P L d 2000 s c 225 (Riba prohibition stayed)

 

 

 

Hence, awarding of compensation and the mechanism adopted in original section 28 as well as provided in Provinces of Punjab, Sindh and N.-W.F.P. is objectionable from Sharjah point of view. This section as is enacted in Baluchistan vide section 9-A, Baluchistan Act 13 of 1985 also does not provide permissible mechanism to allow proper and adequate compensation. These sections shall be substituted by a provision to the following effect:---

 

 

 

“In addition to the compensation fixed on the basis of market value as prevailing on the date of notification under section 4, an additional, sum at the rate of fifteen per centum per annum (or the rate fixed from time to time) of the compensation so fixed shall be added to the compensation due and payable from the date of notification under section 4 till the date of payment of compensation finally. “

 

 

 

As regards section 34, the amount awarded, as rightly observed in the Indian Supreme Court judgments, is not compensation paid to the owner for depriving him of his right to possess the land acquired but is given to him for- deprivation of the use of money representing the compensation for the land acquired and as such is “interest” paid for the delayed payment of the compensation amount.

 

 

 

As in the case of section 28, the finding of the learned Federal , Shariat Court about this section is justified with regard to the language used and the manner ,specified for imposing an additional amount over the original awarded amount. But, while correctly analysing the nature of this additional amount we should not overlook the fact that the landowner has been deprived of the possession of his rightfully owned property without any compensation. As we have already mentioned in our discussion on section 28, acquisition from the point of view of Sharjah is a compulsory purchase by the Government. One of the basic conditions for the validity of such a compulsory purchase, as held by this Court in the case of Qazalbash Waqf v. Land Commissioner (PLD 1990 SC 283) is that the fair market price is given to the landowner before or at the time of taking possession or immediately after it. It means that a valid sale, in the case of acquisition, takes place only when the price is actually paid by the Government to the landowner. Taking possession without the payment of the price, in the case of acquisition, does not in itself amount to effecting a valid sale. The landowner, therefore, is entitled to claim a rent for the period commencing from the date of possession to the date of the payment of the price (the awarded amount) whereby the actual valid sale shall have taken place. This rent should not be less than the fair market rent in the relevant period.

 

 

 

What is wrong in section 34 is, firstly, the use of the word `interest’ and secondly, determining the rate of eight per cent. per annum, with no fegard to the rental value of the acquisitioned property. However, it may be provided that the landowner shall be paid the fair rental value, or an amount equal to 8 % per annum of the awarded amount, whichever is higher, from the time of taking possession to the time when the amount of l compensation is actually paid to him.

 

 

 

With these observations and the direction noted above the judgment of the Federal Shariat Court with regard to Land Acquisition Act, 1894 is upheld.

 

 

V. Code of Civil Procedure, 1908

 

 

 

The provisions of Code of Civil Procedure wherein the word “interest” appears have been discussed in paragraph 297 to paragraph 311 of the impugned judgment. In paragraph 304 it is mentioned that the Sharjah position in relation to interest, mark-up, lease, hire-purchase and service charges has been dealt with while examining the provisions of Negotiable Instruments Act, 1881 and the same observations do equally apply to the provisions of the Code of Civil Procedure. Sections 34(1) & (2), 34-A (1) & (2) and 34-B(1)(a) of the Code of Civil Procedure were declared repugnant to the Injunctions of Islam following the discussion on the question of prohibition of the interest.

 

 

 

Section 34, provides that where a decree is for the payment of money, the Court may, in the decree, order “interest” at such rate as the Court deems reasonable to be paid on the principal amount adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further “interest” at such rate as the Court deems reasonable on the aggregate amount so adjudged, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit. 

 

 

 

Section 34-A has been newly added by Ordinance X of 1980. It deals with interest on public dues. It provides that where the Court is of opinion that a suit was instituted with intent to avoid the payment of any public dues payable by the plaintiff or on his behalf, the Court may, while dismissing such suit, make an order for payment of `interest’ on such public dues at the rate of two per cent., above the bank rate.

 

 

 

Subsection (2) of section 34-A deals with a different situation. It provides that if the Court is of opinion that the recovery of any public dues from the plaintiff was unjustified, the Court may, while disposing of the suit, make an order for payment of interest on the amount recovered at the rate of two per cent., above the bank rate.

 

 

 

Section 34-B has been newly added by Ordinance LXIII of 1980: It deals with interest on dues of a Banking Company. It provides that where a decree is for payment of money due to a Banking Company in repayment of a loan advanced by it, the Court shall, in the decree, provide for interest or return, as the case may be, on the judgment debt from the date of decree till payment. It further provides that in case of interest-bearing loans, the Court shall award a decree for interest at the contracted rate or at the rate of two per cent. above the bank rate, whichever is the higher.        

