A State Legislature enacted a law to regulate money lending in the State. Incidentally the law also touched upon Promissory Notes. Can it be said that the State has encroached upon the legislative domain of the union? Discuss.

1. Facts of the Case:

The State Legislature passed an Act to regulate money lending and protect borrowers from exploitation by moneylenders. The legislation prescribed rules regarding licensing of moneylenders, maximum interest rates, maintenance of accounts, and recovery procedures.
While the main objective was to regulate money lending activities, certain provisions in the law incidentally affected Promissory Notes, which are negotiable instruments used in money lending transactions.
The question arose whether the State Legislature, by framing a law that also affects Promissory Notes, had encroached upon the Union’s legislative powers, since Promissory Notes fall under the Union List (Entry 46 – “Bills of Exchange, Cheques, Promissory Notes and other like instruments”).

2. Issues in the Case:

1. Whether the State law regulating money lending, which incidentally affects Promissory Notes, is ultra vires (beyond the powers) of the State Legislature.
2. Whether such incidental encroachment into the Union List renders the State legislation invalid.
3. To what extent the doctrine of pith and substance applies in determining the validity of the State law.

3. Legal Principles Covered to Support Case Proceedings and Judgements:

1. Doctrine of Pith and Substance:
   • This doctrine determines whether a law is valid by identifying its true nature and object.
   • If the “pith and substance” (main object) of the legislation falls within the powers of the legislature that enacted it, it remains valid even if it incidentally encroaches upon matters within the jurisdiction of another legislature.
   • Derived from cases such as:
     • State of Bombay v. F.N. Balsara (AIR 1951 SC 318)
     • Prafulla Kumar Mukherjee v. Bank of Commerce, Khulna (AIR 1947 PC 60)
2. Distribution of Legislative Powers:
   • The Seventh Schedule of the Indian Constitution divides subjects between:
     • List I (Union List) – Parliament’s jurisdiction
     • List II (State List) – State Legislature’s jurisdiction
     • List III (Concurrent List) – Both can legislate
   • Entry 30, List II: “Money lending and moneylenders; relief of agricultural indebtedness” falls under the State List.
   • Entry 46, List I: “Bills of Exchange, Cheques, Promissory Notes, and other like instruments” falls under the Union List.
   Hence, while States can regulate money lending, they cannot directly legislate on Promissory Notes unless it’s incidental to the main objective.
3. Incidental Encroachment Permissibility:
   • The Constitution allows incidental overlap if the main purpose is within the legislative competence of the enacting body.
   • Cited precedent: Prafulla Kumar Mukherjee v. Bank of Commerce, Khulna where a similar issue was discussed and upheld under the principle of pith and substance.

4. Possible Judgement:

In pith and substance, the State law is intended to regulate money lending, which squarely falls under Entry 30 of the State List. The fact that it incidentally affects Promissory Notes, a subject under the Union List, does not render the law invalid. The encroachment is incidental and not substantial.

Therefore, the law is constitutionally valid as long as its primary object remains within the competence of the State Legislature. The Supreme Court or a competent constitutional bench would likely uphold the legislation, reaffirming that incidental encroachment does not invalidate a statute if its dominant purpose lies within the enacting legislature’s jurisdiction.

Understand the balance of power between the Union and State legislatures under India’s Constitution through this insightful case study. Learn how the doctrine of pith and substance protects valid State laws even when incidental overlaps occur with Union subjects. For law students and professionals, this case highlights the importance of legislative competence and constitutional interpretation in maintaining federal harmony. To explore more in-depth explanations, real case analyses, and legal insights on Constitutional Law, visit lawgana.in and stay informed with expertly curated legal resources and case discussions.