Bombay High Court
Union Bank Of India vs Dalpat Gaurishankar Upadyay on 2 April, 1993
JUDGMENT DR. B.P. Saraf, J.
1. This case has been referred to the Full Bench at the instance of brother, Dhanka J. The controvery that arose for determination relates to interpretation of the expression "principal sum adjudged" as used in section 34 of the Code of Civil Procedure, 1908.
2. The suit in relation to which this controversy arose was filed by the Union Bank of India for recovery of a sum of Rs. 5,55,259.35 with further interest thereon at the rate of 16.5 per cent. per annm with quarterly rests from the date of the suit till payment. The plaintiffs relied on various documents in support of its contention that the defendant had agreed to pay the amount of interest to it with quarterly rests. An ex parte decree against the defendant was prayed for with interest pendente lite and post-decretal. The controversy arose as to the amount on which pendente life or post-decretal interest can be granted. The amount of Rs. 5,55,259.35 for which the suit had been filed was admittedly inclusive of interest due till the filing of the suit. Section 34 of the Civil Procedure Code empowers the court to award pendente lite and post-decretal interest at such rate as it may deem reasonable on the "principal sum adjudged". The question for determination was whether "the principal sum adjudged" would mean the original sum lent or the aggregate amount found due and payable on the date of the suit inclusive of the amount of interest added to the principal amount with or without periodical rests in accordance with the agreement between the parties. A similar expression has also been used in Order 34, rule 2 and Order 34, rule 11. The learned single Judge trying the suit noticed that there was a clear conflict of opinion between the Division Bench judgments of this court in Kaluram v. Chimniram, AIR 1934 Bom 46, and two later unreported judgment in Jaganath Pigments and Chemicals v. Bank of Baroda [1989] 65 Comp Cas 393 (Bom) and Central Bank of India v. Haribhau Kakade (F.A. No. 999 of 1987, decided on March 16, 1988). The learned judge also noticed the conflict of opinion between the view expressed by this court in the later unreported judgments and the views of different High Courts. It is in this bank ground, more particularly in view of the fact that a similar question often arises for consideration in a number of cases especially in bank suits, that the learned single judge recommended reference of the following questions to a larger Bench :
(a) Whether the expression "the principal sum adjudged" used in section 34 of the Code of Civil Procedure Code means only the original amount lent or the amount of original principal without addition of any interest whatsoever thereto and interest pendente lite or post decretal interest can be awarded by the court only on such original amount ?
(b) Whether interest becomes part of the principal or gets merged with the principal within the meaning of section 34 of the Code when the agreement provides for addition of interest to the principal at certain intervals with periodcal rests ?
(c) Whether the expression "principal sum adjudged" includes the aggregate amount found due and payable on the date of the suit inclusive of amount of interest added to the principal with or without periodical rests in accordance with the agreement between the parties, express or implied, or the practice followed ?
(d) What is the meaning of the expression "principal" used in Order 34, rule 2 and Order 34, rule 11 of the Code ?
On the recommendation of the learned single this case has been placed before us for hearing under the orders of the Hon'ble the Chief Justice.
3. We have heard at length Shri Tulzapurkar, learned counsel for the plaintiffs bank. In view of the importance of the controversy we also allowed the Indian Bank's Association to intervene and heard its learned counsel, Shri Kapadia. At our request, learned counsel, Shri R. A. Dada, argued the case on behalf of the defendant who was unrepresented before us. We have carefully considered the various submissions.
4. The first question relates to the interpretation of the expression "principal sum adjuged" used in section 34 of the Civil Procedure Code. The other two are in effect the different shades of facets thereof. We shall, therefore, first deal with the expression "principal sum adjudged" used in section 34 of the Civil Procedure Code. Section 34 reads :
"34. Interest. - (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 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 :
Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cnet. per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advaned by notionalised banks in relation to commercial transactions.
Explanation I. - In this sub-section `nationalised bank' mean a corresponding new bank as defined in the Banking Companies (Acquisition and transfer of Undertakings) Act, 1970 (5 of 1970).
