Meaning of principal sum adjudged for charging interests by banks

(1) Subject to a binding stipulation contained in a voluntary contract
between the parties and/or an established practice or usage interest on
loans and ad-vances may be charged on periodical rests and also capitalised
on remaining unpaid. The principal sum actually advanced coupled with the
interest on periodical rests so capitalised is capable of being adjudged as
principal sum on the date of the suit.
(2) The principal sum so adjudged is 'such principal sum' within the
meaning of Section 34 of the Code of Civil Procedure Code, 1908 on which
interest pendente lite and future interest i.e. post-decree interest, at
such rate and for such period which the Court may deem fit, may be awarded
by the Court.
Supreme Court of India

CENTRAL BANK OF INDIA vs. RAVINDRA AND ORS.

DATE OF JUDGMENT: 18/10/2001

BENCH:DR. A.S. ANAND CJ &  K.T. THOMAS & R.C. LAHOTI & N. SANTOSH HEGDE & S.N.
VARIAVA
Citation : (2002)1 SCC 367
Case No. : Special Leave Petition (civil)  2421 of 1993


What is the meaning to be assigned to the phrases "the
principal sum adjudged" and "such principal sum" as occurring in Section 34
of the Code of Civil Procedure, 1908 [as amended by the Code of Civil
Procedure (Amendment) Act (66 of 1956) w.e.f. 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.
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 and
scope of controversy arising for decision before the Constitution Bench:
"ORDER
After hearing learned Attorney General and amicus curiae Shri A. Subba Rao.
Ranjit Kumar and K.M.K. Nair on (the interpretation of the provisions of
Section 34 CPC on "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 \. D.S. Gowda
and Bank of Baroda v. Jagannath Pigment & Chem., wherein he sought to draw
the deduction that the principal sum adjudged and the principal sum
mentioned 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, were
substituted with the words "the principal sum adjudged", from the date of
the suit to the date of the decree, in addition to any interest adjudged on
such "principal sum" for any period prior to the institution of the suit
(with further interest on such date as the court deems reasonable on the
"principal sum")*. The distinction, therefore, was not drawn to the
attention of this Court in the aforesaid two judgments in particular the
later one. As a fact no argument in this behalf appears to have been
canvassed. Interpretation of the liability of the borrower to pay interest
on the principal sum to include interest that became merged with the
principal sum adjudged or principal sum as lent, is required to be
authoritatively laid down by a Bench of five Judges.
The Registry is directed to place the matter before the Hon'ble the Chief
Justice for constituting the Constitution Bench.
*[Sic., should have been - with further interest at such rate not exceeding
six per cent per annum, as the Court deems reasonable on such 'principal
sum', in our opinion]
Section 34(1) of C.P.C. and 1956 Amendment
Sub-Section (1) of Section 34 abovesaid, as it stood prior to the 1956
amendment, and as it stands amended, are reproduced in juxta position here-
under :
Prior to amendment
As amended by Act No. 66 of 1956
34. (1) Where and in so far a;; a decree is for the payment of money, the
Court may, in the decree, order interest at such rate as the Court deems
reasonable to be paid on the principal sum adjudged, from the date of the
suit to the date of the decree, in addition to any interest adjudged on
such principal sum for any period prior to the institution of the suit,
(with further interest at such rate as the Court deems reasonable on the
aggregate sum so adjudged.] from the date of the decree to the date of
payment, 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 Court
may, in the decree, order interest at such rate as the Court deems
reasonable to be paid on the principal sum adjudged, from the date of the
suit to the date of the decree, in addition to any interest adjudged on
such principal sum for any period prior to the institution of the suit,
(with further interest at such rate 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.
xxx     xxx     xxx     xxx
xxx
(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.
(Underlining by us)
[Portions affected by amendment placed in bracket]
By the 1956 amendment, in Section 34, for the words "with further interest
at such rate as the Court deems reasonable op the aggregate sum so
adjudged", the words "with further interest at such rate not exceeding six
percent, per annum as the Court deems reasonable on such principal sum"
have been substituted in sub-section (1). In sub-section (2) the words "on
such aggregate sum as aforesaid " have been deleted and the words "on such
principal sum" have been substituted. The phrases "on the principal sum
adjudged" and "such principal sum", as occurring in the opening part of
subsection (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 further
interest from the date of the decree upto the date of payment on the s
aggregate sum' which comprises principal sum with interest accrued thereon.
The Committee are of the opinion that interest should not be awarded on
interest but only on the principal sum. Suitable amendment has accordingly
been incorporated in this clause."
The controversy and contending pleas:
There is batch of matters before us wherein the same common question of law
is arising'for decision. Inasmuch we propose (also as has been agreed to by
all the learned counsel appearing for the parties) to decide only the
question of law posed for decision and leave the individual cases to be
decided by appropriate Bench consistently with the law laid down by the
Constitution Bench, we are relieved of the need of noticing facts of
individual cases. Suffice it, for our purpose, to notice in very brief, by
way of illustration, the facts of S.L.P. (C) No. 2421 of 1993 - Central
Bank of India v. Ravindra and Ors. to demonstrate the nature of
controversy. The petitioner bank sanctioned a loan to the respondent no. 1
on (he guarantee of respondents nos. 2 and 3. On 21.6.1979, the respondent
no.l executed a demand promissory note for Rs. 1,37,720 and also executed
term agreement of hypothecation of the vehicle. The loan carried interest
at the rate of 11% per annum with quarterly rests as on 31st March, 30th
June, 30th September and 31st December every year. The total outstanding,
inclusive of the interest charged as per agreement, was Rs. 1,51,825 on the
date of the suit for the recovery whereof the suit was filed by the
petitioner bank. Relief was also prayed for the grant of interest pendente
lite and future interest till realisation. The trial court passed a decree
for Rs. 1,51,825 with future interest at the rate of 8% per annum from the
date of the suit till realisation affording the respondents facility of
payment of the decretal amount in 6 quarterly 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 annum and setting aside the facility of payment by
instalments. However, the High Court directed the interest at the rate of
11% 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 annum
has not been allowed on the entire sum of Rs. 1,51,825.
We have heard Shri Harish N. Salve, learned Solicitor General appearing for
Union of India, Shri Rakesh Dwivedi, Sr. Advocate appearing 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 who highlighted the legal
position and judicial opinion clarifying by and large the fallacy - as per
his submission - in the stand taken by the banks. Other learned counsel
appearing for other borrowers were also heard.
