# CENTRAL BANK OF INDIA v. RA VINDRA AND ORS

- **Citation:** [2001] Supp. 4 S.C.R. 323
- **Court:** Supreme Court of India
- **Decided:** 2001-10-18
- **Bench:** Dr. A.S. Anand, K.T. Thomas, R.C. Lahoti, N. Santosh Hegde, S.N. Variava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/central-bank-of-india-v-ra-vindra-and-ors-18233
- **Pages:** 43

## Headnote

Code of Civil Procedure, 1908: Section 34 [as amended by the Code
of Civil Procedure (Amendment) Act (66 of 1956) w.ej. 1.1.1957]
Recovery of money-Suits for-By Banking Institutions against their
borrowers-" Principal sum adjudged" and "such principal sum" -Bank sanctioned loan to borrower-Loan carried 11% interest per annum-Bank instituted suit for recovery of money-Trial court decreed suit for the total outstandA
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ing amount inclusive of interest on the date of institution of suit with 8% future
interest per annum-On appeal, High Court directed interest at 11% per
annum to be payable only on the principal sum from the date of suit till
realisation though the decree for the original amount was maintained-Correctness of-Held : Subject to contract between parties interest on loans and
advances may be charged on periodical rests and also capitalised on remaining
unpaid-Principal sum actually advanced coupled with the interest on periodiE
cal rests so capitalised is the principal sum on the date of suit-The principal
sum so adjudged is "such principal sum" on which interest pendente lite and
future interest i.e. post decree interest may be awarded by court-However,
penal interest cannot be capitalised.
Recovery of money-Suits for-By Banking institutions against their
F
borrowers-Pleadings-Held: There must be an averment in the plaint that
interests and capitalisation thereof are in accordance with the directions of
RBI-A statement of account to this effect to be filed-Onus is on the borrower
to show why the principal sum as claimed cannot be accepted and adjustedThis practice would narrow down the scope of controversy and enable expediG
tious disposal of suits-Banking Regulations Act, 1949.
Banking Regulations Act, 1949:
Sections 21 and 35-A-Banking practice-Role of RBI-Directives/
circulars-Held: RBI should continue to issue directives/circulars dealing with
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(2001] SUPP. 4 S.C.R.
rate of interest, periodical rests and capitalisation of interest-Such directives/
circulars are binding on the concerned parties-Such directives may be treated
as standards for deciding whether interest charged is excessive, usurious or
opposed to public policy.
Interpretation of Statutes.:
Rules of construction-Principles-Held: a construction, which leads to
repugnancy or inconsistency, has to be avoided-Ordinarily, a word or expression used at several places in an enactment should be assigned the same
meaning.
Words and Phrases :
"The Principal sum adjudged" and "such principal sum"-Meaning
of-In the context of S.34( 1) of the Code of Civil Procedure, 1908.
The petitioner-bank sanctioned a loan to respondent No. 1 on the
guarantee of respondent Nos. 2 and 3. Respondent No. 1 executed a demand promissory note and also executed term agreement of hypothecation
of the vehicle. The loan carried interest at the rate of 11 % per annum with
quarterly rests. The total outstanding inclusive of the interest charged as
per agreement was Rs. 1,51,825 on the date the petitioner-bank filed a suit
for recovery. 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. 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. 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. Hence this appeal.
The following question arose before the Court:
What is the meaning to be assigned to the phrases "the principal sum
adjudged" and "such principal sum" as occurring in Section 34(1) of the
Code of Civil Procedure, 1908 [as ahlended by the Code of Civil Procedure
(Amendment) Act (66 of1956) w.e.

## Text

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CENTRAL BANK OF INDIA
v.
RA VINDRA AND ORS.
OCTOBER 18, 2001
[DR. A.S. ANAND, C.J., K.T. THOMAS, R.C. LAHOTI,
'N. SANTOSH HEGDE AND S.N. VARIAVA, JJ.]
