TaxTMI 
TaxTMI 
2000 (5) TMI 959
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....ed on not only in cities but also in small towns and villages in parts of India. The appellants are shroffs engaged in the business of providing credit to the members of the public. The traditional mode of organising the business of shroffs over the past several decades has been by way of partnership firms. The nature of the services practised by the appellants generally involved maintaining a mutual current account where the customer may either place deposit on call or withdraw money on call, without security. The financing activity of the shroff firms was through capital contributions of the partners/proprietor and deposits made by members of the public. Some of the other activities of the shroffs include cheque discounting, the issuance of hundis the collection of cheques from different centres and providing other similar facilities to customers. The services extended by the appellants are availed of by small and medium-sized traders, professionals, salaried workers, agriculturists and individuals. 3. The Reserve Bank of India is a statutory corporation constituted as the Central Banking Authority for the country by the Reserve Bank of India Act, 1934. The RBI is constituted, ....
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.... twenty-five depositors per individual and not more than two hundred and fifty depositors in all, excluding, in either case, depositors who are relatives of any of the individuals constituting the association. (2) Where at the commencement of section 10 of the Banking Laws (Amendment) Act, 1983, the deposits held by any such person are not in accordance with sub-section (1), he shall, before the expiry of a period of two years from the date of such commencement repay such of the deposits as are necessary for bringing the number of depositors within the relative limits specified in that sub-section." The constitutional validity of section 45S was upheld by the Delhi High Court in Kanta Mehta v. Union of India [1997] 62 Comp. Cas. 769. The main challenge was on the ground that it infringed the appellant's right under article 19(1)(g) of the Constitution and was violative of articles 14 and 19 of the Constitution. While upholding the validity of section 45S, the High Court noted that expert reports by study groups had recommended that it would not be in the interest of all, especially the depositors, if unincor- porated bodies such as partnerships were to work as companies w....
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....ny scheme or arrangement or in any other manner, or lending in any manner : Provided that nothing contained in this sub-section shall apply to the receipt of money by an individual by way of loan from any of his relatives or to the receipt of money by a firm by way of loan from the relative or relatives of any of the partners. (2) Where any person referred to in sub-section (1) other than a body corporate holds any deposit on the 1st day of April, 1997 which is not in accordance with sub-section (1), such deposits shall be repaid by that person immediately after such deposit becomes due for repayment or within two years from the date of such commencement, whichever is earlier. (3) On and from the date of 1st day of April, 1997, no person referred to in sub-section (1) shall issue or cause to be issued any advertisement in any form for soliciting deposit. Explanation-For the purpose of this section : (a)A person shall be deemed to be a relative of another if, and only if: (i) they are members of an HUF; or (ii) they are husband and wife; or (iii) the one is related to the other in the manner indicated in the list of relatives below : List of relatives 1. Father, 2. Mother ....
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....any deposit from the public for the purposes of their business activities. There is a complete prohibition on sharafi transactions (mutual current account transactions) which had formed the bedrock of the financing activities of the shroffs. This is because individuals and firms will no longer be entitled to accept deposits on current account and the minimum period for which a non-banking financial company may accept deposit is now one year. The shroffs will now be compelled to convert from partnership firm into limited companies. Challenging the vires of section 45S, it was submitted by the learned counsel for the appellants that shroffs provided the facility of deposit and loan transactions 24 hours a day and this facility was traditionally extended to customers like agriculturists, such as cotton farmers, tobacco farmers, vegetable producers, etc. who had a seasonal need for finance and a periodic surplus of investible funds. The flexibility of deposit and withdrawal of the funds available to this sector which was provided by the shroff community will now cease. It was submitted that the impugned provisions are violative of the appellants' right to carry on their trade and busi....
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....may impose in public interest. It is therefore, necessary to examine whether such restriction is meant to protect social welfare satisfying the need of prevailing social values. (h)The reasonableness has got to be tested both from the procedural and substantive aspect. It should not be bound by processuai perniciousness or jurisprudence of remedies. (j )'Restriction imposed on the Fundamental Rights guaranteed under article 19 of the Constitution must not be arbitrary, unbridled, uncanalised and excessive and also not unreasonably discriminatory. Ex hypothesi, therefore, a restriction to be reasonable must also be consistent with article 14 of the Constitution. (k)In judging the reasonableness of the restriction imposed by clause (6) of article 19, the Court has to bear in mind Directive Principles of State Policy. (l )Ordinarily, any restriction so imposed, which has the effect of promoting or effectuating a directive principle, can be presumed to be a reasonable restriction in public interest." Keeping the aforesaid principles in mind let us now examine the reasons for enacting section 45S. 7. In the affidavit filed by the respondent it has been, inter alia, stated that the....
