Cash advance in business deals not moneylending: SC

Businessmen can lend money or advances to their suppliers for ensuring regular supply of goods and such an act cannot...

Businessmen can lend money or advances to their suppliers for ensuring regular supply of goods and such an act cannot be termed as illegal or classified as a moneylending act, the Supreme Court held on Wednesday.

A Bench comprising Justices A K Mathur and Markandeya Katju said that often businessmen give money to their suppliers in advance to ensure that the supplies are regular and are made to them rather than being diverted to other parties.

“There is nothing illegal and such activity cannot be perceived as a moneylending business as the businessmen are keen to ensure smooth running of their businesses by adopting various methods,” the Bench observed.

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The ruling came on an appeal filed by a business house challenging a judgement of the Karnataka High Court which had held that lending of money by businessmen to their suppliers amounted to moneylending activity as specified under the Karnataka Money Lenders Act, 1961.

In this case, the company dealing with “areca nut” (supari) was periodically paying advances to its commission agent to ensure regular supply of the product. In a suit for recovery of money given in the course of business, the commission had contended that the company had lent him money despite not having a licence as required under the Karnataka Money Lenders Act, 1961.

Allowing the appeal, the court said that the purpose of the Money Lending Act was to prevent malpractice and oppression by moneylenders who could take advantage of peoples’ poverty. “While in the moneylending business the object of the moneylender is to earn interest on the loan advanced, in the present case the object of the company behind advancing loan was to ensure regular supply of areca nut,” the Bench held.

Drawing an analogy with the expression “landless persons” defined in an earlier judgement, the Bench said the expression “landless persons” should be interpreted to mean “landless peasants” and not “landless businessmen”.