The learned Solicitor General submitted that the expression "the princi-pal
sum adjudged" used in Section 34 may have two meanings : (i) the amounts
actually disbursed to the borrower, or (ii) the amount due from the
borrower on the date of the suit which amount would include the amount of
interest due and payable on the date of the institution of the suit in the
Court. He made two submissions. First is the wider submission, as he named
it, that whatever is the amount due and payable by the defendant on the
date of the institution of the suit becomes "the principal sum adjudged' on
which the judgment-debtor can be directed to pay interest pendente lite and
for future. The learned Solicitor General however did not seriously press
and pursue this wider submission and gave it up soon after projecting the
same before the Court. However, he insistently pressed and pursued the
second one, i.e. the narrower submission that "the principal sum adjudged'
would include all sums as are due under the contract between the parties
and have stood capitalised with the amount actually disbursed to the
borrower. The amalgam - an intimate mixture - would be adjudged as the
principal sum and would not permit any attempt at unscrambling. Developing
the narrower argument further, the learned Solicitor General submitted that
the contract between the parties or an established bank practice (in the
case of banking transactions) may provide for the interest on periodical
rests being compounded and capitalised with the principal, in which event,
the amount debited in the account of the borrower shall shed its character
as interest and become the principal on being capitalised and therefore
shall have to be adjudged as "the principal sum' on the date of the suit.
The contract or established banking practice shall govern the relationship
between the parties and bind the Court. The Court will not reopen the
account so as to separate from the amalgam - the interest charged and the
sums actually advanced, and repaint the interest with the colour which had
stood shed off unless mandate of law overrides the contract or practice and
enables or compels the Court to do so. Any 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.
The learned Solicitor General further submitted that the position of law
remains 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 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 adjudge 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 as 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 prior to the date of the
suit and included in the amount claimed by the plaintiff against the
defendant on the date of the suit may consist of (i) such interest as has
stood capitalised and hence become part of the principal sum, and (ii) such
interest as has not been capitalised or was incapable of being capitalised,
and the later would be 'interest adjudged' in addition to the principal sum
adjudged (which would be inclusive of interest capitalised) on the date of
the institution of the suit. There may be cases where the total amount
debited to the account of the debtor as interest has stood capitalised in
its entirety in which case there may not be any sum of interest left and
available to be treated as interest, other than the principal sum for the
pre-suit period. The correct way of reading the opening part of Section 34
would be - "the principal sum adjudged.................. in addition to
interest, if any, adjudged on such principal sum". 'Any interest adjudged
on such principal sum' mean and should be read as 'interest if any,
adjudged on such principal sum'. The learned Solicitor General went on to
submit that the 1956 amendment does not have any bearing on the meaning of
words 'the principal sum adjudged' which remains the same pre and post
1956. The 1956 amendment, which has substituted the words "on such
principal sum" for the words 'on the aggregate sum so adjudged' has only
this effect that prior to the amendment future interest was capable of
being 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 interest
adjudged as interest on the date of the suit and decretal costs cannot be
ordered to carry future interest, but the amount adjudged as principal sum
though inclusive of interest which has stood capitalised and has partaken
character of principal by virtue of contract or banking practice, is
capable of bearing future interest because it will be 'the principal sum
adjudged'.
Shri Ranjit Kumar, Senior Advocate, the learned amicus as also the other
learned counsel appearing For the debtors have submitted that if the
submission made by the learned Solicitor General is accepted it would
defeat the legislative intent behind the amendment as it would mean the
Court awarding interest on interest. It was submitted 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 CPC. where after
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
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:
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.
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 the usual mode of stating such
accounts. It is balanced at the close of each year, and the periodical
interest on advances accruing in the course of the year is placed to the
debit side of the account, and to the extent of its amount the balance
carried to the debit at the commencement of next year is increased. That
amount is dealt with as a principal sum, on which interest is calculated, -
the bank thereby securing, as they were entitled to do, interest on the
accumulated amount each year, or, as it is generally stated, but not quite
correctly, compound interest. The true view is, that the periodical
interest at the end of each year is a debt to be then paid, and which must
be held to have been paid when placed to the debit of the account as an
additional advance by the bank for the convenience of the obligants." (at
p. 238)
Lord Justice Clerk said :
"The parties must of course have had in view that this account-current
would 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 the
interest accruing during the past year not being otherwise paid or provided
for, placing the amount of such interest as the last item to the debit of
the account, and accumulating such interest along with the principal sum
due 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 first
article of debit in that new account. Where an account is kept in this way
consistently throughout its whole course, the interest thus accumulated
with principal, at the end of each year not only becomes principal, but
never 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 plain
ground of equity, that the interest ought then to be paid, and, because it
is not paid, the debtor becomes thenceforth debtor in the amount, as a
principal sum itself bearing interest. This principle of equity must be
consistently carried out in keeping an account on the bank's books, in
which other parties are interested as obligants, besides the party
operating on the account; and, if it be, then the moment that interest is
thus converted into principal, 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)
In Yourell & Anr. 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 hall7 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 money 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 Commissioners of Inland Revenue
v. Sir H.C. Holder, Bt., &Anr., [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 held that the interest due each half year which, upon
the failure of the company to pay it, was, according to the regular
practice of bankers, added to the capital sum advanced, was thereby
capitalised and could not thereafter be treated as interest. Lord Hanworth
MR noted in his speech that the plan of capitalising interest at the end of
each half year was adopted by bankers in order to enable them in effect to
secure what is usually termed compound interest, which could not have
otherwise been claimed by reason of the usury laws. Later his Lordship
noted that under consideration was not the terms of a particular deed
entered into between the parties but a practice which has been adopted by
bankers for over a century, and which has had certain qualities attributed
to it. Lord Romer concurring with Lord Hanworth opined that having regard
to the method in which, with the concurrence of the company, the account
was kept by the bank, the company must be deemed to have paid each half
year the accruing interest by means of an advance made for this purpose by
the 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 in
view of the bank's practice of adding the interest each half-year to the
