TaxTMI 
TaxTMI 
1991 (3) TMI 395
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....1961 and persons who are doing business as Money Lenders having taken licences under the Karnataka Money Lenders Act, 1961 have questioned the constitutional validity of the Karnataka Pawn Brokers (Amendment) Act, 1985 and the Karnataka Money Lenders (Amendment) Act, 1985 on the ground that the provisions of the said Acts are violative of Articles 14 and 19 of the Constitution of India and they have also questioned the Constitutional validity of Section 4(2)(c) and Section 23(2) of the Karnataka Pawn Brokers Act, 1961 as volatile of Articles 14 and 19 of the Constitution. 2. The material facts necessary for the disposal of these cases are these:- With the object of making better provisions for the regulation and control of transactions of money lending in the State, the Legislature enacted the Karnataka Money Lenders Act, 1961 ('Money Lenders Act' for short). Section 2(10) of the Act defines the expression 'Money Lender'. It reads:- "2(10) "Money Lender" means (i) an individual; or (ii) an undivided Hindu family; or (iii) a company or (iv) an unincorporated body of individuals; who or which, (a) carries on business of money lending in the....
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....r repayment. After having taken the licences, the petitioners have been carrying on the business for the last nearly two decades. 3. In the year 1985 the State Legislature made Amendments to the two enactments, by which Section 7A and 7B were introduced into the Money Lenders Act and Section 4A and Section 4B were introduced into the Pawn Brokers Act. The two provisions are similar. Therefore, it is sufficient to set out the provisions of Section 7A and 7B of the Money Lenders Act. They read:- A. CONDITION OF LICENCE - (1) Every applicant who has been granted a licence under Section 7, whether before or after the commencement of the Karnataka Money Lenders (Amendment) Act, 1985 shall within thirty days from the date of such commencement, and thereafter before the last day of October of every year pay security deposit as provided in Sub-section (2). (2) Every licensee specified in column (2) of the table below shall in the prescribed manner deposit in the Government treasury the amount specified in the corresponding entry in column (3) of the said table by way of security for the due observance of the conditions of the licence. TABLE 1 2 3 (1) A licensee who lends l....
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....ble in Section 7A of the Money Lenders Act and Section 4A of the Pawn Brokers Act was prescribed as a condition for securing licence. In view of the incorporation of Section 7A and 7B into the Money Lenders Act by the Karnataka Money Lenders (Amendment) Act, 1985 and the incorporation of Sections 4A and 4B into the Karnataka Pawn Brokers (Amendment) Act, 1985, the petitioners are challenging the Constitutional validity of the said provisions on the ground they are violative of Articles 14 and 19(1)(g) of the Constitution. Petitioners, who are pawn brokers have also challenged Section 4(2)(c) and Section 23(2) of the Pawn Brokers Act on the ground that by these provisions a pawn broker is also required to take licence under the Money Lenders Act and there was no justification for compelling a pawn broker to take two licences, one under the Pawn Brokers Act and another under the Money Lenders Act and such insistence was violative of Articles 14 and 19 of the Constitution. 4. Sarvasri K. Srinivasan, C.S. Vaidyanathan, J. Jestmal, Paras Jain, C.H. Jadhav, Indrajeet Shah, learned Counsel addressed arguments on behalf of the petitioners. Sri N. Devadas, learned Government Advocate addre....
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....r raising additional resources to reduce this deficit have already been indicated and are listed in Annex VII. I expect that with the full benefit of ₹ 87 crores from those measures, the overall deficit at the end of 1984-85 would be ₹ 182,61 Crores." "ANNEX VII Net Additional Resource Mobilisation Measures. (Rs. in Crores) 1. Rural Development Cess on (a) Sales Tax 42.00 (b) Motor Vehicles-Tax 8.00 2. Rationalisation of Sales Tax 3.00 3. Security deposits from pawn brokers and money lenders 9.00 4. Tax on Mineral Rights 15.00 5. Levy of conversion fine 9.00 6. Urban water supply cess 1.00 ₹ 87.00 Crores." The above speech makes it clear that the impugned provisions requiring pawn brokers and money lenders to make deposits had nothing to do with the object and purpose of the Act, but was based on irrelevant consideration, namely, that the State was short of finances and therefore the State wanted to collect money to the tune of about ₹ 9 crores by way of compelling the money lenders and pawn brokers to make deposits. Therefore, the provisions are not only violative of Articles 14 and 19 but it is also beyo....