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....filled with flashy advertisements for attracting business subsequently most of firms had disappeared. Public confidence had been shattered beyond description and the fate of several depositors stood sealed with the tragedy which had overtaken on them having lost their hard earned money. Similarly complaints were also received by the RBI of individuals/firms and unincorporated bodies accepting deposits in Tamil Nadu. The report received from that State recommended that the RBI should oversee the functioning of such financial firms and it ought to consider banning the activities in public interest. It is the case of the RBI that the flexibility, convenience and facilities, etc. provided by the appellants were turning out to be mirages for the gullible public who ultimately had to bear the brunt of the callous ways in which the unincorporated bodies extended credit under the guise of flexibility and convenience. Unquestionably high interest rates were charged by such firms from the borrowers, but when the time came for the return of money borrowed by such firms, a number of such firms had folded up resulting in great loss to the depositors. The RBI, being a statutory expert body entr....
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....articular way. This Hon'ble Court further held that such companies should invest their own working capital and find such resources elsewhere with which the Reserve Bank has no concern. Since the deposit acceptance by unincorporated bodies is incapable of being regulated by virtue of the large number of such bodies, the provisions in the nature of the amended section 45S are necessary and unincorporated bodies should do their business with their own money or institutional finance or money borrowed from relatives. 9. The amended section 45S further expands the provisions of Chapter III-B by making it necessary for all those, who mobilize public funds for deployment in the financial sector, to follow the norms of prudential management which is the internationally accepted practice in relation to those handling public funds. In view of Chapter III-B, particularly in its revised form after the amendment, it would have been highly incongruous to permit people to side-step the discipline of Chapter III-B by refusing to incorporate themselves. In view of this anomaly which has come about it was decided by the Legislature not to permit such activities in the non-corporate sector. Nothing p....
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.... in para 8.25 of its report as under : "8.25 We, therefore, suggest that the Reserve Bank's control may be extended to finance corporations and necessary enabling legislation be passed to that effect. We recognise that the administrative task of watching and regulating the operations of a large number of small firms will be difficult. We, therefore, suggest that if the law permits, only companies may be allowed to do the banking business in the sense of accepting deposits from the public for the purpose of lending or investment. In that case, the Banking Regulation Act would govern the operations of the Bangalore type finance corporations. If, however, the law does not permit it, any scheme of regulation may have as one of its objections the reduction in the number of finance corporations besides, of course, the safeguarding of depositors interest." It was further submitted that the amendments were introduced after taking into account the recommendations of successive committees, appointed by the Bank and Government of India, which had studied the functioning of these bodies. The question of restricting such financial activity by unincorporated bodies, is a question of economic p....
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....and uninterrupted experience'. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and, therefore, it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. At p. 988 it is further held : "That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the Court would be last fitted to pronounce. The Court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The Court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not." Even if these restrictions incorporated in the Act amount to a total prohibition, such action was necessary in the public interest as the mushroom growth of unincorporated bodies accepting deposits had gone beyond control cal....
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....ng an unreasonable restriction on the fundamental right of the appellants to carry on their trade. They can continue lending money as long as they do not borrow from the public. The services rendered by certain informal sectors of the Indian economy could not be belittled. However, in the path of economic progress, if the informal system was sought to be replaced by a more organised system, capable of better regulation and discipline, then this was an economic philosophy reflected by the legislation in question. Such a philosophy might have its merits and demerits. But these were matters of economic policy. They are best left to the wisdom of the Legislature and in policy matters the accepted principle is that the Courts should not interfere. Moreover, in the context of the changed economic scenario the expertise of people dealing with the subject should not be lightly interfered with. The consequences of such interdiction can have large-scale ramifications and can put the clock back for a number of years. The process of rationalisation of the infirmities in the economy can be put in serious jeopardy and therefore, it is necessary that while dealing with economic legislations, thi....
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....or examination and some arguable point is raised, which persuades the Courts to consider the controversy, the legislative will should not normally be put under suspension pending such consideration. It is now well-settled that there is always a presumption in favour of the constitutional validity of any legislation, unless the same is set aside after final hearing and, therefore, the tendency to grant stay of legislation relating to economic reform, at the interim stage, cannot be understood. The system of checks and balances has to be utilised in a balanced manner with the primary objective of accelerating economic growth rather than suspending its growth by doubting its constitutional efficacy at the threshold itself. While the Courts should not abrogate its duty of granting interim injunctions where necessary, equally important is the need to ensure that the judicial discretion does not abrogate from the function of weighing the overwhelming public interest in favour of the continuing operation of a fiscal statute or a piece of economic reform legislation, till on a mature consideration at the final hearing, it is found to be unconstitutional. It is, therefore, necessary to sou....