Code of Civil Procedure, 1908: Section 34 [as amended by the Code
of Civil Procedure (Amendment) Act (66 of 1956) w.ej. 1.1.1957]
Recovery of money-Suits for-By Banking Institutions against their
borrowers-" Principal sum adjudged" and "such principal sum" -Bank sanctioned loan to borrower-Loan carried 11% interest per annum-Bank instituted suit for recovery of money-Trial court decreed suit for the total outstandA
B
c
D
ing amount inclusive of interest on the date of institution of suit with 8% future
interest per annum-On appeal, High Court directed interest at 11% per
annum to be payable only on the principal sum from the date of suit till
realisation though the decree for the original amount was maintained-Correctness of-Held : Subject to contract between parties interest on loans and
advances may be charged on periodical rests and also capitalised on remaining
unpaid-Principal sum actually advanced coupled with the interest on periodiE
cal rests so capitalised is the principal sum on the date of suit-The principal
sum so adjudged is "such principal sum" on which interest pendente lite and
future interest i.e. post decree interest may be awarded by court-However,
penal interest cannot be capitalised.
Recovery of money-Suits for-By Banking institutions against their
F
borrowers-Pleadings-Held: There must be an averment in the plaint that
interests and capitalisation thereof are in accordance with the directions of
RBI-A statement of account to this effect to be filed-Onus is on the borrower
to show why the principal sum as claimed cannot be accepted and adjustedThis practice would narrow down the scope of controversy and enable expediG
tious disposal of suits-Banking Regulations Act, 1949.
Banking Regulations Act, 1949:
Sections 21 and 35-A-Banking practice-Role of RBI-Directives/
circulars-Held: RBI should continue to issue directives/circulars dealing with
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SUPREME COURT REPORTS
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rate of interest, periodical rests and capitalisation of interest-Such directives/
circulars are binding on the concerned parties-Such directives may be treated
as standards for deciding whether interest charged is excessive, usurious or
opposed to public policy.
Interpretation of Statutes.:
Rules of construction-Principles-Held: a construction, which leads to
repugnancy or inconsistency, has to be avoided-Ordinarily, a word or expression used at several places in an enactment should be assigned the same
meaning.
Words and Phrases :
"The Principal sum adjudged" and "such principal sum"-Meaning
of-In the context of S.34( 1) of the Code of Civil Procedure, 1908.
The petitioner-bank sanctioned a loan to respondent No. 1 on the
guarantee of respondent Nos. 2 and 3. Respondent No. 1 executed a demand promissory note and also executed term agreement of hypothecation
of the vehicle. The loan carried interest at the rate of 11 % per annum with
quarterly rests. The total outstanding inclusive of the interest charged as
per agreement was Rs. 1,51,825 on the date the petitioner-bank filed a suit
for recovery. 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. 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. 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. Hence this appeal.
The following question arose before the Court:
What is the meaning to be assigned to the phrases "the principal sum
adjudged" and "such principal sum" as occurring in Section 34(1) of the
Code of Civil Procedure, 1908 [as ahlended by the Code of Civil Procedure
(Amendment) Act (66 of1956) w.e.f.1.1.1957], a question of frequent recurH
rence and having far reaching implications in suits for recovery of money,
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CENTRAL BANK OF INDIA v. RA VINDRA
325
specially those filed by banking institutions against their borrowers?
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Disposing of the appeal, the Court
HELD : 1. 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 authorisB
ing 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. [351-C-D]
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2. 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 a~ount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy. [362-C]
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3. Novation, that is, a debtor entering into a fresh agreement with
creditor undertaking payment of previously borrowed principal amount
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coupled with interest by treating the sum total as principal, any contract
express or implied and an express acknowledgment 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 failure to protest is
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not acquiescence. [362-D-E]
4. 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
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obligations of the parties as to recovery and payment of interest. [362-F]
5. Capitalisation method is founded on the principle that the borrower
failed to make the payment though he could have made and thereby rendered himself a defaulter. To hold an amount debited to the account of the
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borrower ~apitalised 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 d!le and
thereby avoiding capitalisation. Any debit entry in the account of the borrower and claimed to have been capitalised so as to form an amalgam of the
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principal sum may W excluded on being show 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 the payment before capitalisation
thereby excluding its capitalisation. [362-G-H; 363-A]
6. The power conferred by Sections 21 and 35-A of the Banking
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Regulations Act, 1935 is coupled with duty to act. Reserve Bank of India i~
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
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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
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interest which can be charged and the period 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 directives may be treated as
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standards for the purpose of deciding whether the interest charged is
excessive, usurious or opposed to public policy. [363-D-E]
7. 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. [363-E]
8. Any interest charged and/or capitalised in violation of RBI directives, as to rate of interest, or as to period at which rests can be arrived at,
shall be disallowed and/or excluded from capital sum and be treated only
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CENTRAL BANK OF INDIA v. RA VIND RA
as interest and dealt with accordingly. [363-F)
327
9. Award of interest pendente lite and post-decree is discretionary
with the Court as it is essentially governed by Section 34 of the Code of
Civil Procedure, 1908 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 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. [363-G-H; 364-A)
10.1. A construction, which leads to repugnancy or inconsistency,
has to be avoided. Ordinarily, a word or expression used at several places
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on 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 exD
pression 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''. That construction is to be rejected which will introduce uncertainly, friction or confusion into the working of the system.
