Supreme Court Upholds Section 21A of Banking Regulation Act, but Carves Out Exception for State Debt Relief Acts in Agricultural Indebtedness Cases (2018)

Date of the Judgment: 16 February 2018

Citation: (2018) INSC 123

Judges: R.F. Nariman, J., Navin Sinha, J.

Can a central law on banking override state laws designed to protect farmers from debt? The Supreme Court of India recently tackled this complex question, examining the constitutional validity of Section 21A of the Banking Regulation Act, 1949. This section prevents courts from scrutinizing interest rates charged by banks, potentially harming indebted farmers. The Court had to balance the central government’s power over banking with state governments’ responsibility for agricultural debt relief.

Case Background

The case began as a Public Interest Litigation (PIL) filed under Article 32 of the Constitution of India. The petitioners, concerned citizens, challenged the constitutional validity of Section 21A of the Banking Regulation Act, 1949. This section, introduced in 1984, prevents courts from reopening loan transactions between banks and their debtors, even if the interest rates charged are deemed excessive. The petitioners argued that this provision has led to severe exploitation of farmers, contributing to a high rate of farmer suicides due to insurmountable debt burdens.

The petitioners highlighted a report by the Parliamentary Standing Committee on Agriculture (2006-2007), which recommended scrapping Section 21A. The committee noted that the Usurious Loans Act of 1918, which allowed courts to intervene in cases of excessive interest, was effectively nullified for banks by Section 21A. The petitioners also pointed out that many states have enacted debt relief laws to protect farmers, which are undermined by Section 21A.

Timeline

Legal Framework

The core of the legal framework in this case involves several key pieces of legislation and constitutional provisions:

• Section 21A of the Banking Regulation Act, 1949: This section, introduced by the Banking Laws (Amendment) Act of 1983, states: “Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 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 re-opened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.” This provision prevents courts from reviewing interest rates charged by banks.
• The Usurious Loans Act, 1918: This Act allows courts to intervene in cases where interest rates are excessive and transactions are unfair. Section 3 of the Act allows courts to “re-open the transaction, take an account between the parties and relieve the debtor of all liability in respect of any excessive interest.”
• State Debt Relief Acts: Various states have enacted laws to provide relief to indebted farmers, often allowing for the reduction or waiver of interest and principal amounts.
• Article 246 of the Constitution of India: This article defines the legislative powers of the Parliament and State Legislatures. It includes:
  • List I (Union List), Entry 45: “Banking.”
  • List II (State List), Entry 30: “Money-lending and money-lenders; relief of agricultural indebtedness.”

Arguments

Arguments by the Petitioners:

• The petitioners argued that Section 21A is unconstitutional as it allows banks to charge usurious rates of interest without judicial oversight, leading to farmer exploitation and suicides.
• They contended that the Usurious Loans Act, 1918, and various State Debt Relief Acts, which aim to protect debtors, are rendered ineffective by Section 21A. They emphasized the historical context, noting that even under British rule, laws existed to prevent excessive interest rates.
• The petitioners relied on the Constituent Assembly Debates to show that the “relief of agricultural indebtedness” was intentionally placed in the State List, giving states exclusive power to legislate on this matter. They also highlighted that a proposal to include it in the Concurrent List was rejected.
• They cited the Andhra Pradesh High Court’s judgment in State Bank of India, In re, AIR 1986 AP 291, which had struck down Section 21A. Though this judgment was later overturned by the Supreme Court in State Bank of India v. Yasangi Venkateswara Rao (1999) 2 SCC 375, the petitioners argued that the Supreme Court’s decision lacked a proper ratio decidendi and was per incuriam.
• They argued that Section 21A violates Article 14 of the Constitution, being both discriminatory and arbitrary, and should be struck down. Alternatively, they proposed that the section be read down when applied to agricultural loans.

Arguments by the Respondents:

• The Reserve Bank of India (RBI), represented by Shri Jayant Bhushan, argued that Section 21A falls squarely under Entry 45 of List I (“Banking”) of the Constitution, giving Parliament the power to legislate on this matter.
• They contended that even if Section 21A incidentally touches upon Entry 30 of List II (“relief of agricultural indebtedness”), the principle of federal paramountcy dictates that the central law should prevail. They argued that “relief of agricultural indebtedness” should not include debts to banks.
• The Union of India, represented by Ms. Shirin Khajuria, argued that the “relief of agricultural indebtedness” should be read in conjunction with “money lending and money lenders,” implying that it applies only to non-banking entities. They asserted that if it were intended to apply to banks, it would have been a separate entry.
• They emphasized that the RBI and the Central Government have taken various measures to assist farmers, including issuing guidelines and setting up expert groups. They maintained that the Supreme Court’s judgment in Yasangi Venkateswara Rao (supra) laid down a clear ratio decidendi that should be followed.
• They argued that there was no specific pleading in the writ petition to demonstrate how Article 14 had been violated, and that Section 21A enjoys a presumption of constitutionality.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. What is the scope of Entry 45, List I (“Banking”) vis-à-vis Entry 30, List II (“Money-lending and money-lenders; relief of agricultural indebtedness”) of the Seventh Schedule to the Constitution?
2. Whether Section 21A of the Banking Regulation Act can be said to prevail over State Debt Relief Acts in the event of a clash between the two?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Rustom Cavasjee Cooper (Banks Nationalisation) v. Union of India, (1970) 1 SCC 248:* Defined the scope of “banking” as accepting deposits for lending or investment, not including all commercial activities.
• Union of India v. Delhi High Court Bar Assn., (2002) 4 SCC 275:* Held that “banking” includes all aspects of banking, including ancillary matters like debt recovery.
• Prafulla Kumar Mukherjee v. Bank of Commerce Ltd., Khulna, AIR 1947 PC 60:* Explained the doctrine of pith and substance, stating that the true nature of an enactment must be determined.
• Virendra Pal Singh v. Distt. Asstt. Registrar, Coop. Societies, (1980) 4 SCC 109:* Held that the U.P. Cooperative Societies Act was within the State’s legislative competence, even if it touched upon banking.
• Harish Tara Refractories (P) Ltd. v. Certificate Officer, Sader Ranchi, (1994) 5 SCC 324:* Held that the Bihar and Orissa Public Demands Recovery Act was referable to the Concurrent List, not the Union List.
• Fatehchand Himmatlal & Ors. v. State of Maharashtra etc., (1977) 2 SCC 670:* Upheld the Maharashtra Debt Relief Act, stating that “relief of agricultural indebtedness” falls under the State’s legislative competence.
• Pathumma and Ors. v. State of Kerala and Ors., (1978) 2 SCC 1:* Upheld the Kerala Debt Agriculturists Relief Act, stating that “relief of agricultural indebtedness” includes setting aside sales of property.
• State Bank of India, In re, AIR 1986 AP 291:* The Court agreed with the reasoning of the Andhra Pradesh High Court.
• State Bank of India v. Yasangi Venkateswara Rao, (1999) 2 SCC 375:* The Court found that the judgment in Yasangi Venkateswara Rao lacked a proper ratio decidendi and was per incuriam and therefore not binding.
• Hoechst Pharmaceuticals Ltd. v. State of Bihar, (1983) 3 SCR 130:* Explained the federal supremacy principle, stating that Union power prevails in case of irreconcilable conflict.
• Sudhir Chandra Nawn v. WTO, (1969) 1 SCR 108:* Reiterated that Parliament’s power supersedes State power in case of conflict.
• Calcutta Gas Co. (Proprietary) Ltd. v. State of W.B., 1962 Supp (3) SCR 1:* Stressed the need to harmonize entries and give effect to both, avoiding redundancy.
• Central Bank of India v. Ravindra, (2002) 1 SCC 367:* Stated that agricultural borrowings are to be treated differently, and interest capitalization cannot be permitted except on annual or six-monthly rests.
• Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) (P) Ltd., (1963) 3 SCR 209:* Held that a general entry must be construed as excluding a specific entry.
• Subrahmanyan Chettiar v. Muttuswami Goundan, AIR 1941 FC 47:* Discussed the doctrine of incidental trenching and its limits, with a dissenting opinion emphasizing the clash between central and state laws.
• Attorney General for Canada v. Attorney General for British Columbia (1930 A.C. 111):* Summarized principles on incidental encroachment, stating it is permissible if the field is unoccupied.
• Federation of Hotels and Restaurants v. Union of India, (1989) 3 SCC 634:* Stated that if an Act of Parliament is covered by a Union List entry, no restriction can be read into Parliament’s power.
• In Re CP & Berar Sales of Motor Spirit & Lubricants Taxation Act, 1938 AIR 1939 FC 1:* Set out principles for interpreting legislative powers, including a liberal interpretation and examining the true nature of the enactment.
• UCO Bank v. Dipak Debbarma, (2017) 2 SCC 585:* Held that the federal structure can nullify an incidental encroachment by parliamentary legislation where the dominant legislation is the State legislation.
• Special Reference No.1 of 2001, (2004) 4 SCC 489:* Stated that entries should be harmonized, and a central law prevails only if there is an irreconcilable conflict.
• Dalbir Singh v. State of Punjab (1979) 3 SCR 1059:* Explained the concept of ratio decidendi and its importance in precedents.
• Som Prakash Rekhi v. Union of India (1981) 2 SCR 111:* Held that a laconic discussion and limited ratio in a previous case is not binding.
• Municipal Corpn. of Delhi v. Gurnam Kaur, (1989) 1 SCC 101:* Held that a decision given without argument or reference to relevant provisions is per incuriam and not binding.
• State of M.P. v. Narmada Bachao Andolan, (2011) 7 SCC 639:* Explained the principle of per incuriam, stating that it applies to decisions made in ignorance of a statute or binding authority.

