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TMI Blog1985 (10) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the stipulation of agreement providing for payment of compound interest. The loan agreement provided for the payment of 11/2 of interest over and above the prevailing bank rate but subject to a condition of the debtor paying a minimum of 81/2% per annum with quarterly rests on the borrowed amount. Thus the principal amount of loan earned every quarter interest which was added in that quarter to the principal amount. The principal amount thus got geometrically swollen up. In telugu this would be described as (Vernacular omitted). This method of charging interest known as the method of charging compound interest is always condemned. Lord Wright in Riches v. West Minster Bank Ltd. 1947 AC 390 refers to the saint-socialist scholar Prof. Tawney to say that money-lending was condemned by the medieval mind as usurious. In our country, charging of compound interest is particularly condemned in relation to the loans advanced to the agriculturists. Many reports of the famine and other commissions appointed to look into the causes for the economic misery of the Indian farmer found agricultural indebtedness as one of the principal causes for the economic misery of the farmer and asked fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract between him and the Bank providing for charging of compound interest was contrary to the provisions of S. 13 of the above A.P. Agriculturists Relief Act of 1938, and also to the Usurious Loans Act 10 of 1918 as amended by the Madras Amendment Act VIII of 1937. The second objection of the defendant was upheld by the Courts below giving rise to this second appeal filed by the plaintiff bank. The question : -- 3. The only question that falls for consideration of this Court in this second appeal is whether the finding of the Courts below upon the surviving point of the controversy between the parties should be upheld. Previous judgments of this Court : -- 4. In one or two recent judgments of this Court for which I spoke similar questions of law were considered. In Indian Bank v. Krishnamurthy (1983) 1 Andh LT 357 : AIR 1983 A.P. 347 a Division Bench held that the Indian Bank constituted by the mandate of S. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act was not a Corporation constituted by a special Indian law and that S. 4(1)(e) of the A.P. Agriculturists Relief Act of 1938 to the extent it confers exemption from the applicability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstance is that the above S. 21-A of the Banking Companies Regulation Act has the effect of interdicting the application of the A.P. Agriculturists Relief Act of 1938 and the Usurious Loans Act of 1918 as amended by Madras Amendment Act VII of 1937 to the loans given by the Banks to the agriculturists. The Banking Companies Regulation Act and its meaning:-- 7. The Banking Companies Regulation Act No. 1 of 1984 had been enacted by the Parliament subsequent to the rendering of the above judgments by this Court. This Court had, therefore, no occasion to consider earlier either the constitutional validity or the scope and meaning of the abovesaid S. 21-A of the Banking Companies Regulation Act. The question whether the abovesaid S. 21-A of the Banking Companies Regulation Act has taken away the applicability of the A.P. Agriculturists Relief Act of 1938 and the Usurious Loans Act of 1918 as amended by Madras Amendment Act VIII of 1937 now falls for consideration. S. 21-A of the Banking Companies Regulation Act reads thus : Notwithstanding anything contained in the Usurious Loans Act, 1918, or any other law relating to indebtedness in force in any State, a transaction between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S. 21-A of the Banking Companies Regulation Act cannot be read as forbidding the courts from reopening a loan on any of those grounds excepting the ground of excessive interest. The ground of excessive interest which alone is made by S. 21-A unavailable to the courts to reopen the transaction does not bar the court jurisdiction to reopen the transaction on other equally efficacious grounds which are different in law From ground of excessive interest. The meaning of excessive interest rate : -- 8. Before we ascertain the legal meaning of the words interest being excessive we may note that economic thought found justification for charging interest. Aristotle laid it down that all money was in its nature barren meaning thereby that money was not the source of wealth. This deep insight into the economic nature and origin of the wealth of nations greatly influenced the climate of the logical opinion and classical economic opinion both of which condemned the institution of interest as one reaping a harvest without sowing. Adam Smith who extolled as the source of wealth could not justify on economic grounds charging of interest. But the running of an industrial, commercial econom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of compound interest cannot be agreed in advance, but numerous exceptions apply, particularly in the case of bunking institutions and current accounts (Art. 248 of the Civil Code, Art. 355 of the Commercial Code). In Switzerland (Art. 314) the