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Thursday, March 15, 2018

Money lending laws = corporate laws - whether the amendments made to the Karnataka Money Lenders Act, 1961 and the Karnataka Pawn Brokers Act, 1961 in the year 1998 providing that the security deposit furnished by the money lenders and pawn brokers in terms of Sections 7-A and 4-A of the Acts respectively shall not carry interest, is constitutional, legal and valid. = we are clearly of the view that 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. 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 retrospective from 1985 are illegal and invalid.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5793 OF 2008
The State of Karnataka & Ors. …. Appellant(s)
Versus
The Karnataka Pawn Brokers Assn. & Ors. … Respondent(s)

With
CIVIL APPEAL NOS. 2874-2878 OF 2018
(Arising out of SLP© Nos. 8652-8656 of 2012)
J U D G M E N T
Deepak Gupta J.
Leave granted in SLP(C) Nos. 8652-8656 of 2012.
2. The main issue raised in these appeals is whether the
amendments made to the Karnataka Money Lenders Act, 1961 and
the Karnataka Pawn Brokers Act, 1961 in the year 1998 providing
1
that the security deposit furnished by the money lenders and pawn
brokers in terms of Sections 7-A and 4-A of the Acts respectively
shall not carry interest, is constitutional, legal and valid.
Background
3. The State of Karnataka enacted the Karnataka Money Lenders
Act, 1961 (for short the M.L. Act) with a view to regulate and control
the transactions of money lending in the State. Section 5 of the
M.L. Act makes it obligatory for any person carrying on the
business of money lending to procure licence before carrying on the
business of money lending.
4. The State of Karnataka simultaneously enacted the Karnataka
Pawn Brokers Act, 1961 (for short the P.B Act) to regulate and
control the business of pawn brokers. Section 3 of the P.B. Act
makes it obligatory for every person desirous of carrying on the
business as a pawn broker to conduct his business only after he
obtains a licence in accordance with the provisions of the Act.
5. The main business of both money lenders and pawn brokers is
to advance or lend money to individuals who approach them for
loans. The only difference is that a pawn broker is authorized to
2
accept valuable articles like gold, gold ornaments etc. as pledge for
security of the payment.
6. In the year 1985, amendments were brought out to both the
Acts. Section 7-A & 7-B were introduced in the M.L. Act and
corresponding Sections 4-A & 4-B were introduced in the P.B. Act.
These amendments provided that the persons desirous of obtaining
a licence 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 brokers and money lenders. A Division Bench of the
Karnataka High Court in Manakchand Motilal vs. State of
Karnataka1 upheld the validity of Sections 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 grounds raised to challenge the
validity of the aforesaid provisions was that there is no provision for
payment of interest on the security amount. The Division Bench
relying upon the judgment of this Court in Jagdamba Paper
Industries (P) Ltd. vs. Haryana State Electricity Board2
 held
1 I.L.R 1991 KAR 1928
2 (1983) 4 SCC 508
3
that the money lenders / pawn brokers were entitled to interest on
the security deposits at the prevailing rate of interest payable by the
scheduled banks on a fixed deposit for a period of one year. The
State Government was also directed to make proper rules in this
behalf. The relevant portion of the judgment reads as follows :-
“16.…..It is true that the Sections do not make a
provision for giving interest but at the same time the
Sections do not prohibit the payment of interest. If the
Sections prohibited the payment of interest, such a
provision would be arbitrary and therefore there would
have been force in the contention of the petitioners
that the provisions were violative of Article 14 on the
ground that it is arbitrary, for, Article 14 strikes at
arbitrariness in State action. (See: E.P. ROYAPPA v.
STATE OF TAMIL NADU, and MANEKA GANDHI v.