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....heir business. V) When the Legislature had made provision for taking deposits from pawn brokers and money lenders, there should have been a provision for making payment of interest on the amount deposited and failure to make a provision for payment of interest on the substantial amount taken as deposit is not only arbitrary but also unreasonable restriction on the fundamental right of the petitioners to carry on business guaranteed under Article 19(1)(g) of the Constitution. VI) The provisions of Section 7B of the Money Lenders Act and Section 4B of the Pawn Brokers Act, which provide for forfeiture of the security deposit was arbitrary and violative of Articles 14 and 19 of the Constitution. 6. In support of the contention that the provisions are violative of Articles 14 and 19 of the Constitution, the learned Counsel for the petitioners relied on the Judgment of the Supreme Court BACHAN SINGH v. STATE OF PUNJAB, AIR1982SC1325 . The relevant portion of the Judgment reads:- "It is clear on first principle that Sub-clauses (a) to (g) of Clause (1) of Article 19 enact certain fundamental freedoms and if Sub-clauses (2) to (G) were not there, any law contravening one or mo....
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....eness can be laid down as applicable to all cases". The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied, the value of human life the disproportion of the imposition, the social philosophy of the Constitution and the prevailing conditions at the time would all enter into the judicial verdict. And we would do well to bear in mind that in evaluating such elusive factors and forming his own conception of what is reasonable in all the circumstances of a given case, it is inevitable that the social philosophy and the scale of values of the judge participating in the decision would play a very important part." The learned Counsel also submitted that there was no material collected by the State regarding the activities of money lenders and pawn brokers which are found to be injurious to the interest of the general public which constituted the basis for imposing restrictions such as those imposed by Section 7A of the Money Lenders Act and Section 4A of the Pawn Brokers Act. In support of the submission, the learned Counsel also relied on Paragraph-16 of the Judgment of....
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....le depends upon the object of the State action, is to seriously erode its effectiveness. Examining the problem not merely in semantics but in the broader and more appropriate context of the constitutional scheme which aims at affording the individual the fullest protection of his basic rights and on that foundation to erect a structure of a truly democratic polity, the conclusion, in our Judgment, is inevitable that the validity of the State action must be adjudged in the light of its operation upon the rights of the individual and groups of individuals in all their dimensions." In support of the contention that the forfeiture clause contained in Section 7A of the Money Lenders Act and Section 4A of the Pawn Brokers Act are violative of Articles 14 and 19 of the Constitution, the learned Counsel relied on the Division Bench Judgment of the Kerala High Court in MONARCH INVESTMENTS, ST. THOMAS ROAD, TRICHUR v. STATE OF KERALA, AIR1989Ker177 in which the provisions of Section 16A of the Kerala Money Lenders Act providing for forfeiture of the security deposit was held to be violative of Articles 14 and 19(1)(g) of the Constitution. The relevant portion of the Judgment on which t....
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.... 11 of 1985) was issued. This Bill seeks to replace the said ordinance." He also referred to paragraphs-8 and 10 of the Statement of Objections. They read:- "8. The Respondents-State has been pleased to impose the security deposit as a measure to impose discipline in the business of Money Lending and Pawn Brokerage by promulgating ordinances. The business of Money Lending/Pawn Brokerage, is being regulated with the sole object of regulating the business for the maximum benefit of the general public. The total aggregate amount lent during the year is taken as criteria to determine the quantum of security deposit. The prescription of security deposit regulates the business of money lending and pawn brokerage in accordance with the provisions of the Act and Rules and enables the State to protect the interest of common people. It is needless to mention, that more than 60% of the articles pledged belong to poor and weaker sections of the society. The petitioners are not permitted to take advantage of the helplessness of the poor people and exploit the situation. Hence, it is necessary in the interest of public to have some check and control over the activities of the Pawn B....
