TaxTMI 
TaxTMI 
2001 (10) TMI 1065
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....rincipal sum' as occurring in section 34 of the Code of Civil Procedure, 1908 ('the Code') [as amended by the Code of Civil Procedure (Amendment) Act (66 of 1956) with effect from 1-1-1957], a question of frequent recurrence and having far reaching implications in suits for recovery of money, specially those filed by banking institutions against their borrowers, has been referred by a three-Judge Bench of this Court to the Constitution Bench. 2. It will be useful to reproduce the order of reference dated 7-5-1996 [since reported as Central Bank of India v. Ravindra (1996) 5 SCC 279] so as to highlight the nature and scope of controversy arising for decision before the Constitution Bench : " ORDER After hearing learned Attorney General and amicus curiae S/Shri A. Subba Rao, Ranjit Kumar and K.M.K. Nair on the interpretation of the provisions of Section 34 CPC on the 'the principal sum adjudged' the matter is required to be considered by a Constitution Bench. The learned Attorney General has drawn our attention to the judgments of this Court in Corpn. Bank v. D.S. Gowda [1994] 5 SCC 213 and Bank of Baroda v. Jagannath Pigment & Chemicals [1996] 5 SCC 280 wherein he sought to draw ....
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....nstitution 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 the decree to the date of payment, or to such earlier date as the Court thinks fit. ****** (2) Where such a decree is silent with respect to the payment of further interest on such aggregate sum as aforesaid from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefor shall not lie. (2) Where such a decree is silent with respect to the payment of further interest on such principal sum from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefor shall not lie." [Emphasis Supplied] 4. By the 1956 amendment, in section 34, for the words 'with further interest at such rate as the Court deems reasonable on the aggregate sum so adjudged', the words 'with further interest at such rate not exceeding six per cent per annum as the Court deems reasonable on such principal sum' have been substituted in sub-section (1). In su....
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....rterly instalments with exigibility clause. An appeal preferred by the bank before the High Court was partly allowed modifying the decree of the trial court by awarding interest at the rate of 11 per cent per annum and setting aside the facility of payment by instalments. However, the High Court directed the interest at the rate of 11 per cent per annum to be payable only on Rs. 99,000, which was stated to be the principal sum, from the date of the suit till realisation though the decree for Rs. 1,51,825, the amount due and payable on the date of the suit was maintained. The petitioner bank is aggrieved by the decree of the High Court to the extent to which future interest at the rate of 11 per cent per annum has not been allowed on the entire sum of Rs. 1,51,825. 7. We have heard Shri Harish N. Salve, the learned Solicitor General appearing for Union of India, Shri Rakesh Dwivedi, Sr. Advocate appear-ing for State Bank of India and Shri K.N. Bhat, Sr. Advocate who has intervened on behalf of the Indian Banks Association as also other learned counsel appearing for several banks. We have also heard Shri Ranjit Kumar, Senior Advocate, the learned amicus appointed to assist the Court....
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....ny view to the contrary, if accepted, would be destructive of banking system which is functioning on a practice recognised for over a century over the world, submitted the learned Solicitor General. 9. The learned Solicitor General further submitted that the position of law remains the same insofar as the meaning of 'the principal sum adjudged' occurring in the first part of section 34(1) is concerned and the principal sum so adjudged shall be the amount on which the Court shall award interest pendente lite, i.e., from the date of the suit to the date of the decree as also the future interest. In other words, submitted the learned Solicitor General, the Court shall adjudged the principal sum as it stands just anterior to the date of the suit consistently with the contract or banking practice binding the parties and once that is done 'the principal sum adjudged' shall be 'such principal sum' for the purpose of interest pendente lite is also future interest. So far as the 'interest adjudged' in addition to 'the principal sum adjudged' for any period prior to the institution of the suit is concerned, the learned Solicitor General submitted, that there may be cases where interest prio....
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....mitted that without regard to the fact that the interest for the pre-suit period has stood capitalised by force of contract or banking practice between the parties, and has assumed the colour and character of principal sum, the contract or banking practice ceases to be applicable once the suit is filed and the matter has entered the domain of Court under section 34 of the Code, whereafter nothing prevents the Court from unscrambling the amalgam so as to sieve out the principal from interest and confine the award of interest pendente lite and post decree to principal sum only. Capitalisation of interest debited on periodical rests - does it convert interest into 'the principal sum'? - a survey of judicial opinion : 11. A host of authorities were cited at the Bar, throwing light on the issue at hand. It will be useful to have a survey thereof. 12. We would begin with the statement of law in Reddie v. Williamson [1863] 1 Macph (Ct. of Sess.) 228, as we find that the law propounded therein has been 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 th....
