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Supreme Court of India
Central Bank Of India vs Ravindra And Ors on 18 October, 2001
Equivalent citations: AIR 2001 SUPREME COURT 3095, 2002 (1) SCC 367, 2001 AIR SCW 4468, 2002 (1) BLJR 207, (2002) 1 BANKJ 314, 2001 (7) SCALE 351, (2001) 9 JT 101 (SC), 2002 BLJR 1 207, (2001) 3 PUN LR 837, (2001) 2 KER LJ 849, (2001) 107 COMCAS 416, (2002) 1 CIVILCOURTC 364, (2002) 1 GUJ LH 474, (2002) 1 KER LT 743, (2002) 1 MAD LJ 109, (2002) 1 MAD LW 683, (2002) 2 RAJ LW 241, (2001) 5 SCJ 133, (2002) 1 BANKCAS 150, (2002) 2 ANDHLD 97, (2001) 7 SUPREME 764, (2002) 1 RECCIVR 49, (2002) 1 ICC 1, (2001) 7 SCALE 351, (2001) 45 ALL LR 695, (2001) 4 CIVLJ 790, (2001) 4 CURCC 219, (2001) 3 BANKCLR 461, (2002) 2 BOM CR 616
Bench: K.T. Thomas, R.C. Lahoti, N. Santosh Hegde
CASE NO.:Special Leave Petition (civil) 2421 of 1993PETITIONER:CENTRAL BANK OF INDIARESPONDENT:RAVINDRA AND ORS.DATE OF JUDGMENT: 18/10/2001BENCH:DR. A.S. ANAND CJ & K.T. THOMAS & R.C. LAHOTI & N. SANTOSH HEGDE & S.N.VARIAVAJUDGMENT:
JUDGMENT2001 ( 4 ) Suppl. SCR 323Special Leave Petition (C) No. 2421 of 1993.
WITHC.A. Nos. 3964, 3967/92, S.L.P. (C) No. 3954/94, S.L.P.(C) No. 9082, SLP(C) No. 9088/95, S.L.P. (C) No. 4562/98, C.A. No. 4716/94 and C.A. No. 2496of 1993.
The Judgment of the Court was delivered byR.C. LAHOTI, J. What is the meaning to be assigned to the phrases "theprincipal sum adjudged" and "such principal sum" as occurring in Section 34of the Code of Civil Procedure, 1908 [as amended by the Code of CivilProcedure (Amendment) Act (66 of 1956) w.e.f. 1.1.1957], a question offrequent recurrence and having far reaching implications in suits forrecovery of money, specially those filed by banking institutions againsttheir borrowers, has been referred by a three-Judge Bench of this court tothe Constitution Bench.
It will be useful to reproduce the order of reference dated 7th May, 1996(since reported as [1996] 5 SCC 279) so as to highlight the nature andscope of controversy arising for decision before the Constitution Bench:
"ORDERAfter hearing learned Attorney General and amicus curiae Shri A. Subba Rao.Ranjit Kumar and K.M.K. Nair on (the interpretation of the provisions ofSection 34 CPC on "the principal sum adjudged" the matter is required to beconsidered by a Constitution Bench. The learned Attorney General has drawnour attention to the judgments of this Court in Corpn. Bank \. , wherein he sought to drawthe deduction that the principal sum adjudged and the principal summentioned later would be the same. He seeks to take support from the word"such' in support of his contention. Preceding Amendment Act 66 of 1956,the words were "aggregate sum so adjudged" and after amendment, weresubstituted with the words "the principal sum adjudged", from the date ofthe suit to the date of the decree, in addition to any interest adjudged onsuch "principal sum" for any period prior to the institution of the suit(with further interest on such date as the court deems reasonable on the"principal sum")*. The distinction, therefore, was not drawn to theattention of this Court in the aforesaid two judgments in particular thelater one. As a fact no argument in this behalf appears to have beencanvassed. Interpretation of the liability of the borrower to pay intereston the principal sum to include interest that became merged with theprincipal sum adjudged or principal sum as lent, is required to beauthoritatively laid down by a Bench of five Judges.
The Registry is directed to place the matter before the Hon'ble the ChiefJustice for constituting the Constitution Bench.
*[Sic., should have been - with further interest at such rate not exceedingsix per cent per annum, as the Court deems reasonable on such 'principalsum', in our opinion]Section 34(1) of C.P.C. and 1956 AmendmentSub-Section (1) of Section 34 abovesaid, as it stood prior to the 1956amendment, and as it stands amended, are reproduced in juxta position here-under :
Prior to amendmentAs amended by Act No. 66 of 1956
34. (1) Where and in so far a;; a decree is for the payment of money, theCourt may, in the decree, order interest at such rate as the Court deemsreasonable to be paid on the principal sum adjudged, from the date of thesuit to the date of the decree, in addition to any interest adjudged onsuch principal sum for any period prior to the institution of the suit,(with further interest at such rate as the Court deems reasonable on theaggregate sum so adjudged.] from the date of the decree to the date ofpayment, or to such earlier date as the Court thinks fit.
(1) Where and in so far as a decree is for the payment of money, the Courtmay, in the decree, order interest at such rate as the Court deemsreasonable to be paid on the principal sum adjudged, from the date of thesuit to the date of the decree, in addition to any interest adjudged onsuch principal sum for any period prior to the institution of the suit,(with further interest at such rate not exceeding six per cent, per annum,as the Court deems reasonable on such principal sum,) from the date of thedecree to the date of payment, or to such earlier date as the Court thinksfit.
(2) Where such a decree is silent with respect to the payment of furtherinterest on such aggregate sum as aforesaid from the date of the decree tothe date of payment or other earlier date, the Court shall be deemed tohave refused such interest, and a separate suit therefor shall not lie.
xxx xxx xxx xxxxxx
(2) Where such a decree is silent with respect to the payment of furtherinterest on such principal sum from the date of the decree to the date ofpayment or other earlier date, the Court shall be deemed to have refusedsuch interest, and a separate suit therefor shall not lie.
(Underlining by us)[Portions affected by amendment placed in bracket]By the 1956 amendment, in Section 34, for the words "with further interestat such rate as the Court deems reasonable op the aggregate sum soadjudged", the words "with further interest at such rate not exceeding sixpercent, per annum as the Court deems reasonable on such principal sum"
have been substituted in sub-section (1). In sub-section (2) the words "onsuch aggregate sum as aforesaid " have been deleted and the words "on suchprincipal sum" have been substituted. The phrases "on the principal sumadjudged" and "such principal sum", as occurring in the opening part ofsubsection (1) of Section 34, have not been touched by the amendment.
The report of the Joint Committee to which the Bill was referred stated,inter alia, as under :
"11. Clause 2. - Section 34 of the Code empowers a Court to award furtherinterest from the date of the decree upto the date of payment on the saggregate sum' which comprises principal sum with interest accrued thereon.The Committee are of the opinion that interest should not be awarded oninterest but only on the principal sum. Suitable amendment has accordinglybeen incorporated in this clause."
The controversy and contending pleas:
There is batch of matters before us wherein the same common question of lawis arising'for decision. Inasmuch we propose (also as has been agreed to byall the learned counsel appearing for the parties) to decide only thequestion of law posed for decision and leave the individual cases to bedecided by appropriate Bench consistently with the law laid down by theConstitution Bench, we are relieved of the need of noticing facts ofindividual cases. Suffice it, for our purpose, to notice in very brief, byway of illustration, the facts of S.L.P. (C) No. 2421 of 1993 - CentralBank of India v. Ravindra and Ors. to demonstrate the nature ofcontroversy. The petitioner bank sanctioned a loan to the respondent no. 1on (he guarantee of respondents nos. 2 and 3. On 21.6.1979, the respondentno.l executed a demand promissory note for Rs. 1,37,720 and also executedterm agreement of hypothecation of the vehicle. The loan carried interestat the rate of 11% per annum with quarterly rests as on 31st March, 30thJune, 30th September and 31st December every year. The total outstanding,inclusive of the interest charged as per agreement, was Rs. 1,51,825 on thedate of the suit for the recovery whereof the suit was filed by thepetitioner bank. Relief was also prayed for the grant of interest pendentelite and future interest till realisation. The trial court passed a decreefor Rs. 1,51,825 with future interest at the rate of 8% per annum from thedate of the suit till realisation affording the respondents facility ofpayment of the decretal amount in 6 quarterly instalments with exigibilityclause. An appeal preferred by the bank before the High Court was partlyallowed modifying the decree of the trial court by awarding interest at therate of 11% per annum and setting aside the facility of payment byinstalments. However, the High Court directed the interest at the rate of11% per annum to be payable only on Rs. 99,000, which was stated to be theprincipal sum, from the date of the suit till realisation though the decreefor Rs. 1,51,825, the amount due and payable on the date of the suit, wasmaintained. The petitioner bank is aggrieved by the decree of the HighCourt to the extent to which future interest at the rate of 11% per annumhas not been allowed on the entire sum of Rs. 1,51,825.