Explanation II. - For the purposes of this section, a transaction is a commercial transaction if it is connected with the industry, trade or business of the party incurring the liability."
5. It is clere from a plain reading of section 34 that it deals with powers of the court to award interest (i) from the date of the suit to the date of the decree, and (ii) from the date of the decree to the date of payment.
6. The award of interest for the two periods mentioned above can only be on the principal sum adgudged. There is no dispute in that regard. The only controversy is in regard to the true meaning of this expression, viz., "principal sum adjudged". The question that falls for determination is whether this expression means simply the principal amount lent or advanced by the plaintiffs to the defendant which remains unpaid on the dateof the suit it includes also any interest adjudged on such unpaid principal for any period prior to the institution of the suit. The controversy, in other words, is whether in the interest accrued till the date of the filig of the suit will partake of the character of principal and lose its identity as interest depending on the agreement between the parties, express or implied or prevailing banking or trade practice.
7. Before we proceed to examine the controversy, it must be expedient to observe that interest for periods prior to the institution of the suit is not governed by the provisions of section 34, that being a matter of substantive law, usage of trade or agreement (See Secretary, Irrigation Department, Government of Orissa v. G. C. Roy . Section 34 only governs award of interest from the date of the suit till that date of the decree and from the date of decree to the date of payment which is payable only in the "principal sum adjudged". While providing for such interest, this section also taken note of the fact that in addition to the principal sum interest might also be due or adjudged due to the plaintiff on such principl for periods prior to the filing of the suit and making it clear that interest pendente lite and post decretal governed by this section is in addition to such interest adjudged for period prior to the filing of the suit. In other words, this section clerly recognises interest for the period prior to the institution of the suit as "interest" in contradistinction to "principal" and provides for award of additional interest for the period from the date of the suit to the date of the decree and further interest from the date of the suit to the date of the decree and further interest from the date of the decree to the date payment only on the "principal sum" and not on the aggregate amount due on the date of the filing of the suit including interest due, if any, up to that date.
8. Learned counsel for the plaintiffs fairly stated that it is not his case that in all cases interest for the period prior to the institution of the suit would form part of the "principal s um adjudged". There are cases where such interest would retain its indentity as such. He, however, submits that there are cases where interest will merge in principal and form part there are cases where interest will merge in principal and form part thereof, one such case bieng where an agreement provides for addition of interest to the principal at certain intervals with periodical rests. In such a case, interest will beocme part of the principal and gets merged in it and in that event "principal sum adjudged" as used in section 34 shall include such interest also. Learned counsel tried to draw a distinction between "simple interest" and "compound interest". According to him, different consequences will flow in case compound interest is charged by the bank on the basis of an agreement or prevailing banking practice. Interest in such a case gets added to the principal at certain intervals. It sheds its character as interest and gets capitalised.
9. A reference was made in this connection to Halsbury's Laws of England, Volume 3, pargraph 160, where such banking practice has been acknowledged in the following terms :
"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 a 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."
10. Reliance was also placed on the decision of the House of Lords in Paton (Fenton's Trustees) v. IRC [1938] 1 All ER 786, where it was observed that the accrued interest which the bank has, with the customer's assent, added to the principal loan ceases to be due or recoverable as interest but becomes merged in the principal. Lerned counsel referred to a decision of the Calcutta High Court in Bank of Rajanthan Ltd. v. S. K. Trading Co. [1990] Bank J 677, particularly the following passages, in paragraphs 15, 16 and 17 :
"The contention of Mr. Sarkar with regard to section 34 of the Civil Procedure Code is that in view of the agreement between the parties in interest with quarterly rests becomes part of the principal and, therefore, this 11,88,000 odd which includes interest will be the principal amount within the meaning of section 34 of the Civil Procedure Code... On behalf of the respondents-defendants Mr. Das has contended that in view of the amendment made in section 34 at present such interest under section 34 can be granted only on the sum of Rs. 11,88,000 odd which includes interest....There cannot be any doubt that the interest under section 34 after amendment can be granted on the principal sum only, but what is the principal sum depends on the facts and circumstances of each case.....While granted. This is generally the law after the amendment of section 34. There cannot be any dispute ...It means that the interest calculated up to the end of a particular quarterr is thereafter added to the principal amount and since then it becomes part of the principal amount. This practice is well-known and it has been so recognised ..."