 

 

 

Clause (b) of the said section provides that in the case of loans given on the basis of mark-up in price, lease, hire-purchase or service charges for the contracted rate of mark-up, rental hire or service charges, as the case may be, the Government shall provide for interest or return at the contracted rate or at the latest rate of the Banking Company for similar loans, whichever is higher.

 

 

 

Clause (c) of section 34-B provides that in the case of loans given on the basis of participation in profit and loss, for return at such rate, not being less than the annual rate of profit for the preceding six months paid by the Banking Company on term deposits of six months accepted by it on the basis of participation in profit and loss, the Court shall in the decree provide for such return and at such rate, not less than the annual rate of profit for the preceding six months as stated above, which the Court ma consider just and reasonable in the circumstances of the case.

 

 

 

Section 34-B (b) and (c) relates to the recovery of money owed to a Banking Company by a client who entered into a transaction of mark-up, leasing, hire-purchase, service charge or profit and loss sharing. The learned Federal Shariat Court has subjected these provisions to the same comment as it has made in relation to sections 79 and 80 of the Negotiable Instruments Act. We have already explained the shortcoming in the finding of the Federal Shariat Court in this respect while discussing sections 79 and 80 of the Negotiable Instruments Act. The same comments are applicable here with greater force, because these provisions of the Code are meant in more express terms for the recovery of the previous obligations.

 

 

 

Consequently, subsections (b) and (c) of section 34-B of the Code are hereby held to be repugnant to the Injunctions of Islam.

 

 

 

 The provisions of sections 34 and 34-A conferred a power on the Court to grant additional sum over and above the decreed amount and the sums to be allowed have been named as interest. We have already held that any amount over and above the principal amount of debt is Riba, hence prohibited. Therefore, any additional amount contemplated in these provisions does fall within the definition of `Riba’. However, it is appropriate at this stage to take due notice of some of the submissions emphatically canvassed by the economists and bankers, particularly of Mr. Muhammad Umar Chhapra and Mr. Shahid Siddiqui to the effect that no banking system can successfully operate and particularly the Islamic Finance if the lending institutions, corporate bodies, firms and individuals do not on their own abide by their commitments in time in making repayments and are not otherwise made to repay financial assistance/loan received by them according to the agreed upon time limit. They emphasized that recovery system through legal means and Courts should necessarily be so designed as to make possible recovery within weeks. Mr. Chhapra was of the view that if the repayment schedule is not adhered to by the borrowers themselves or they are not made to abide by the repayment schedule by the legal system and the Courts, Islamic Finance cannot flourish and that is why the moral hazard involved in the Islamic economic system has to be taken care of by the law Courts. Mr.Shahid Siddiqui in his address submitted that firstly the borrowing is to be resorted to by a Muslim as a last resort as otherwise Islamic economic system contemplates for other arrangements like Masharaka, Mudarabah and profit and loss sharing systems for growth of business and industry. He added that veil of incorporation should not be allowed to be used as a shield to commit fraud and avoid the liabilities incurred. The concept of a company being a separate and independent entity has to be curtailed in its scope and the persons forming that legal entity have to be held responsible for the failure of the business concern, company or the venture, and the representation made in the feasibility reports and other allied documents, on consideration of which the financial assistance was received should be taken on the failure of the business of the venture to be fraudulent and false representations entailing penal consequence under the penal law of the land. He argued that the burden should be on the persons forming the ostensibly failed venture to prove that the representations made by them in feasibility reports and other documents were true and that the failure was on account of factors beyond their control as otherwise such defaulters after devouring national wealth would continue to flourish inside and outside the country as is the case of the present defaulters of banks and financial institutions. The religious scholars as well as the economists can provide such legal measures which will make the recovery of the dues from the defaulters effective as well as timely.. They pointed out that the Holy Prophet (p.b.u.h.) did not join Sala-tul-Janazah of a person who died leaving his debt unpaid. It is for such a reason that at the Janazah prayer, legal representatives of a deceased person make a declaration that if any one has any monetary demand against the deceased he may come forth with his claim so that it may be paid and discharged by heirs or they should remit/give up the loan in the name of Allah Almighty. Such an offer/declaration is made in the Janazah prayers of knowledgeable Muslims and people do make claims and receive satisfaction of their claim/debt or they give-up their claim or loan in the name of Allah Almighty so that the deceased soul may rest in peace, but such a declaration is never seen to have been made in case of persons of wealthy class most probably for the reason that they make distinction between personal liability and liability of the venture of the company being separate legal entities though in most of such cases they have executed the documents guaranteeing personally return of the amount involved.