We have heard Shri Harish N. Salve, learned Solicitor General appearing forUnion of India, Shri Rakesh Dwivedi, Sr. Advocate appearing for State Bankof India and Shri K.N. Bhat, Sr. Advocate who has intervened on behalf ofthe Indian Banks Association as also other learned counsel appearing forseveral banks. We have also heard Shri Ranjit Kumar, Senior Advocate, thelearned amicus appointed to assist the Court who highlighted the legalposition and judicial opinion clarifying by and large the fallacy - as perhis submission - in the stand taken by the banks. Other learned counselappearing for other borrowers were also heard.
The learned Solicitor General submitted that the expression "the princi-palsum adjudged" used in Section 34 may have two meanings : (i) the amountsactually disbursed to the borrower, or (ii) the amount due from theborrower on the date of the suit which amount would include the amount ofinterest due and payable on the date of the institution of the suit in theCourt. He made two submissions. First is the wider submission, as he namedit, that whatever is the amount due and payable by the defendant on thedate of the institution of the suit becomes "the principal sum adjudged' onwhich the judgment-debtor can be directed to pay interest pendente lite andfor future. The learned Solicitor General however did not seriously pressand pursue this wider submission and gave it up soon after projecting thesame before the Court. However, he insistently pressed and pursued thesecond one, i.e. the narrower submission that "the principal sum adjudged'would include all sums as are due under the contract between the partiesand have stood capitalised with the amount actually disbursed to theborrower. The amalgam - an intimate mixture - would be adjudged as theprincipal sum and would not permit any attempt at unscrambling. Developingthe narrower argument further, the learned Solicitor General submitted thatthe contract between the parties or an established bank practice (in thecase of banking transactions) may provide for the interest on periodicalrests being compounded and capitalised with the principal, in which event,the amount debited in the account of the borrower shall shed its characteras interest and become the principal on being capitalised and thereforeshall have to be adjudged as "the principal sum' on the date of the suit.The contract or established banking practice shall govern the relationshipbetween the parties and bind the Court. The Court will not reopen theaccount so as to separate from the amalgam - the interest charged and thesums actually advanced, and repaint the interest with the colour which hadstood shed off unless mandate of law overrides the contract or practice andenables or compels the Court to do so. Any view to the contrary, ifaccepted, would be destructive of banking system which is functioning on apractice recognised for over a century over the world, submitted thelearned Solicitor General.
The learned Solicitor General further submitted that the position of lawremains the same in so far as the meaning of 'the principal sum adjudged'occurring in the first part of Section 34(1) is concerned and the principalsum so adjudged shall be the amount on which the Court shall award interestpendente lite, i.e., from the date of the suit to the date of the decree asalso the future interest. In other words, submitted the learned SolicitorGeneral, the Court shall adjudge the principal sum as it stands justanterior to the date of the suit consistently with the contract or bankingpractice binding the parties and once that is done 'the principal sumadjudged' shall be 'such principal sum' for the purpose of interestpendente lite as also future interest. So far as the 'interest adjudged' inaddition to 'the principal sum adjudged' for any period prior to theinstitution of the suit is concerned, the learned Solicitor Generalsubmitted, that there may be cases where interest prior to the date of thesuit and included in the amount claimed by the plaintiff against thedefendant on the date of the suit may consist of (i) such interest as hasstood capitalised and hence become part of the principal sum, and (ii) suchinterest as has not been capitalised or was incapable of being capitalised,and the later would be 'interest adjudged' in addition to the principal sumadjudged (which would be inclusive of interest capitalised) on the date ofthe institution of the suit. There may be cases where the total amountdebited to the account of the debtor as interest has stood capitalised inits entirety in which case there may not be any sum of interest left andavailable to be treated as interest, other than the principal sum for thepre-suit period. The correct way of reading the opening part of Section 34would be - "the principal sum adjudged.................. in addition tointerest, if any, adjudged on such principal sum". 'Any interest adjudgedon such principal sum' mean and should be read as 'interest if any,adjudged on such principal sum'. The learned Solicitor General went on tosubmit that the 1956 amendment does not have any bearing on the meaning ofwords 'the principal sum adjudged' which remains the same pre and post1956. The 1956 amendment, which has substituted the words "on suchprincipal sum" for the words 'on the aggregate sum so adjudged' has onlythis effect that prior to the amendment future interest was capable ofbeing awarded on the aggregate of three components taken together, i.e. (1)the principal sum (so adjudged), (2) pre-suit interest (so adjudged), and(3) decretal costs. By virtue of 1956 amendment:, the amount of interestadjudged as interest on the date of the suit and decretal costs cannot beordered to carry future interest, but the amount adjudged as principal sumthough inclusive of interest which has stood capitalised and has partakencharacter of principal by virtue of contract or banking practice, iscapable of bearing future interest because it will be 'the principal sumadjudged'.
Shri Ranjit Kumar, Senior Advocate, the learned amicus as also the otherlearned counsel appearing For the debtors have submitted that if thesubmission made by the learned Solicitor General is accepted it woulddefeat the legislative intent behind the amendment as it would mean theCourt awarding interest on interest. It was submitted that without regardto the fact that the interest for the pre-suit period has stood capitalisedby force of contract or banking practice between the parties, and hasassumed the colour and character of principal sum, the contract or bankingpractice ceases to be applicable once the suit is filed and the matter hasentered the domain of Court under Section 34 of the CPC. where afternothing prevents the Court from unscrambling the amalgam so as to sieve outthe principal from interest and confine the award of interest pendente litepost decree to principal sum only.
Capitalisation of interest debited on periodical rests - does it convertinterest into 'the principal sum'? - a survey of judicial opinion:
A host of authorities were cited at the Bar, throwing light on the issue athand. It will be useful to have a survey thereof.
We would begin with the statement of law in Reddie v. Williamson, [1863] 1Macph (Ct. of Sess.) 228, as we find that the law propounded therein hasbeen referred to in a number of decisions rendered by the Court of Appeals,House of Lords, this Court and several High Courts. Lord Cowan said:
"This account, from its origin, is kept in the usual mode of stating suchaccounts. It is balanced at the close of each year, and the periodicalinterest on advances accruing in the course of the year is placed to thedebit side of the account, and to the extent of its amount the balancecarried to the debit at the commencement of next year is increased. Thatamount is dealt with as a principal sum, on which interest is calculated, -the bank thereby securing, as they were entitled to do, interest on theaccumulated amount each year, or, as it is generally stated, but not quitecorrectly, compound interest. The true view is, that the periodicalinterest at the end of each year is a debt to be then paid, and which mustbe held to have been paid when placed to the debit of the account as anadditional advance by the bank for the convenience of the obligants." (atp. 238)Lord Justice Clerk said :
"The parties must of course have had in view that this account-currentwould be kept in the way, in which bankers always keep such accounts,balancing the account at the end of the year; and, in the event of theinterest accruing during the past year not being otherwise paid or providedfor, placing the amount of such interest as the last item to the debit ofthe account, and accumulating such interest along with the principal sumdue on the account, and bringing down the balance thus ascertained,consisting partly of principal, and partly of interest, to the new accounr.for the ensuing year, and placing the accumulated balance as the firstarticle of debit in that new account. Where an account is kept in this wayconsistently throughout its whole course, the interest thus accumulatedwith principal, at the end of each year not only becomes principal, butnever thereafter ceases to be dealt with as principal. " (at p. 236)'The privilege of a banker to balance the account at the end of the year,and accumulate the interest with the principal, is founded on this plainground of equity, that the interest ought then to be paid, and, because itis not paid, the debtor becomes thenceforth debtor in the amount, as aprincipal sum itself bearing interest. This principle of equity must beconsistently carried out in keeping an account on the bank's books, inwhich other parties are interested as obligants, besides the partyoperating on the account; and, if it be, then the moment that interest isthus converted into principal, the amount of it must be reckoned as part ofthe drafts on the credit, or beyond the credit, for which the partyoperating on the account will be liable as principal in any event,............." (at p.237)In , [1918] AC 372, interest wascharged from day to day with half yearly rests, so that the interest wascapitalised every hall7 year in accordance with the terms of the deed whichalso contained ceiling on the principal sum which could be recoverable onthe security. Lord Atkinson observed in his speech that whenever onbalancing the mortgagor's current account with the bank a debit balance wasfound against him, that balance, by force of the covenant, became part ofthe principal money secured by the mortgage, subject however, to thecovenant limit. Lord Wrenbury opined that the interest upon the overdraftwas capitalised half yearly and as against the bank the capitalisedinterest must be regarded as principal and hence the debit balance of theoverdraft banking account was principal. In Commissioners of Inland Revenuev. Sir H.C. Holder, Bt., &Anr., [1931] 2 KB 81, the bank debited halfyearly interest to the borrower's bank account on the amount owing fromtime to time. It was held that the interest due each half year which, uponthe failure of the company to pay it, was, according to the regularpractice of bankers, added to the capital sum advanced, was therebycapitalised and could not thereafter be treated as interest. Lord HanworthMR noted in his speech that the plan of capitalising interest at the end ofeach half year was adopted by bankers in order to enable them in effect tosecure what is usually termed compound interest, which could not haveotherwise been claimed by reason of the usury laws. Later his Lordshipnoted that under consideration was not the terms of a particular deedentered into between the parties but a practice which has been adopted bybankers for over a century, and which has had certain qualities attributedto it. Lord Romer concurring with Lord Hanworth opined that having regardto the method in which, with the concurrence of the company, the accountwas kept by the bank, the company must be deemed to have paid each halfyear the accruing interest by means of an advance made for this purpose bythe bank to the company.
