1999 JTR(SC) 60
1999 AIR(SC) 896 ; 1999 AIR(SCW) 568 ; 1999 1 AllCJ 775 ; 1999 1 ArbLR 366 ; 1999 BankJ 302 ; 1999 2 BBCJ(SC) 95 ; 2001 1 BC 87 ; 1999 1 CLT(SC) 105 ; 1999 95 CompCas 805 ; 1999 1 CompLJ 385 ; 1999 2 ICC 59 ; 1999 ISJ(Banking) 232 ; 1999 1 JT 145 ; 1999 1 RAJ 383 ; 1999 1 Scale 131 ; 1999 2 SCC 375 ; 1999 1 SCJ 337 ; 1999 1 SCR 213 ; 1999 1 UJ 443 ; 1999 KHC 998 ; 1999 1 Supreme 196
1999(1) Supreme 196
Supreme Court of India
(From Andhra Pradesh High Court)
B.N. Kirpal & S. Rajendra Babu, JJ.
State Bank of India -Appellant
versus
Yasangi Venkateswara Rao -Respondent
Civil Appeal No. 4607 of 1989
Decided on 21-1-1999
Counsel for the Parties :
For the Appellant : K.N. Raval, Additional Solicitor General, Sanjay Kapur, Rajiv Kapur, Advocates (M.K. Michael), Advocate (NP).
Important Points
1. The Enactment Section 21A of the Banking Companies Regulation Act was clearly within the domain of Parliament and the Section had been validly enacted.
2. If Parties to a bank loans agree that in respect of the amount advanced against a mortgage compound interest will be paid, the Court cannot interfere and reduce the amount of interest agreed to.
3. It is not correct to say that normally when a security is offered in case of mortgage of property, charging of compound interest would be regarded as excessive for mortgage has no relation with whatsoever with quantum of interest to be charged.
Act
Referred
:BANKING COMPANIES REGULATION ACT : S.21(a)
BANKING REGULATIONS ACT : S.21(a)
CIVIL PROCEDURE CODE : O.34 R.2
CONSTITUTION OF INDIA : Sch.7 List.2 Entry.30, Art.246, Art.245
TRANSFER OF PROPERTY ACT : S.58
(A) The impugned legislation operates at the intersection of banking regulation and contract law, where Section 21-A of the Banking Companies Regulation Act, inserted by the Banking Laws (Amendment) Act 1984, creates a substantive bar on judicial review of interest rates charged by banking companies. This provision directly overrides other conflicting laws, including the Usurious Loans Act, 1918, and operates irrespective of whether the transaction involves an agriculturist or a non-agriculturist. The constitutional allocation under Entry 45 of List I grants Parliament exclusive jurisdiction to legislate on banking, rendering State List Entry 30 inapplicable; consequently, the State cannot claim legislative competence over this matter under the doctrine of repugnancy. The provision reflects a legislative policy to shield banking contracts from judicial interference on pricing, thereby fostering uniformity in financial agreements.
(B) The core legal principles revolve around legislative competence, the primacy of Parliamentary law in banking regulation, and the enforceability of contractual interest terms. Courts are estopped from reducing interest rates where a valid statutory provision prohibits such intervention, even in cases involving mortgage securities. The existence of adequate security does not render the charging of compound interest excessive, as the formation of a mortgage is a separate contractual matter from the terms of the loan.
Facts of the case:
A suit for recovery of money was instituted by an appellant before a District Munsif, which passed a preliminary decree that was affirmed on appeal. In the second appeal, the contention regarding the charging of interest arose following the insertion of Section 21-A into the Banking Companies Regulation Act. The High Court invalidated the section on the ground that Parliament lacked jurisdiction, prompting the present appeal.
Findings of Court:
The High Court's observation on legislative competence was erroneous, as Section 21-A falls within the domain of Parliament under Entry 45 of List I. The provision validly applies to all loans advanced by banking companies. The court also rejected the observation that mortgage securities influence the permissibility of compound interest, emphasizing that such terms are a matter of contract.
Issues:
Whether Section 21-A of the Banking Companies Regulation Act is constitutionally valid; whether Parliament has jurisdiction to enact such a provision; whether the courts can reduce interest rates on mortgage loans despite contractual agreement; and whether the security offered affects the assessment of excessive interest.
Ratio Decidendi:
Since Section 21-A is a valid exercise of Parliamentary power under Entry 45 of List I, it ousts judicial interference on the grounds of excessive interest. The provision applies universally to banking transactions, and the nature of the security does not provide a basis for courts to override the agreed interest rate.
Result:
The appeal is allowed, the judgment of the High Court is set aside, and the decree of the lower appellate court is restored without any order as to costs.