UNION OF INDIA). Further, there would have been
also force in the contention of the petitioners that such
a provision which compelled them to deposit
considerable amount in cash with the Government
without any provision for payment of interest was an
unreasonable restriction on their fundamental right to
carry on business guaranteed under Article 19(1)(g) of
the Constitution, It is indisputable that by such
deposit not only the petitioners lose the opportunity of
earning profit on the said amount but the value of the
money also goes down as years pass and thereby the
petitioners would be forced to incur losses instead of
earning profit out of the money, which they would
have invested in their business, but for the
compulsion to deposit a portion of it in the
Government. Therefore, it appears to us that in the
absence of any prohibition in the provisions of the Act
regarding payment of interest, in view of Article 14, the
Government while making Rules for the purposes of
4
the Act under Section 44 of the Money Lenders Act
and Section 22 of the Pawn Brokers Act has not only
the power but also a duty to provide for payment of
interest. As far as the rate of interest is concerned, in
our opinion, as the deposit prescribed under Section
7A of the Money Lenders Act and Section 4A of the
Pawn Brokers Act is for a period of one year, as the
duration of the licence on, each occasion being one
year, the Government should pay interest on the
amount of security deposit made by a licensee at the
rate at which the interest is paid by any Scheduled
Bank on a fixed deposit for one year.”
No appeal was filed by the State of Karnataka against this
judgment. However, the money lenders and pawn brokers filed an
SLP which was dismissed. It appears that thereafter the State
framed certain rules pursuant to the directions of the Division
Bench of the Karnataka High Court. These Rules were also
challenged by the money lenders/pawn brokers. It appears that the
High Court of Karnataka approved some portions of the Rules but,
at the same time, directed that the Rules be reframed in compliance
with the earlier judgment.
7. Thereafter, the State of Karnataka enacted the Karnataka
Money Lenders (Amendment) Act, 1998 and a similar amendment
was also made to the P.B. Act. In this case we are not concerned
5
with the other amendments. We are restricting our discussion only
to sub-section 3 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
xxx xxx xxx
(3) For the purposes of sub-section(2), the amount of
the security payable in a year by a licensee shall be
determined on the basis of the [the amount invested
by him in the business during the previous year [and
such security deposit shall not carry any
interest:]”
3
“Section 4-A. Conditions of licence.-
xxx xxx xxx
xxx xxx xxx
(3) For the purposes of sub-section(2), the amount of
the security payable by a licensee in a year shall be
determined on the basis of the [the amount invested
by him in the business during the previous year] [and
such security deposit shall not carry any
interest]:”4
The highlighted parts of the above Sections were introduced by the
amendments of 1998 but were deemed to be inserted from
31.05.1985 making it retrospective in application.
3 Introduced vide Act No.14 of 1998
4 Introduced vide Act No.9 of 1998
6
8. The association of pawn brokers and money lenders filed writ
petitions in the High Court of Karnataka challenging the
constitutional validity of these amendments. The learned Single
Judge dismissed the writ petitions. However, the Division Bench
allowed the writ petitions and 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 constitutionally valid and
legal, the provisions providing for non-payment of interest on
security deposits were held to be constitutionally bad and were
accordingly set aside.
9. The Division Bench held that as far as interest is concerned,
in the earlier judgment in Manakchand Motilal’s case, the
Karnataka High Court had held that the money lenders and pawn
brokers were entitled to interest on the amount of deposit and the
said judgment had become final since the SLP against the same was
dismissed. The Division Bench further held that the judgment of
the Apex Court in Ferro Alloys Corpn. Ltd. vs. A.P. State
Electricity Board5
 was not applicable and was wrongly relied
upon by the learned Single Judge. It was also observed that the
5 1993 Supp (4) SCC 136
7
High Court in Manakchand Motilal’s case (supra) had clearly held
that in case there was a provision for non-payment of interest then
such provision would be un-constitutional. It was further held that
the State Government could not nullify the judgment of the High
Court in Manakchand Motilal’s case by way of subsequent
amendment.
10. In the appeal filed by the State of Karnataka , Shri Devadatt
Kamath, learned AAG, has raised the following issues :-
(i) Business of money lending or pawn broking is an usurious
business and, therefore, the State wanted to frame a policy to
discourage the business of money lending and pawn broking and
hence stringent conditions have been laid down including the
condition that no interest would be payable on the security. He
also contends that nobody is forced to do the business of money
lending or pawn broking and if persons want to obtain licence then
they will have to submit the security deposits in terms of the Acts.
(ii) The amendments of 1998 are in the nature of validating Acts.
He submits that the State of Karnataka is fully competent to enact
such a provision and, therefore, the State was within its powers to
8
make the amendments to effectively negate the judgment in
Manakchand 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 the
facts of the said case.