law is similar, and the same seems to apply to Scotland. In the United States of America the broad rule is that contracts to pay compound interest are void. Reverting Back to excessive interest :-- 10. In deciding whether rate of interest is excessive or not courts will have regard to the particular facts of a case before them. Such an enquiry will be conducted by the courts primarily on the basis of the security given by the debtor for the repayment of the loan and the solvency of the debtor and the market rate of interest prevailing. Normally where security offered by the debtor is good and adequate as it is in a case of mortgage of property the courts will hold charging of compound interest to be excessive. Rate of interest, which may not be excessive on an unsecured loan may, therefore, be found to be excessive by the courts where there is good security. See Kruse v. Seeley (1924) 1 Ch. 136. Even rates of simple interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue. Sec. 21A of the Banking Companies Regulation Act is, therefore, applicable only to individual cases. Its purpose is to forbid the courts from making an individual investigation and to forbid the courts entertaining a particular defence of the defendant. The legal effect of S. 21-A of the Banking Companies Regulation Act is nothing more and nothing less and is nothing else, than to prevent the courts from investigating into one type of defence that might be set up by the defendants and which would require a composite inquiry into that question. Sec. 21-A compared with Agriculturists' Relief Act:-- 12. Now, the question is, is the purpose of the A.P. Agriculturists Relief Act of 1938 the same as that of S. 21-A of the Banking Companies Regulation Act of 1938. It appears to me that it is not. On the other hand, the legal effect of the A.P. Agriculturists' Relief Act is totally different from the legal effect of S. 21-A of the Banking Companies Regulation Act. The questions tried and the issues decided under the A.P. Agriculturists Relief Act are not the same as those under S. 21-A of the Banking Companies Regulation Act. The A.P. Agriculturists Relief Act is more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 1938 has nothing to do with the individual merits or demerits of a particular case. In fact, it is conceivable for a court of law to find that 15% of simple interest charged to an agriculturist in a particular case is not excessive, but even in such a case the court would be without liberty to grant a decree for the suit amount because the courts under S. 13 of the A.P. Agriculturists Relief Act cannot pass a decree for 15% interest. Because passing of a decree for 15% interest would be contrary to the above S. 13 of the A.P. Agriculturists Relief Act of 1938 and not because the court finds it an excessive rate of interest the courts refuse to grant a decree at 15%. In other words, the grounds for granting of relief to a farmer under the provisions of the A.P. Agriculturists Relief Act are general statutory prohibition which are qualitatively different from the ground of excess interest which is mentioned in S. 21-A of the Banking Companies Regulation Act. In implementing S. 13 of the A.P. Agriculturists Relief Act, it is not at all the concern of the courts to find out whether the rate of interest is excessive or not. Such an enquiry will be wholly outside the scope of the Agric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t easy for me to hold that by the use of the generic word 'debtor' S. 21-A of the Banking Companies Regulation Act intends to refer to the agriculturists. Agriculturists constitute a special and particular economic segment of the society found to be in dire need of statutory relief from their agricultural indebtedness. Only a small fraction of Bank loans are advanced to agriculturists. They are largely given to industrialists, consumers and even to speculators. The A.P. Agriculturists Relief Act, 1938 is a special law enacted to relieve the State Economy of a particular ailment found by the elected representatives to be afflicting it. That Act is therefore made applicable only to agriculturists. By the time S. 21-A of the Banking Companies Regulation Act has come to be enacted, the law is that the Agriculturists Relief Act covers the Bank loans advanced to agriculturists. Parliament which must have been aware of the applicability of the A.P. Agriculturists Act to the Bank loans did not specifically refer to the Bank loans advanced to the agriculturists and deny the farmers relief to which they are found by the State Legislature to be in need of. One would expect the Parliam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction was substantially unfair, but such presumption may be rebutted by proof of special circumstances justifying the rate of interest. 