IMPORTANT POINTS
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;
The provisions making these amendments retrospective from 1985 are illegal and invalid.

Headnote:(a) Karnataka Money Lenders Act, 1961 – Section 7-A r/w section 4-A, Karnataka Pawn Brokers Act, 1961 – High Court basing its decision on absence of any provision prohibiting the payment of interest – Observing that a provision prohibiting payment of interest would be arbitrary and violative of Article 14 of the Constitution of India – In the nature of obiter – Not ratio decidendi. (Para 15)
       I.L.R 1991 KAR 1928 – Referred
       (b) Karnataka Money Lenders Act, 1961 – Section 7-A r/w section 4-A, Karnataka Pawn Brokers Act, 1961 and 1988 amendments – No provision for payment of interest in the Acts at the time of High court judgment – Court observing that provision prohibiting interest would be illegal, had it been there – No error in judgment requiring correction – Later by 1988 amendments State prohibiting interest – These amendments not altering basis of the judgment in any way – State by making the provisions retrospective, trying to nullify High Court judgment – Not permissible – Doctrine of separation of powers – Held, validating Acts to the extent of being retrospective are illegal. (Para 24)
       (1969) 2 SCC 283; 1993 Supp.(1) SCC 96(II); (1995) 6 SCC 16; (2014) 12 SCC 696; (2017) 1 SCC 283 – Relied upon
       I.L.R 1991 KAR 1928 – Referred
       (c) Karnataka Money Lenders Act, 1961 – Section 7-A r/w section 4-A, Karnataka Pawn Brokers Act, 1961 as amended by 1988 amendments – Validity of prohibiting interest – There is no equitable right to claim interest – Provision providing that no interest is payable was neither arbitrary nor unreasonable. (Para 33, 36, 41)
       1993 Supp (4) SCC 136; ; (1977) 2 SCC 670 – Relied upon
       AIR (31) 1944 Nagpur 330; AIR (1989) KER.177 – Cited with approval
       (1983) 4 SCC 508 – Distinguished
       (d) Interpretation of statute – Validity – Arbitrariness writ large would make a provision unconstitutional – Section 7-A & 7-B, Karnataka Money Lenders Act, 1961 and 4-A & 4-B, Karnataka Pawn Brokers Act, 1961 held valid. (Para 43, 44)
       (2017) 10 SCC 800; (2017) 9 SCC 611; (1992) 1 SCC 508; (2009) 12 SCC 26; (2010) 8 SCC 767; (2015) 9 SCC 695 – Relied upon
       Facts of the case:
       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 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.
       Finding of the Court:
       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;
       The provisions making these amendments retrospective from 1985 are illegal and invalid.
       Result: Appeals partly allowed.

JUDGMENT

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 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 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 Karnataka (I.L.R 1991 KAR 1928) 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 Board (1983) 4 SCC 508) held 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

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2018 Supreme(SC) 236

IMPORTANT POINTSSection 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;The provisions making these amendments retrospective from 1985 are illegal and invalid.

Cases Referred (13)

IMPORTANT POINTS
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;
The provisions making these amendments retrospective from 1985 are illegal and invalid.