 

 

 

It is also pertinent to note that in our legal system the difficulties of the decree-holders compound when the decree is sought to be executed. The obtaining of decree itself is not an easy task as all sorts of frivolous objections and delaying tactics are adopted/used for delaying completion of the trial. In addition to the delaying tactics adopted by the litigants the heavy work load of the Courts also contributes in delaying early and timely decision of causes. The number of cases daily fixed for hearing is so numerous that Presiding Officers cannot afford to give more than a few minutes to each case. The cases keep on lingering for years together due to all these factors.

 

 

 

The provisions of the Code of Civil Procedure are, therefore, to be viewed in the aforenoted perspective in addition to the legal question whether the power conferred by these provisions on a Court to grant additional amount over and above the amount decreed, though the said additional amount is called interest, falls within the definition of Riba.

 

 

 

It may be noted that the power conferred on the Court by law to grant additional sum is not premised on any act of the party to the transaction yet this grant of additional sum is without a counter-value and is a payment receipt of which law permits over and above the principal amount. Thus, indirectly Riba al-Nasiah has been allowed to be practised as it is Riba that is paid and received in a loan transaction and this is the Riba that has been prohibited by the Holy Qur’an. If the said provision is taken to be conferring a power on the Court to allow compensation to the lender/decree-holder for the loss caused to him by not returning the amount of liability through vexatious pleas and dilatory tactics after the filing of the suit or even after passing of the decree then granting of such power to allow compensation cannot be objected to but the compensation at a fixed rate to be awarded in each and every case based on opportunity cost of money is not permissible as in each case such a power will have to be exercised in consideration of the circumstances prevailing in that particular case. The Legislature can also confer a power on the Court to impose penalty on a party who makes a default in meeting out his liability or who is found guilty of putting up vexatious pleas and adopting dilatory tactics with a view to cause delay in decision of the case and in discharging his liabilities and from, the amount of such penalty a smaller or bigger part depending upon the circumstances can be awarded as solatium to the party who is put to loss and inconvenience by such tactics. The amount of penalty can be received by the State and used for charitable purposes and in the projects of public interest including the projects intended to ameliorate economic conditions of the sections of the society possessing little or nothing i.e. needy people/peoples without means. The provisions of the Code of Civil Procedure, quoted above, are therefore, held to be repugnant to they Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) for the reasons given above and these sections may, therefore, be suitably amended keeping in view the observations given above.

 

 

 

Following are the other provisions of the Code of Civil Procedure commented upon in the impugned judgment:---

 

 

 

(i) Section 2(12);

 

(ii) Section 35(3);

 

(iii) Section 144(1);

 

(iv) Order XXI, Rule 11 (2)(g)

 

(v) Order XXI, Rule 38;

 

(vi) Order XXI. Rule 79(3);

 

(vii) Order XXI, Rule 80(3);

 

(viii) Order XXI, Rule 93;

 

(ix) Order XXXIV, Rule 2(1) (a)(i), (iii), (c) (i). and (ii):

 

(x) Order XXXIV, Rule 2(2);

 

(xi) Order XXXIV, Rule 4;

 

(xii) Order XXXIV, Rule 7(1)(a) (i)&(iii) and (c)(i)&(ii);

 

(xiii) Order XXXIV, Rule 7(2);

 

(xiv) Order XXXIV, Rule 11;

 

(xv) Order XXXIV, Rule 13(1);

 

(xvi) Order XXXVII, Rule 2;

 

(xvii) Order XXXIX, Rule 9;

 

 

 

The word “interest” wherever appearing in these provisions shall also be deleted and substituted appropriately.

 

 

 

Order XXXVII, Rule 2 (2) (a) and (b) are similar to the provisions of sections 79 and 80 of the Negotiable Instruments Act, 1881 and are subject to the same findings as recorded by us with regard to that Act. Both these provisions (i.e. sub-rules (a) and (b) of Rule 2, Order XXXVII), of the Code are hereby declared repugnant to the Injunctions of Islam.

 

 

 

Rule 79 (3) of Order XXI of the Code provides that if, in pursuance of a decree of recovery, a debt receivable by the defendant is sold, the Court shall prohibit the original creditor of that debt from receiving the debt or any interest thereon, and the debtor from making payment thereof to any person except the purchaser.

 

 

 

Similarly, Rule 80(3) of the Order XXI of the Code contemplates the transfer of a negotiable instrument, required for the purpose of recovery, and provides as under:

 

 

 

“Until the transfer of such negotiable instrument or share, the Court may, by order, appoint some persons to receive any interest or dividend due thereupon and to sign a receipt for the same...”

 

 

 

Here again the appointed person has been allowed to receive interest. That is why the Federal Shariat Court has included it in the objectionable provisions.

 

 

 

The judgment of the Federal Shariat Court about these two provisions is upheld to the extent noted above.