amount advanced, the interest was in effect paid each half year to the bank
by means of advances made for the purpose by the bank to the customer and
for this reason no part payment (later) made by the tax payer was payment
of 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 without
deduction tax, was placed to the debit of the account of the borrower and
the aggregate amount was then treated as principal for the following half
year. Question arose, whether the interest in question which was
capitalised could be said to have been in fact paid by the borrower so as
to attract applicability to him of certain beneficial provision of the
Income Tax Act, 1918? Lord Atkin opined - "The simple fact is that the
amount of interest accruing during the half year is ascertained at the end
of the half-year, and is added to the account as a debt in precisely the
same position as the other debit items, whether for money lent, the price
of securities 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 Rusell, 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 cautioner's liability
under 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 to
by the principal debtor, and recognised as ordinary practice, precluded any
claim for past interest as interest prior to the last balance. The caution
was liable for whatever was drawn upon the cash credit account up to 400,
and the unpaid interest was debited in account just like the ordinary
drafts upon it, and became part of the principal debtor's capital
indebtedness for which the cautioner was liable up to 400, with interest
subsequent 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 the
principal sum due to it, with interest thereon, as agreed, until payment or
judgment in the usual way, and that the agreement included the term,
implied by the usage of bankers, that the bank was entitled to capitalise
interest which in the case before their Lordships was (by concession) at
quarterly rests and that such entitlement continued until judgment or
payment. In the Court of Appeal, Lloyd LJ, who wrote the pending order, was
of the opinion that an implied agreement to pay compound interest with
quarterly rest based on the banking practice exists during the currency of
the banker-customer relationship but once the banker-customer relationship
ceases the bank cannot charge compound interest atd only simple interest
would be payable. His Lordship traced the history of banking practice as
borne out by judicial precedents, and held :
"(i) There is no right to compound interest save by agreement, express or
implied, or custom binding on the parties; (ii) there was no express
agreement to pay compound interest in the present case; (iii) an agreement
to pay compound interest may be implied by virtue of acquiescence (Lord
Ciancarly v. Latouche), but (iv) such an agreement is not normally implied
except as to "mercantile accounts current for mutual transactions"
(Deutsche Bank v. Banque des Marchands de Moscou, 4 L.D.B. 293, 296, per
Greer L.J.; (v) it is open to question whether the agreement between the
bank and Pinios dated 8 February, 1977 was an account current for mutual
transactions; but, even if it was, it ceased to be such an account when the
bank closed the account and demanded repayment on 13 November 1978; (vi)
the bank never pleaded or proved a custom entitling 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."
The bank appealed to the House of Lords. The House of Lords allowed the
appeal and 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
occurred, 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.
In Billamal 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
then giving a renewal note for the original debt plus the capitalised
interest, could produce a result which might at first sight appear
oppressive, and yet there would be nothing harsh or unconscionable in the
creditor's demand, since the added interest only accumulated while
heforebore to enforce the payment of the sums from time to time due to
him."
S.R.M.S. Chethambaram Chettier v. Loo Thon Poo, AIR (1940) Privy Council
60, was a dispute between money lenders and borrowers arising for the State
of Johore. Interest was charged @ 24% and was then capitalised and made
payable by monthly instalments. Question arose whether the interest so
charged was excessive and unfair. Their Lordships held that where a loan
has been incurred for interest and this interest is added to the amount
agreed to be due when a new transaction is agreed between the parties which
includes that payment of interest as an acknowledged debt this is not in
principle open to any sound objection. Their Lordships referred to the
decision of the Court of Appeal in Lyle v. Chappel, [1932] 1 KB 691, speech
of Lord Atkin in Paton v. Inland Revenue Commissioners, [1938] AC 341,
decision of Channel, J, in Carrington Ltd. v. Smith, [1906] 1 KB 79, and
the decision by the Court of Appeal in Reading Trust v. Spero, [1930] 1 KB
492, and held that a willing and intelligent borrower had agreed to the
interest charged is one of the circumstances to be taken into account
though not conclusive. Their Lordships upheld the charge of 15% interest
payable on the sums from time to time acknowledge to be owing by the
borrowers to the lenders and thus allowing interest on interest. However,
interest charged @ 24% on the loan and charges which were amply secured by
charges on rubber estate which had been well looked after and kept in good
order was held unreasonable, excessive and unfair. The fact remains that
Their Lordships approved charging of interest @ 15% and capitalisation of
the same by means of acknowledgment to that effect by the borrowers and
also upheld permissibility of further 15% interest being charged on the sum
so capitalised.
It was pointed out in Lyle v. Chappel, (Supra, at p., 706) that it ought
not to make any difference to the validity of a transaction by way of a
renewal of a loan, whether the parties go through the form of payment by
the borrower of the whole amount due and a re-landing 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 acknowledged by the borrower together with an undertaking by the
borrower to pay the amount of the agreed debt.
Jafar Husain v. Bishambhar Nath, AIR 1937 Allahabad 442, was a case of
recovery due on a mortgage and considered by reference to Order 34, Rule 11
of the Code of Civil Procedure. 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 the principal sum secured by the
mortgage deed but also to the amount due on account of interest which has
become a part of principal in accordance with the terms of the deed on the
date when the preliminary decree is prepared. The Division Bench pointed
out that reliance by the borrower on a ruling of the Oudh Chief Court in
Chotey Lai v. Mohammad Ahmad Ali Khan, AIR (1933) Oudh 128, which appeared
to be taking a view to the contrary was not good law inasmuch as a
different 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 adopted
by 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 each
year and treat it is a fresh advance by the bank. The Division Bench noted
that according to the usage prevailing between bankers and customers, it is
an implied term of their dealing that the banker is to be treated as having
made an advance to the customer at the end of each year or half year, as
the case may be, of a sum equivalent in amount to the interest accruing
during that period, so as to enable the customer to discharge the interest,
increasing the principal of his debt by a corresponding amount. It was
urged that the periodical settlement of accounts evidenced by the
borrower's letter of acknowledgment were renewals and only the sums
advanced as principal were repayable notwithstanding its capitalisation of
interest from time to time the interest being still treated as interest and
wiped out. The Division Bench speaking through Patanjali Sastri, J. (as his
Lordship then was) noted that if the effect of the mode of dealing adopted
between banker and customer is according to the long standing usage
governing their relations, to treat the interest accruing in any year as
discharged by a borrowing of an equivalent sum from the bank in precisely
the same way as if the customer had given the bank a cheque upon the
account for the amount in question with which the bank extinguished the
interest and then placed the amount of the cheque to the debit of the
account as an ordinary draft." it is difficult to see how the operation of
this principle is affected by anything contained in the explanation to be
found in the relevant provision of Madras Agriculturists' 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.