Holder & Anr. \. Inland Revenue Commissioner, [1932] All E.R. 265 and Paton(Fenton's Trustee) v. Inland Revenue Commissioners, [1938] All E.R. 786,are cases under the Income Tax Law. In Holder's case it was held that inview of the bank's practice of adding the interest each half-year to theamount advanced, the interest was in effect paid each half year to the bankby means of advances made for the purpose by the bank to the customer andfor this reason no part payment (later) made by the tax payer was paymentof interest and hence the tax payer was not entitled to the relief claimed.In Paton's case each half year interest at an agreed rate, and withoutdeduction tax, was placed to the debit of the account of the borrower andthe aggregate amount was then treated as principal for the following halfyear. Question arose, whether the interest in question which wascapitalised could be said to have been in fact paid by the borrower so asto attract applicability to him of certain beneficial provision of theIncome Tax Act, 1918? Lord Atkin opined - "The simple fact is that theamount of interest accruing during the half year is ascertained at the endof the half-year, and is added to the account as a debt in precisely thesame position as the other debit items, whether for money lent, the priceof securities bought, commission, or other source of debt. It takes itsposition as part of the whole debt due to the bank, and, as part of thewhole debt, is in the next half-year chargeable with interest." HisLordship approved the view of Rusell, J. of Court of Appeal taking the viewthat because of a provision contained in the deed between the parties whichenables the interest to be capitalised, the interest is not capitalisedbecause it is in fact paid, but because it has in fact not been paid. LordMacmillan opined - "It may well be that, in a question between a bank andits customer, and equally between a bank and its customer's cautioner, theinterest accruing annually may, by the sanctioned method of accounting,cease to be interest when it is accumulated with the principal, so that thebank can thereafter no longer sue for the interest asinterest............It is manifest, however, that it is only by a legalfiction that the interest in such cases as the present can be said to havebeen paid. After, as before, the striking of the balance, the same sumremains due, no longer, it may be, as interest, but still due as part ofthe principal debt. In construing the extent of the cautioner's liabilityunder the case credit bond, the court would appear to have been well-founded in their view that the bank's own method of accounting, assented toby the principal debtor, and recognised as ordinary practice, precluded anyclaim for past interest as interest prior to the last balance. The cautionwas liable for whatever was drawn upon the cash credit account up to 400,and the unpaid interest was debited in account just like the ordinarydrafts upon it, and became part of the principal debtor's capitalindebtedness for which the cautioner was liable up to 400, with interestsubsequent to the last balance."
In National Bank of Greece S.A. v. Pinios Shipping Co. No. 1 & Anr., [1990]1 AC 637, House of Lords upheld the entitlement of the bank to theprincipal sum due to it, with interest thereon, as agreed, until payment orjudgment in the usual way, and that the agreement included the term,implied by the usage of bankers, that the bank was entitled to capitaliseinterest which in the case before their Lordships was (by concession) atquarterly rests and that such entitlement continued until judgment orpayment. In the Court of Appeal, Lloyd LJ, who wrote the pending order, wasof the opinion that an implied agreement to pay compound interest withquarterly rest based on the banking practice exists during the currency ofthe banker-customer relationship but once the banker-customer relationshipceases the bank cannot charge compound interest atd only simple interestwould be payable. His Lordship traced the history of banking practice asborne out by judicial precedents, and held :
"(i) There is no right to compound interest save by agreement, express orimplied, or custom binding on the parties; (ii) there was no expressagreement to pay compound interest in the present case; (iii) an agreementto pay compound interest may be implied by virtue of acquiescence (LordCiancarly v. Latouche), but (iv) such an agreement is not normally impliedexcept as to "mercantile accounts current for mutual transactions"
(Deutsche Bank v. Banque des Marchands de Moscou, 4 L.D.B. 293, 296, perGreer L.J.; (v) it is open to question whether the agreement between thebank and Pinios dated 8 February, 1977 was an account current for mutualtransactions; but, even if it was, it ceased to be such an account when thebank closed the account and demanded repayment on 13 November 1978; (vi)the bank never pleaded or proved a custom entitling it to continue tocharge compound interest after the account had been closed, or, a fortiori,after it had issued proceedings for the recovery of debt."
The bank appealed to the House of Lords. The House of Lords allowed theappeal and preferred by the bank and modified the judgment of the Court ofAppeal by holding that no reason can be seen why that relationship shouldnot be continued until repayment of the debt, or judgment, whichever firstoccurred, with the effect that, so long as the contractual interest waspayable, the bank continued to be entitled to capitalise it. The House ofLords did not agree with the Court of Appeal that the relationship ofbanker and customer stood terminated by the bank's demand for payment.
In Billamal v. Ahad Shah, AIR (1918) PC 249, the Privy Council recognisedthe justification for adding on the accumulated interest under an earliertransaction in the fresh transaction and observed as under :
"A borrower who obtains a loan secured by a promissory note on quitereasonable terms, by neglecting to pay the note on maturity, furtherneglecting to pay the accruing interest for the several years following andthen giving a renewal note for the original debt plus the capitalisedinterest, could produce a result which might at first sight appearoppressive, and yet there would be nothing harsh or unconscionable in thecreditor's demand, since the added interest only accumulated whileheforebore to enforce the payment of the sums from time to time due tohim."
S.R.M.S. Chethambaram Chettier v. Loo Thon Poo, AIR (1940) Privy Council60, was a dispute between money lenders and borrowers arising for the Stateof Johore. Interest was charged @ 24% and was then capitalised and madepayable by monthly instalments. Question arose whether the interest socharged was excessive and unfair. Their Lordships held that where a loanhas been incurred for interest and this interest is added to the amountagreed to be due when a new transaction is agreed between the parties whichincludes that payment of interest as an acknowledged debt this is not inprinciple open to any sound objection. Their Lordships referred to thedecision of the Court of Appeal in Lyle v. Chappel, [1932] 1 KB 691, speechof Lord Atkin in Paton v. Inland Revenue Commissioners, [1938] AC 341,decision of Channel, J, in Carrington Ltd. v. Smith, [1906] 1 KB 79, andthe decision by the Court of Appeal in Reading Trust v. Spero, [1930] 1 KB492, and held that a willing and intelligent borrower had agreed to theinterest charged is one of the circ*mstances to be taken into accountthough not conclusive. Their Lordships upheld the charge of 15% interestpayable on the sums from time to time acknowledge to be owing by theborrowers to the lenders and thus allowing interest on interest. However,interest charged @ 24% on the loan and charges which were amply secured bycharges on rubber estate which had been well looked after and kept in goodorder was held unreasonable, excessive and unfair. The fact remains thatTheir Lordships approved charging of interest @ 15% and capitalisation ofthe same by means of acknowledgment to that effect by the borrowers andalso upheld permissibility of further 15% interest being charged on the sumso capitalised.
It was pointed out in Lyle v. Chappel, (Supra, at p., 706) that it oughtnot to make any difference to the validity of a transaction by way of arenewal of a loan, whether the parties go through the form of payment bythe borrower of the whole amount due and a re-landing of the same amount bythe money lender, or the transaction is carried out without any suchpayment by treating the amount of principal and interest still due as adebt acknowledged by the borrower together with an undertaking by theborrower to pay the amount of the agreed debt.
Jafar Husain v. Bishambhar Nath, AIR 1937 Allahabad 442, was a case ofrecovery due on a mortgage and considered by reference to Order 34, Rule 11of the Code of Civil Procedure. The words 'on the principal amount found ordeclared due on the mortgage' came up for the consideration of DivisionBench. It was contended for the borrower that in calculating the amount dueto the mortgagee up to the date fixed for redemption, interest from thedate of the decree till the date fixed for redemption should be calculatedon the principal sum secured by the deed and not on the total amount due onthe date of the decree on account of principal as well as compoundinterest. The mortgage deed provided for interest being calculated sixmonthly and that if it was not paid then it would become a part of theprincipal. The Division Bench held that the words 'on the principal amountfound or declared due' refer not only to the principal sum secured by themortgage deed but also to the amount due on account of interest which hasbecome a part of principal in accordance with the terms of the deed on thedate when the preliminary decree is prepared. The Division Bench pointedout that reliance by the borrower on a ruling of the Oudh Chief Court inChotey Lai v. Mohammad Ahmad Ali Khan, AIR (1933) Oudh 128, which appearedto be taking a view to the contrary was not good law inasmuch as adifferent view was taken by the same Court in Rajendra Bahadur Singh v.Raghubir Singh, AIR (1034) Oudh 473. In Padianiappa Mudaliar and Ors. \.Narayana Ayyar and Ors., AIR (1943) Madras 157, the mode of dealing adoptedby the parties was what is usually followed between banker and customer.The effect of the system is to capitalise the interest at the end of eachyear and treat it is a fresh advance by the bank. The Division Bench notedthat according to the usage prevailing between bankers and customers, it isan implied term of their dealing that the banker is to be treated as havingmade an advance to the customer at the end of each year or half year, asthe case may be, of a sum equivalent in amount to the interest accruingduring that period, so as to enable the customer to discharge the interest,increasing the principal of his debt by a corresponding amount. It wasurged that the periodical settlement of accounts evidenced by theborrower's letter of acknowledgment were renewals and only the sumsadvanced as principal were repayable notwithstanding its capitalisation ofinterest from time to time the interest being still treated as interest andwiped out. The Division Bench speaking through Patanjali Sastri, J. (as hisLordship then was) noted that if the effect of the mode of dealing adoptedbetween banker and customer is according to the long standing usagegoverning their relations, to treat the interest accruing in any year asdischarged by a borrowing of an equivalent sum from the bank in preciselythe same way as if the customer had given the bank a cheque upon theaccount for the amount in question with which the bank extinguished theinterest and then placed the amount of the cheque to the debit of theaccount as an ordinary draft." it is difficult to see how the operation ofthis principle is affected by anything contained in the explanation to befound in the relevant provision of Madras Agriculturists' Relief Act, 1938which merely provides that in cases of renewal of the debt, the sumsadvanced as principal shall alone be treated as the principal sum repayableby the agriculturists; for, the interest of the previous year is, under therule, discharged, and the corresponding increase in the indebtedness of thecustomer is treated as a principal sum advanced by the bank.
