Section 21A of Banking Regulation Act will not operate in States with Debt Relief Act on ‘agricultural indebtedness’

In what could be a significant judgment in relation to agricultural indebtedness and loans to farmers, the Supreme Court today upheld the Constitutional validity of Section 21A of the Banking Regulation Act, 1949. The Court, however, held that the said provision will not operate in those States where there is a State Debt Relief Act that deals with the subject matter of relief of agricultural indebtedness..The judgment delivered by Justices Rohinton Nariman and Navin Sinha also contains an exhaustive discussion on the interplay between Lists I and II of the Constitution in the event of incidental encroachment of a Parliamentary statute upon State List..The challenge.Section 21A prohibits Courts from reopening a debt between a banking company and its debtor, on the ground that the rate of interest charged by the banking company is excessive. It keeps out of the Usurious Loans Act, 1918 and/or any other State legislation relating to indebtedness, and then declares that no such loan transaction shall be reopened by any court on the ground of charging of excessive rates of interest..The petition challenging the vires of Section 21A was filed by certain public-spirited citizens. The petitioners placed reliance on the report of the Parliamentary Standing Committee on Agriculture for the year 2006-2007 to say that Section 21A should be abolished, insofar as it applies to rural indebtedness..According to the petitioners, a total number of 2,56,913 farmers committed suicide in India between the years 1995 to 2010, and this was because, and directly linked to, usurious rates of interest being charged from them by banks, which cannot be interfered with by courts, thanks to Section 21A..Submissions of parties.Sanjay Parikh for petitioners.Advocate Sanjay Parikh, who appeared for petitioners, had placed reliance on the Usurious Loans Act to show that in British India, even a foreign power was alive to the fact that courts need to interdict excessive rates of interest, and were given complete freedom to do so, depending on the facts of each case, including the plight of the farmer debtor..He had also referred to and relied upon various State Debt Relief Acts, by which every State has recognized and provided, by way of legislation, that loans and interest thereon either be waived totally or partially or that courts may come to the rescue of the farmer debtor by lowering the rate of interest..He strongly relied upon the Supreme Court’s judgments in Fatehchand Himmatlal & Ors. v. State of Maharashtra etc. [(1977) 2 SCC 670] and Pathumma and Ors. v. State of Kerala and Ors. [(1978) 2 SCC 1], to show that State Debt Relief Acts were unsuccessfully challenged in the Supreme Court, and are referable to Entry 30, List II of the Seventh Schedule to the Constitution..He referred to the Constituent Assembly Debates to show that that part of Entry 30, List II, which speaks of relief of agricultural indebtedness, was introduced by the Constitution for the first time, not being in the predecessor entry in the Government of India Act, 1935. He also referred to and relied upon a proposed amendment by Shibban Lal Saxena, by which it was sought to place Entry 30 into the Concurrent List, so that Parliament may also have a say in the relief of agricultural indebtedness. However, this was turned down by the Constituent Assembly, so that this subject remained exclusively within the domain of the State legislature..Relying on report of the Parliamentary Standing Committee on Agriculture for the year 2006- 2007, Parikh argued that Parliament was alive to the fact that Section 21A ought to be abolished, as it was a very harsh provision which led to farmer suicides on a mass scale. He also contended that the provision impinged upon Article 14, both in its discriminatory aspect as well as the fact that it was an arbitrary piece of legislation which needs to be struck down. He also argued that, in any case, as an alternative argument, Section 21 A should be read down when applied to loans given by banks to the rural agricultural sector..Jayant Bhushan for RBI.Senior Advocate Jayant Bhushan, appearing on behalf of the Reserve Bank of India, referred to Article 246 of the Constitution and to several judgments thereunder and stated that Section 21A squarely falls within Entry 45, List I of the Seventh Schedule to the Constitution, which is “banking”..According to him, even if some part of the Section were to incidentally trench upon Entry 30, List II, having regard to the federal paramountcy principle, State legislation under Entry 30, List II must give way to Section 21A and not the other way around. He also argued that the best way of reconciling Entry 30, List II with Entry 45, List I was to say that “relief of agricultural indebtedness” will not include indebtedness to banks..Shirin Khajuria for Central government.Shirin Khajuria appeared and argued for Central government. It was her contention that “relief of agricultural indebtedness”, that is in the latter part of Entry 30, List II of the Seventh Schedule to the Constitution, should be read along with “money lending and money lenders” which is the first part of the said entry. That being the case, relief of agricultural indebtedness would apply only to money lenders and money lending and not to banks at all. If the subject of relief of agricultural indebtedness were not linked to money lending, it would have found itself in a separate entry in the State List, which is not the case..She also relied upon a number of judgments, and read from two counter affidavits filed by the Union of India to show how the Central Government was