Two decisions by Kerala High Court may now be noticed. Palai Central Bank
Ltd. v. C. Ramaswami Nadar, AIR 1959 Kerala 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 plaint 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 carry interest, is valid. It was further held that the word
'principal amount' are not restricted to the original sum lent but are
comprehensive to include arrears of interest, on which interest is agreed
to be paid. Trandamma and Ors. v. Kuriakore Patherichal lype, AIR (1962)
Kerala 235, is Full Bench decision which, though did not notice the
Division Bench decision in Palai Central Bank Limited (supra), laid down
the same law. An overdraft agreement entered into by the defendants with
the plaintiff bank provided that the interest at 7 1/2% as agreed upon will
be 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 the
Bank in pursuance of such agreement, the suit was filed for recovery of the
amount due on 31.12.1952 as principal with future interest till the date of
the suit. It was held that the effect of the agreement was to wipe off all
interest outstanding at the end of each quarter by means of further
advances from the bank of similar amounts which are debited to the account
of the debtor. It was further held that the interest that thus accumulated
with principal at the end of each quarter became principal and never
thereafter ceased to be dealt with as principal. The amount due on
31.12.1952 in the account was treated as the principal amount outstanding
on 1.11.1953. However, in passing the Full Bench noted that the position
may have been different if under a local debt relief law it was
subsequently provided that the principal would mean the amount originally
advanced together with sum, if any subsequently advanced, notwithstanding
any stipulation to treat any interest as principal.
In K. Appa Rao v. V.L Varadaraj & Ors. AIR (1981) Madras 94, the Division
Bench, speaking through Nainar Sundram, J., pointed out that the charging
of compound interest by itself is not per se usurious except in the case of
an agriculturist protected by the Usurious Loans Act, 1981 as amended in
its application in Madras. However, the Division Bench, by reference to an
earlier decision of that High Court, pointed out that for the purpose of
determining whether interest would be excessive or not the risk incurred by
the creditor by advancing the loan (whether it was secured or not and if
secured to what extent) and if compound interest is charged, the periods at
which it is calculated and the total advantage which may be reasonably
excepted 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 the
contention of learned counsel for the borrower that the interest can never
become principal and the words 'principal sum' in Section 34, Code of Civil
Procedure 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) Madras 463, holding
that the 'principal sum adjudged' (within the meaning of Section 34 of the
Code of Civil Procedure) is the amount found due as on the date of the
suit.
Division Bench decision in Kalyanpur Cold Storage, Kalyanpur and Ors. v.
Sohanlal Bajpai (deceased by LRs.) and Anr., AIR (1990) Allahabad 218, and
Single Bench decision in Indian Bank v. M/s. Kamalalaya Cloth Store and
Anr., AIR (1991) Orissa 44, have taken the view, though they do not contain
any elaborate reasoning, that under Section 34 of the Code of Civil
Procedure the expression 'principal sum adjudged' is to be distinguished
from principal sum advanced. The Orissa High Court has followed the Delhi
deci-sion above said. It was a case of commercial loan. The amount of
interest quarterly added to the amount of loan was held entitled as
principal amount on the date of the suit for the purpose of future
interest.
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, Rule
5 of the Code of Civil Procedure seeking direction to the bank to point out
separately by breaking up its claim so as to show the amount of the
principal and the interest separately, it was held that the principal
amount found due not only means the principal amount but also the amount
due 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 his
Lordship then was), speaking for the Division Bench, held that the
expression "principal sum adjudged" used in Section 34 indicates that it is
not the original principal amount but it could be an amount so adjudged as
principal. If, as per the contract between the parties, interest also is to
be treated as principal, the amount so adjudged is to be taken as principal
for granting future interest.
In State Bank of India v. Smt. Neela Ashok Naik & Anr., AIR (2000) Bombay
151, Y.K. Sabharwal, C.J. (as his Lordship then was) speaking for the
Division Bench, dealing with Section 34 of the Civil Procedure Code, held
that legal position clearly was; that the principal sum adjudged' can
include in it interest as well, depending upon the contract between the
parties. The contract for payment of interest with quarterly rests resulted
into the interest being capitalised so as to make sum total of the
principal 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] 4
SCC 115, this Court has observed that on failure of the borrower to pay 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.
In Corporation Bank v. D. S. Gowda & Anr., [1994] 5 SCC 213 a batch of
appeals 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 Rao
and Ors., AIR (1986) Karnataka 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, Eluru, Re, AIR
(1986) AP291, where also noticed and dealt with D.S. Gowda's case was of a
commercial advance taken by the borrower for the purpose of constructing
residential flats on a building site allotted by Bangalore Develop-ment
Authority. Interest at the rate of 16.5% per annum, with quarterly rests,
was charged. Interest, penal interest and service charges were debited to
the 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 was
charged at rates far excess of the limits prescribed by the Reserve Bank,
also by compounding at quarterly rests, not permitted by Reserve Bank. One
of the questions having a bearing on the day to day transactions of
loan/advance entered into by the banks was: Whether the bank is entitled to
claim interest with periodical rests, e.g., a monthly rest, a quarterly
rest, a six-monthly rest, or a yearly rest, or compound interest in any
other manner, from a borrower who has obtained a loan or an advance for
agricultural/commercial purposes, as the case may be? During the course of
its judgment the Court observed (vide para 14) :-
"......charging of interest with periodical rests or compounding of
interest would be allowed if there is evidence of the customer having
acquiesced therein, provided the relation of banker and customer is
subsisting. However, if the relationship undergoes a change into that of
mortgagee and mortgagor by the taking of a mortgage, the charging of
interest would be governed in accordance with the terms of the mortgage.
The taking of a mortgage to secure the fluctuating balance of an overdrawn
account, being not inconsistent with the relationship of banker and
customer, would not displace an earlier right to charge compound interest.
Thus, the practice of bankers to debit the accrued interest to the
borrower's current account at regular periods is a recognised practice."
Their Lordships cited with approval the following passage from Halsbury's
Laws of England (4th Edition) (Vol. 3, at page 118, para 160) :-
"160. Interest. By the universal custom of bankers, a banker has the right
to charge simple interest at a reasonable rate on all overdrafts. An
unusual rate of interest, interest with periodical rests, or compound
interest can only be justified, in the absence of express agreement, where
the customer is shown or must be taken to have acquiesced in the account
being kept on that basis. Whether such acquiescence can be assumed from his
failure to protest at an interest entry in his statement of account is
doubtful.
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."
