Bombay High Court
State Bank Of India vs Shri Umanath Ganpat Nadkarni And Others on 9 April, 1999
Equivalent citations: 1999(3)BOMCR696, AIR 2000 BOMBAY 51, 1999 (3) ARBI LR 485, (2000) 2 CIVILCOURTC 117, (2000) 1 MAH LJ 567, (1999) 3 ARBILR 485, (1999) 2 BANKCAS 444, (1999) BANKJ 738, (2000) 2 CIVLJ 484, (1999) 4 CURCC 293, (1999) 4 ALLMR 195 (BOM), (1999) 3 BOM CR 696
Author: R.M.S. Khandeparkar
Bench: R.M.S. Khandeparkar
ORDER R.M.S. Khandeparkar, J.
1. This appeal arises from the judgment and decree dated 21st August, 1996 passed by the Civil Judge, Senior Division, Quepem, in Special Civil Suit No. 79/92/A. By the impugned decree the trial Court has decreed the suit and the respondents are directed to pay a sum of Rs. 1,03,088/- with interest at the rate of 15.5% per annum with quarterly rests from 30-6-1992 till 23-11-1992 and further to pay simple interest at the rate of 6% per annum from the date of filing of the suit till the date of final payment.
2. The facts, in brief, relevant for the decision are that the appellant herein advanced a sum of Rs. 95,000/- in the form of agricultural term loan for the purpose of poultry development to the respondent No. 1 on the strength of guarantee furnished by the respondents Nos. 2 and 3. In terms of the agreement, the respondent agreed to repay the loan at the rate of interest of 12% per annum with quarterly rests. After obtaining the loan, the respondent did not pay the instalments as agreed upon and therefore, the appellant served a legal notice dated 3-11-1992 calling upon the respondent to pay the entire dues with interest. Since the respondent did not pay the same, the appellant filed the suit claiming total sum of Rs. 1,03,088/- with interest at the rate of 15% per annum with quarterly rests from 30-6-1992 till the date of final payment. The respondent contested the claim of the appellant and submitted that the respondent had suffered heavy losses and therefore, could not make the payment regularly. The respondent denied the liability to pay interest at the rate over and above 6% per annum as per the Reserve Bank directives for the loans granted in the form of agricultural term loans. The trial Court decreed the suit as already stated above while holding that the appellants have admitted that the loan was given for agricultural purpose and the respondents alleged that they could not repay the loan due to the losses incurred in the business.
3. Shri R.G. Ramani while assailing the impugned judgment and decree, submitted that the trial Court ought to have held that the proviso to section 34 of the Code of Civil Procedure was directly attracted in the case and therefore, ought to have awarded the future interest at contractual rate. According to the learned Advocate, the reasons given by the trial Court for restricting the rates of interest at 6% per annum are untenable in law. Once it is not disputed that the loan was granted for the purpose of poultry development, merely because the same is granted under the scheme of agricultural term loan, that would not entitle the respondent to restrict the payment of interest at the rate of 6% per annum, and therefore, the trial Court erred in not granting future interest at contractual rate. In support of his submission, the learned Advocate sought to rely upon the decisions in the matter of Canara Bank v. Mahadeo Appa Phadtare and others, reported in 1995(2) Bom.C.R. 359 : 1995 Bank.J. 400 : A.I.R. 1994 Bombay 251, Central Bank of India v. Ravindra and others, , Corporation Bank v. D.S. Gowda and another, , Bank of India v. Harish Chandra Shrivastava and another, reported in 1998(I) B.C. 362 and in the matter of State Bank of India v. M/s. Himalaya Engineer Works and others, reported in 1997(II) B.C. 599.
4. On the other hand, Shri F. M. Reis, learned Advocate appearing for the respondents, submitted that the trial Court failed to consider that admittedly the loan taken by the respondent was for agricultural purposes and as such the appellants were not entitled to charge interest with quarterly rests. He further submitted that the trial Court failed to consider that the substantial amounts were paid by the respondent in the suit loan account and as such the learned Judge ought to have adjudged the principal sum before granting the interest from the date of filing the suit upto the actual payment. He further submitted that when there is a mortgage of the property, section 34 of the Code of Civil Procedure has no application and what is applicable is Order 34, Rule 11 of the Code of Civil Procedure. He sought to rely upon the decision in the matter of Mahadeo Rama Bhonsle and others v. Central Bank of India and another, reported in 1998 Bank.J. 472(Bom.) : 1997(2) B.C.J. 458, Union Bank of India v. M/s. Noor Dairy Fann and others, reported in 1997 Bank.J. 397(Bom.) : 1997(2) B.C.J. 30 and N.M. Veerappa v. Canara Bank and others, reported in 1999 Bank.J. 101(S.C.) : 1998(1) B.C.J. 312.