(emphasis * supplied) The conclusion, at paragraph 27, was also referred to, which is in the following terms (at page 685) :
"Accordingly, we are of the opinion that in view of such clauses in the agreement between the parties which provide for quarterly rests, the interest calculated by the bank was mereged with the principal and for the propose of section 34 of the said Act principal sum would be Rs. 11,88,706 for which decree was claimed and for which the decree was passed."
11. Counsel also referred to the decision of the Division Bench of this court in Kaluram v. Chimniram, AIR 1934 Bom 86, where repelling the contention that under section 34 of the Civil Procedure Code which allowed the court to give interest on the principal sum adjudged at the date of the suit the court cannot give compound interest, Beaumont C.J. observed :
"...I think we clearly have jurisdiction to give compound interest..."
12. It was also observed in the same judgment by Blackwol J., at pages 90 and 91 of the report that section 34 of the Civil Procedure Code did not prevent the court from allowing compound interest since the obligation to pay such compound interest was impliedly agreed upon between the parties. These observations were made in the context of the award of interest pendente lite and post-decretal interest.
13. At this stage it may be pertinent to observe that this decision was rendered on the interpretation of section 34 of the Civil Procedure Code as it stood at the relevant time. Subsequent to the aforesaid judgment this section was amended by the Code of Civil Procedure (Amendment) Act, 1956 (Act LXVI of 1956), and the words "with further interest at such rate not exceeding six per cent. per annum as the court deems reasonable on such principal sum" were substituted for the wods "with further interest at such rate as the court deems resonable on the agregate sum so adjudged", and the words "on such principal sum" were substituted for the then existing words "such aggregate sum". The object of the aforesaid amendment to section 34 is evident from the Report of the joint Committee on the Bill, as published in the Gaxette of India, Extraordinary, Part II, section 22, dated December 13, 1955. The relevant part of the report reads as under :
"Section 34 of the Code empowers a court to award further interest from the date of the decree up to the date of the payment of 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."
14.The aforesaid observations of the Joint Committee make it abundantly clear that the intention of the Legislature was not to allow the award of compound interest by the courts and to give effect to that intention the expression "principal sum" was introduced with fundamentally means the "principal sum" only without addition of amount of interest, if any, accrued thereon till the date of filing of the suit. We shall revert to this aspect to little later. Before that we may refer to some other decisions of this court where a view contrary to the one taken by the Division Bench in Kaluram v. Chimniram, AIR 1934 Bom 86, had been taken. We may refer in this connection to the decision of the Division Bench in Jagannath Pigments and Chemicals v. Bank of Baroda [1989] 65 Comp Cas 393. This appeal arose out of the suit filed by the bank wherein the interest ws claimed on the sum of RRs. 1,66,759.29 which was inclusive of the amount of interest of Rs. 1,20,675.59. The trial court had awarded interest pendente lite on the aforesaid sum of Rs. 1,66,579.29. On appeal, he Division Bench of this court modified the decree and awarded interest pendente lite only on the principal amount of Rs. 1,20,675.29. Evidently, that was done on the interpretation of the expression "principal sum adjudged" on mean principal sum only and not the aggregate amount including interest due and payable on the date of the suit.
15. The same view was taken by another Division Bench comprimsing S. C. Pratap, as he then was, and A. D. Tated JJ. In Central Bank of India v. Haribhau Kakade (F.A. No. 999 of 1987, decided on March 16, 1988). This appeal arose out of the decree in a suit based on promissory note for a sum of Rs. 1,49,318. The amount claimed ny the bank due from the date of the filing of the suit including in the interest up to that date was Rs. 2,45,162.74. The interest pendente lite, etc., was claimed on the aggregate amount including interest. This court allowed interest only on the amount of promissory note and not on the aggregate amount which was found due and payable on the date of the suit.
