto or owed to another. Interest accrues from day to day even ifpayable only at intervals, and is, therefore, apportionable in respectof time between persons entitled in succession to the principal.”

According to Law Lexicon, by P. Ramanathan Aiyar 3[rd] Edition(2005) (page 2402) Vol 2:

“Interest” means the time value of the funds or money involved,which, unless otherwise agreed, is calculated at the rate and onthe basis customarily accepted by the banking community for thefunds of money involved.”

In WORDS AND PHRASES permanent editions, Vol 22-page 148,Interest means :-

i) “Interest” is compensation for loss of use of principal. JerseyCity v. Zink, 44 A.2d 825, 828, 133 N.J. Law 437"

ii) “Interest” means compensation for the use or forbearance ofmoney. Commissioner of Internal Revenue v. Meyer, CCA, 139F.2d 256,259"

Black’s Law Dictionary, Sixth Edition (page 812) defines ‘Interest’as:- “For use of money. Interest is the compensation allowed by lawor fixed by the parties for the use or forbearance of borrowedmoney. Jones V. Kansas Gas & Electric Co.222 Kan. 390, 565,P.2d 597, 604.”

28. There is no manner of doubt that normally a person would beentitled to interest for the period he is deprived of the use of money andthe same is used by the person with whom the money is lying. The issue A

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Athat arises for determination is whether a provision providing for non-payment of interest is so inequitable that it can be termed to be arbitraryand held to be violative of Article 14 of the Constitution of India.

29. The respondents have referred to the recommendations madeby the Law Commission of India in its 63[rd] Report. In Para 7.9 of theBReport it was noted that in case of security deposits, if a demand forinterest is not made, interest is not recoverable. This observation is basedon the decision of the Nagpur High Court in Sheikh Mehtab S/o SheikhFarid Mussalman vs. Dharamrao Bhujangrao[11]. The LawCommission felt that in view of the fact that deposits are often taken forperformance of contractual or statutory obligations it would be fair thatCinterest from the date of deposit should be allowed on such deposits.Despite the recommendation of the Law Commission no statutoryprovision was introduced making it obligatory on the part of any authorityto pay interest on deposits.

30. Though various judgments have been cited, we are of theDview that only two are required to be considered. The first is the judgmentrelied upon by the Division Bench of the Karnataka High Court inJagdamba Paper Industries (P) Ltd. (supra). We may note that thesaid judgment does not lay down any proposition of law because thedirection for payment of interest has been issued with the agreement ofEthe parties. This Court in the above judgment had observed that therespondent should pay interest and the respondent agreed to do so. Thiscannot be termed as a judgment laying down law that in every case ofdeposit, interest must be paid.

31. The second important judgment is Ferro Alloys Corpn. Ltd.F(supra). Various issues were raised in this case but we are concernedonly with that portion of the judgment which deals with the payment ofinterest on the security deposits, deposited by the consumers. In thiscase, this Court dealt with the regulations framed by various electricityboards.

G32. There were two types of cases before the Supreme Court.The regulation of some boards provided for payment of very low rate ofinterest. The regulation of some boards did not provide for payment ofinterest on security deposit at all. The issue before the Apex Court waswhether the consumers were entitled to interest on the security deposit.

H11 AIR (31) 1944 Nagpur 330

33. Dealing with the question whether the interest on the securitydeposits is payable in equity or under common law, this Court observedas follows :- “129. Strictly speaking, the word “interest” would apply only totwo cases where there is a relationship of debtor and creditor. Alender of money who allows the borrower to use certain fundsdeprives himself of the use of those funds. He does so becausehe charges interest which may be described as a kind of rent forthe use of the funds. For example, a bank or a lender lending outmoney on payment of interest. In this case, as already noted,there is no relationship of debtor and creditor.”

Thereafter, the Court also held as follows :- “132. The argument of Mr. G. Ramaswamy, learned counsel, thatthe deposit does not contemplate appropriation is not correctbecause in the nature of contract it is liable to be appropriated forthe satisfaction of any amount liable to be paid by the consumerto the Board for violation of any conditions of supply in the contextof wide-scale theft of energy, tampering with the meters and suchother methods adopted by the consumers. Therefore, the saidconsumption security deposit serves not only to secure the interestof the Board for any such violation but should serve as a deterrenton the consumer in discharging his obligations towards the Board.”