The Court’s reasoning was based on the following points:

• Harmonious Construction: The Court emphasized the need to harmonize the entries in the Union and State Lists, giving effect to both wherever possible, rather than adopting an approach that would render one of them redundant.
• Pith and Substance: The Court reiterated that the doctrine of pith and substance is used to determine the true nature of a law, and that incidental trenching upon another list does not invalidate a law if it falls within one list.
• Incidental Trenching and Unoccupied Field: The Court held that the doctrine of incidental trenching and unoccupied field applies to both Parliamentary and State legislations. It stated that where a central law incidentally encroaches upon a State subject, the State law will prevail if the State has already legislated on the subject.
• Federal Supremacy: The Court clarified that the principle of federal supremacy applies only when there is an irreconcilable conflict between entries, and not when a State is exercising its exclusive legislative power.
• Ratio Decidendi: The Court explained that the ratio decidendi of a judgment is the principle of law adopted having regard to the line of reasoning of the Judge which alone binds in future cases. It held that the judgment in Yasangi Venkateswara Rao lacked a proper ratio decidendi and was per incuriam.

The Court quoted the following from the judgment:

• “Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 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 re-opened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.”
• “re-open the transaction, take an account between the parties and relieve the debtor of all liability in respect of any excessive interest.”
• “Subjects must still overlap, and where they do the question must be asked what in pith and substance is the effect of the enactment of which complaint is made, and in what list is its true nature and character to be found. If these questions could not be asked, much beneficent legislation would be stifled at birth, and many ofuseful and necessary powers of the State would be rendered nugatory.”
• “The widest possible meaning must be given to the entries in the legislative lists. The entries should be interpreted liberally and not in a narrow or pedantic sense. The entries should be given not only their literal meaning but also their extended meaning. The entries should be construed to include all ancillary and subsidiary matters. The entries should be construed to include all matters which are reasonably connected to the entry.”
• “The doctrine of pith and substance is used to determine the true nature of a law. The doctrine of incidental trenching is used to determine whether a law that incidentally encroaches upon another list is valid. The doctrine of occupied field is used to determine whether a State law is valid when a central law already exists on the same subject.”
• “When a State law is enacted in the State’s exclusive domain, the federal supremacy principle does not apply. The State law will prevail over a central law in the State’s exclusive domain.”
• “The ratio decidendi of a judgment is the principle of law adopted having regard to the line of reasoning of the Judge which alone binds in future cases.”
• “A decision given without argument or reference to relevant provisions is per incuriam and not binding.”

Final Decision

The Supreme Court delivered the following final decision:

• Section 21A is constitutionally valid: The Court upheld the constitutional validity of Section 21A of the Banking Regulation Act, 1949, stating that it falls within the legislative competence of the Parliament under Entry 45 of List I (Union List) of the Constitution.
• Exception for State Debt Relief Acts: The Court carved out an exception for State Debt Relief Acts, holding that these Acts will prevail over Section 21A in cases of agricultural indebtedness. The Court emphasized that “relief of agricultural indebtedness” is a distinct subject matter within the exclusive legislative domain of the States under Entry 30 of List II (State List).
• Yasangi Venkateswara Rao Overruled: The Court overruled its previous judgment in State Bank of India v. Yasangi Venkateswara Rao (1999) 2 SCC 375, stating that it lacked a proper ratio decidendi and was per incuriam.

Flowchart of the Court’s Decision

Implications

The judgment has significant implications for various stakeholders:

• For Farmers: The judgment provides a crucial safeguard for farmers by ensuring that State Debt Relief Acts can be effectively implemented. Farmers can now seek relief from excessive interest rates and debt burdens through these state-level mechanisms.
• For Banks: While Section 21A remains valid, banks will need to be mindful of State Debt Relief Acts, especially in cases of agricultural loans. This may require banks to adopt more reasonable lending practices and interest rates.
• For State Governments: The judgment reinforces the power of state governments to legislate on matters related to agricultural indebtedness. This allows states to implement targeted debt relief measures for farmers, addressing local needs and conditions.
• For the Legal System: The judgment clarifies the interplay between central and state laws, particularly in the context of banking and agriculture. It also emphasizes the importance of a proper ratio decidendi in judicial precedents.

Conclusion

The Supreme Court’s judgment in Jayant Verma & Ors. vs. Union of India & Ors. is a landmark ruling that balances the central government’s power over banking with the states’ responsibility for agricultural debt relief. While upholding the constitutional validity of Section 21A of the Banking Regulation Act, the Court carved out a significant exception for State Debt Relief Acts in cases of agricultural indebtedness. This decision ensures that farmers have access to state-level mechanisms for debt relief, providing a crucial safety net against exploitation by banks. The ruling underscores the importance of a harmonious interpretation of the legislative lists and the principle of federalism in the Indian Constitution.