Two decisions by Kerala High Court may now be noticed. Palai Central BankLtd. v. C. Ramaswami Nadar, AIR 1959 Kerala 194, is a Division Benchdecision which noticed a line of Full Bench decisions of the TravancoreHigh Court taking the view that when the agreement between the parties to alitigation sanctioned arrears of interest remaining unpaid for anyspecified period being treated as principal, the principal amount sued forwithin the meaning of the concerned provision would be the amount claimedin the plaint as principal on that basis. It was held that the terms'principal' used in Section 31 of Travancore Civil Procedure Code (8 of1100) is not restricted in its meaning to the original sum lent and that anagreement to treat arrears of interest, at fixed periods, as principal,which is to carry interest, is valid. It was further held that the word'principal amount' are not restricted to the original sum lent but arecomprehensive to include arrears of interest, on which interest is agreedto be paid. Trandamma and Ors. v. Kuriakore Patherichal lype, AIR (1962)Kerala 235, is Full Bench decision which, though did not notice theDivision Bench decision in Palai Central Bank Limited (supra), laid downthe same law. An overdraft agreement entered into by the defendants withthe plaintiff bank provided that the interest at 7 1/2% as agreed upon willbe calculated quarterly, four times every year, and added to the principal.On the balance shown as due on 31.12.1952 in the account maintained by theBank in pursuance of such agreement, the suit was filed for recovery of theamount due on 31.12.1952 as principal with future interest till the date ofthe suit. It was held that the effect of the agreement was to wipe off allinterest outstanding at the end of each quarter by means of furtheradvances from the bank of similar amounts which are debited to the accountof the debtor. It was further held that the interest that thus accumulatedwith principal at the end of each quarter became principal and neverthereafter ceased to be dealt with as principal. The amount due on31.12.1952 in the account was treated as the principal amount outstandingon 1.11.1953. However, in passing the Full Bench noted that the positionmay have been different if under a local debt relief law it wassubsequently provided that the principal would mean the amount originallyadvanced together with sum, if any subsequently advanced, notwithstandingany stipulation to treat any interest as principal.
In AIR (1981) Madras 94, the DivisionBench, speaking through Nainar Sundram, J., pointed out that the chargingof compound interest by itself is not per se usurious except in the case ofan agriculturist protected by the Usurious Loans Act, 1981 as amended inits application in Madras. However, the Division Bench, by reference to anearlier decision of that High Court, pointed out that for the purpose ofdetermining whether interest would be excessive or not the risk incurred bythe creditor by advancing the loan (whether it was secured or not and ifsecured to what extent) and if compound interest is charged, the periods atwhich it is calculated and the total advantage which may be reasonablyexcepted to have accrued from the transaction, are important factors.
In Syndicate Bank v. M/s. West Bengal Cements Limited and Ors., AIR (1989)Delhi 107, Y.K. Sabharwal, J. (as his Lordship then was) rejected thecontention of learned counsel for the borrower that the interest can neverbecome principal and the words 'principal sum' in Section 34, Code of CivilProcedure should be given the ordinary meaning as given in thedictionaries, and termed as misconceived the argument that the interestunder section 34 could be awarded only on the original sum advanced as theargument ran counter to the normal banking practice, and which, ifaccepted, would act as a premium for those not paying the amount ofinterest when it is due at the cost of those making payment of interestwhen it is due. It was held that the bank was entitled to the sum claimedas due from and payable by the defendants as the principal sum with futureinterest on such amount from the date of suit to the date of realisation.Reliance was placed on Division Bench decision of Madras High Court inSigappiachi v. M.A.P.A. Palaniappa Chettiar, AIR (1972) Madras 463, holdingthat the 'principal sum adjudged' (within the meaning of Section 34 of theCode of Civil Procedure) is the amount found due as on the date of thesuit.
Division Bench decision in Kalyanpur Cold Storage, Kalyanpur and Ors. v.Sohanlal Bajpai (deceased by LRs.) and Anr., AIR (1990) Allahabad 218, andSingle Bench decision in Indian Bank v. M/s. Kamalalaya Cloth Store andAnr., AIR (1991) Orissa 44, have taken the view, though they do not containany elaborate reasoning, that under Section 34 of the Code of CivilProcedure the expression 'principal sum adjudged' is to be distinguishedfrom principal sum advanced. The Orissa High Court has followed the Delhideci-sion above said. It was a case of commercial loan. The amount ofinterest quarterly added to the amount of loan was held entitled asprincipal amount on the date of the suit for the purpose of futureinterest.
In State Bank of India v. Advar Singh Saih and Ors., AIR (1986) Punjab &Haryana 381, while rejecting the borrower's application under Order 6, Rule5 of the Code of Civil Procedure seeking direction to the bank to point outseparately by breaking up its claim so as to show the amount of theprincipal and the interest separately, it was held that the principalamount found due not only means the principal amount but also the amountdue as interest which has become part of the principal.
In Nedungadi Bank Ltd. v. M/s. Aswathi Starch and Glucose (P) Ltd.,Anamangad & Ors., AIR (1996) Kerala 112, K.G. Balakrishnan, J. (as hisLordship then was), speaking for the Division Bench, held that theexpression "principal sum adjudged" used in Section 34 indicates that it isnot the original principal amount but it could be an amount so adjudged asprincipal. If, as per the contract between the parties, interest also is tobe treated as principal, the amount so adjudged is to be taken as principalfor granting future interest.
In , AIR (2000) Bombay151, Y.K. Sabharwal, C.J. (as his Lordship then was) speaking for theDivision Bench, dealing with Section 34 of the Civil Procedure Code, heldthat legal position clearly was; that the principal sum adjudged' caninclude in it interest as well, depending upon the contract between theparties. The contract for payment of interest with quarterly rests resultedinto the interest being capitalised so as to make sum total of theprincipal advanced plus interest accrued thereon "principal sum adjudged"
on the date of the suit, the expres-sion as employed under Section 34.
In Shew Kissen Battar v. The Commissioner of Income Tax, Calcutta, [1973] 4SCC 115, this Court has observed that on failure of the borrower to pay inaccordance with the terms of the contract he is liable to pay compoundinterest. In other words, if he fails to pay interest in accordance withthe contract, he is liable to pay interest on interest. To put itdifferently, when the interest payable is not paid, the same becomes a partof the principal and thereafter interest has to be paid not only on theoriginal principal but also on that part of the interest which had become apart of the principal.
In , [1994] 5 SCC 213 a batch ofappeals against three decisions of Karnataka High Court [reported as D.S.Gowda v. Corporation Bank, AIR (1983) Karnataka 143, H.P. Krishna Reddy v.Canara Bank, AIR (1985) Karnataka 228 and Bank of India v. Kamam Ranga Raoand Ors., AIR (1986) Karnataka 242] were disposed of and while doing so twodecisions of Andhra Pradesh High Court, namely, K.C. Venkateswarlu v.Syndicate Bank, AIR (1986) AP 290 and State Bank of India, Eluru, Re, AIR(1986) AP291, where also noticed and dealt with D.S. Gowda's case was of acommercial advance taken by the borrower for the purpose of constructingresidential flats on a building site allotted by Bangalore Develop-mentAuthority. Interest at the rate of 16.5% per annum, with quarterly rests,was charged. Interest, penal interest and service charges were debited tothe account and capitalised. In the cases of H.P. Krishna Reddy, (supra)and Kamam Ranga Rao (supra), loans were advanced for agricultural purposes.
Directions made by Reserve Bank of India were violated and the interest wascharged at rates far excess of the limits prescribed by the Reserve Bank,also by compounding at quarterly rests, not permitted by Reserve Bank. Oneof the questions having a bearing on the day to day transactions ofloan/advance entered into by the banks was: Whether the bank is entitled toclaim interest with periodical rests, e.g., a monthly rest, a quarterlyrest, a six-monthly rest, or a yearly rest, or compound interest in anyother manner, from a borrower who has obtained a loan or an advance foragricultural/commercial purposes, as the case may be? During the course ofits judgment the Court observed (vide para 14) :-
"......charging of interest with periodical rests or compounding ofinterest would be allowed if there is evidence of the customer havingacquiesced therein, provided the relation of banker and customer issubsisting. However, if the relationship undergoes a change into that ofmortgagee and mortgagor by the taking of a mortgage, the charging ofinterest would be governed in accordance with the terms of the mortgage.The taking of a mortgage to secure the fluctuating balance of an overdrawnaccount, being not inconsistent with the relationship of banker andcustomer, would not displace an earlier right to charge compound interest.Thus, the practice of bankers to debit the accrued interest to theborrower's current account at regular periods is a recognised practice."