5. Upon hearing the learned Advocates for the parties and on perusal of the records, the following points arise for determination in the present appeal :-
(1) Whether the appellant is entitled for contractual rate of interest instead of 6 per cent awarded by the trial Court ?
(2) Whether the appellant is entitled to charge interest with quarterly rests inspite of the loan being for agricultural purpose ?
(3) Whether the expression "principal sum" for the purpose of calculation of interest included the amount of interest accrued till the date of the filing of the suit ?
6. In Corporation Bank v. D.S. Gowda and another (supra), the Apex Court while considering the point as to whether the interest rate of 16.5% per annum with quarterly rests on a secured loan can be said to be so excessive as to render the transaction substantially unfair, observed that the term "excessive" is a relative term and what may be excessive in one case may not be so in another and much will depend on the circumstances obtained at the material date. The Apex Court further held that if the Reserve Bank keeping in view the economic scenario of the country and the impact that interest rates would have on the economy, fixes the minimum and the maximum interest rates that banks can charge on loans/advances, the same cannot be termed to be unreasonable or excessive, Referring to the facts of that case, the Apex Court observed that the borrower therein did not specifically contend in his written statement that the interest charged was excessive, but merely contended that the Bank was not entitled to quarterly rests. The track record of the borrower was poor and till 1975 he had not paid a single paisa by way of instalment or interest. The guidelines issued by the Reserve Bank permitted a maximum interest at the rate of 16.5% per annum with quarterly rests. The fluctuation in the rate of interest between 1973 and 1975 on the borrowings in the mercantile community was not on record and there was also no evidence on record as to the rate at which the loan could have been had in 1975 on the security of immoveable property in the open market. The Apex Court thereafter considering the various circulars issued by the Reserve Bank from time to time in exercise of power conferred by section 21 and 35A of the Banking Regulation Act, held that the circulars and directives provided that the agricultural advances should not be treated on a par with commercial loans insofar as the rate of interest thereon is concerned because the farmers do not have any regular source of income except sale proceeds of their crops which income they get once in a year. The question of recovery of interest with quarterly or six-monthly rests from the farmers is, therefore not feasible. The fact that the farmers are fluid at a given point of time every year has to be kept in mind in determining the point of time when they should be expected to repay the loan or pay the instalment or interest on advances. Therefore, to allow the banks to charge interest on quarterly or half-yearly rests from farmers would tantamount to virtually compel them to pay the compound interest, since they would not be able to pay the interest except once in a year i.e. when they receive the income from the sale proceeds of their crops. The Reserve Bank has shown concern for the farmers by directing all banking institutions to so regulate the recovery of interest as to coincide with the point of time when the farmers are fluid. The Apex Court further held that compounding of interest on current dues on agricultural advances having been discouraged, the Bank is not entitled to charge interest with shorter periodical rests and compound the same.
7. In Canara Bank v. Mahadeo Appa Phadatare and others (supra), the Division Bench of this Court while considering the question as to whether the decree so far as it relates to the rate of interest was liable to be varied or not in the said case, observed that it cannot be gainsaid that when a person engages himself in agricultural pursuits, he does so to earn an income by application of his labour and skill and when he seeks loan to gainfully employ the same in such pursuits, he enters into commercial transactions unlike a person who obtains a loan for purchasing car for his own use or building a house for his own accommodation. The Division Bench further held that the conclusion arrived at in the said decision does not necessarily mean that in all cases of commercial transactions the Court is bound to allow interest at contractual rate. The Division Bench further held that the section itself confers wide judicial discretion in the matter and that necessarily means that it would depend upon facts and circumstances of each case.