(iv) Lastly, that there is no fundamental right or legal right to
claim interest and the State is legally competent to enact a
provision that no interest shall be paid on the amount of security
deposited.
11. On the other hand Mr. Gurukrishna Kumar, learned senior
counsel appearing for the respondents contended that the matter
inter-se parties was settled by the judgment rendered in
Manakchand Motilal’s case (supra). He also contended that the
statute cannot nullify the mandamus issued in the earlier judgment
without removing the basis of the judgment. He further contended
that the judicial decisions which have become final, cannot be set
at naught by the legislature. The main contention was that both
under law and equity a person whose money, which is property, is
kept by another, is entitled to compensation by way of interest for
9
the period for which the money has been retained by the other
party. He, therefore, submitted that the provisions prohibiting the
payment 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
the Karnataka High Court in Manakchand Motilal’s case (supra)?;
(ii) Whether the amendments brought into Section 7-A and
4-A of the M.L. Act and the P.B. Act respectively providing that
security deposit would not carry any interest is contrary to the
judgment in Manakchand Motilal’s case (supra) and the State was
not competent to introduce such amendments; and
(iii) Whether the provisions providing that no interest is
payable are arbitrary and hence violative of Article 14 of the
Constitution of India.
Issue No.1
13. As far as the first issue is concerned, at the outset, we may
note 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
10
M.L. Act and the P.B. Act respectively, in so far as they made a
provision for deposit 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 Court held that the State Government was
entitled to introduce a condition for payment of deposit. The Court,
however, felt that for the provision to be constitutionally valid, the
deposit must carry interest. We have quoted the relevant portion of
the judgment in Manakchand Motilial’s case in the earlier part of
this judgment. The Division Bench noticed that the Acts do not
have any provision for payment of interest and observed that, at the
same time, there was also no prohibition for the payment
of interest.
14. In our view, the observations 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 (supra). 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. We may also
11
point out that 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, in our opinion, was not the ratio decidendi of the case.
15. 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 (supra) mainly on the ground that there was no
provision prohibiting the payment of interest. We are, therefore, of
the considered view that the observation made in Manakchand
Motilal’s case (supra) that a provision prohibiting payment of
interest would be arbitrary and violative of Article 14 of the
12
Constitution of India was a passing observation in the nature of
obiter not arising for decision in the said case.
Issue No.2
16. The second issue is whether the effect of the judgment in
Manakchand Motilal’s case (supra) can be undone by bringing out
amendments in question. A large number of authorities have been
cited in this regard. We may refer to a few of them.
17. In Shri Prithvi Cotton Mills Ltd. and Another vs. Broach
Borough Municipality and Others 6
, a Constitution Bench of this
Court, dealing with the question of validity of a validation Act
passed with a view to get over the judgment of this Court, held that
even it has competence, the Legislature cannot merely pass a law
that a decision of this Court shall not bind. This Court held as
follows :-
“4.…….Granted legislative competence, it is not
sufficient to declare merely that the decision of the
Court shall not bind for that is tantamount to
reversing the decision in exercise of judicial power
which the Legislature does not possess or exercise. A
court’s decision must always bind unless the
conditions on which it is based are so fundamentally
altered that the decision could not have been given in
the altered circumstances…….”
6 1969(2) SCC 283
13
18. In the matter of Cauvery Water Disputes Tribunal, Re7
 a
Constitution Bench of this Court after referring to a large number of
authorities held as follows :-
“76.The principle which emerges from these authorities
is that the legislature can change the basis on which a
decision is given by the Court and thus change the law
in general, which will affect a class of persons and
events at large. It cannot, however, set aside an
individual decision inter parties and affect their rights
and liabilities alone. Such an act on the part of the
legislature amounts to exercising the judicial power of
the State and to functioning 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 held entitled to certain promotions and service benefits from a
particular date. Even though these benefits were given to them the
State did not give them the monetary benefits and, in fact, passed a
law which had the effect of denying the monetary benefits due to
the petitioners, in terms of the judgments earlier passed in their
7 1993 Supp.(1) SCC 96(II)
8 (1995) 6 SCC 16
14
favour. After dealing with the entire law on the subject this Court
held as follows :-
“12. It is now well settled by a catena of decisions of
this Court that a binding judicial pronouncement
between the parties cannot be made ineffective with the
aid of any legislative power by enacting a provision
which in substance overrules such judgment and is not
in the realm of a legislative enactment which displaces
the basis or foundation of the judgment and uniformly
applies to a class of persons concerned with the entire
subject sought to be covered by such an enactment
having retrospective effect………
xxx xxx xxx
xxx xxx xxx
15. We may note at the very outset that in the present
case the High Court had not struck down any
legislation which was sought to be re-enacted after
removing any defect retrospectively by the impugned
provisions. This is a case where on interpretation of
existing law, the High Court had given certain benefits
to the petitioners. That order of mandamus was sought
to be nullified by the enactment of the impugned
provisions in a new statute. This in our view would be
clearly impermissible legislative exercise.”