15. To the above, a proviso was added to the effect that in the case of loans to agriculturists if compound interest is charged, the court shall presume that the interest is excessive. It would be noted that even the above amendments do not make the power of reopening turn upon excessive rate of interest. The power of reopening a loan transaction can be exercised under the amended Usuruious Loans Act only on the ground that the transaction between the parties is substantially unfair. It is true that in reaching that conclusion, the Amending Act directs the court to presume that in all cases where compound interest is charged to farmers, interest is excessive and that, therefore, the transaction was substantially unfair between the parties unless special circumstances justifying the charging of compound interest were shown to exist. That direction merely adds a rebuttable presumption made by the statute in holding that the transaction is substantially unfair. But it does not alter the grounds contained in the enacting clauses of the amended Us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islative capacity of the Parliament and so long it did not violate the constitutional injunctions contained in the chapter on fundamental rights. So far. I have assumed that S. 21-A of the parliamentary law is constitutionally valid in both respects and could therefore override the operation of the A.P. Agriculturists' Relief Act of 1938 and Usurious Loans Act of 1918 with its Madras amendment. We will now have to test that assumption and see whether S. 21-A of the Banking Companies Regulation Act enacted by the Parliament can, while carrying the meaning which the appellant Bank attributes to it as forbidding the courts not to scale down the debts owed by the agriculturists to the Banks on the ground of excessive interest, be regarded as intra vires of the legislative powers of the Parliament. Fundamental rights apart, S. 21. A can be upheld only if that section is found to be a law with respect to one of the items in List I of the seventh schedule. 17. Under our constitutional system of distribution of Legislative powers between the Union on the one hand and the States on the other, about 97 matters are listed in the Union list, also called list I, with respect to which law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receiving of moneys on current or deposit account and payment of cheques paid in by a customer. Without doubt it can be asserted that neither money lending in general nor denial of grant of relief of agricultural indebtedness in particular which is the substance of S. 21-A will come within the scope of the basic meaning of the word Banking in Item 45 of the Union list. (See Vol. 2 H.L.E. 4th Eda and also the judgment of the court of appeal in United Dominions Trust v. Kirkwood (1966) 1 All ER 968). If that were all, S. 21-A would not be characterised as a law with respect to the item of Banking in Union List. But the courts have attributed to the word 'Banking' an extended meaning which goes far beyond its primary meaning. Interpreting the head 15 of the enumerated classes of the exclusive federal subjects in the British North America Act, the Privy Council laid down in Attorney General for Alberta v. Attorney General for Canada 1947 AC 503 : (AIR 1948 PC 194) that the word Banking in that entry carried an extended meaning including grant of credit by Banks to its customers. It was on that basis the Privy Council in that case struck down. The Alberta Bill of Rights Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the legislative subject of agricultural indebtedness is always treated as separate and distinct from Banking and is allotted to the exclusive jurisdiction of the regional governments while the subject of Banking is always allotted to the Union. The unimpeachable evidence of our Constitutional history and the relevant constitutional texts furnish convincing support for this view. Both under the 1935 Act as well as under the present Constitution, Banking is treated as a federal subject to be legislated upon by the Parliament alone. Under the 1933 Act, there was no specific item of relief of agricultural indebtedness. Under the 1935 Act there was only money-lending and money lenders as a part of item 27 of the Provincial List. Under the Draft Constitution, while retaining the item of money-lending and money lenders as a State but an independent subject of legislation it is proposed that a separate and distinct legislative item namely Relief of Agricultural indebtedness should be added to the exclusive State list in item 34. According to that draft proposal, item 34 read as Money-lending and Moneylenders, relief of agricultural indebtedness . By means of that proposal of the draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial reductions. The money-lender in the country dominates more in that strata of the agricultural population which is relatively worse off. The boom can hardly be said to have benefited that strata. On the other hand, the debt represents accumalations of decades. The debt legislation in the various provinces has not, admittedly, been able to touch even the fringe of the problem. We feel it necessary, therefore, that the debt should be compulsorily scaled down and then taken over by the State. Experiments made in this direction in the Province of Madras, for example, serve as a useful pointer. Under the working of the Madras Agriculturists' Relief Act of 1938 debts were scaled down by about 47 per cent and the provisions of the Act can, by no logic, be characterised as drastic. In the Punjab, under the operation of the Debt Conciliation Boards, debts amounting to 40 lakhs were settled for about 14 lakhs. If