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.... Prosecution proceedings in these 25 cases. During the year under report 7 cases have been decided by the Court and the accused in these 7 cases have been convicted. At the end of the year 52 cases have been pending in the various Courts for trial." He submitted that though this was a report for the period subsequent to the impugned Amendments, it indicates the mal-practices in the business which required to be checked. 8. As regards the submission made by the learned Counsel for the petitioners that even assuming that there was justification for compelling the pawn brokers to make the deposit as they were receiving valuable articles including Gold articles as pledges, there was no justification for insisting on the deposit to be made by the money lenders, the learned Counsel submitted that there was no substance in the contention, for the reason that the money lenders were authorised to lend money on the security of immovable property such as agricultural lands and therefore there was greater necessity for insisting on the deposit by the money lenders in order to afford protection to poor agriculturists, who approach the money lenders for borrowing money. As regards the su....
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....o exist with the purpose or object of the legislation, so determined. The question next is of the manner in which the purpose or object of the enactment has to be determined and the material which can be used for this exercise. xxx xxx xxx 18. Not only this, to sustain the presumption of constitutionality, consideration may be had even to matters of common knowledge; the history of the times; and every conceivable state of facts existing at the time of legislation which can be assumed. Even though for the purpose of construing the meaning of the enacted provision, it is not permissible to use these aids, yet it is permissible to look into the historical facts and surrounding circumstances for ascertaining the evil sought to be remedied. The distinction between the purpose or object of the legislation and the legislative intention, indicated earlier, is significant in this exercise to emphasise the availability of larger material to the Court for reliance when determining the purpose or object of the legislation as distinguished from the meaning of the enacted provision. 19. We propose to utilise these permissible aids for discerning the purpose or object of the legislative pr....
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....e Government was not taking loan of any amount from the money lenders or pawn brokers but it was only a deposit taken as security for carrying on the business as money lenders or as pawn brokers in accordance with the terms and conditions of the licence and therefore there was no substance in the contention of the learned Counsel that the provision should have been made for payment of interest. 11. As regards the forfeiture clause incorporated in Section 7B of the Money Lenders Act and Section 4B of the Pawn Brokers Act, the learned Government Advocate submitted that Clause (5) of Section 7B of the Money Lenders Act indicates the object and purpose namely payment of an amount to the borrower affected by the acts of the licensee by the Registrar. He submitted that there was sufficient safeguards in that Section for effecting forfeiture and there is also a right of appeal against forfeiture and therefore cannot be regarded as violative of Articles 14 and 19(1)(g) of the Constitution. The learned Counsel distinguished the Judgment of the Kerala High Court on the ground that the provision of Section 16A of the Kerala Money Lenders Act was held to be unconstitutional for the reason tha....
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....etence." Therefore it is clear, the classification of Money Lenders and Pawn Brokers for purpose of regulating their money lending activity is reasonable. Further, regarding the impugned Amendments as can be seen from the Statement of Objects and Reasons annexed to the Bill and paragraphs 8 and 10 of the Statement of Objections extracted earlier, the provisions were intended to safeguard the interests of the borrowers, who mostly belong to poorer sections of the society, if and when they are adversely affected by the activities of the money lenders or pawn brokers, as the case may be. The classification therefore has also a rational nexus to the object sought to be achieved. The restriction imposed by the Amendments, subject to the correct interpretation of the two Sections which is indicated later, is neither arbitrary, nor can be regarded as an unreasonable restriction on the Fundamental Right of the petitioners to carry on their business. Therefore, the impugned provisions do not violate Article 14 or 19(1)(9) of the Constitution. It is also not possible to accept the contention of the petitioners that the reasons furnished in the Budget Speech of the Chief Minister really....
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....the basis of total turnover and not on the basis of the actual amount invested in the business by a money lender or by a pawn broker, as the case may be, would be an unreasonable restriction and also arbitrary. We are of the view that the basis of the challenge is in view of the wrong interpretation of the provision by the State. The stand taken by the State regarding the meaning of the two provisions is set out in paragraph-8 of the Statement of Objections extracted earlier. For the purpose of deciding the amount to be deposited by a licensee, the aggregate amount lent during the previous year is taken as the basis. In our opinion, when Section 7A and Section 4A says that a person who lends an amount less than ₹ 1 lakh in a year has to deposit ₹ 5,000/- it means that if the amount which he has utilised in his lending business is less than ₹ 1 lakh he is required to make a deposit of ₹ 5,000/- only. For instance, if a money lender has invested only a sum of ₹ 25,000/- in the business, the fact that he advanced it as short term loans for one month or two months and immediately on repayment of the loan he advanced it again as short term loan for like per....