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 to whether the Legislature could set at naught the decision of the
9 (2014) 12 SCC 696
15
superior courts. After referring to a large number of judgments, this
Court laid down the following principles:-
(i) that the doctrine of separation of powers is an entrenched
principle in the Constitution of India even though there is no specific
provision in the Constitution;
(ii) Independence of Courts from Executive and Legislature is
fundamental to the rule of law and one of the basic tenets of the
Indian Constitution;
(iii) the doctrine of separation of powers between the three organs
of the State – Legislature, Executive and the Judiciary is a
consequence of principles of equality enshrined in Article 14 of the
Constitution of India. Consequently, a law can be set aside on the
ground that it breaches the doctrine of separation of powers since
that would amount to negation of equality under Article 14 of the
Constitution of India;
(iv) the High Courts and the Supreme Court are empowered by the
Constitution of India to determine whether a law made by the
Parliament or State Legislature is void;
16
(v) the doctrine of separation of powers applies to the final
judgments of the courts. The Legislature cannot declare any
decision 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 a court
of law or on coming to know of it aliunde;
(vi) if the Legislature has the power and competence to make a
validating law it can make the law retrospective;
(vii) even where the law is enacted by the Legislature appears
within its competence but if in substance it is shown as an attempt
to interfere with the judicial process, such law can be invalidated
being in breach of the doctrine of separation of powers.
21. The same principle has been reiterated in Cheviti Venkanna
Yadav vs. State of Telangana and Others10 in the following
terms:-
“30.……The legislature has the power to enact laws
including the power to retrospectively amend laws and
thereby remove causes of ineffectiveness or invalidity.
When a law is enacted with retrospective effect, it is not
considered as an encroachment upon judicial power
when the legislature does not directly overrule or reverse
a judicial dictum. The legislature cannot, by way of an
enactment, declare a decision of the court as erroneous
or a nullity, but can amend the statute or the provision
so as to make it applicable to the past……”
10 (2017) 1 SCC 283
17
22. On analysis of the aforesaid judgments it can be said that 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.
23. 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
18
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.
24. Applying these principles to the present case it is apparent
that when the decision was rendered in Manakchand Motilal’s
case (supra) 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.
19
25. 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 (supra). We are clearly of the view that the State Legislature
could not have nullified the judgment passed in Manakchand
Motilal’s case (supra) by retrospectively amending the Acts.
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 observations
made in Manakchand Motilal’s case (supra) that if the provision
prohibits payment of interest then such a provision would be
violative of Article 14 of the Constitution, is obiter, the issue
whether such an amendment is valid or not will have to be decided
on its own merits.
20
Issue No.3
27. To decide this issue we must first understand the concept of
interest. It has been repeatedly held that interest is basically
compensation for 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
compensation for the use or retention by one person of
a sum of money belonging to or owed to another.
Interest accrues from day to day even if payable only
at intervals, and is, therefore, apportionable in respect
of time between persons entitled in succession to the
principal.”
According to Law Lexicon, by P. Ramanathan Aiyar 3rd 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 on the basis customarily accepted by
the banking community for the funds 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. Jersey City v. Zink, 44 A.2d 825, 828, 133
N.J. Law 437”
21
ii) “Interest” means compensation for the use or
forbearance of money. Commissioner of Internal
Revenue v. Meyer, CCA, 139 F.2d 256,259”
Black’s Law Dictionary, Sixth Edition (page 812) defines
‘Interest’ as:-
“For use of money. Interest is the compensation
allowed by law or fixed by the parties for the use or
forbearance of borrowed money. 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 be
entitled to interest for the period he is deprived of the use of money
and the same is used by the person with whom the money is lying.