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 v. Canara Bank, AIR (1985) Karnataka 228, and Bank of India
v. Kamam Ranga Rao, AIR (1986) Karnataka 242. Universal banking practice of
usually charging interest on periodical rests and com-pounding interest on
remaining unpaid was specifically dealt with and approved. The principle
relevant consideration which prevailed with the Court were : continuing
judicial upholding of such practice over a length of time and the Reserve
Bank of India by issuing circulars/directives from time to time and on
paying 'adequate attention' having accorded its approval to permissibility
of such practice but intervening in the interest of streamlining the same.
Bank of Baroda v. Jagannath Pigment & Chemicals & Ors., (Civil
Appeal No. 2785/1987) decided on September 21, 1994 [see [1996] 5 SCC, at
p. 280] is a short judgment delivered by three-Judge Bench of this Court
approving 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 to
which 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 charged
and added to the sum borrowed would be the principal sum adjudged on which
future interest could be granted under section 34 of the Civil Procedure
Code. This plea found favour with the Trial Judge. On appeal the High Court
modified the decree by directing that future interest should be calculated
on the sum borrowed viz. Rs. 1,20,675.59 and not the principal sum adjudged
i.e. Rs. 1,66,759.29. This Court set aside the appellate judgement of the
High Court and restored the decree passed by the Trial Judge.
In Renusagar Power Co. Ltd. v. General Electric Co., [1994] Supp. 1 SCC
644, pp. 89-93 a three-Judge Bench of this Court has noted the practice of
charging interest as prevalent in Australia, Canada and India and held that
compound interest can be awarded by Courts in India when justice so demands
and is not to be regarded as being against public policy. The Court noted
that it is a common knowledge that provision is made for the payment of
compound interest in contracts for loans advanced by banks and financial
institutions and such contracts are enforced by Courts.
Shri Ranjit Kumar, the learned amicus brought to the notice of the Court a
few decisions taking the view that under Section 34 of the CPC principal
sum has to be read as consisting of the amounts actually advanced and hence
the Court must unscramble the amalgam and segregate such principal sum from
the amount of interest compounded and capitalised and confine award of
interest pendente lite and post-decree only to such principal sum. He
referred to Soli Pestonji Majoo & Ors. v. Gangadhar Khomka, [1969] 1 SCC
220; M.V. Mahalinga Aiyar v. Union Bank Ltd., Kumbakonam, AIR (1943) Madras
216; 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 Bank
of India v. Gaurishankar Upadyay, AIR (1992) Bombay 482; Gujarat Agro Oil
Enterprises 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. Dena
Bank & Anr., (1994) MPLJ 610 and Punjab National Bank v. Surinder Singh
Mandyal & Ors., 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.
Soli Pestonji Majoo & Ors. 's case decided by this Court was a case of
mortgage decided by reference to Order 34 of the C.P.C. 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 of
judgment. Vide para 5, the Court has said that the special provision of
Order 34 would apply in preference to the general provisions in Section 34
in the case of mortgage. Clearly this Court has not laid down any principle
dealing with Section 34 of the C.P.C.. In M.V. Mahaling Aiyar's case
Division Bench of Madras High Court has not dealt with the principle of
capitalisation. The case has no rel-evance for the issue at hand. Full
Bench decision of Bombay High Court in Union Bank of India v. Gaurishankar
Upadyay proceeds on the assumption that the 'principal sum'can never
include interest whatever be the agreement between the parties and this
hypothesis is itself incorrect as we have dealt with. The Full bench
dissented from the view taken by a number of High Courts and chose to
follow a Division Bench decision of that very High Court in the case of
M/s. Jagannath Pigment & Chemicals v. Bank of Baroda, which has been
reversed by this Court (See - [1996] 5 SCC 279). D.S. Gowda's cast of
Karnataka High Court was also reversed by this Court. Himachal Pradesh,
Madhya Pradesh, Andhra Pradesh and Punjab High Court decisions cited by the
learned 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 has
not approved interest being awarded on the sum adjudged as interest for the
pre-suit period (See, Para 3 L of the Report). To the same effect is the
Division Bench decision of Gujarat High Court in Gujarat Agro's case. These
two decisions have no relevance to the issue before us. Conclusion which
follows :
The English decisions and the decisions of this Court and almost all the
High Courts of the country have noticed and approved long established bank-
ing practice of charging interest at reasonable rates on periodical rests
and capitalising the same on remaining unpaid. Such a practice is prevalent
and also recognised in non-banking money lending transactions. Legislature
has stepped in from time to time to relieve the debtors from hardship
whenever it has found the practice of charging compound interest and its
capitalisation to be oppres-sive and hence needing to be curbed. The
practice is permissible, legal and judicially upheld excepting when
superseded by legislation. There is nothing wrong in the parties
voluntarily entering into transactions, evidenced by deeds incorporating
covenant or stipulation for payment of compound interest at reasonable
rates, and authorising the creditor to capitalise the interest on re-
maining 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 :
Black's Law Dictionary (7th Edition) defines 'interest' inter alia as the
compensation fixed by agreement or allowed by law for the used 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 Department, Government of Orissa & Ors. 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 be called
interest, compensation or damages........this is
the principles of Section 34, Civil Procedure Code. In Dr. Shamlal Narula
v. C.I.T., Punjab, [1964] 7 SCR 668, this Court held that interest is paid
for the deprivation of the use of the money. The essence of interest in the
opinion of Lord Wright, in Riches v. Westminister Bank Ltd., [1947] 1 All
ER 469, 472, is that it is a payment which becomes due because the creditor
has not had his money at the due date. It may be regarded either as
representing the profit he might have made if he had had the use of the
money, or, conversely, the loss he suffered because he had not that use.
The general idea is that he is entitled to compensation for the
deprivation; 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 have
been made, in breach of his legal rights, and interest was a compensation
whether the compensation was liquidated under an agreement or statute. A
Division 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 thus
articulated the concept of interest - "the words "interest" and
"compensation" are sometimes used interchangeably and on other occasions
they have distinct connotation. "Interest" in general terms is the return
or compensation for the use or retention by one person of a sum of money
belonging to or owned to another. In its narrow sense,"interest" is
understood to mean the amount which one has contracted to pay for use of
borrowed money.......... In whenever category "interest" in a particular
case may be put, it is a consideration paid either for the use of money or
for forbearance in demanding it, after it has fallen due, and thus, it is a
charge for the use or forbearance of money. In this sense, it is a
compensation allowed by law or fixed by parties, or permitted by custom or
usage, for use of money, belonging to another, or for the delay in paying
money after it has become payable." It is the appeal against this decision
of Punjab High Court which was dismissed by Supreme Court in Dr. Shamlal
Manila's case (supra).