16. It is this inconsistency between the decision of this court in Kaluram v. Chimniram, AIR 1934 Bom 86, and the later two decisions of the two Division Benches of this court dated November 19, 1986, and March 16, 1988, which persuaded the learned single judge to recommend reference of the controversy to the Full Bench.
17. Before dealing with this conflict, it may be appropriate also to refer to some of the decisions of the other High Courts on this point. The Division Bench of the Madras High Court in Sigappiachi v. Palaniappa, , the Orissa High Court in Indian Bank v. Kamalalaya Cloth Store, , the Allahabad High Court in Jafar Husain v. Bishambhar Nath, AIR 1937 All 442 and Kalyanpur Cold Storage v. Sohanlal Bajpai, , have all taken the view that the expression "principal sum adjudged" in section 34 of the Civil Procedure Code woud mean the amount found due on the date of the suit including interest accrued up to that date. The Allahabad High Court in the last decision in Kalyanpur Cold Storage v. Sohanlal Bajpai, , observed that the expression "principal sum adjudged" was to be distinguished for "principal sum advanced" and held that "final amount" which has been determined by the court after adjudicating upon t he rights of the parties to the suit shall be deemed to be the "principal sum adjudged" and interest shall accrue on such amount and not on the original amount advanced. The court, in other words, held that the "principal amount" shall include the amount of interest till the date of filing of the suit. No distinction was drawn in this case between simple interest and compound interest. The court, in effect, equated "aggregate sum" will "principal sum of found due".
18. Reference may be made also to a decision of the Delhi High Court in Syndicate Bank v. West Bengal Cements Ltd., AIR 1989 Delhi 107 ; [1991] 71 Comp Cas 602. The Delhi High Court has taken a view that the expression "principal sum adjudged" would include such amount of interest which has become part of the principal. In this decision also reliance was placed on the banking practice as well as the observations of Lord Macmillan J. in Paton's case [1938] 1 All ER 786 (HL), particularly that observations of the effect that accured interest which is the principal itself. This decision was followed by the Orissa High Court in Indian Bank, . It may be pertinent to note that there is also an earlier decision of the Orissa High Court in Food Corporation of India v. Samena Co-operative Marketing Society Ltd. [1987] Cur. L.J. (Ci and Cri) 778, wherein it was held that interest under section 34 of the Civil Procedure Code could be awarded only on the principal due and not on the amount of interest which sum was also adjudged along withe principal. This decision does not appear to have been placed before the court in the latter case in Indian Bank, , wherein a contrary view was taken.
18. A Division Bench of the Punjab and Haryana High Court in State of Punjab v. Scheduled Caste Co-operative Land Owing Society Ltd., , discussed the provisions of section 34 of the Civil Procedure Code in the context of the amendment made therein by the 1956 Amendment Act and held as follows (at page 196) :
"Thus, interest awardable from the date of the plaint to the date of the decree under section 34, as it stands now, will be only on the principal sum and not on the whole amount including the interest as claimed..."
(emphasis * supplied).
It was further observed (at page 196) :
"Before the above-mentioned amendment of section 34 by the Amendment Act, 1956, further interest was awarable on the aggregate principal and interest as on the date of the decree..."
(emphasis * supplied).
19. There is also an earlier decision of the Division Bench of the Madras High Court in M. V. Mahalinga Aiyar v. Union Bank Ltd., AIR 1943 Mad 216, where it was held that any interest awardable from the date of the plaint to the date of the decree can be only upon the principal sum due. It was observed (at page 217) :
"There is, however, one small error in the decree which has been brought to our notice. The learned Subordinate Judge hs decreed to the plaintiff a sum of Rs. 9981-1-9 with interest thereon at the rate of eight per cent. per annum from August 17, 1938, to the date of the decree. In doing so he has overlooked the fact that the sum of Rs. 9981-1-9 includes interest calculated up to the date of the plaint and, therefore, that any interest awardable from the date of the plaint to the date of the decree must be only upon the principal sum due. The decree will accoundingly be modified by saying "do pay to the plaitiffs the sum of Rs. 9981-1-9 with interest on Rs. 8,500 at the rate of eight per cent. per annum from August 17, 1938, to this date."