The issue that arises for determination is whether a provision
providing for non-payment of interest is so inequitable that it can
be termed to be arbitrary and held to be violative of Article 14 of the
Constitution of India.
29. The respondents have referred to the recommendations made
by the Law Commission of India in its 63rd Report. In Para 7.9 of
the Report it was noted that in case of security deposits, if a
demand for interest is not made, interest is not recoverable. This
observation is based on the decision of the Nagpur High Court in
22
Sheikh Mehtab S/o Sheikh Farid Mussalman vs. Dharamrao
Bhujangrao11. The Law Commission felt that in view of the fact
that deposits are often taken for performance of contractual or
statutory obligations it would be fair that interest from the date of
deposit should be allowed on such deposits. Despite the
recommendation of the Law Commission no statutory provision was
introduced making it obligatory on the part of any authority to pay
interest on deposits.
30. Though various judgments have been cited, we are of the view
that only two are required to be considered. The first is the
judgment relied upon by the Division Bench of the Karnataka High
Court in Jagdamba Paper Industries (P) Ltd. (supra). We may
note that the said judgment does not lay down any proposition of
law because the direction for payment of interest has been issued
with the agreement of the parties. This Court in the above
judgment had observed that the respondent should pay interest and
the respondent agreed to do so. This cannot be termed as a
judgment laying down law that in every case of deposit, interest
must be paid.
11 AIR (31) 1944 Nagpur 330
23
31. The second important judgment is Ferro Alloys Corpn. Ltd.
(supra). Various issues were raised in this case but we are
concerned only with that portion of the judgment which deals with
the payment of interest on the security deposits, deposited by the
consumers. In this case, this Court dealt with the regulations
framed by various electricity boards.
32. There were two types of cases before the Supreme Court. The
regulation of some boards provided for payment of very low rate of
interest. The regulation of some boards did not provide for payment
of interest on security deposit at all. The issue before the Apex
Court was whether the consumers were entitled to interest on the
security deposit.
33. Dealing with the question whether the interest on the security
deposits is payable in equity or under common law, this Court
observed as follows :-
“129. Strictly speaking, the word “interest” would
apply only to two cases where there is a relationship of
debtor and creditor. A lender of money who allows the
borrower to use certain funds deprives himself of the
use of those funds. He does so because he charges
interest which may be described as a kind of rent for
the use of the funds. For example, a bank or a lender
lending out money on payment of interest. In this
24
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, that the deposit does not contemplate
appropriation is not correct because in the nature of
contract it is liable to be appropriated for the
satisfaction of any amount liable to be paid by the
consumer to the Board for violation of any conditions
of supply in the context of wide-scale theft of energy,
tampering with the meters and such other methods
adopted by the consumers. Therefore, the said
consumption security deposit serves not only to secure
the interest of the Board for any such violation but
should serve as a deterrent on 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 the
stipulation that no interest is payable on the securities furnished
would be un-constitutional and arbitrary, and held as follows:-
“143. In the light of the above discussion, we hold
that the clause not providing for interest is neither
arbitrary nor palpably unreasonable, nor even
unconscionable. In holding so we have regard to the
following:
1. The consumer made the security deposit in
consideration of the performance of his obligation for
obtaining the service which is essential to him.
25
2. The electricity supply is made to the consumers
on credit as has been noted above.
3. The billing time taken by the Board is to the
advantage of the consumer.
4. Public revenues are blocked in generation,
transmission and distribution of electricity for the
purpose of supply. The Board pays interest on the
loans borrowed by the Board. This is in order to
perform public service. On those payments made by
the Board it gets no interest from the consumers.
5. The Board needs back its blocked money to carry
out public service with reasonable recompense.
6. The Board is not essentially a commercial
organisation to which the 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
Paper Industries (P) Ltd. (supra), it was observed by this Court
that Jagdamba’s case did not decide the issue of payment of
interest.
36. After going through the judgments in Jagdamba’s and
Ferro Alloys’s case, we are of the view that the High Court erred in
relying upon the judgment in Jagdamba’s case which, in fact, had
not decided this issue at all. In Ferro Alloys’s case this Court had
clearly held that the provision providing that no interest is payable
was neither arbitrary nor unreasonable.