Their Lordships cited with approval the following passage from Halsbury'sLaws of England (4th Edition) (Vol. 3, at page 118, para 160) :-
"160. Interest. By the universal custom of bankers, a banker has the rightto charge simple interest at a reasonable rate on all overdrafts. Anunusual rate of interest, interest with periodical rests, or compoundinterest can only be justified, in the absence of express agreement, wherethe customer is shown or must be taken to have acquiesced in the accountbeing kept on that basis. Whether such acquiescence can be assumed from hisfailure to protest at an interest entry in his statement of account isdoubtful.
Acquiescence in such charges only justifies them so long as the relation ofbanker and customer exists with respect to the advance. If the relation isaltered into that of mortgagee and mortgagor by the taking of a mortgage,interest must be calculated according to the terms of the mortgage, oraccording to the new relation.
The taking of a mortgage to secure a fluctuating balance of an overdrawnaccount, is not, however, inconsistent with the relation of a banker andcustomer, so as to displace a previously accrued right to charge compoundinterest.
It is the practice of bankers to debit the accrued interest to theborrower's current account at regular periods (usually half-yearly); wherethe current account is overdrawn or becomes overdrawn as the result of thedebit the effect is to add the interest to the principal, in which case itloses its quality of interest and becomes capital."
Their Lordships reversed the judgment of the Karnataka High Court which wasunder appeal and approved and affirmed view of the same High Court in H.P.Krishna Reddy v. Canara Bank, AIR (1985) Karnataka 228, and Bank of Indiav. Kamam Ranga Rao, AIR (1986) Karnataka 242. Universal banking practice ofusually charging interest on periodical rests and com-pounding interest onremaining unpaid was specifically dealt with and approved. The principlerelevant consideration which prevailed with the Court were : continuingjudicial upholding of such practice over a length of time and the ReserveBank of India by issuing circulars/directives from time to time and onpaying 'adequate attention' having accorded its approval to permissibilityof such practice but intervening in the interest of streamlining the same.
2785/1987) decided on September 21, 1994 [see [1996] 5 SCC, atp. 280] is a short judgment delivered by three-Judge Bench of this Courtapproving the two-Judge Bench decision of this Court in Corporation Bank(supra). Therein the sum borrower by the debtor was Rs. 1,20,675.59p towhich compound interest was added and a suit to recover a sum of Rs.l,66,759.29p. with interest was filed claiming that the interest chargedand added to the sum borrowed would be the principal sum adjudged on whichfuture interest could be granted under section 34 of the Civil ProcedureCode. This plea found favour with the Trial Judge. On appeal the High Courtmodified the decree by directing that future interest should be calculatedon the sum borrowed viz. Rs. 1,20,675.59 and not the principal sum adjudgedi.e. Rs. 1,66,759.29. This Court set aside the appellate judgement of theHigh Court and restored the decree passed by the Trial Judge.
In Renusagar Power Co. Ltd. v. General Electric Co., [1994] Supp. 1 SCC644, pp. 89-93 a three-Judge Bench of this Court has noted the practice ofcharging interest as prevalent in Australia, Canada and India and held thatcompound interest can be awarded by Courts in India when justice so demandsand is not to be regarded as being against public policy. The Court notedthat it is a common knowledge that provision is made for the payment ofcompound interest in contracts for loans advanced by banks and financialinstitutions and such contracts are enforced by Courts.
Shri Ranjit Kumar, the learned amicus brought to the notice of the Court afew decisions taking the view that under Section 34 of the CPC principalsum has to be read as consisting of the amounts actually advanced and hencethe Court must unscramble the amalgam and segregate such principal sum fromthe amount of interest compounded and capitalised and confine award ofinterest pendente lite and post-decree only to such principal sum. Hereferred to , [1969] 1 SCC220; M.V. Mahalinga Aiyar v. Union Bank Ltd., Kumbakonam, AIR (1943) Madras216; l.K. Merchants Ltd. v. Indra Prakash Karnani, AIR (1973) Calcutta 306;D.S. Gowda v. M/s. Corporation Bank, AIR (1983) Karnataka 143; Union Bankof India v. Gaurishankar Upadyay, AIR (1992) Bombay 482; Gujarat Agro OilEnterprises Ltd. Ahmedabad v. Arvind H. Pathak, AIR (1993) Gujarat 47,Indian Bank, rep. by the Zonal Manager, Hyderabad v. P. Venkata Satyavathi& Ors., (1993) 1 Andhra Weekly Reports 607, Ramashree Chandrakar v. DenaBank & Anr., (, AIR (1996) HP 1. Obviously he could not have multiplied theauthorities which are bound to be few being not in line with the weight ofthe judicial authority which we have already dealt with. Having gonethrough all the cited rulings we are of the opinion that no dent results inthe view we are taking.
's case decided by this Court was a case ofmortgage decided by reference to Order 34 of the C.P.C. wherein it was heldthat till the period for redemption expired, the matter was in domain ofcontract but after the period of redemption the matter passed to that ofjudgment. Vide para 5, the Court has said that the special provision ofOrder 34 would apply in preference to the general provisions in Section 34in the case of mortgage. Clearly this Court has not laid down any principledealing with Section 34 of the C.P.C.. In M.V. Mahaling Aiyar's caseDivision Bench of Madras High Court has not dealt with the principle ofcapitalisation. The case has no rel-evance for the issue at hand. FullBench decision of Bombay High Court in Union Bank of India v. GaurishankarUpadyay proceeds on the assumption that the 'principal sum'can neverinclude interest whatever be the agreement between the parties and thishypothesis is itself incorrect as we have dealt with. The Full benchdissented from the view taken by a number of High Courts and chose tofollow a Division Bench decision of that very High Court in the case ofM/s. , which has beenreversed by this Court (See - [1996] 5 SCC 279). D.S. Gowda's cast ofKarnataka High Court was also reversed by this Court. Himachal Pradesh,Madhya Pradesh, Andhra Pradesh and Punjab High Court decisions cited by thelearned amicus, are based on Bombay High Court Full Bench view. In I.K.Merchants Ltd. 's case, the learned single Judge of Calcutta High Court hasnot approved interest being awarded on the sum adjudged as interest for thepre-suit period (See, Para 3 L of the Report). To the same effect is theDivision Bench decision of Gujarat High Court in Gujarat Agro's case. Thesetwo decisions have no relevance to the issue before us. Conclusion whichfollows :
The English decisions and the decisions of this Court and almost all theHigh Courts of the country have noticed and approved long established bank-ing practice of charging interest at reasonable rates on periodical restsand capitalising the same on remaining unpaid. Such a practice is prevalentand also recognised in non-banking money lending transactions. Legislaturehas stepped in from time to time to relieve the debtors from hardshipwhenever it has found the practice of charging compound interest and itscapitalisation to be oppres-sive and hence needing to be curbed. Thepractice is permissible, legal and judicially upheld excepting whensuperseded by legislation. There is nothing wrong in the partiesvoluntarily entering into transactions, evidenced by deeds incorporatingcovenant or stipulation for payment of compound interest at reasonablerates, and authorising the creditor to capitalise the interest on re-maining unpaid so as to enable interest being charged at the agreed rate onthe interest component of the capitalised sum for the succeeding period.Interest once capitalised, sheds its colour of being interest and becomes apart of principal so as to bind the debtor/borrower.
Interest and its classes :
Black's Law Dictionary (7th Edition) defines 'interest' inter alia as thecompensation fixed by agreement or allowed by law for the used or detentionof money, or for the loss of money by one who is entitled to its use;especially, the amount owed to a lender in return for the use of theborrowed money. According to Stroud's Judicial Dictionary of Words andPhrases (5th edition) interest means, inter alia, compensation paid by theborrower to the lender for deprivation of the use of his money. In,[1992] 1 SCC 508, the Constitution Bench opined that a person deprived ofthe use of money to which he is legitimately entitled has a right to becompensated for the deprivation, call it by any name. It may be calledinterest, compensation or damages........this isthe principles of Section 34, Civil Procedure Code. In Dr. Shamlal Narulav. C.I.T., Punjab, [1964] 7 SCR 668, this Court held that interest is paidfor the deprivation of the use of the money. The essence of interest in theopinion of Lord Wright, in Riches v. Westminister Bank Ltd., [1947] 1 AllER 469, 472, is that it is a payment which becomes due because the creditorhas not had his money at the due date. It may be regarded either asrepresenting the profit he might have made if he had had the use of themoney, or, conversely, the loss he suffered because he had not that use.The general idea is that he is entitled to compensation for thedeprivation; the money due to creditor was not paid, or, in other words,was withheld from him by the debtor after the time when payment should havebeen made, in breach of his legal rights, and interest was a compensationwhether the compensation was liquidated under an agreement or statute. ADivision Bench of the High Court of Punjab speaking through Tek Chand, J.in C.I.T., Punjab v. Dr. Shamlal Narula, AIR (1963) Punjab 411 thusarticulated the concept of interest - "the words "interest" and"compensation" are sometimes used interchangeably and on other occasionsthey have distinct connotation. "Interest" in general terms is the returnor compensation for the use or retention by one person of a sum of moneybelonging to or owned to another. In its narrow sense,"interest" isunderstood to mean the amount which one has contracted to pay for use ofborrowed money.......... In whenever category "interest" in a particularcase may be put, it is a consideration paid either for the use of money orfor forbearance in demanding it, after it has fallen due, and thus, it is acharge for the use or forbearance of money. In this sense, it is acompensation allowed by law or fixed by parties, or permitted by custom orusage, for use of money, belonging to another, or for the delay in payingmoney after it has become payable." It is the appeal against this decisionof Punjab High Court which was dismissed by Supreme Court in Dr. ShamlalManila's case (supra).