However 'penal interest' has to be distinguished from 'interest'. Penal
interest is an extraordinary liability incurred by a debtor on account of
his being a wrong-doer by having committed the wrong of not making the
payment when it should have been made, in favour of the 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.
Mulla on the Code of Civil Procedure (1995 Edition) sets out three
divisions of interest as dealt in Section 34 of CPC. 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 not a matter of
procedure; interest pendente lite is not a matter of substantive law (See,
Secretary, Irri-gation Department, Government of Orissa & Ors. v. G.C. Roy,
[1992] 1 SCC 508, Pr. 44-iv). Pre-suit interest is referable to substantive
law and can be sub-divided into two sub-heads; (i) where there is a
stipulation for the payment of interest at a fixed rate; and (ii) where
there is no such stipulation. If there is a stipulation for the rate of
interst, the Court must allow that rate upto the date of the suit subject
to three exceptions; (i) any provision of law applicable to money lending
transactions, or usury laws or any other debt law governing the parties and
having an overriding effect on any stipulation for payment of interest
voluntarily 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 the
rate is not penal the Court may reduce it if the interest is excessive and
the transaction was substantially unfair. If there is no express
stipulation for payment of interest the plaintiff is not entitled to
interest except on proof of mercantile usage, statutory right to interest,
or an implied agreement. Interest from the date of suit to date of decree
is in the discretion of the Court. Interest from the date of the decree to
the date of payment or any other earlier date appointed by the Court is
again in the discretion of the Court - to award or not to award as also the
rate at which to award. These principles are well established and are not
disputed by learned counsel for the parties. We have stated the same only
by way of introduction to the main controversy before us which has a colour
little different and somewhat complex. The learned counsel appearing before
us are agreed that pre-suit interest is a matter of substantive law and a
voluntary stipulation entered into between the parties for payment of
interest would being the parties as also the Court excepting in any case
out 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 deal
with the question posed before us: "Where and in so far as a decree is for
the payment of money, the Court may, in the decree, order interest at such
rate as the Court deems reasonable to be paid on the principal sum
adjudged,
from the date of the suit to the date of the decree, in addition to any
interest adjudged on such principal sum for any period prior to the
institution of the suit, with further interest at such rate 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."
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 parties has stood capitalised. Interest pendente lite
and future interest (i.e. interest post-decree not exceeding 6 per cent per
annum) shall be awarded on such principal sum i.e. the principal sum
adjudged on the date of the suit. It is well settled that the use of the
word 'may' in Section 34 confers a discretion on the Court to award or not
to award interest or to award interest at such rate as it deems fit. Such
interest, so far as future interest is concerned may commence from the date
of the decree and may be made to stop running either with payment or with
such earlier date as the Court thinks fit. Shortly hereinafter we propose
to give an indication of the circumstances in which the Court may decline
award of interest or may award interest at a rate lesser than the
permissible 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 in
the latter part of Section 34(1), which refers to interest pendente lite
and post-decree, should be interpreted to mean principal sum arrived at by
excluding the interest even if it has stood capitalised. This would be
consistent with the legislative intent as reflected in the report of Joint
Committee and sought to be fulfilled by 1956 Amendment. For two reasons
this contention has to be rejected. Firstly, entertaining such a plea
amounts to begging the question. As we have already held that the interest
once capitalised ceases to be interest and becomes a part of principal sum
or capital. That being so the interest forming amalgam with the principal,
in view of having been capitalized, is principal sum and therefore the
question of awarding interest on interest does not arise at all. Secondly,
well-settled principles of interpretation of statutes would frown upon such
a plea being entertained. A construction which leads to repugnancy or
inconsistency has to be avoided. Ordinarily, a word or expres-sion used at
several places in one enactment should be assigned the same meaning so as
to avoid "a head-on clash" between two meanings assigned to the same word
or expression occurring at two places in the same enactment. It should not
be lightly assumed that "Parliament had given with one hand what it took
away with the other" [See - Principles of Statutory Interpretation, Justice
G.P. Singh, 7th Edition 1999, p.1 13]. That construction is to be rejected
which will introduce uncertainty, friction or confusion into the working of
the system (ibid, p.l 19). 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 depend-ing 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 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, (ibib, 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 iden-tify on its radar the contextual use
of the word or expression and then determine its direction avoiding
collision with icebergs of inconsistency and repugnancy.
Webster defines "such" as "having the particular quality or character
specified; certain; representing the object as already particularised in
terms 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 be
mentioned or implied; of the same quality as something just mentioned (used
to avoid the repetition of one word twice in a sentence); of a degree or
quantity stated or implicit; the same as something just mentioned (used to
avoid repetition of one word twice in a sentence); that part of something
just stated or about to be stated." Thus, generally speaking, the use of
the word "such" as an adjective prefixed to a noun is indicative of the
draftsman's intention that he is assigning the same meaning or
characteristic to the noun as has been previously indicated or that he is
referring to something which has been said before. This principle has all
the more vigorous application when the two places employing the same
expression, at earlier place the expression having been defined or
characterised and at the latter place having been qualified by use of the
word "such", are situated in close proximity.
We are of the opinion that the meaning assigned to the expression 'the
principal sum adjudged' should continue to be assigned to "principal sum"
at such other places in Section 34(1) where the expression has been used
qualified 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 a
part of the principal consistently with the contract between the parties or
established banking prac-tice does not offend the sense of reason, justice
and equity. As we have noticed such a system has a long established
practice and a series of judicial precedents upholding the same. Secondly,
the underlying principle as noticed in several decided cases is that when
interest is debited to the account of the borrower on periodical rests, it
is debited because of its having fallen due on that day. Nothing prevents
the 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 for
capitalising the amount of interest and converting it into principal. If
the interest is not paid on the date due, from that date the creditor is
deprived of such 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 and Ors. v.
Narayana Ayyar and Ors. (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 ad-judged" 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 of C.P.C.. The expression "principal sum"
cannot be given different meanings at different places in the language of
same section, i.e. Section 34 of C.P.C..
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 Section 34, by narrowing down its
ambit, in con-formity with the scope of the first clause in so far as the
expression "the principal sum adjudged" occurring in the first part of
Section 34 is concerned which has been left untouched by amendment. The
meaning to be assigned to this expression in the first part remains the
same as it was even before the amendment. However, in the third part of
Section 34 the words used were "on the aggregate sum so adjudged". The
judicial opinion prevalent then was (to wit, see Prabirendra Mohan v.
