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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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;

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(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

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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

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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.  

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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.  

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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”

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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

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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

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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

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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.

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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.   

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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

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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

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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

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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  

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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

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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

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