However 'penal interest' has to be distinguished from 'interest'. Penalinterest is an extraordinary liability incurred by a debtor on account ofhis being a wrong-doer by having committed the wrong of not making thepayment when it should have been made, in favour of the person wronged andit is neither related with nor limited to the damages suffered. Thus, whileliability to pay interest is founded on the doctrine of compensation, penalinterest is a penalty founded on the doctrine of penal action. Penalinterest can be charged only once for one period of default and, therefore,cannot be permitted to be capitalised.
Mulla on the Code of Civil Procedure (1995 Edition) sets out threedivisions of interest as dealt in Section 34 of CPC. The division isaccording to the period for which interest is allowed by the Court, namely
- (1) interest accrued due prior to the institution of the suit on theprincipal sum adjudged; (2) additional interest on the principal sumadjudged, from the date of the suit to the date of the decree, at such rateas the Court deems reasonable; (3) further interest on the principal sumadjudged, from the date of the decree to the date of the payment or to suchearlier date as the Court thinks fit, at a rate not exceeding 6 per centper annum. Popularly the three interests are called pre-suit interest,interest pendente lite and interest post-decree or future interest.Interest for the period anterior to institution of suit is not a matter ofprocedure; interest pendente lite is not a matter of substantive law (See,,[1992] 1 SCC 508, Pr. 44-iv). Pre-suit interest is referable to substantivelaw and can be sub-divided into two sub-heads; (i) where there is astipulation for the payment of interest at a fixed rate; and (ii) wherethere is no such stipulation. If there is a stipulation for the rate ofinterst, the Court must allow that rate upto the date of the suit subjectto three exceptions; (i) any provision of law applicable to money lendingtransactions, or usury laws or any other debt law governing the parties andhaving an overriding effect on any stipulation for payment of interestvoluntarily entered into between the parties; (ii) if the rate is penal,the Court must award at such rate as it deems reasonable; (iii) even if therate is not penal the Court may reduce it if the interest is excessive andthe transaction was substantially unfair. If there is no expressstipulation for payment of interest the plaintiff is not entitled tointerest except on proof of mercantile usage, statutory right to interest,or an implied agreement. Interest from the date of suit to date of decreeis in the discretion of the Court. Interest from the date of the decree tothe date of payment or any other earlier date appointed by the Court isagain in the discretion of the Court - to award or not to award as also therate at which to award. These principles are well established and are notdisputed by learned counsel for the parties. We have stated the same onlyby way of introduction to the main controversy before us which has a colourlittle different and somewhat complex. The learned counsel appearing beforeus are agreed that pre-suit interest is a matter of substantive law and avoluntary stipulation entered into between the parties for payment ofinterest would being the parties as also the Court excepting in any caseout of the three exceptions set out hereinbefore.
"Such Principal Sum"-meaning of:
Let us paraphrase the relevant part of Section 34(1) as under and then dealwith the question posed before us: "Where and in so far as a decree is forthe payment of money, the Court may, in the decree, order interest at suchrate as the Court deems reasonable to be paid on the principal sumadjudged,from the date of the suit to the date of the decree, in addition to anyinterest adjudged on such principal sum for any period prior to theinstitution of the suit, with further interest at such rate not exceedingsix per cent per annum, as the Court deems reasonable on such principalsum, from the date of the decree to the date of payment, or to such earlierdate as the Court thinks fit."
A few points are clear from a bare reading of the provision. Whiledecreeing a suit if the decree be for payment of money, the Court wouldadjudge the principal sum on the date of the suit. The Court may also becalled upon to adjudge interest due and payable by the defendant to theplaintiff for the pre-suit period which interest would, on the findingsarrived at and noted by us hereinabove, obviously be other than suchinterest as has already stood capitalised and having shed its character asinterest, has acquired the colour of the principal and having stoodamalgamated in the principal sum would be adjudged so. The principal sumadjudged would be the sum actually loaned plus the amount of interest onperiodical rests which according to the contract between the parties or theestablished banking parties has stood capitalised. Interest pendente liteand future interest (i.e. interest post-decree not exceeding 6 per cent perannum) shall be awarded on such principal sum i.e. the principal sumadjudged on the date of the suit. It is well settled that the use of theword 'may' in Section 34 confers a discretion on the Court to award or notto award interest or to award interest at such rate as it deems fit. Suchinterest, so far as future interest is concerned may commence from the dateof the decree and may be made to stop running either with payment or withsuch earlier date as the Court thinks fit. Shortly hereinafter we proposeto give an indication of the circ*mstances in which the Court may declineaward of interest or may award interest at a rate lesser than thepermissible rate.
It was submitted by the learned amicus and other counsel for the bor-rowers, that the expression "on such principal sum" as occurring twice inthe latter part of Section 34(1), which refers to interest pendente liteand post-decree, should be interpreted to mean principal sum arrived at byexcluding the interest even if it has stood capitalised. This would beconsistent with the legislative intent as reflected in the report of JointCommittee and sought to be fulfilled by 1956 Amendment. For two reasonsthis contention has to be rejected. Firstly, entertaining such a pleaamounts to begging the question. As we have already held that the interestonce capitalised ceases to be interest and becomes a part of principal sumor capital. That being so the interest forming amalgam with the principal,in view of having been capitalized, is principal sum and therefore thequestion of awarding interest on interest does not arise at all. Secondly,well-settled principles of interpretation of statutes would frown upon sucha plea being entertained. A construction which leads to repugnancy orinconsistency has to be avoided. Ordinarily, a word or expres-sion used atseveral places in one enactment should be assigned the same meaning so asto avoid "a head-on clash" between two meanings assigned to the same wordor expression occurring at two places in the same enactment. It should notbe lightly assumed that "Parliament had given with one hand what it tookaway with the other" [See - Principles of Statutory Interpretation, JusticeG.P. Singh, 7th Edition 1999, p.1 13]. That construction is to be rejectedwhich will introduce uncertainty, friction or confusion into the working ofthe system (ibid, p.l 19). While embarking upon interpretation of words andexpressions used in a Statute it is possible to find a situation when thesame word or expression may have somewhat different meaning at differentplaces depend-ing on the subject or context. This is however an exceptionwhich can be resorted to only in the event of repugnancy in the subject orcontext being spelled out. It has been the consistent view of Supreme Courtthat when the Legislature used same word or expression in different partsof the same section or statute, there is a presumption that the word isused in the same sense throughout, (ibib, p.263). More correct statement ofthe rule is, as held by House of Lords in Farrell v. Alexander, [1976] 2All E.R. 721, 736, "where the draftsman uses the same word or phrase insimilar contexts, he must be presumed to intend it in each place to bearthe same meaning". The Court having accepted invitation to embark uponinterpretative expedition shall iden-tify on its radar the contextual useof the word or expression and then determine its direction avoidingcollision with icebergs of inconsistency and repugnancy.
Webster defines "such" as "having the particular quality or characterspecified; certain; representing the object as already particularised interms which are not mentioned. In New Webster's Dictionary And Thesaurus,mean-ing of "such" is given as "of a kind previously or about to bementioned or implied; of the same quality as something just mentioned (usedto avoid the repetition of one word twice in a sentence); of a degree orquantity stated or implicit; the same as something just mentioned (used toavoid repetition of one word twice in a sentence); that part of somethingjust stated or about to be stated." Thus, generally speaking, the use ofthe word "such" as an adjective prefixed to a noun is indicative of thedraftsman's intention that he is assigning the same meaning orcharacteristic to the noun as has been previously indicated or that he isreferring to something which has been said before. This principle has allthe more vigorous application when the two places employing the sameexpression, at earlier place the expression having been defined orcharacterised and at the latter place having been qualified by use of theword "such", are situated in close proximity.
We are of the opinion that the meaning assigned to the expression 'theprincipal sum adjudged' should continue to be assigned to "principal sum"
at such other places in Section 34(1) where the expression has been usedqualified by the adjective "such" that is to say, as "such principal sum".