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
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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
spelt out. [355-C-E]
Farrel v. Alexander, (1976] 2 All E.R. 721, referred to.
G.P. Singh; Principles of Statutory Interpretation, 7th Edn. 1999, pp.
113 and 119, referred to.
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10.2. The Court having accepted invitation to embark upon interG
pretative 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 and repugnancy. [355-G]
11.1. The use of the word "such" as an adjective prefixed to a noun is
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indicative of the draftsman's intention that he is assigning the same mean-
. ing 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 characB
terised and at the latter place having been qualified by use of the word
"such'', are situated in close proximity. [356-C]
New Websters Dictionary And Thesaurus, referred to.
11.2. The meaning assigned to the expression 'the principal sum
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adjudged' should continue to be assigned to 'principal sum' at such other
places in Section 34(1) CPC where the expression has been used qualified
by the adjective "such", that is to say, as "such principal sum". [356-D]
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12. 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 if the
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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
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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, but also any contravention thereof or any
default in compliance therewith is punishable under Section 46(4) of the
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Banking Regulations Act, 1949. The Court can act on the assumption that
transactions or dealings have ·taken place and accounts maintained by
banks in conformity with RBI directives. [364-B-E]
13. The reference is answered in the following terms :
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(a) Subject to a binding stipulation contained in a voluntary contract
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CENTRAL BANK OF INDIA v. RA VINDRA
329
between the parties and/or an established practice or usage interest on
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loans and advances may be charged on periodical rests and also capitalised
on remaining unpaid. The principal sum actually advanced coupled with
the interest on periodical rest so capitalised is capable of being adjudged as
principal sum on the date of suit.
(b) The principal sum so adjudged is "such principal sum" within the
meaning of Section 34(1) CPC 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. [364-H; 365-A-B]
Corporation Bank v. H.S. Gowda, [1994] 5 SCC 213 and Bank of
Baroda v. Jagannath Pigment & Chems, [1996] 5 SCC 280, affirmed.
Pestonji Majoo v. Gangadhar Khomka, [1969] 1 SCC 220; M. V.
Mi1!zalinga Aiyar v. Union Bank Ltd., AIR (1943) Mad 216; I.K. Merchants
Ltd. v. Indira Prakash Karnani, AIR (1973) Cal 306; D.S. Gowda v. Mis.
Cmporation Bank Ltd., AIR (1983) Kar 143; Union Bank of India v.
Gaurishankar Upadyay, AIR (1992) Bom 482; Gujarat Agro Oil Enterprises
Ltd. v. Arvind H. Pathak, AIR Guj. 47; Indian Bank v. P. Venkata Satyavathi,
(1993) 1AWR607; Ramshree Chandrakav v. Dena Bank, (1994) MPLJ 610
and Punjab National Bank v. Surinder Singh Mandyal, AIR (1996) HP 1, ~eld
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inapplicable.
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Shiv Kissen Bhattar v. CIT, [1973] 4 SCC 115; Corporation Bank v.