The Court clearly held that there was no equitable right to claim interest.

34. This Court also considered the question as to whether thestipulation that no interest is payable on the securities furnished wouldbe un-constitutional and arbitrary, and held as follows:- “143. In the light of the above discussion, we hold that the clausenot providing for interest is neither arbitrary nor palpablyunreasonable, nor even unconscionable. In holding so we haveregard to the following:

1. The consumer made the security deposit in consideration ofthe performance of his obligation for obtaining the service whichis essential to him.

2. The electricity supply is made to the consumers on credit ashas been noted above.

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3. The billing time taken by the Board is to the advantage of theconsumer.

4. Public revenues are blocked in generation, transmission anddistribution of electricity for the purpose of supply. The Boardpays interest on the loans borrowed by the Board. This is in orderBto perform public service. On those payments made by the Boardit gets no interest from the consumers.

5. The Board needs back its blocked money to carry out publicservice with reasonable recompense.

6. The Board is not essentially a commercial organisation to whichCthe consumer has furnished the security to earn interest thereon.”

35. It would also be pertinent to notice that in Ferro Alloys Corpn.Ltd. (supra) after referring to the judgment in Jagdamba PaperIndustries (P) Ltd. (supra), it was observed by this Court thatJagdamba’s case did not decide the issue of payment of interest.D

36. After going through the judgments in Jagdamba’s and FerroAlloys’s case, we are of the view that the High Court erred in relyingupon the judgment in Jagdamba’s case which, in fact, had not decidedthis issue at all. In Ferro Alloys’s case this Court had clearly held thatthe provision providing that no interest is payable was neither arbitraryEnor unreasonable.

37. We may now deal with the contention whether a conditionproviding that no interest is payable for security amount deposited by themoney lenders or pawn brokers is unreasonable. This Court in M/sFatehchand Himmatlal and Others vs. State of Maharashtra[12]heldFthat even if it be accepted that money lending is a trade then alsorestrictions can be placed upon it. The following observations arerelevant :- “29……..Money-lending and trade financing are indubitably“trade” in the broad rubric, but our concern here is blinkered by aGspecific pattern of tragic operations with no heroes but only anti-heroes and victims.

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12 (1977) 2 SCC 670H

38. …….These are weaker sections for whom constitutionalconcern is shown because institutional credit instrumentalities haveignored them. Money lending may be ancillary to commercialactivity and benignant in its effects, but money-lending may alsobe ghastly when it facilitates no flow of trade, no movement ofcommerce, no promotion of intercourse, no servicing of business,but merely stagnates rural economy, strangulates the borrowingcommunity and turns malignant in its repercussions. The formermay surely be trade, but the latter — the law may well say — isnot trade. In this view, we are more inclined to the view that thisnarrow, deleterious pattern of money- lending cannot be classedas “trade”….”

38. Thereafter this Court observed as follows :_

“42.Maybe, some stray money-lenders may be good souls and tostigmatise the lovely and unlovely is simplistic betise. But thelegislature cannot easily make meticulous exceptions and has toproceed on broad categorisations, not singular individualisations.

So viewed, pragmatics overrule punctilious and unconscionablemoney-lenders fall into a defined group…..

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44. Every cause claims its martyr and if the law, necessitated bypractical considerations, makes generalisations which hurt a few,it cannot be helped by the Court……”

39. We must also remember that the businesses of money lendingand pawn broking are usurious businesses and the Government mayrightly impose onerous conditions to restrict or even discourage peoplefrom entering into such businesses. We are not comparing thesebusinesses with the liquor business but the observations of the KeralaHigh Court in Monarch Investments St. Thomas Road, Trichur andOrs. vs. State of Kerala & Ors.[13] are relevant:- “8. Broadly stated, money lending is business. But it has to beremembered that money lenders usually charged heavy interest,impose very onerous conditions for the grant of loans, and thepoor debtor may, in almost all cases be compelled to sell his produceor part with his land. Money lending as a business thus forms partof a pernicious trade requiring greater monetary regulation andcontrol than those imposed on the normal trade or business……..”