Recognition of the method of capitalisation of interest so as to make it apart of the principal consistently with the contract between the parties orestablished banking prac-tice does not offend the sense of reason, justiceand equity. As we have noticed such a system has a long establishedpractice and a series of judicial precedents upholding the same. Secondly,the underlying principle as noticed in several decided cases is that wheninterest is debited to the account of the borrower on periodical rests, itis debited because of its having fallen due on that day. Nothing preventsthe borrower from paying the amount of interest on the date it falls due.If the amount of interest is paid there will be no occasion forcapitalising the amount of interest and converting it into principal. Ifthe interest is not paid on the date due, from that date the creditor isdeprived of such use of the money which it would have made if the debtorhad paid the amount of interest on the date due. The creditor needs to becompensated for deprivation. As held in Pazhaniappa Mudaliar and Ors. v.Narayana Ayyar and Ors. (supra) the fact-situation is analogous to one asif the creditor has advanced money to the borrower equivalent to the amountof interest debited. We are, therefore, of the opinion that the expression"the principal sum ad-judged" may include the amount of interest, chargedon periodical rests, and capitalised with the principal sum actuallyadvanced, so as to become an amalgam of principal in such cases where it ispermissible or obligatory for the Court to hold so. Where the principal sum(on the date of suit) has been so adjudged, the same shall be treated as"principal sum" for the purpose of "such principal sum" - the expressionemployed later in Section 34 of C.P.C.. The expression "principal sum"
cannot be given different meanings at different places in the language ofsame section, i.e. Section 34 of C.P.C..
The 1956 amendment serves two-fold purpose. Firstly, it prevents award ofinterest on the amount of interest so adjudged on the date of suit.Secondly, it brings the last clause of Section 34, by narrowing down itsambit, in con-formity with the scope of the first clause in so far as theexpression "the principal sum adjudged" occurring in the first part ofSection 34 is concerned which has been left untouched by amendment. Themeaning to be assigned to this expression in the first part remains thesame as it was even before the amendment. However, in the third part ofSection 34 the words used were "on the aggregate sum so adjudged". Thejudicial opinion prevalent then was (to wit, see , AIR (1954) Calcutta 289, 295 that 'aggregatesum' contemplated the aggregate of (i) the principal sum adjudged, (ii) theinterest from the date of the suit to the date of decree, and (iii) thepre-suit interest. Future interest was capable of being awarded also on theamount of pre-suit interest - adjudged as such, that is, away from suchinterest as was adjudged as principal sum having amalgamated into in byvirtue of capitalisation. The amendment is intended to deprive the court ofits pre-amendment power to award interest on interest i.e. interest oninterest adjudged as such. The amendment cannot be read as intending,expressly or by necessary implication, to deprive the court of its power toaward future interest on the amount of the principal sum adjudged, thesense in which the expression was understood, also judicially expoundedeven before 1955; the expression having been left untouched by the 1956amendment.
It was submitted from borrowers' side that such an interpretation ofSection 34 of the Civil Procedure Code as canvassed on behalf of the banks,if accepted, may result in anomalous situations emerging. To wit, it waspointed out that if the bank deliberately and unscrupulously delays thesuit being filed, for such period of delay the bank would gain an advantageby continuing to charge interest at the contract rate and by capitalisingthe same. If the suit was filed promptly then the contract would cease tooperate and debtor would be relieved from the rigour of the contract andfind solace under the operation of Section 34 of the Civil Procedure Code.True it is that once a suit is filed in the Court, so far as Section 34 ofthe Civil Procedure Code is concerned, the relationship of parties ceasesto be governed by contract between the parties and comes to be governed bySection 34 of the Civil Procedure Code. Still the submission has to berepelled for several reasons. Firstly, the bank can afford to wait or delaythe filing of the suit only during the period of limitation which delaywould not be illegitimate. Secondly, noting prevents the debtor, evenduring the period of this delay, to pay or tender the amount of interest asand when it falls due and thereby prevent its capitalisation. Thirdly, thecourt is not powerless to deny the bank's claim for interest, if in thefacts and circ*mstances of a given case the court is persuaded to hold thatfiling of the suit was delayed for the purpose of deliberately gaining anunfair advantage over adverse finan-cial condition of the defendant. Insuch cases the pre-suit interest though claimed in accordance with thecontract would be denied by the Court on the ground of public policy and onthe ground of the creditor having tried to gain an unfair advantage overthe debtor by a deliberate inaction of himself, no one can take advantageof its own wrong.
It was further submitted that if the expression "the principal sum ad-judged" was to be interpreted and assigned a meaning as inclusive of theinterest capitalised and therefore being the principal sum to be adjudgedso at the date of the suit then there would be left nothing to be adjudgedby way of interest for the pre-suit period and therefore a part of Section34(1) "and in addition to any interest adjudged on such principal sum forany period prior to the institution of the suit" - shall be renderedredundant. We cannot subscribe to this submission. We give just anillustration or two to demonstrate reasons for our such opinion. The sameplaintiff while suing the same defendant may join in the suit more causesof action then one; one permitting capitalisation of interst, and theother, not permitting the same. There may be a case, as was Gowda's casedecided by this Court, wherein interest is capitalised with quar-terlyrests on a particular date, says 31st March and so on and the suit is filedbefore the date on which interest will be capitalised. The amount ofinterest charged for the period of time less than the quarter would remainan interest, not capitalised. Then there may be a case where interest mayhave been charged and capitalised at a rate exceeding the one permitted inwhich case the amount of interest charged and capitalised beyond thequantum permissible shall have to be separated. In all such cases theprincipal sum inclusive of capitalised interest to the extent permissibleshall be adjudged as 'principal sum' and there would also be 'in additionany interest adjudged by way of interest on such principal sum' for thepre-suit period. We therefore find force in the submission of the learnedSolicitor General that in that part of Section 34(1) which speaks of"interest adjudged on such principal sum" for pre-suit period, the textshould be read as if by reading "interest" qualified by "if any" so as tomake it meaningful.
It was also submitted that Section 34 of the CPC is general in itsapplication to all money suits and if banking practice or banking contractsproviding for capitalisation of interest charged on periodical rests wereto be recognised it will mean that application of Section 34 would bedifferent in suits filed by banks and in suits filed by creditors otherthan bankers. In our opinion it is bound to be so. Section 34 is a generalprocedural provision and whether it would apply or not and if apply then towhat extent would obviously depend on the fact situation of each case.
We are, therefore, of the opinion that two-Judge Bench decision of thisCourt in , and three Judge Benchdecision in , arecorrectly decided and are, therefore, affirmed. A creditor can chargeinterest from his debtor on periodical rests and also capitalise the sameso as to make it a part of the principal. Such a course can be justified bystipulation in a contract voluntarily entered into between the parties orby a practice or usage well established in the world to which the partiesbelong. Such practice is to be found already in vogue in the field ofbanking business. Such contract or usage or practice can stand abrogated bylegislation such as Usury Laws or Debt Relief Laws and so on.
A Few Notes of Caution:
Though we have answered the question of law before us, but we cannot leavethe matter at that alone without sounding notes of caution, lest our viewof the law should be misconstrued and misapplied. Before we do so, it wouldbe appropriate to refer to the decision of this Court in Corporation Bankv. D.S. Gowda (supra) in somewhat details.
The Banking Regulations Act, 1949 empowers Reserve Bank, on its beingsatisfied that it is necessary or expedient in the public interest or inthe interest of depositors or banking policy so to do, to determine thepolicy in relation to advances to be followed by banking companiesgenerally or by any banking company in particular and when the policy hasbeen so determined it has a binding effect. In particular, the Reserve Bankof India may give direc-tions as to the rate of interest and other termsand conditions on which advances or other financial accommodation may bemade. Such directions are also binding on every banking company. Section35A also empowers Reserve Bank of India in the public interest or in theinterest of banking policy or in the interests of depositors (and so on) toissue directions generally or in particular which shall be binding. Witheffect from 15.2.1984 Section 21A has been inserted in the Act which takesaway power of the Court to re-open a trans-action between a banking companyand its debtor on the ground that the rate of interest charged isexcessive. The provision has been given an overriding effect over the UsuryLoans Act, 1918 and any other provincial law in force relating toindebtedness.
This Court held in D.S. Gowda's case that the directions issued by theReserve Bank of India have statutory flavour. The Court noted thatagricultural finance stands on a different footing for the reason thatagriculturists do not have any regular source of income other than the saleproceeds of their crops and therefore agricultural loans have to be treateddifferently from other loans and borrowings. Reserve Bank of India has alsoshown its concern towards agriculturist loances by devising separate policyto govern them and not per-mitting capitalisation of accrued interest onagricultural loans except on annual rests or when the loan/instalment hasbecome overdue.
As to capitalisation of interest charged on periodical rests this Courtfound the High Court of Karnataka having noticed that banks in India werenot following a uniform practice and some banks charged interest withmonthly or quarterly rests while others charged with yearly or six monthlyrests and hence the Reserve Bank of India had to issue directives to bringabout uniformity in that behalf. In conclusion this Court held that if bankwas claiming interest in excess of that permitted by the circular/directionof the Reserve Bank, the Court could give relief to the aggrieved partynotwithstanding Section 21A to the extent of interest charged in excess ofthe rate prescribed by the Reserve Bank of India. A distinction was drawnbetween Court's power to interfere on the premise that the interest chargedis excessive under the general law and courts interference on the premisethat the interest charged is in contravention of the circulars/directionsissued by the Reserve Bank of India. In the former case it would not bepermissible in view of the bar enacted by Section 21A of the BankingRegulations Act while in the latter case it would be permissible because ofthe Reserve Bank's circulars and directions having statutory force underSections 21/35A of the Act having been violated. The question whetherinterest charged in excess of the minimum rate of interest appointed by theReserve Bank without fixing a ceiling and levying higher rate to be chargedat the discretion of each bank can be treated as excessive andunconscionable and whether in such situation Section 21A would debar theCourt from reduc-ing the rate of interest to a reasonable limit was leftopen and undecided as the same did not arise in the case before the Court.However it was made very clear that if the Reserve Bank has fixed themaximum rate of interest under Sections 21/35A of the Act any transactioncharging interest within the limit so ap-pointed would not be treated asexcessive.