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....al, the amount of it must be reckoned as part of the drafts on the credit, or beyond the credit, for which the party operating on the account will be liable as principal in any event, ....." (at p. 237) 13. In Yourell v. Hibernian Bank Ltd. 1918 AC 372, interest was charged from day to day with half yearly rests, so that the interest was capitalised every half year in accordance with the terms of the deed which also contained ceiling on the principal sum which could be recoverable on the security. Lord Atkinson observed in his speech that whenever on balancing the mortgagor's current account with the bank a debit balance was found against him, that balance, by force of the covenant, became part of the principal moneys secured by the mortgage subject, however, to the covenant limit, Lord Wrenbury opined that the interest upon the overdraft was capitalised half yearly and as against the bank the capitalised interest must be regarded as principal and hence the debit balance of the overdraft banking account was principal. In IRC v. Sir H.C. Holder, Bt. 1931 (2) KB 81, the bank debited half yearly interest to the borrower's bank account on the amount owing from time to time. It was hel....
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....ecurities bought, commission, or other source of debt. It takes its position as part of the whole debt due to the bank, and, as part of the whole debt, is in the next half-year chargeable with interest." His Lordship approved the view of Russell, J. of Court of Appeal taking the view that because of a provision contained in the deed between the parties which enables the interest to be capitalised, the interest is not capitalised because it is in fact paid, but because it has in fact not been paid. Lord Macmillan opined - "It may well be that, in a question between a bank and its customer, and equally between a bank and its customer's cautioner, the interest accruing annually may, by the sanctioned method of accounting, cease to be interest when it is accumulated with the principal, so that the bank can thereafter no longer sue for the interest as interest... It is manifest, however, that it is only by a legal fiction that the interest in such cases as the present can be said to have been paid. After, as before, the striking of the balance, the same sum remains due, no longer, it may be, as interest, but still due as part of the principal debt. In construing the extent of the cautio....
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....titling it to continue to charge compound interest after the account had been closed, or, a fortiori, after it had issued proceedings for the recovery of debt." 16. The matter went in appeal to the House of Lords. The House of Lords to some extent allowed the appeal preferred by the bank and modified the judgment of the Court of Appeal by holding that no reason can be seen why that relationship should not be continued until repayment of the debt, or judgment, whichever first accrued, with the effect that, so long as the contractual interest was payable, the bank continued to be entitled to capitalise it. The House of Lords did not agree with the Court of Appeal that the relationship of banker and customer stood terminated by the bank's demand for payment. 17. In Lala Balla Mal v. Ahad Shah AIR 1918 PC 249, the Privy Council recognised the justification for adding on the accumulated interest under an earlier transaction in the fresh transaction and observed as under:- "A borrower who obtains a loan secured by a promissory note on quite reasonable terms, by neglecting to pay the note on maturity, further neglecting to pay the accruing interest for the several years following, and ....
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.... and a re-lending of the same amount by the money lender, or the transaction is carried out without any such payment by treating the amount of principal and interest still due as a debt acknow-ledged by the borrower together with an undertaking by the borrower to pay the amount of the agreed debt. 20. Jafar Husain v. Bishambhar Nath, AIR 1937 All. 442, was a case of recovery due on a mortgage and considered by reference to Order 34, rule 11 of the Code. The words 'on the principal amount found or declared due on the mortgage' came up for the consideration of Division Bench. It was contended for the borrower that in calculating the amount due to the mortgagee up to the date fixed for redemption, interest from the date of the decree till the date fixed for redemption should be calculated on the principal sum secured by the deed and not on the total amount due on the date of the decree on account of principal as well as compound interest. The mortgage deed provided for interest being calculated six monthly and that if it was not paid then it would become a part of the principal. The Division Bench held that the words 'on the principal amount found or declared due' refer not only to t....