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.... security is to be paid shall be deemed to be the aggregate amount lent by him during the previous year." It is based on this provision that the contention is advanced that the recycling of the same amount as loan to different persons in the same year can take the aggregate amount lent by him exceed even the capital utilised for lending. This Sub-section (2B) speaks "of the amount lent by the licencee for the year for which the security is to be paid" and by a statutory fiction "the aggregate amount lent" during the previous year is reckoned as the amount lent in that year. When the amount lent in an year is the basis for the security to be paid, and the total amount lent for that year has to be taken note of, it seems to be clear that it is the total amount utilised for lending in the previous year that furnishes the guide for the security for the current year. Thus if one lakh alone was utilised for the purpose of lending, the fact that the same amount was lent to different persons the same year does not increase the total amount lent; the total amount lent remains at rupees one lakh. "The aggregate amount lent" in Sub-section (2B) has thus to b....
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....HESE v. I.T.O., [1981]131ITR597(SC) ). Therefore, we hold that on a correct interpretation of the two provisions, the criteria for deciding the amount to be deposited by a licensee is the amount invested by him in the business and not the aggregate of the loans advanced more than once utilising the same amount invested in the business. 15. Now coming to the submission made by the learned Counsel for the petitioners that not making a provision for the payment of interest is invalid, the learned Counsel for the petitioners relied on paragraph-11 of the Judgment of the Supreme Court in JAGADAMBA PAPER INDUSTRIES v. HARYANA STATE ELECTRICITY BOARD, [1984]1SCR165 and on the Division Bench Judgment of this Court rendered following the aforesaid Judgment in BANGALORE WATER SUPPLY AND SEWERAGE BOARD v. RAMAKRISHNA AITHAL, ILR1986KAR488 of the said Judgment reads:- "17. The next question for consideration is the submission made by the learned Counsel for the petitioners that in the event of the Court accepting the plea of the Board that the deposit required under Regulation 7A is in the nature of security deposit for ensuring payment in the light of the Judgment of the Supreme Court....
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....ent which requires that the Electricity Board and the Water Board to pay interest on the amount of security deposited, collected from the consumers has no application to the cases, for the reason, in the said case it was held that when the Water Board and the Electricity Board were charging interest on the amount of bills which were not paid in time, they should also pay interest on the amount of deposit. We are not impressed by the distinction sought to be made out by the learned Government Advocate. In this behalf the relevant observation in the Judgment of the Supreme Court in the case of Jagadamba Paper Industries is of significance. They are: "Since the amount is hold as security, we indicated to the Counsel for the Board that security amount should bear the same interest as admissible on fixed deposits of Scheduled Banks for a term of years...." In the present case also the money lenders and pawn brokers are required to deposit a substantial amount to be held as security for the observance of the conditions of the licence and as that money remains with the Government, it is most unreasonable for the State to say that no interest would be paid on the amount so dep....
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....ry, for, Article 14 strikes at arbitrariness in State action. (See: E.P. ROYAPPA v. STATE OF TAMIL NADU, (1974)ILLJ172SC and MANEKA GANDHI v. UNION OF INDIA, [1978]2SCR621 ). 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 the Act under Section 44 of the Money Lenders Act and Sec....
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....nd as the taking of money lenders' licence is made a condition for securing eligibility to the pawn brokers licence, having fixed the licence fee of ₹ 100/- for money lenders' licence and only ₹ 50/- is fixed as licence fee for pawn brokers. In our opinion, the mere fact that the pawn broker is also required to take money lenders licence, in the circumstances, cannot be regarded as violative of either Article 14 or Article 19(1)(g) of the Constitution. 18. The learned Counsel for the petitioners next contended that there are no clear provisions for adjustment of the deposits already made either under Section 7A of the Money Lenders Act or under Section 4A of the Pawn Brokers Act or for refund. In our opinion, even in the absence of any such provision, if a person has already made deposit as prescribed under Section 7A of the Money Lenders Act or under Section 4A of the Pawn Brokers Act and if in the next year on account of higher investment of money in the business an individual pawn broker or money lender comes within the next higher slab or any other higher slab and he is required to make a higher deposit he can only be called upon to deposit the balance of t....