2018 (3) TMI 1064 - SC - Indian Laws

Constitutional validity of 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. What is the scope, ambit and effect of the judgment of the Karnataka High Court in Manakchand Motilal s case 1991 (3) TMI 395 - SUPREME COURT OF INDIA , where the Division Bench 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? - Held that - It would also be apposite to mention that after making the aforesaid observation, the Division Bench again noted that in the absence of any prohibition in the provisions of the Acts, regarding payment of interest, in view of Article 14, the Government while making rules must provide for payment of interest. This itself was a clear indicator that the Court decided the issue in Manakchand Motilal s case mainly on the ground that there was no provision prohibiting the payment of interest - the observation made in Manakchand Motilal s case that a provision prohibiting payment of interest would be arbitrary and violative of Article 14 of the Constitution of India was a passing observation in the nature of obiter not arising for decision in the said case. Whether the effect of the judgment in Manakchand Motilal s case can be undone by bringing out amendments in question? - Held 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 - 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 - 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 - 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. Whether the provisions providing that no interest is payable are arbitrary and hence violative of Article 14 of the Constitution of India? - Held that - Contracts providing for non-payment of interest on earnest money and security deposits have been considered in the context of the Arbitration Acts. The Courts have held that in view of the agreement entered into between the parties, the arbitrator cannot award interest prior to the date of passing of the award. In fact, this Court has clearly held that the arbitrator cannot award pendente lite interest - 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. 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 - That the provisions making these amendments retrospective from 1985 are illegal and invalid. Appeal allowed in part.

Summary

Issues Involved:

1. Constitutionality and validity of amendments to the Karnataka Money Lenders Act, 1961, and the Karnataka Pawn Brokers Act, 1961, regarding non-payment of interest on security deposits.
2. Scope and effect of the judgment in Manakchand Motilal’s case.
3. Competence of the State to introduce amendments contrary to the judgment in Manakchand Motilal’s case.
4. Whether provisions providing for non-payment of interest are arbitrary and violative of Article 14 of the Constitution of India.

Issue-wise Detailed Analysis:

Issue No. 1: Scope and Effect of the Judgment in Manakchand Motilal’s Case

The primary issue in Manakchand Motilal’s case was the validity of Sections 7-A and 4-A of the M.L. Act and the P.B. Act, which mandated a security deposit for obtaining a license. The Court upheld the State's right to require a security deposit but emphasized that for the provision to be constitutionally valid, the deposit must carry interest. The Court noted that the Acts did not prohibit the payment of interest and thus directed the State to make rules for the payment of interest. The observations regarding the unconstitutionality of a provision prohibiting interest were deemed obiter dicta, as there was no such provision at the time.

Issue No. 2: Competence of the State to Introduce Amendments

The State of Karnataka enacted amendments in 1998 to Sections 7-A and 4-A of the M.L. Act and the P.B. Act, explicitly stating that the security deposits would not carry interest. These amendments were made retrospective from 1985. The Court analyzed whether the State could nullify the judgment in Manakchand Motilal’s case by such amendments. The Court cited precedents, emphasizing that while the Legislature can amend laws retrospectively to remove the basis of a judicial decision, it cannot merely overturn a judicial decision. The amendments did not alter the basis of the judgment in Manakchand Motilal’s case but attempted to nullify the mandamus issued by the Court. Therefore, the retrospective application of the amendments was held to be illegal.

Issue No. 3: Arbitrariness and Violation of Article 14

The Court examined whether the provision for non-payment of interest on security deposits was arbitrary and violative of Article 14. Interest is considered compensation for the use or retention of money. The Court noted that while normally a person is entitled to interest for the period they are deprived of the use of money, it is not an absolute right. The Court referred to the judgment in Ferro Alloys Corpn. Ltd., which held that a provision not providing for interest is neither arbitrary nor unreasonable. The Court also observed that the businesses of money lending and pawn broking are usurious and the State may impose onerous conditions to regulate or discourage such businesses. Since the licensees accept the condition of non-payment of interest with full knowledge, the provision cannot be deemed unreasonable or arbitrary.

Conclusion:

1. Sections 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.
2. The provisions making these amendments retrospective from 1985 are illegal and invalid.

The appeals were partly allowed, and the judgment of the Karnataka High Court was set aside to the extent that it invalidated the retrospective application of the amendments.