D.S. Gowda, [1994] 5 SCC 213; Renusagar Power Co. Ltd. v. General Electric Co., [1994] Supp. 1 SCC 644; Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, [1992] 1 SCC 508; Dr. Sham/al Narula v. CIT,
[1964] 7 SCR 668; State Bank of India, Bhubaneswar v. Ganjam District
Tractor Owner's Association, [1994] 5 SCC 238; Jaffar Hussain v. Bishambhar
Nath, AIR (1937) All 442, Chotey Lal v. Mohammad Ahmad Ali Khan, AIR
(1933) Oudh 128; Rajendra Bhadur Singh v. Raghubir Singh, AIR (1934)
Oudh 473; Pazhaniappa Mudaliar v. Narayana Ayyar, AIR (1943) Mad 157;
Palai Central Bank Ltd. v. C. Ramaswami Nadar, AIR (1959) Ker 194;
Thandamma v. Kuriakore Putherichal Iype, AIR (1962) Ker 235; K. Appa
Rao v. V.L. Varadaraj, AIR (1981) Mad 94, Syndicate Bank v. Mis. West
Bengal Cements Ltd., AIR (1989) Del l07; Sigappiachi v. M.A.P.A. Palaniappa
Chettiar, AIR (1972) Mad 463; Kalyanp11r Cold Storage v. Sohanlal Bt~jpai,
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AIR (1990) All 218; Indian Bank v. Mis. Kamalalaya Cloth Store, AIR (1991)
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SUPREME COURT REPORTS
[2001] SUPP. 4 S.C.R.
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Ori 44; State Bank of India v. Advar Singh Saih, AIR (1986) P & H 381;
Nedungadi Bank Ltd. v. Mis. Aswathi Starch and Glucose (P) Ltd., AIR (1996)
Ker 112, State Bank of India v. Smt. Neela Ashok Naik, AIR (2000) Bom 151;
H.P. Krishna Reddy v. Canara Bank, AIR (1985) Kar 228, Bank of India v.
Kamam Ranga Rao, AIR (1986) Kar 242; K.C. Venkateswarlu v. Syndicate
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Bank, AIR (1986) AP 290; State Bank of India, Eluru: Re, AIR (1986) AP
291; Billamal v. Ahad Shah, AIR (1918) PC 249 and S.R.M.S. Chethambaram
Chettiar v. Loo Thon Pao, AIR (1940) PC 60, referred to.
Reddie v. Williamson, (1863] 1 Macph (Ct. of Sess.) 228; Yourell v.
Hibernian Bank Ltd., [1918] SC 372; Commissioners of Inland Revenue v. Sir
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H.C. Holder, Bt. [1931] 2 KB 81; Holder v. Inland Revenue Commissioners,
(1932] All E.R. 265; Paton (Fenton's Trustee) v. Inland Revenue Commissioners, (1938) All E.R. 786; National Bank of Greece S.A. v. Pinios Shipping Co.
No. I, [1990] 1 AC 637; Lyle v. Chappel, [1932] 1 KB 691, Paton v. Inland
Revenue Commissioners, [1938) AC 341; Carrington Ltd. Smith, (1906] 1 KB
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79; Reading Trust v. Spero, [1930) 1 KB 492 and Riches v. Westminster Bank
Ltd., (1947] 1 All E.R. 469, referred to.
Mulla : Code of Civil Procedure, (1995 Edn.), Halsbury's Laws of
England 4th Edn. Vo. 3 p. 118, Blacks Law Dictionary 7th Edn., referred to.
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Deutsche Bank v. Banque des Marchands de Moscou, 4 L.D.B. 293,
cited.
CIVIL APPELLATE JURISDICTION : Special Leave Petition (C) No.
2421 of 1993.
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From the Judgm~nt and Order dated 15.7.92 of the Bombay High Court
in F.A. No. 227 of 1990.
WITH
C.A. Nos. 3964, 3967/92, S.L.P. (C) No. 3954/94, S.L.P.(C) No. 9082,
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SLP (C) No. 9088/95, S.L.P. (C) No. 4562/98, C.A. No. 4716/94 and C.A. No.
2496 of 1993.
Harish N. Salve, Solicitor General, Rakesh Dwivedi, K.N. Bhat, Ranjit
Kumar (AC), J.B. Dadachanji & Co., Janendra Lal, Ms. Yasmin Tarapore,
Siddharth Goswami, Siddarth Choudhary, Ms. Aprajita Singh, Ms. Gayatri
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Goswami, Prikesh Kapoor for Janendra Lal & Co., B.R. Narang, Amit P.