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....culturists' Relief Act, 1938 which merely provides that in cases of renewal of the debt, the sums advanced as principal shall alone be treated as the principal sum repayable by the agriculturists; for, the interest of the previous year is, under the rule, discharged, and the corresponding increase in the indebtedness of the customer is treated as a principal sum advanced by the bank. 21. Two decisions by Kerala High Court may now be noticed. Palai Central Bank Ltd. v. C. Ramaswami Nadar AIR 1959 Ker. 194, is a Division Bench decision which noticed a line of Full Bench decisions of the Travancore High Court taking the view that when the agreement between the parties to a litigation sanctioned arrears of interest remaining unpaid for any specified period being treated as principal, the principal amount sued for within the meaning of the concerned provision would be the amount claimed in the plant as principal on that basis. It was held that the terms 'principal' used in section 31 of Travancore Civil Procedure Code (8 of 1100) is not restricted in its meaning to the original sum lent and that an agreement to treat arrears of interest, at fixed periods, as principal, which is to carr....
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....the total advantage which may be reasonably expected to have accrued from the transaction, are important factors. 23. In Syndicate Bank v. West Bengal Cements Ltd. AIR 1989 Delhi 107, Y.K. Sabharwal, J. (as his Lordship then was) rejected the contention of learned counsel for the borrower that the interest can never become principal and the words 'principal sum' in section 34, of the Code should be given the ordinary meaning as given in the dictionaries, and termed as misconceived the argument that the interest under section 34 could be awarded only on the original sum advanced as the argument ran counter to the normal banking practice, and which, if accepted, would act as a premium for those not paying the amount of interest when it is due at the cost of those making payment of interest when it is due. It was held that the bank was entitled to the sum claimed as due from and payable by the defendants as the principal sum with future interest on such amount from the date of suit to the date of realisation. Reliance was placed on Division Bench decision of Madras High Court in Sigappiachi v. M.A.P.A. Palaniappa Chettiar AIR 1972 Mad. 463, holding that the 'principal sum adjudged' (....
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.... in accordance with the terms of the contract he is liable to pay compound interest. In other words if he fails to pay interest in accordance with the contract, he is liable to pay interest on interest. To put it differently, when the interest payable is not paid, the same becomes a part of the principal and thereafter interest has to be paid not only on the original principal but also on that part of the interest which had become a part of the principal. 29. In Corp. Bank v. D.S. Gowda [1994] 5 SCC 213 a batch of appeals against three decisions of Karnataka High Court [reported as D.S. Gowda v. Corp. Bank AIR 1983 Kar. 143, H.P. Krishna Reddy v. Canara Bank AIR 1985 Kar. 228 and Bank of India v. Karnam Ranga Rao AIR 1986 Kar. 242] were disposed of and while doing so two decisions of Andhra Pradesh High Court, namely, K.C. Venkateswarlu v. Syndicate Bank AIR 1986 AP 290 and State Bank of India In re AIR 1986 AP 291, were also noticed and dealt with, D.S. Gowda's case (supra) was of a commercial advance taken by the borrower for the purpose of constructing residential flats on a building site allotted by Bangalore Development Authority. Interest at the rate of 16.5 per cent per ann....
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....l. Acquiescence in such charges only justifies them so long as the relation of banker and customer exists with respect to the advance. If the relation is altered into that of mortgagee and mortgagor by the taking of a mortgage, interest must be calculated according to the terms of the mortgage, or according to the new relation. The taking of a mortgage to secure a fluctuating balance of an overdrawn account, is not, however, inconsistent with the relation of a banker and customer, so as to displace a previously accrued right to charge compound interest. It is the practice of bankers to debit the accrued interest to the borrower's current account at regular periods (usually half-yearly); where the current account is overdrawn or becomes overdrawn as the result of the debit the effect is to add the interest to the principal, in which case it loses its quality of interest and becomes capital." [Emphasis supplied] 31. Their Lordships reversed the judgment of the Karnataka High Court which was under appeal and approved and affirmed view of the same High Court in H.P. Krishna Reddy's case (supra), and Karnam Ranga Rao's case (supra). Universal banking practice of usually charging int....