It is interesting to note that the same Bench which decided D.S. Gowda'scase also decided State Bank of India, Bhubaneswar v. Ganjam DistrictTractor Owners Association and Ors., [1994] 5 SCC 238, and held that wherethe agreement between the bank and the borrower did not provided forpayment of compound interest or interest with periodical rests, the bankcould not have charged the same.
During the course of hearing it was brought to our notice that in view ofseveral Usury Laws and Debt Relief Laws in force in several States privatemoney lending has almost come to an end and needy borrowers by and largedepend on banking institutions for financial facilities. Several unhealthyprac-tices having slowly penetrated into prevalence were pointed out.Banking is an organised institution and most of the banks press intoservice long running documents wherein the borrowers fill in the blanks, attimes without caring to read what has been provided therein, and bindthemselves by the stipulations articulated by best of legal brains.Borrowers other than those belonging to corporate sector, find themselveshaving unwittingly fallen into a trap and rendered themselves liable andobliged to pay interest the quantum whereof may at the end prove to beruinous. At times the interest charged and capitalised is manifold than theamount actually advanced. Rule of damdupat does not apply. Penal interest,service charges and other over-heads are debited in the account of theborrower and capitalised of which debits the borrower may not even beaware. If the practice of charging interest on quarterly rests is upheldand given a judicial recognition, unscrupulous banks may resort to charginginterest even on monthly rests and capitalising the same. Statements of Ac-counts supplied by banks to borrowers many a times do not containparticulars or details of debit entries and when written in hand are worsethan medical prescriptions putting to test the eyes and wits of theborrowers. Instances of unscrupulous, unfair and unhealthy dealings can bemultiplied though they cannot be generalised. Suffice it to observe thatsuch issues shall have to be left open to be adjudicated upon inappropriate cases as and when actually arising for decision and we cannotventure into laying down law on such issues as do not arise fordetermination before us. However, we propose to place on record a fewincidental observations, without which, we feel, our answer will not becomplete and that we do as under :
(1) Though interest can be capitalised on the analogy that the interestfalling due on the accrued date and remaining unpaid, partakes thecharacter of amount advanced on that date, yet penal interest, which ischarged by way of penalty for non-payment, cannot be capitalised. Furtherinterest, i.e. interest on interest, whether simple, compound or penal,cannot be claimed on the amount of penal interest. Penal interest cannot becapitalised. It will be opposed to public policy.
(2) Novation, that is, debtor entering into a fresh agreement withcreditor undertaking payment of previously borrowed principal amountcoupled with interest by treating the sum total as principal, any contractexpress or implied and an express acknowledgement of accounts, are bestevidence of capitalisa-tion. Acquiescence in the method of accountingadopted by the creditor and brought to the knowledge of the debtor may alsoenable interest being con-verted into principal. A mere failure to protestis not acquiescence.
(3) The prevalence of banking practice legitimatises stipulations as tointerest on periodical rests and their capitalisation being incorporated incontracts. Such stipulations incorporated in contracts voluntarily enteredinto and binding on the parties shall govern the substantive rights andobligations of the parties as to recovery and payment of interest.
(4) Capitalisation method is founded on the principle that the borrowerfailed to make payment though he could have made and thereby renderedhimself a defaulter. To hold an amount debited to the account of theborrower capitalised it should appear that the borrower had an opportunityof making the payment on the date of entry or within a reasonable time orperiod of grace from the date of debit entry or the amount falling due andthereby avoiding capitalisa-tion. Any debit entry in the account of theborrower and claimed to have been capitalised so as to form an amalgam ofthe principal sum may be excluded on being shown to the satisfaction of theCourt that such debit entry was not brought to the notice of the borrowerand/or he did not have the opportunity of making payment beforecapitalisation and thereby excluding its capitalisa-tion.
(5) The power conferred by Sections 21 and 35A of the Banking RegulationsAct, 1935 is coupled with duty to Act. Reserve Bank of India is primebanking institution of the country entrusted with a supervisory role overbanking and conferred with the authority of issuing binding directions,having statutory force, in the interest of public in general and preventingbanking affairs from deterioration and prejudice as also to secure theproper management of any banking company generally. Reserve Bank of Indiais one of the watchdogs of finance and economy of the nation. It is, and itought to be, aware of all relevant factors, including credit conditions asprevailing, which would invite its policy decisions. RBI has been issuingdirections/circulars from time to time which, inter alia, deal with rate ofinterest which can be charged and the periods at the end of which rests canbe struck down, interest calculated thereon and charged and capitalised. Itshould continue to issue such directives. Its circulars shall bind thosewho fall within the net of such directives. For such transaction which arenot squarely governed by such circulars, the RBI direc-tives may be treatedas standards for the purpose of deciding whether the interest charged isexcessive, usurious or opposed to public policy.
(6) Agricultural borrowings are to be treated on a pedestal different fromothers. Charging and capitalisation of interest on agricultural loanscannot be permitted in India except on annual or six monthly restsdepending on the rotation of crops in the area to which the agriculturistborrowers belong.
(7) Any interest charged and/or capitalised in voilation of RBIdirectives, as to rate of interest, or as to periods at which rests can bearrived at, shall be dis-allowed and/or excluded from capital sum and betreated only as interest and dealt with accordingly.
(8) Award of interest pendente lite and post-decree is discretionary withthe Court as it is essentially governed by Section 34 of the CPC de horsthe contract between the parties. In a given case if the Court finds thatin the principal sum adjudged on the date of the suit the component ofinterest is disproportionate with the component of the principal sumactually advanced the Court may exercise its discretion in awardinginterest pendente lite and post-decree inter-est at a lower rate or mayeven decline awarding such interest. The discretion shall be exercisedfairly, judiciously and for reasons and not in an arbitrary or fancifulmanner.
In view of the law having been settled with this judgment, it is expectedhenceforth from the banks, bound by the directives of the Reserve Bank ofIndia, to make an averment in the plaint that interest/compound interesthas been charged at such rates, and capitalised at such periodical rests,as are permitted by, and do not run counter to, the directives of theReserve Bank of India. A statement of account shall be filed in Courtshowing details and giving particulars of debit entries, and if debit entryrelates to interest then setting out also the rate of, and the period forwhich, the interest has been charged. On the Court being prima faciesatisfied, if a dispute is raised in that regard, of the permissibility ofdebits, the onus would be on the borrower to show why the amount of debitbalance appearing at the foot of the account and claimed as principal sumcannot be so accepted and adjudged. This practice would narrow down thescope of controversy in suits filed by banking institutions and enable anexpeditious disposal of the suits, the issues wherein are by and largecapable of being determined by documentary evidence. RBI directives havenot only statutory flavour, any contravention thereof or any default incompliance therewith is punishable under sub-section (4) of Section 46 ofBanking Regu-lations Act, 1949. The Court can act on assumption thattransactions or dealings have taken place and accounts maintained by banksin conformity with RBI directives.
We have dealt with the law governing the debtor and creditor relation-ship.We have not dealt with any provision or principle of taxation lawwhereunder deemed payment of interest consequent upon capitalisation andactual payment whenever made may be treated as capital or revenue whichquestion shall have to be determined under the scheme of relevant statutoryenactment.
Subject to the above we answer the reference in following terms :
(1) Subject to a binding stipulation contained in a voluntary contractbetween the parties and/or an established practice or usage interest onloans and ad-vances may be charged on periodical rests and also capitalisedon remaining unpaid. The principal sum actually advanced coupled with theinterest on periodical rests so capitalised is capable of being adjudged asprincipal sum on the date of the suit.
(2) The principal sum so adjudged is 'such principal sum' within themeaning of Section 34 of the Code of Civil Procedure Code, 1908 on whichinterest pendente lite and future interest i.e. post-decree interest, atsuch rate and for such period which the Court may deem fit, may be awardedby the Court.
(3) Corporation Bank v. H.S. Gowda and Anr., [1994] 5 . have been correctly decided.
All the learned counsel for the parties did their best to assist the Courtin arriving at a just decision on the issues of significance and farreaching implications. However, we would like to place on record ourappreciation of valuable assistance given to Court by Shri Ranjit Kumar,Sr. Advocate assisted by Shri K.M.K. Nair and Shri A. Subba Rao, Advocates,who appeared as amicus curiae on Court's request and with objectivityplaced before the Court relevant material, judicial view-points and severalauthorities. As most of the borrowers were unrepresented, the Court neededtheir assistance.
Let all these appeals and SLPs be now placed before appropriate Bench fordecision.