Berhampore Bank Ltd. & Ors., AIR (1954) Calcutta 289, 295 that 'aggregate
sum' contemplated the aggregate of (i) the principal sum adjudged, (ii) the
interest from the date of the suit to the date of decree, and (iii) the
pre-suit interest. Future interest was capable of being awarded also on the
amount of pre-suit interest - adjudged as such, that is, away from such
interest as was adjudged as principal sum having amalgamated into in by
virtue of capitalisation. The amendment is intended to deprive the court of
its pre-amendment power to award interest on interest i.e. interest on
interest adjudged as such. The amendment cannot be read as intending,
expressly or by necessary implication, to deprive the court of its power to
award future interest on the amount of the principal sum adjudged, the
sense in which the expression was understood, also judicially expounded
even before 1955; the expression having been left untouched by the 1956
amendment.
It was submitted from borrowers' side that such an interpretation of
Section 34 of the Civil Procedure Code as canvassed on behalf of the banks,
if accepted, may result in anomalous situations emerging. To wit, it was
pointed out that if the bank deliberately and unscrupulously delays the
suit being filed, for such period of delay the bank would gain an advantage
by continuing to charge interest at the contract rate and by capitalising
the same. If the suit was filed promptly then the contract would cease to
operate and debtor would be relieved from the rigour of the contract and
find 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 of
the Civil Procedure Code is concerned, the relationship of parties ceases
to be governed by contract between the parties and comes to be governed by
Section 34 of the Civil Procedure Code. Still the submission has to be
repelled for several reasons. Firstly, the bank can afford to wait or delay
the filing of the suit only during the period of limitation which delay
would not be illegitimate. Secondly, noting 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 finan-cial 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.
It was further submitted that if the expression "the principal sum ad-
judged" 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
by way of interest for the pre-suit period and therefore a part of Section
34(1) "and in addition to any interest adjudged on such principal sum for
any period prior to the institution of the suit" - shall be rendered
redundant. We cannot subscribe to this submission. We give just an
illustration or two to demonstrate reasons for our such opinion. The same
plaintiff while suing the same defendant may join in the suit more causes
of action then one; one permitting capitalisation of interst, and the
other, not permitting the same. There may be a case, as was Gowda's case
decided by this Court, wherein interest is capitalised with quar-terly
rests on a particular date, says 31st March and so on and the suit is filed
before the date on which interest will be capitalised. The amount of
interest charged for the period of time less than the quarter would remain
an interest, not capitalised. Then there may be a case where interest may
have been charged and capitalised at a rate exceeding the one permitted in
which case the amount of interest charged and capitalised beyond the
quantum permissible shall have to be separated. In all such cases the
principal sum inclusive of capitalised interest to the extent permissible
shall be adjudged as 'principal sum' and there would also be 'in addition
any interest adjudged by way of interest on such principal sum' for the
pre-suit period. We therefore find force in the submission of the learned
Solicitor General that in that part of Section 34(1) which speaks of
"interest adjudged on such principal sum" for pre-suit period, the text
should be read as if by reading "interest" qualified by "if any" so as to
make it meaningful.
It was also submitted that Section 34 of the CPC is general in its
application to all money suits and if banking practice or banking contracts
providing for capitalisation of interest charged on periodical rests were
to be recognised it will mean that application of Section 34 would be
different in suits filed by banks and in suits filed by creditors other
than bankers. In our opinion it is bound to be so. Section 34 is a general
procedural provision and whether it would apply or not and if apply then to
what extent would obviously depend on the fact situation of each case.
We are, therefore, of the opinion that two-Judge Bench decision of this
Court in Corporation Bank v. D.S. Gowda & Anr., and three Judge Bench
decision in Bank of Baroda v. Jagannath Pigment & Chemicals & Ors., 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:
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 Corporation Bank
v. D.S. Gowda (supra) in somewhat details.
The Banking Regulations 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 do, to determine the
policy in relation to advances to be followed by banking companies
generally or by any banking company in particular and when the policy has
been so determined it has a binding effect. In particular, the Reserve Bank
of India may give direc-tions as to the rate of interest and other terms
and conditions on which advances or other financial accommodation may be
made. Such directions are also binding on every banking company. Section
35A also empowers Reserve Bank of India in the public interest or in the
interest of banking policy or in the interests of depositors (and so on) to
issue directions generally or in particular which shall be binding. With
effect from 15.2.1984 Section 21A has been inserted in the Act which takes
away power of the Court to re-open a trans-action between a banking company
and its debtor on the ground that the rate of interest charged is
excessive. The provision has been given an overriding effect over the Usury
Loans Act, 1918 and any other provincial law in force relating to
indebtedness.
This Court held in D.S. Gowda's case that the directions issued by the
Reserve Bank of India have statutory flavour. The Court noted that
agricultural finance stands on a different footing for the reason that
agriculturists do not have any regular source of income other than the sale
proceeds of their crops and therefore agricultural loans have to be treated
differently from other loans and borrowings. Reserve Bank of India has also
shown its concern towards agriculturist loances by devising separate policy
to govern them and not per-mitting capitalisation of accrued interest on
agricultural loans except on annual rests or when the loan/instalment has
become overdue.
As to capitalisation of interest charged on periodical rests this Court
found the High Court of Karnataka having noticed that banks in India were
not following a uniform practice and some banks charged interest with
monthly or quarterly rests while others charged with yearly or six monthly
rests and hence the Reserve Bank of India had to issue directives to bring
about uniformity in that behalf. In conclusion this Court held that if bank
was claiming interest in excess of that permitted by the circular/direction
of the Reserve Bank, the Court could give relief to the aggrieved party
notwithstanding Section 21A to the extent of interest charged in 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 courts interference 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
Regulations Act while in the latter case it would be permissible because of
the Reserve Bank's circulars and directions having statutory force under
Sections 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 reduc-ing 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 under Sections 21/35A of the Act any transaction
charging interest within the limit so ap-pointed would not be treated as
excessive.
It is interesting to note that the same Bench which decided D.S. Gowda's
case also decided State Bank of India, Bhubaneswar v. Ganjam District
Tractor Owners Association and Ors., [1994] 5 SCC 238, and held that where
the agreement between the bank and the borrower did not provided for
payment of compound interest or interest with periodical rests, the bank
could not have charged the same.