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....ndente lite and post-decree only to such principal sum. He referred to Soli Pestonji Majoo v. Gangadhar Khomka [1969] 1 SCC 220, M.V. Mahalinga Aiyar v. Union Bank Ltd. AIR 1943 Mad. 216, I.K. Merchants Ltd. v. Indra Prakash Karnani AIR 1973 Cal. 306, D.S. Gowda's case (supra), Union Bank of India v. Dalpat Gaurishankar Upadyay AIR 1992 Bom. 482, Gujarat Agro Oil Enterprises Ltd. v. Arvind H. Pathak AIR 1993 Guj. 47, Indian Bank v. P. Venkata Satyavathi 1993 (1) Andhra Weekly Reports 607, Ramashre Chandrakar v. Dena Bank 1994 MPLJ 610 and Punjab National Bank v. Surinder Singh Mandyal AIR 1996 HP 1. Obviously he could not have multiplied the authorities which are bound to be few being not in line with the weight of the judicial authority which we have already dealt with. Having gone through all the cited rulings we are of the opinion that no dent results in the view we are taking. 35. Soli Pestonji Majoo's case (supra) decided by this Court was a case of mortgage decided by reference to order 34 wherein it was held that till the period for redemption expired, the matter was in domain of contract but after the period of redemption the matter passed to that judgment. Vide para 5, th....
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....ing covenant or stipulation for payment of compound interest at reasonable rates, and authorizing the creditor to capitalise the interest on remaining unpaid so as to enable interest being charged at the agreed rate on the interest component of the capitalised sum for the succeeding period. Interest once capitalised, sheds its colour of being interest and becomes a part of principal so as to bind the debtor/borrower. Interest and its classes 37. Black's Law Dictionary (7th Edition) defines 'interest' inter alia as the compensation fixed by agreement or allowed by law for the use or detention of 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 the borrowed money. According to Stroud's Judicial Dictionary of Words And Phrases (5th edition) interest means, inter alia, compensation paid by the borrower to the lender for deprivation of the use of his money. In Secretary, Irrigation Deptt. v. G.C. Roy [1992] 1 SCC 508, the Constitution Bench opined that a person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may....
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....he person wronged and it is neither related with nor limited to the damages suffered. Thus, while liability to pay interest is founded on the doctrine of compensation, penal interest is a penalty founded on the doctrine of penal action. Penal interest can be charged only once for one period of default and therefore cannot be permitted to be capitalised. 39. Mulla on the Code of Civil Procedure (1995 Edition) sets out three divisions of interest as dealt in section 34. The division is according to the period for which interest is allowed by the Court, namely-(1) interest accrued due prior to the institution of the suit on the principal sum adjudged; (2 ) additional interest on the principal sum adjudged, from the date of the suit to the date of the decree, at such rate as the Court deems reasonable; (3) further interest on the principal sum adjudged, from the date of the decree to the date of the payment or to such earlier date as the Court thinks fit, at a rate not exceeding 6 per cent per 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 ....
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....est adjudged on such 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 the decree to the date of payment, or to such earlier date as the Court thinks fit." [Emphasis supplied] 41. A few points are clear from a bare reading of the provision. While decreeing a suit if the decree be for payment of money, the Court would adjudge the principal sum on the date of the suit. The Court may also be called upon to adjudge interest due and payable by the defendant to the plaintiff for the pre-suit period which interest would, on the findings arrived at and noted by us hereinabove, obviously be other than such interest as has already stood capitalised and having shed its character as interest, has acquired the colour of the principal and having stood amalgamated in the principal sum would be adjudged so. The principal sum adjudged would be the sum actually loaned plus the amount of interest on periodical rests which according to the contract between the parties or the established banking practice has stood capitalised. Interest pendente ....
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....certainty, friction or confusion into the working of the system ( ibid, p. 119). While embarking upon interpretation of words and expressions used in a Statute it is possible to find a situation when the same word or expression may have somewhat different meaning at different places depending on the subject or context. This is however an exception which can be resorted to only in the event of repugnancy in the subject or context being spelled out. It has been the consistent view of the Supreme Court that when the Legislature used same word or expression in different parts of the same section or statute, there is a presumption that the word is used in the same sense throughout. (ibid, p. 263). More correct statement of the rule is, as held by House of Lords in Farrell v. Alexander [1976] 2 All E.R. 721, 736, "where the draftsman uses the same word or phrase in similar contexts, he must be presumed to intend it in each place to bear the same meaning". The Court having accepted invitation to embark upon interpretative expedition shall identify on its radar the contextual use of the word or expression and then determine its direction avoiding collision with icebergs of inconsistency an....