should, therefore, be possible and must be considered as necessary to scale down the present debts to about 25 per cent, before they are taken over by the State. Assuming the present indebtedness to amount to about ₹ 1,000/- crores the debt to be taken over by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imony to those economic facts. One of the major pledges of the Indian National Movement is to eradicate this economic State of helplessness of the Indian agriculturists. But none had ever more forcibly described this economic tragedy of the Indian farmer than Mahatma Gandhi who in his famous statement made to an Indian Criminal court trying him for sedition. The Mahatma said: No sophistry, no jugglery in figures can explain away evidence that the skeletons in many villages present to a naked eye. I have no doubt whatsoever that both England and the town-dwellers of India will have to answer, if there is a God above, for this crime against humanity, which is perhaps unequalled in human history. 21. The Constituent Assembly rejected Prof. Saxena's amendment to transfer the item 34 to the concurrent list. The rejection of Proof. Saxena's amendment to transfer the item of relief of agricultural indebtedness to the concurrent list is a clear proof of the fact that in the view of the Constitution, the power, the responsibility and accountability for solving the problem of agricultural indebtedness should not be shared by the States with the Parliament and that it should exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of minds which, though strong in concept, are weak in vision and slow in capturing the historical truths. Our history is full of evidence of the British colonial exploitation of this country which necessitated taking of measures for providing relief of agricultural indebtedness. Examining the matter from that angle, I am led to the conclusion that the legislative subject of grant of credit to the agriculturists is treated by the Constitution to be an exclusive State subject with which the Union has no concern. 23. The Schemes of the Canadian Constitution and the Austrialian Constitution are not at all identical without constitutional scheme. No famine, no pestilence, no disease did hit the Canadian farmer or Australian farmer with the same force or frequency as they hit the Indian farmers nor did they hit them with on such a gigantic scale. The absence of the item of relief of agricultural indebtedness being mentioned as a separate and distinct item of regional jurisdiction, in those Constitutions is understandable. In the absence of such a separate enumeration in those conditions the need to subtract from the general meaning of the word Banking in the federal list the spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and powers of the State Legislatures to grant relief of agricultural indebtedness. In that view, I am in most respectful agreement of the judgment of the Full Bench of the Madras High Court in Nagaratnam v. Seshayya, AIR 1939 Mad 361. 27. Our Supreme Court in Fatechand v. State of Maharashtra, AIR 1977 SC 1825 at P. 1844 categorically declared that money lending and debt liquidation are within the State's legislative competence. It said : Entry 30 in List II is Money-lending and money-lenders, Relief of Agricultural indebtedness . If common sense and common English are components of constitutional construction, relief against loans by scaling down, discharging, reducing interest on principal and staying the realisation of debts will, among other things, fall squarely within the topic. The whole gamut of money-lending and debt-liquidation is thus within the State's legislative competence. 28. In Pathumma v. State of Kerala, AIR 1978 SC 771 our Supreme Court had reiterated the above view of the item No. 30 of List II. 29. Considering the fact that grant of debt relief has always been treated in our country as a legislative subject to be passed upon by the reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Constitution. Such a law would violently discriminate against the hapless borrowers. Law cannot, in its majestic abstraction, forget the social realities that those who are compelled to sleep under the bridges cannot be treated as equal to those who can live in palaces and that it is always necessary for our law to adopt a realistic policy of protective discrimination of the weak, the helpless and the hapless for realising the egalitarian goals of our constitutional directives and fundamental rights. Sec. 21-A of the Banking Companies Regulation Act does not merely wink at inequality. By withdrawing legal defences traditionally available to the debtors from the arena of court litigation S. 21-A actively enforces inequality. The fact that ours is the world's longest Constitution with express powers of judicial review conferred on the superior courts has heightened the responsibility of the courts for social, political and economic transformation of our society. Clearly the elaboration of the details in our Constitution shows that the courts are intended to be active vehicles of social transformation in several areas. It is for this purpose the Constitution directly confers the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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