 

 

 

VI. Cooperative Societies Act, 1925

 

 

 

Section 59(2)(e) of the Cooperative Societies Act, 1925 and Rule 14(1)(h), Rule 22 and Rule 41 alongwith Appendices I to IV have been discussed in paragraphs 312 to 321 of the impugned judgment and declared repugnant to Injunctions of Islam (PLD 1992 FSC 1). Section 71 (2), clause (ee) of the Cooperative Societies Act, 1925 as well as sub-bye-law (6) of Bye-law (3) of the National Industrial Cooperative Finance Corporation Limited to the extent that such provide for “interest” have also been declared repugnant to the Injunctions of Islam vide PLD 1992 FSC 537 and PLD 1992 FSC 535 respectively.

 

 

 

The word “interest” appearing in these provisions has been ordered to be deleted on the ground that charging, levying and recovery of interest is not permissible under the Injunctions of Shariah. The impugned judgments of the Federal Shariat Court to that extent are upheld.

 

 

 

(VIII) The Insurance Act, 1938

 

 

 

The following provisions of the Insurance Act, 1938, were challenged before the Federal Shariat Court and the same to the extent that these provide for range of rate of interest, guarantee as to the interest amount, payment of interest on instalments and other conditions as to interest, were held to be repugnant to the Injunctions of Islam in paragraphs 322 to 324 of the impugned judgment:---

 

 

 

S.3-BB(1)(b).---Prepare statement of yield indicating the range of rates of interest or yield on the investment of the insurers’ funds.

 

 

 

Subsection (3) of section 27.---In computing the assets required by the section to be kept invested by an insurer, a sum equal to the amount of his liabilities to persons who are not citizens of Pakistan m respect of life insurance policies issued in Pakistan in favour of such persons but expressed in a currency other than the Pakistan rupee may, if such sum is invested in securities of, and guaranteed as to principal and interest by, the Government of the country in whose currency such policies are expressed, be taken into account.

 

 

 

S.29(8)(b).--- :he loan is of such amount that the instalment of capital and interest does not exceed one-fourth of the basic salary of the employee or one-fourth of the renewal commission or overriding commission of an agent or an employer of agents, as the case may be, during a year;

 

 

 

(c) (iii) .---the loan does not exceed such amount as may be prescribed and is subject to such conditions, including conditions as to interest and the time allowed for its payment, as may be prescribed.

 

 

 

S.47-B.---(1) Where payment on a policy issued by an insurer becomes due and the person entitled thereto has complied with all the requirements, including the filing of complete papers, for claiming the payment, the insurer shall, if he fails to make the payment within a period of ninety days from the date on which the payment becomes due or the claimant complies with the requirements, whichever is later, pay interest as specified in subsection (2) on the amount so payable unless he proves that such failure was due to circumstances beyond his control.

 

 

 

(2) The interest under subsection (1) shall be payable for the period during which the failure continues and shall be calculated at monthly rests at the rate five per cent. higher than the prevailing bank rate.

 

 

 

S.81(2)(d).---The report of the actuary shall contain an abstract in which shall be stated:---

 

 

 

(d) the rate of interest assumed.

 

 

 

In the first provision the words “rates of interest” may be deleted in consonance with the objectives of prohibition of interest under Shariah. The word “interest” appearing in subsection (3) of section 27 need not be omitted as this pertains to securities of, and guarantees as to principal and interest, by the Government of the country in whose currency such policies are expressed. This as such pertains to the assured of foreign origin and securities of foreign Government. This amount, however, is to be taken notice in computing the investment required to be invested by an insurer. This aspect was not taken note of and merely as the word “interest” appeared, its deletion was directed. The word “interest” appearing in the other provisions may however, be deleted but it should be substituted with suitable amendments keeping in view the purposes and the policy of the law on the lines indicated in this judgment. The purpose should be to effectively implement the objectives of eliminating Riba from the economy of the society without hampering the economic activities and also ensuring at the same time the growth and progress of the economy together with fairness to meet the obligations and liabilities. However, the question whether Insurance business as in vogue is in accord with Injunctions of Islam is a different question, which is not under-consideration in these appeals.

 

 

 

(IX) State Bank of Pakistan Act, 1956

 

 

 

Section 22(1) of the State Bank of Pakistan Act, 1956 has been scrutinized in paragraphs 325 to 328 of the impugned judgment and purchase of bills and other commercial instruments like Debentures, Bonds etc. on the basis of interest has been declared to be repugnant to the Injunctions of Islam by the Federal Shariat Court. This view is maintained and upheld. Obviously, the mode of transacting these financial products/instruments has to be changed to a mode compatible with the Islamic modes of finance. We would, therefore, leave it to the economists and bankers to adapt to the new situation keeping in view the Qur’anic prohibition of Riba:---