20. This decision also does not seem to have been placed before the court while considering a similar controversy later in Sigappiachi v. Palaniappa, , which has been referred to in support of the ocntrary view. Besides, the later decision is clearly distinguishable. It was an account suit and it was in that context that it was held that the principal sum adjudged would be the amount payable by the defendant on the date of the suit.
We have carefully gone through various decisions referred to above, more particularly the decisions of this court in Kalurakm v. Chimniram, AIR 1934 Bom 86, and in Jagannath Pigments and Chemicals v. Bank of Baroda [1989] 65 Comp Cas 393 (Bom) and Central Bank of India v. Haribhau Kakade (F.A. No. 999 of 1987, March 16, 1988). So far as the decisions of this court are concerned, we do not find that there is any reasl inconsitency in the two sets of decisions. The decision in Kaluram's case, AIR 1934 Bom 86, is clearly distingishable on two grounds. Firstly, it is a decision under section 34 of the Civil Procedure Code, as it stood prior to the 1956 amendment, when the expressions used therein wre different. Secondly, the controversy in that case was whether under section 34 the court could award compound interest, if obligation to pay such compound interest was impliedly agreed upon between the parties. It was held that the court could do so in exercise of its powers under section 34. That position has since been completely changed by the 1956 amendment whereby section 34 was amended and the expression "principal Sum" was incorporated in the context of the award of interest under that section. The object of the amendment, as is evident from the report of the Joint Committee, was to prohibit award of interets on interest and was to restrict it only on the principal sum. Under section 34, as amended, the interest can be awarded only on the principal sum and not on the aggregate sum comprising principal and interest accrued thereon. The decision in Kaluram, AIR 1934 Bom 86, therefore, has no applications of this court were delivered on the interpretation of the amended section. We are, therefore, of the opinion tht the correct law has been laid down in these two decisons.
We have also gone through the decisions of the various High Courts which have taken the view that the prinipal sum adjudged in section 34 would mean the amount found due on the date of the suit including the interest up to that date. In our opinion, this view is not correct. While rendering these decisons, emphasis was laid more on the banking practice than on the clear language of section 34 and the scheme thereof in the light of the amendment made in 1956 and the object thereof. To say that the "principal sum adjuged would include the amount of interest also which had accrued up to the date of filing of the suit clearly goes counter to the very scheme and object of section 34 which intends to prohibit award of compound interest, i.e., interest on interest.
At this stage, it may be expedient to refer to the meaning of the three expression, "interest", "simple interest" and "compound interest" as given in the different authoritative law dictionaries.
West's Legal Thesaurus or Dictionary defines these three expression as under :
"Interest". - A charge that is paid to borrow for use of money.
"Simple interest". - Interest paid on the initial amount invested and not on any earning or interest thereon.
"Compound interest". - Interest on interest ; the interest that is earned generates further interest on these earnings."
21. Black's Law Dictionary (Fifth Edition) defines these expressions as follows :
"Interest". - Interest is the compensation allowed by law or fixed by the parties for the use or forbearance or detention of money...Payments a borrower pays a lender for the use of the money."
"Simple interest". - That which is paid for the principal or sum lent, at a certain rate or allowance made by law or agreement of parties. Interest calculated on principal where interest earned during periods before maturity of loan is neither added to the principal nor paid to the leader. That paid on the principal lent as distinguished from compound interest which is interest paid on unpaid interest."
"Compound interest". - Interest upon interest, i.e., interest paid on principal plus accrued interest. Exists where accrued interest is added to the principal sum, and the whole treated as now principal for the calculation of the interest for the next period. Interest added to principal as interest becomes due and thereafter made to bear interest."
(emphasis * supplied)
22. In the Corpus Juris Secundum (Volume 47) "interest" has been defined to mean -
"compensation allowed by law, or fixed by the parties for the use or forbearance of money, or for defention."
"Simple interest" has been defined as :
* Here printed in italics.
"interest computed solely on the principal."
"Compound interest" has been defined as :
"compound interest is interest on interest...accrued interest added to the principal sum and the whole of treated as new principal for the calculation of interest for the next period."
(emphasis * supplied)