8. In Bank of India v. Harish Chandra Shrivastava and another (supra), the Division Bench of the Madhya Pradesh High Court held that section 34(1) of Code of Civil Procedure authorises the Court to order interest at such rate to be paid on the principal amount adjudged from the date of the suit till the date of the decree. The Madhya Pradesh High Court sought to derive support to the said finding from the decision of the Madras High Court in Sigappiachi and others v. M.A.P.A. Palaniappa Chettiar, , of the Punjab and Haryana High Court in the matter of (M/s. Jagdamba Rice Mills and others v. Oriental Bank of Commerce, Kamal), , and of the Orissa High Court in the matter of Indian Bank v. M/s. Kamalalaya Cloth Store and another, . It further held that the principal amount found due not only means the principal amount as such but also the amount due on interest which has become also part of the principal amount. Moreover the Division Bench of this Court to which I was a party, while referring to a Full Bench decision of this Court in the matter of Union Bank of India v. Dalpat Gaurishankar Upadyay, held in the matter of Mahadeo Rama Bhonsle and others v. Central Bank of India and another (supra) that the interest under section 34 can be allowed only on the principal sum and not on the principal sum plus interest accrued thereon till the filing of the suit and that "the principal sum adjudged" used in section 34 of the Code of Civil Procedure means the original amount lent without addition thereto of any amount whatsoever.
9. In State Bank of India v. M/s. Himalaya Engineer Works and others (supra), the Division Bench of Himachal Pradesh High Court held that the principal sum adjudged would be inclusive of amount of interest accrued on the principal amount of loan.
10. In N.M. Veerappa v. Canara Bank and others (supra), the Apex Court held that section 34 of the Code of Civil Procedure applies to simple money decrees and payments of interest pending such suits. Order 34, Rule 11 of Code of Civil Procedure deals with mortgage suits and payment of interest. It is therefore obvious that so far as mortgage suits are concerned, the special provision in Order 34, Rule 11 alone would be applicable and not section 34.
11. In Union Bank of India v. M/s. Noor Dairy Farm and others (supra), the learned Single Judge of this Court has held that the Supreme Court has observed in the case of Corporation Bank v. D.S. Gowda and another (supra), that in the case of agricultural loan the bank cannot charge compound interest at 3 months or half yearly rests. It was further held that in view of the said decision of the Apex Court, it is not permissible for the Banks to charge interest at half-yearly rests in case of agricultural loans and in such cases there is no scope for claiming compound interest with periodical rests.
12. The contention relating to the applicability of Order 34, Rule 11 of the Code of Civil Procedure is totally devoid of substance as the suit in question is not relating to the mortgage or immoveable properties and therefore, the decision in N.M. Veerappa v. Canara Bank and others (supra) is not at all relevant to decide the case in hand.
13. Section 34(1) of the Code of Civil Procedure provides that where and insofar 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. The proviso to the said section states that where the liability in relation to the sum so adjudged has arisen out of a commercial transaction, the rate of such further interest may exceed six per cent per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which monies are lent or advanced by nationalised banks in relation to commercial transactions. The Explanation II defines a transaction to be a commercial transaction if it is connected with the industry, trade or business of the party incurring the liability. Sub-section (2) of section 34 provides that where a decree is silent with respect to the payment of further interest on such principal amount 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.
14. Section 34 apparently deals with the liability to pay interest in money suits during the pendency of the suit as well as after the disposal of the suit till the payment of the entire amount. It does not relate to the interest prior to the filing of the suit as it is a matter of substantive law and it is outside the scope of the said section. In other words, section 34 empowers the Court to award interest pending the suit and after the disposal of the suit. This is also clear from sub-Section (2) of the said section wherein it is provided that when a decree is silent about the payment of interest from the date of decree, it shall be deemed that the Court has refused to grant such interest and the decree-holder would not be entitled to file any separate suit in respect of such claim. As regards the interest during the pendency of the suit, the section itself provides that the Court "may order interest at such rate as the Court deems reasonable". Therefore, the rate of payment of interest has been made a matter of discretion, of course, to be exercised judiciously by the Court.
15. It is thus clear that the grant of interest under section 34 is a matter of discretion and is to be exercised based on the facts and circumstances of each case. The trial Court in the case in hand has awarded interest at the rate of 6% per annum from the date of the filing of the suit till the date of payment of the entire amount. The materials on record do not disclose any justification for grant of any interest at the rate beyond 6% awarded by the trial Court. In order to enable the trial Court to grant the interest beyond the rate of 6% it was necessary for the appellant to place on record the materials justifying the same. The appellant, therefore, is not entitled for contractual rate of interest from the date of filing of the suit till the date of payment of the entire amount.