fully alive to the plight of poor farmers, and had set up expert groups to report on the same..Judgment.Wide ambit of Entry 45 of List I.The Court first dealt with the ambit of Entry 45, List I. Relying on various precedents, it held that Entry 45, List I has been construed widely as including not only banking, but all aspects incidental or ancillary to banking, so long as the field of “banking” does not trench upon trading activities not incidental to banking, which would fall under Entry 26, List II..Regarding the Banking Regulation Act it held that Act deals with the subject “banking” insofar as it licenses banking companies and cooperative banks, and seeks to regulate them. It then held that Section 21A relates to the business of banking since it is a provision which seeks to interdict on the reopening of loan transactions between a banking company and its debtor, on the ground that the rate of interest charged is excessive..It therefore held that statute and the impugned provision fall within Entry 45, List I..On the scope of Entry 30, List II.The Court turned down the submission of the Central government that the expression “relief of agricultural indebtedness” must take colour from the expression “money lending and money lenders” preceding it in Entry 30, List II of the Seventh Schedule..“We are afraid we cannot agree for several reasons. Firstly, purely grammatically, a semicolon separates the two expressions showing that they are not inextricably connected. Also, we have already adverted to several judgments, including Pathumma (supra), which state that the widest and the most liberal possible meaning must be given to Entry 30, List II of the Seventh Schedule. The latter part of this entry cannot be narrowed down by any rule of noscitur a sociis, or taking colour from the former part of the entry….”.The Court, further held that the fact that “money lending and money lenders” is separate and distinct from “relief of agricultural indebtedness” was also clear from the fact that money lending is not restricted to the agricultural sector, but would include, money lent to all persons, including purely commercial transactions..The harmonization of Entry 45, List I and Entry 30, List II.Having made the above conclusions, the court proceeded to state that the real question was how to harmonize Entry 45, List I and Entry, 30 List II..a. Delineation of banking and relief of agricultural indebtedness.Explaining Article 246, the Court held that where two entries in the Union List and the State List, respectively, have a head-on collision and are irreconcilable, then, as a last resort, the entry in the State List is to give way to the entry in the Union List..“But, this is only as a last resort. First, it is incumbent upon the Court to harmonise the entries, if possible, by giving effect to both and not rendering any one of them otiose.”.The Court then went on to delineate ‘banking’ and ‘relief of agricultural indebtedness’..“Qua the general entry “banking” under Entry 45, List I, which deals with banks of all kinds and the lending by banks as well as recovery of debts by banks generally, Entry 30, List II, which deals with relief of agricultural indebtedness, is special, for the reason that indebtedness itself is only one species of banking and agricultural indebtedness is a sub-species thereof. The species of indebtedness is within Entry 45, List I, whereas the subspecies of agricultural indebtedness is within Entry 18, List II. It is only relief of agricultural indebtedness, which is a sub-sub-species of indebtedness, which is relatable to Entry 30, List II.”.Having made that delineation, the Court proceeded to note that as per the Constitutional scheme, agriculture is an exclusive State subject. Hence, the best way to harmonise the two entries was by giving effect to both. This can be done, it held, only if the relief of agricultural indebtedness is to include banks. Thus, Entry 45 will remain intact and the relief of agricultural indebtedness will be carved out of it..“..the two entries are best harmonised by giving effect to both. This can only be done if the relief of agricultural indebtedness is to include banks, both cooperative and otherwise. As mentioned earlier, Entry 18, List II gives the States exclusive power to legislate on “land improvement and agricultural loans.” Entry 45, List I will remain intact and will have carved out of it the relief of agricultural indebtedness, which, as we have already seen, is a sub-sub-species of indebtedness, which itself is one of many aspects of banking.”.b. Incidental trenching.Based on the delineation and the interpretation that followed it, the Court concluded that even though, in pith and substance, the Banking Regulation Act fell within Entry 45, List I, insofar as relief of agricultural indebtedness was concerned, Section 21A certainly trenched upon Entry 30, List II. The question, therefore, was what was the position in law with respect to such incidental trenching..The answer was the doctrine of unoccupied field i.e. if the encroachment is merely incidental, then there is no defect so long as the trespass is upon an unoccupied field. Noting the words of Article 246, the Court held that incidental encroachment by Parliament will fall foul of the Constitution if the exclusive field allotted to the State legislature is not unoccupied..It, therefore, upheld the vires of Section 21A of the Act but held that insofar as the said Section incidentally encroaches upon the field of relief of agricultural indebtedness, set out in Entry 30, List II, it will not operate in those States where there is a State Debt Relief Act which deals with the subject matter of relief of agricultural indebtedness..Read the judgment below.