26
37. We may now deal with the contention whether a condition
providing that no interest is payable for security amount deposited
by the money lenders or pawn brokers is unreasonable. This Court
in M/s Fatehchand Himmatlal and Others vs. State of
Maharashtra12 held that even if it be accepted that money lending
is a trade then also restrictions can be placed upon it. The
following observations are relevant :-
“29……..Money-lending and trade financing are
indubitably “trade” in the broad rubric, but our
concern here is blinkered by a specific pattern of tragic
operations with no heroes but only anti-heroes and
victims.
xxx xxx xxx
xxx xxx xxx
38.…….These are weaker sections for whom
constitutional concern is shown because institutional
credit instrumentalities have ignored them. Money
lending may be ancillary to commercial activity and
benignant in its effects, but money-lending may also
be ghastly when it facilitates no flow of trade, no
movement of commerce, no promotion of intercourse,
no servicing of business, but merely stagnates rural
economy, strangulates the borrowing community and
turns malignant in its repercussions. The former may
surely be trade, but the latter — the law may well say
— is not trade. In this view, we are more inclined to
the view that this narrow, deleterious pattern of
money- lending cannot be classed as “trade”….”
12 (1977) 2 SCC 670
27
38. Thereafter this Court observed as follows :_
“42.Maybe, some stray money-lenders may be good
souls and to stigmatise the lovely and unlovely is
simplistic betise. But the legislature cannot easily
make meticulous exceptions and has to proceed on
broad categorisations, not singular individualisations.
So viewed, pragmatics overrule punctilious and
unconscionable money-lenders fall into a defined
group…..
xxx xxx xxx
44.Every cause claims its martyr and if the law,
necessitated by practical considerations, makes
generalisations which hurt a few, it cannot be helped
by the Court……”
39. We must also remember that 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. We are not
comparing these businesses with the liquor business but the
observations of the Kerala High Court in Monarch Investments St.
Thomas Road, Trichur and Ors. vs. State of Kerala & Ors.
13
are relevant:-
“8.Broadly stated, money lending is business. But
it has to be remembered that money lenders usually
charged heavy interest, impose very onerous
conditions for the grant of loans, and the poor debtor
may, in almost all cases be compelled to sell his
13 AIR (1989) KER.177
28
produce or part with his land. Money lending as a
business thus forms part of a pernicious trade
requiring greater monetary regulation and control than
those imposed on the normal trade or business……..”
“9.Money-lenders whether described as belonging
to a “narrow noxious category” or “as oppressive and
back breaking”, whether there are honest money
lenders or unscrupulous money-lenders form a special
class whose business require greater statutory control
and supervision and whose “freedom to fleece” has to
be restrained in public interest………”
40. 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.
41. 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
29
engage in the trade of money lending or pawn broking. Therefore,
the impugned provisions cannot be held to be unreasonable.
42. Lastly, we have to consider the submission as to whether a
provision providing that no interest is payable on the security
deposit is so arbitrary, as to make it unconstitutional.
43. In Independent Thought vs. Union of India and Anr.
14
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; can it be said that such a clause in the contract is so
arbitrary that the contract becomes void or becomes inoperative.
We do not think so. If we make reference to 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 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
14 (2017) 10 SCC 800
30
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.
44. 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 interest15. Though these authorities do not directly
deal with the issue with which we are concerned, 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. We may, however,
note that under the Arbitration Act of 1940, this Court held that the
arbitrator could award pendente lite interest16 but under the
Arbitration and Conciliation Act, 1996 the arbitrator cannot award
interest prior to the date of award17. The clause for non-payment of
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
31
interest has not been held void in any case. Therefore, we are
clearly of the view that 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.
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 retrospective
from 1985 are illegal and invalid.
46. In view of the above discussion the appeals are partly allowed
and the judgment of the High Court of the Karnataka is set aside in
the aforesaid terms. Pending application(s), if any, stand(s)
disposed of.
....................................J.
(MADAN B. LOKUR)
....................................J.
(DEEPAK GUPTA)
New Delhi
March 15, 2018
& Ors., (2010) 8 SCC 767, Union of India v. Bright Power Projects (India) Pvt. Ltd., (2015) 9
SCC 695
32

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