16. The trial Court has held in the impugned judgment that "the plaintiffs admit that the loan was given for agricultural purpose". Moreover, the said finding is totally contrary to the records. The pleadings as well as the evidence produced on record by the appellants clearly disclose that the appellants have nowhere admitted that the loan was given for agricultural purpose. On the contrary, the pleadings in the plaint state that the loan was for the purpose of poultry development and business. The relevant pleadings in the plaint read thus:-
"2. The plaintiff at the request of the defendant No. 1 granted certain credit facility to the defendant No. 1 in the form of agricultural term loan for Rs. 95,000/- (Rupees Ninety-five thousand only) for the purpose of poultry development (Broiler)"
The reply thereto by the respondents in the written statement reads thus:-
"1. With reference to paras 1, 2, 3 and 4 of the plaint, it is admitted that the defendant No. 1 had availed of the credit facility from the plaintiff Bank, to the tune of Rs. 95,000/-.
In the course of recording of evidence, the appellants' witness, the Branch Manager, P.W. 1 stated thus:-
"On 25-4-1988 at the request of the Deft. No. 1 the Pltff. granted cash credit facility to him in form of agricultural term loan for Rs. 95 thousand, for the purpose of poultry business."
The said statement was neither denied nor challenged. In fact, the respondents on their part did not produce any evidence in support of their contention that the loan was given for agricultural purposes. Not even a suggestion to that effect was made to the witness of the appellant in the course of trial.
17. Therefore, the materials on record do not disclose that the loan was for agricultural purposes. On the contrary it specifically discloses that it was for poultry business. Merely because the loan was granted under the scheme of "agricultural term loan" by itself it would not be sufficient, in the absence of evidence in support of the claim of the respondents, to hold that the loan was for agricultural purposes. It was necessary for the respondent to establish by producing cogent evidence on record that either the loan was for agricultural purpose or the mere fact of granting loan under the scheme of "agricultural term loan" itself signifies that it is for agricultural purposes.
18. Being so, the decision in the matter of Corporation Bank v. D.S. Gowda and another (supra), and in the matter of Union Bank of India v. M/s. Noor Dairy Farm and others (supra), are of no help in the case in hand. In fact, the Apex Court in Corporation Bank's case (supra) has clearly held that in case of agricultural loans/advances the position has been made amply clear by the circulars issued by the Reserve Bank and the same do not permit Banks to charge compound interest with quarterly rests. The Apex Court has clearly held therein that :-
"In such cases as observed earlier the interest can be fixed with annual rests coinciding with the time when the farmer is fluid and if thereafter the farmer fails to pay the interest it would be open to compound the interest on the crop loan or instalments upon the term loan becoming overdue."
All the observations by the Apex Court are in relation to the loan for agricultural purposes and not the loan under the scheme called "agricultural term loan". In the matter of Union Bank of India v. M/s. Noor Dairy Farm and others (supra), it was an undisputed fact that the loan was an agricultural loan and it was also established so by documentary evidence on record. In fact, para 11 of the said judgment clearly states that :-
"it is admitted by P.W. 1 that the suit loan is an agricultural, even documents bear it out."
It was in that context placing reliance upon the decision of the Apex Court in Corporation Bank's case (supra) that the bank was not permitted to charge interest at half-yearly rests in the said case.
19. Being so, no fault can be found with the decree awarding interest at the rate of 15.5% per annum with quarterly rests for the period from 30-6-1992 to 23-11-1992, and therefore, does not warrant any interference by the Appellate Court in that regard.
20. As regards the third question, it is clearly covered by the decision of the Division Bench of this Court in the matter of Mahadeo Rama Bhonsle and others v. Central Bank of India and another (supra). It has been clearly held therein that the amount of interest is to be calculated on the principal sum only and not the principal sum plus the interest accrued till the filing of the suit. The decree as far as it awards the interest on the total sum of Rs. 1,03,088/- which includes interest on the amount till the date of filing of the suit has to be modified so as to restrict the same to the principal sum of Rs. 95,000/- only. In other words, the appellant shall be entitled for interest at the rate of 15.5% per annum for a period from 30-6-1992 till 23-11-1992 on the total sum of Rs. 95,000/-.
21. The first and the third points for determination are accordingly answered in negative and the second question is answered in affirmative as far as it relates to grant of interest at "quarterly rests" since the loan was not for agricultural purposes.
22. The Appeal as well as the Cross-objections therefore fail and are hereby dismissed. In the circumstances, there shall be no order as to costs.
23. Appeal & Cross objection dismissed.