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“9. Money-lenders whether described as belonging to a “narrownoxious category” or “as oppressive and back breaking”, whetherthere are honest money lenders or unscrupulous money-lendersform a special class whose business require greater statutorycontrol and supervision and whose “freedom to fleece” has to berestrained in public interest………”

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40. It is thus apparent that the courts have frowned upon the“trade” of money lending. The profession of money lending, may be atrade, but onerous restrictions may be placed on such trade which isdefinitely usurious. These onerous restrictions would be reasonablekeeping in view the nature of the trade. The Legislature in its wisdomCcan decide whether it should make it more difficult for people to engagein the business of money lending and pawn broking.

41. A money lender or a pawn broker applies for licence to do thisbusiness knowing fully well that the security that he shall deposit shallnot earn any interest. He with open eyes accepts the condition which isDpart of the Acts. Nobody forces a person to engage in the trade ofmoney lending or pawn broking. Therefore, the impugned provisionscannot be held to be unreasonable.

42. Lastly, we have to consider the submission as to whether aprovision providing that no interest is payable on the security deposit isso arbitrary, as to make it unconstitutional.E[[14]]

43. In Independent Thought vs. Union of India and Anr.[[14]] thisCourt held that arbitrariness must be writ large to make it un-constitutional.Whether the interest should be paid or not is a matter which partiesdecide amongst themselves. Supposing, there is a contract providingthat no interest will be paid on the amount advanced; can it be said thatFsuch a clause in the contract is so arbitrary that the contract becomesvoid or becomes inoperative. We do not think so. If we make referenceto every day transactions, banks do not pay interest on current account.Supposing, a person’s money lies in the current account for 3-4 years hecannot claim interest only on the ground that the bank would have utilizedthis money for commercial purposes. There are various instances whereGschools, other educational institutions, clubs, societies ask for refundabledeposits on which no interest is payable. These are accepted to be normalroutine practices because these bodies are not engaged in commercialactivities. Even a pawn broker pays no interest on the value of the securitypledged with him.

44. Contracts providing for non-payment of interest on earnestmoney and security deposits have been considered in the context of theArbitration Acts. The Courts have held that in view of the agreemententered into between the parties, the arbitrator cannot award interestprior to the date of passing of the award. In fact, this Court has clearlyheld that the arbitrator cannot award pendente lite interest[15]. Thoughthese authorities do not directly deal with the issue with which we areconcerned, it is obvious that in all these cases, the Court has not construedthe provision of the contract providing for non-payment of interest to bevoid. The said provision has, in fact, been legally enforced. We may,however, note that under the Arbitration Act of 1940, this Court held thatthe arbitrator could award pendente lite interest[16] but under the Arbitrationand Conciliation Act, 1996 the arbitrator cannot award interest prior tothe date of award[17]. The clause for non-payment of interest has notbeen held void in any case. Therefore, we are clearly of the view thatthe impugned provisions prohibiting payment of interest on the amountof security deposits cannot be said to be arbitrary or violative of Article14 of the Constitution of India.

45. In view of the above discussion it is held as follows :-

(i) Section 7-A & 7-B of the M.L. Act and 4-A & 4-B of the P.B.Act are valid from the date of their enactment;

(ii) That the provisions making these amendments retrospectivefrom 1985 are illegal and invalid.

46. In view of the above discussion the appeals are partly allowedand the judgment of the High Court of the Karnataka is set aside in theaforesaid terms. Pending application(s), if any, stand(s) disposed of.

Ankit Gyan

Appeals partly allowed.

15 Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611

16 Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy, (1992)

1 SCC 508

17 Sayeed Ahmed & Company v. State of Uttar Pradesh & Ors., (2009) 12 SCC 26, Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors., (2010) 8 SCC 767, Union of India v. Bright Power Projects (India) Pvt. Ltd., (2015) 9 SCC 695

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