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.]
331
Deshpande, Balraj Dewan, V. Sudeer, Ugra Shankar Prasad, Rajiv Kapur, Ms.
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Shubhra Kapur, Sanjay Kapur, R.K. Kapoor, P. Verma for Anis Ahmad Khan,
M.K. Dua, Ms. Nina Gupta, Uday Gupta, Ms. Arpita Mahajan, Vineet Kumar,
K.M.K. Nair and A. Subba Rao (AC), Varun Goswami, R.C. Verma, Mukesh
Verma, Ms. Madhu Moolchandani, Ms. Sushma Manchanda, Dhruv Mehta,
Ms. Shobha, Ms. Anu Mehta, S.K. Mehta, Manoj Swarup, K.R. Nagarja,
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Shivaji M. Jadhav for the appearing parties.
Ex-parte for Respondent No. 4 in C.A. No. 4716/94.
The Judgment of the Court was delivered by
R.C. LAHOTI, J. 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. l.l.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.
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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
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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
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this Court in Corpn. Bank v. D.S. Gowda and Bank of Baroda v.
Jagannath Pigment & Chem., wherein he sought to draw the deduction
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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
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[2001] SUPP. 4 S.C.R.
of the suit to the date of the decree, in addition to any interest adj1,1dged
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 hereunder:
Prior to amendment
34. (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 reasonAs amended by Act No. 66 of 1956
(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 able to be paid on the principal sum
adjudged, from the date of the suit to
adjudged, from the date of the suit to the date of the decree, in addition to
the date of the decree, in addition to any interest adjudged on such princiany interest adjudged on such principal sum for any period prior to the
pal sum for any period prior to the institution of the suit, (with further
institution of· the suit, (with further interest at such rate not exceeding six
interest at such rate as the Court deems per cent. per annum, as the Court deems
reasonable on the aggregate sum so reasonable on such principal sum,)
adjudged.] from the date of the decree from the date of the decree to the date
to the date of payment, or to such of payment, or to such earlier date as
earlier date as the Court thinks fit.
the Court thinks fit.
CENTRAL BANK OF INDIA v. RA VINDRA [LAHOTI, J.]
333
(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.
(Underlining by us)
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.
[Portions affected by amendment placed in bracket]
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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
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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 '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."
11ze 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
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to by all the learned counsel appearing for the parties) to decide only the
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SUPREME COURT REPORTS
[2001) SUPP. 4 S.C.R.
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. 2421of1993 - 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 the guarantee of respondents nos. 2 and 3. On
21.6.1979, the respondent no.I 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 Rak:esh 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.
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The learned Solicitor General submitted that the expression "the pri~ci-
CENTRAL BANK OF INDIA v. RA VINDRA [LAHOTI, J.]
335
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 1 ·"uld 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
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to be adjudged as 'the principal sum' on the date of the suit. The contract or
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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
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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
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SUPREME COURT REPORTS
[2001) SUPP. 4 S.C.R.
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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
B
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
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'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 capit~lised 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
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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
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(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
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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
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intent behind the amendment as it would mean the Court awarding interest on
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CENTRAL BANK OF INDIA v. RA VINDRA [LAHOTI, J.]
337
interest. It was submitted that without regard to the fact that the interest for the
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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
B
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:
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"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
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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
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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 p:tid when placed to the d~bit of
the account as an additional advance by the bank for the convenience
of the obligants." (at p. 238)
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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 e~d of the year; and, in the event of the
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SUPREME COURT REPORTS
[2001] SUPP. 4 S.C.R.
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
prinbipal sum due on the account, and bringing dowri the bal~ce thus
ascertained, consisting partly of principal, and partly of interest, to the
new account 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
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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 money
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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., & Am:, [1931] 2 KB
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81, the bank debited half yearly interest to the borrower's bank account on the
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CENTRAL BANK OF INDIA v. RA VINDRA [LAHOTI, J.]
339
amount owing !rom time to time. It was held that the interest due each half year
A
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.