During the course of hearing it was brought to our notice that in view of
several Usury Laws and Debt Relief Laws in force in several States private
money lending has almost come to an end and needy borrowers by and large
depend on banking institutions for financial facilities. Several unhealthy
prac-tices having slowly penetrated into prevalence were pointed out.
Banking is an organised institution and most of the banks press into
service long running documents wherein the borrowers fill in the blanks, at
times without caring to read what has been provided therein, and bind
themselves by the stipulations articulated by best of legal brains.
Borrowers other than those belonging to corporate sector, find themselves
having unwittingly fallen into a trap and rendered themselves liable and
obliged to pay interest the quantum whereof may at the end prove to be
ruinous. At times the interest charged and capitalised is manifold than the
amount actually advanced. Rule of damdupat does not apply. Penal interest,
service charges and other over-heads are debited in the account of the
borrower and capitalised of which debits the borrower may not even be
aware. If the practice of charging interest on quarterly rests is upheld
and given a judicial recognition, unscrupulous banks may resort to charging
interest even on monthly rests and capitalising the same. Statements of Ac-
counts supplied by banks to borrowers many a times do not contain
particulars or details of debit entries and when written in hand are worse
than medical prescriptions putting to test the eyes and wits of the
borrowers. Instances of unscrupulous, unfair and unhealthy dealings can be
multiplied though they cannot be generalised. Suffice it to observe that
such issues shall have to be left open to be adjudicated upon in
appropriate cases as and when actually arising for decision and we cannot
venture into laying 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, 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 capitalisa-tion. Acquiescence in the method of accounting
adopted by the creditor and brought to the knowledge of the debtor may also
enable interest being con-verted into principal. A mere failure to protest
is not acquiescence.
(3) The prevalence of banking practice legitimatises stipulations as to
interest on periodical rests and their capitalisation being incorporated in
contracts. Such stipulations incorporated in contracts voluntarily entered
into and binding on the parties shall govern the substantive rights and
obligations of the parties as to recovery and payment of interest.
(4) Capitalisation method is founded on the principle that the borrower
failed to make payment though he could have made and thereby rendered
himself a defaulter. To hold an amount debited to the account of the
borrower capitalised it should appear that the borrower had an opportunity
of making the payment on the date of entry or within a reasonable time or
period of grace from the date of debit entry or the amount falling due and
thereby avoiding capitalisa-tion. Any debit entry in the account of the
borrower and claimed to have been capitalised so as to form an amalgam of
the principal sum may be excluded on being shown to the satisfaction of the
Court that such debit entry was not brought to the notice of the borrower
and/or he did not have the opportunity of making payment before
capitalisation and thereby excluding its capitalisa-tion.
(5) The power conferred by Sections 21 and 35A of the Banking Regulations
Act, 1935 is coupled with duty to Act. Reserve Bank of India is prime
banking institution of the country entrusted with a supervisory role over
banking and conferred with the authority of issuing binding directions,
having statutory force, in the interest of public in general and preventing
banking affairs from deterioration and prejudice as also to secure the
proper management of any banking company generally. Reserve Bank of India
is one of the watchdogs of finance and economy of the nation. It is, and it
ought to be, aware of all relevant factors, including credit conditions as
prevailing, which would invite its policy decisions. RBI has been issuing
directions/circulars from time to time which, inter alia, deal with rate of
interest which can be charged and the periods at the end of which rests can
be struck down, interest calculated thereon and charged and capitalised. It
should continue to issue such directives. Its circulars shall bind those
who fall within the net of such directives. For such transaction which are
not squarely governed by such circulars, the RBI direc-tives 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 voilation of RBI
directives, as to rate of interest, or as to periods at which rests can be
arrived at, shall be dis-allowed 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 of the CPC 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 inter-est at a lower rate or may
even decline awarding such interest. The discretion shall be exercised
fairly, judiciously and for reasons and not in an arbitrary or fanciful
manner.
In view of the law having been settled with this judgment, it is expected
henceforth from the banks, bound by the directives of the Reserve Bank of
India, to make an averment in the plaint that interest/compound interest
has been charged at such rates, and capitalised at such periodical rests,
as are permitted by, and do not run counter to, the directives of the
Reserve Bank of India. A statement of account shall be filed in Court
showing details and giving particulars of debit entries, and if debit entry
relates to interest then setting out also the rate of, and the period for
which, the interest has been charged. On the Court being prima facie
satisfied, if a dispute is raised in that regard, of the permissibility of
debits, the onus would be on the borrower to show why the amount of debit
balance appearing at the foot of the account and claimed as principal sum
cannot be so accepted and adjudged. This practice would narrow down the
scope of controversy in suits filed by banking institutions and enable an
expeditious disposal of the suits, the issues wherein are by and large
capable of being determined by documentary evidence. RBI directives have
not only statutory flavour, any contravention thereof or any default in
compliance therewith is punishable under sub-section (4) of Section 46 of
Banking Regu-lations Act, 1949. The Court can act on assumption that
transactions or dealings have taken place and accounts maintained by banks
in 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 law
whereunder deemed payment of interest consequent upon capitalisation and
actual payment whenever made may be treated as capital or revenue which
question shall have to be determined under the scheme of relevant statutory
enactment.
Subject to the above we answer the reference in following terms :
(1) Subject to a binding stipulation contained in a voluntary contract
between the parties and/or an established practice or usage interest on
loans and ad-vances may be charged on periodical rests and also capitalised
on remaining unpaid. The principal sum actually advanced coupled with the
interest on periodical rests so capitalised is capable of being adjudged as
principal sum on the date of the suit.
(2) The principal sum so adjudged is 'such principal sum' within the
meaning of Section 34 of the Code of Civil Procedure Code, 1908 on which
interest pendente lite and future interest i.e. post-decree interest, at
such rate and for such period which the Court may deem fit, may be awarded
by the Court.
(3)  Corporation Bank v. H.S. Gowda and Anr., [1994] 5 SCC 213 and Bank of
Baroda v. Jagannath Pigment & Chem. have been correctly decided.

All the learned counsel for the parties did their best to assist the Court
in arriving at a just decision on the issues of significance and far
reaching implications. However, we would like to place on record our
appreciation 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 objectivity
placed before the Court relevant material, judicial view-points and several
authorities. As most of the borrowers were unrepresented, the Court needed
their assistance.
Let all these appeals and SLPs be now placed before appropriate Bench for
decision.

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