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....uch use of the money which it would have made if the debtor had paid the amount of interest on the date due. The creditor needs to be compensated for deprivation. As held in Pazhaniappa Mudaliar's case (supra) the fact-situation is analogous to one as if the creditor has advanced money to the borrower equivalent to the amount of interest debited. We are, therefore, of the opinion that the expression 'the principal sum adjudged' may include the amount of interest, charged on periodical rests, and capitalised with the principal sum actually advanced, so as to become an amalgam of principal in such cases where it is permissible 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 expression employed later in section 34. The expression 'principal sum' cannot be given different meanings at different places in the language of same section, i.e., section 34. 45. The 1956 amendment serves two-fold purpose. Firstly, it prevents award of interest on the amount of interest so adjudged on the date of suit. Secondly, it brings the last clause of sect....
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....elay the filing of the suit only during the period of limitation which delay would not be illegitimate. Secondly, nothing prevents the debtor, even during the period of this delay, to pay or tender the amount of interest as and when it falls due and thereby prevent its capitalisation. Thirdly, the Court is not powerless to deny the bank's claim for interest, if in the facts and circumstances of a given case the court is persuaded to hold that filing of the suit was delayed for the purpose of deliberately gaining an unfair advantage over adverse financial condition of the defendant. In such cases the pre-suit interest though claimed in accordance with the contract would be denied by the Court on the ground of public policy and on the ground of the creditor having tried to gain an unfair advantage over the debtor by a deliberate inaction of himself; no one can take advantage of its own wrong. 47. It was further submitted that if the expression 'the principal sum adjudged' was to be interpreted and assigned a meaning as inclusive of the interest capitalised and therefore being the principal sum to be adjudged so at the date of the suit then there would be left nothing to be adjudged ....
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....e Bench decision in Jagannath Pigment & Chemical's case (supra) are correctly decided and are, therefore, affirmed. A creditor can charge interest from his debtor on periodical rests and also capitalise the same so as to make it a part of the principal. Such a course can be justified by stipulation in a contract voluntarily entered into between the parties or by a practice or usage well established in the world to which the parties belong. Such practice is to be found already in vogue in the field of banking business. Such contract or usage or practice can stand abrogated by legislation such as Usury Laws or Debt Relief Laws and so on. A Few Notes of Caution 50. Though we have answered the question of law before us, but we cannot leave the matter at that alone without sounding notes of caution, lest our view of the law should be misconstrued and misapplied. Before we do so, it would be appropriate to refer to the decision of this Court in D.S. Gowda's case (supra) in somewhat details. 51. The Banking Regulation Act, 1949 empowers Reserve Bank, on its being satisfied that it is necessary or expedient in the public interest or in the interest of depositors or banking policy so to ....
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....excess of the rate prescribed by the Reserve Bank of India. A distinction was drawn between Court's power to interfere on the premise that the interest charged is excessive under the general law and Court's interfer-ence on the premise that the interest charged is in contravention of the circulars/directions issued by the Reserve Bank of India. In the former case it would not be permissible in view of the bar enacted by section 21A of the Banking Regulation Act, while in the latter case it would be permissible because of the Reserve Bank's circulars and directions having statutory force under section 21/35A of the Act having been violated. The question whether interest charged in excess of the minimum rate of interest appointed by the Reserve Bank without fixing a ceiling and levying higher rate to be charged at the discretion of each bank can be treated as excessive and unconscionable and whether in such situation section 21A would debar the Court from reducing the rate of interest to a reasonable limit was left open 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 the maximum rate of interest u....
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....ing down law on such issues as do not arise for determination before us. However, we propose to place on record a few incidental observations, without which, we feel, our answer will not be complete and that we do as under:- (1) Though interest can be capitalised on the analogy that the interest falling due on the accrued date and remaining unpaid, partakes the character of amount advanced on that date, yet penal interest, which is charged by way of penalty for non-payment, cannot be capitalised. Further interest, i.e. interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy. (2) Novation, that is, a debtor entering into a fresh agreement with creditor undertaking payment of previously borrowed principal amount coupled with interest by treating the sum total as principal, any contract express or implied and an express acknowledgement of accounts, are best evidence of capitalisation. Acquiescence in the method of accounting adopted by the creditor and brought to the knowledge of the debtor may also enable interest being converted into principal. A mere failu....
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....s, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy. (6) Agricultural borrowings are to be treated on a pedestal different from others. Charging and capitalisation of interest on agricultural loans cannot be permitted in India except on annual or six monthly rests depending on the rotation of crops in the area to which the agriculturist borrowers belong. (7) Any interest charged and/or capitalised in violation of RBI directives, as to rate of interest, or as to periods at which rests can be arrived at, shall be disallowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly. (8) Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by section 34 de hors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a....