(A) The impugned legislation operates at the intersection of banking regulation and contract law, where Section 21-A of the Banking Companies Regulation Act, inserted by the Banking Laws (Amendment) Act 1984, creates a substantive bar on judicial review of interest rates charged by banking companies. This provision directly overrides other conflicting laws, including the Usurious Loans Act, 1918, and operates irrespective of whether the transaction involves an agriculturist or a non-agriculturist. The constitutional allocation under Entry 45 of List I grants Parliament exclusive jurisdiction to legislate on banking, rendering State List Entry 30 inapplicable; consequently, the State cannot claim legislative competence over this matter under the doctrine of repugnancy. The provision reflects a legislative policy to shield banking contracts from judicial interference on pricing, thereby fostering uniformity in financial agreements.
(B) The core legal principles revolve around legislative competence, the primacy of Parliamentary law in banking regulation, and the enforceability of contractual interest terms. Courts are estopped from reducing interest rates where a valid statutory provision prohibits such intervention, even in cases involving mortgage securities. The existence of adequate security does not render the charging of compound interest excessive, as the formation of a mortgage is a separate contractual matter from the terms of the loan.
Facts of the case:
A suit for recovery of money was instituted by an appellant before a District Munsif, which passed a preliminary decree that was affirmed on appeal. In the second appeal, the contention regarding the charging of interest arose following the insertion of Section 21-A into the Banking Companies Regulation Act. The High Court invalidated the section on the ground that Parliament lacked jurisdiction, prompting the present appeal.
Findings of Court:
The High Court's observation on legislative competence was erroneous, as Section 21-A falls within the domain of Parliament under Entry 45 of List I. The provision validly applies to all loans advanced by banking companies. The court also rejected the observation that mortgage securities influence the permissibility of compound interest, emphasizing that such terms are a matter of contract.
Issues:
Whether Section 21-A of the Banking Companies Regulation Act is constitutionally valid; whether Parliament has jurisdiction to enact such a provision; whether the courts can reduce interest rates on mortgage loans despite contractual agreement; and whether the security offered affects the assessment of excessive interest.
Ratio Decidendi:
Since Section 21-A is a valid exercise of Parliamentary power under Entry 45 of List I, it ousts judicial interference on the grounds of excessive interest. The provision applies universally to banking transactions, and the nature of the security does not provide a basis for courts to override the agreed interest rate.
Result:
The appeal is allowed, the judgment of the High Court is set aside, and the decree of the lower appellate court is restored without any order as to costs.
Judgment
Kirpal, J.-The challenge in this appeal is to the judgment of the High Court which, while allowing the appeal filed by the respondent, had declared Section 21-A of the Banking Companies Regulation Act as being ultra vires.
2. Briefly stated the facts are that a suit for recovery of money was filed by the appellant before the District Munsif, Eluru. The trial court passed a preliminary decree and the same was substantially upheld by the District Court.
3. In the second appeal which was filed, one of the contentions which was raised related to the charging of interest by the appellant. After the decree of the trial Court, by the Banking Laws (Amendment) Act 1 of 1984, new Section 21-A was inserted in the Banking Companies Regulation Act. The said Section reads as follows :
“Notwithstanding anything contained in the Usurious Loans Act, 1918 or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be reopened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.”
4. Relying upon the provision, the contention of the appellant was that there would be no occasion for the court to reduce the rate of interest which the borrower had contracted to pay.
5. The High Court in the second appeal, even without an issue being framed to this effect, entertained the plea regarding the validity of the said Section and observed as follows:
“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 regional Governments alone and that the words “Relief of agricultural indebtedness” were specially added by our constitution to enable the State Legislatures to alleviate the suffering of the farmers from their agricultural indebtedness and that the Constituent Assembly had deliberately rejected an amendment moved seeking to transfer this item to the concurrent list, I hold that Section 21-A of the Banking Companies Regulation Act which forbids the Courts from reopening the bank loans on the ground of excessive interest is not a law enacted by the Parliament with respect to the item of Banking.”
6. The learned Additional Solicitor General contends that the aforesaid observation of the High Court is not correct. He also submits that the High Court had erred in observing that “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.”
7. We are unable to understand as to how the High Court could come to the conclusion that the Parliament had no jurisdiction to enact Section 21-A. There can be no doubt that Section 21-A deals with the question of the rate of interest which can be charged by a banking company. Entry 45 of List I of the Seventh Schedule clearly empowers the Parliament to legislate with regard to banking. The enactment of Section 21-A was clearly within the domain of the Parliament. The said Section applies to all types of loans which are granted by a banking company, whether to an agriculturist or a non-agriculturist, and, therefore, reference by the High Court to Entry 30 of List II was of no consequence. In our opinion, the said Section 21-A had been validly enacted.
8. We also find it difficult to agree with the observation of the High Court that normally when a security is offered in the case of mortgage of property, charging of compound interest would be regarded as excessive. Entering into a mortgage is a matter of contract between the parties. If the parties agree that in respect of the amount advanced against a mortgage compound interest will be paid, we fail to understand as to how the court can possibly interfere and reduce the amount of interest agreed to be paid on the loan so taken. The mortgaging of a property is with a view to secure the loan and has no relation whatsoever with the quantum of interest to be charged.
9. With the aforesaid observations, this appeal is allowed, the judgment and decree of the High Court is set aside and that of the lower appellate court restored. No order as to costs.
(C.R.) Appeal allowed.
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