Andhra HC (Pre-Telangana)
Kolli Venkata Apparao And Anr. vs State Bank Of India on 8 September, 1997
Equivalent citations: 1997(5)ALT530, [1999]95COMPCAS95(AP), AIR 1998 ANDHRA PRADESH 2, (1997) 2 LS 464, (1997) 5 ANDHLD 716, (1997) 5 ANDH LT 530, (1998) 1 ICC 395, (1999) 95 COMCAS 95
JUDGMENT D. Reddeppa Reddi, J.
1. The defendants who have suffered a preliminary decree for a sum of Rs. 2,40,070.80 calculated up to April 13, 1993, i.e., Rs. 55,000 towards principal, Rs. 1,73,693.80 towards interest and Rs. 11,377.00 towards costs in O.S. No. 64 of 1986, a suit for foreclosure filed by the State Bank of India, Agricultural Development Branch, Proddatur, on the file of the Subordinate Judge, Proddatur, are the appellants herein.
2. The suit has been filed on the foot of the hypothecation deed dated April 10, 1974, executed by the first appellant as borrower and the second appellant as guarantor for a sum of Rs. 55,000 together with interest at 1/2 per cent. over the SBI advance rate subject to a minimum of 12 1/2 per cent. per annum with half-yearly rests. The appellants admitted the execution of the deed of hypothecation dated April 10, 1974, and the demand promissory notes referred to in the plaint. However, they resisted the suit claim on several grounds, the main being that the interest should be scaled down as per the provisions of the Agricultural Debt Relief Act (Act No. 4 of 1938), and the suit is barred by limitation as far as the second appellant, the guarantor, is concerned. Appropriate issues have been framed. Evidence has been let in on either side, P.W. 1 has been examined and exhibits A-1 to A-39 have been marked on behalf of the plaintiff. The first defendant, who is the first appellant herein, examined himself as D.W. 1 and exhibits B-1 to B-23 have been marked on his behalf. On appraisal of the said oral and documentary evidence, the trial court answered all the issues in favour of the respondent/plaintiff and against the appellants/defendants. Accordingly, a preliminary decree has been passed against the appellants for a sum of Rs. 2,06,803.80 with future interest at 6 per cent. per annum on Rs. 55,000 from the date of the suit till the date of realisation.
3. Though several grounds have been raised and lengthy written arguments have been submitted, T. Veerabhadrayya, learned counsel for the appellants, made only two submissions. His first and the principal submission is that compounding of interest with half-yearly rests in respect of agricultural advances is illegal, being contrary to the circulars/directives issued by the Reserve Bank of India and the law laid down by the Supreme Court in Corporation Bank v. D. S. Gowda . His second submission, which is rather supplementary to the first, is that charging of interest on incidental charges debited to the appellants' account from time to time is not permissible either under the terms of the contract entered into between the parties or under any provisions of law.
4. K. Gopalakrishna Murthy, learned counsel for the respondent/plaintiff, refutes the first submission on the ground that when a borrower defaults it would be open to the bank to compound interest with half-yearly rests even in respect of agricultural advances and the second submission on the ground that once the incidental charges are debited to the borrower's account, they become due from him and therefore the bank is entitled to charge interest thereon.
5. In view of these rival submissions, the points that emerge for my consideration are :
(1) Whether, in the facts and circumstances of the case, the respondent/plaintiff bank is justified in compounding interest with half yearly rests ? and (2) Whether charging of interest on incidental charges debited to the appellants' account from time to time is permissible in law ?
6. Point No. 1 : It is admitted by learned counsel on either side that the suit claim is based on exhibit A-34, an extract of the statement of account relating to the suit debt. It is also admitted by them that as per the said statement, interest was charged on the suit debt with half-yearly rests at 14.5 per cent. for the period from April 10, 1975, to December 31, 1977, at 11 per cent. for the period from January 1, 1978, to December 31, 1979, and at 12.5 per cent. for the period from December 1, 1980, to August 25, 1986, the date of institution of the suit. Further, they did not dispute the applicability of the above-stated rates of interest to agricultural loans.
7. The principle that "if it is proved that the interest charged by banks on loans advanced is not in conformity with the rate prescribed by the Reserve Bank then the court could disallow such excess interest and give relief to the party notwithstanding the provisions of section 21A. Banks are bound to follow the directives or circulars issued by the Reserve Bank prescribing the structure of interest to be charged on loans and any interest charged by banks in excess of the prescribed limit would be illegal and void. Banks cannot charge compound interest with quarterly rests on agricultural advances" enunciated by the High Court of Karnataka in Krishna Reddy v. Canara Bank, , had the approval of the Supreme Court in Corporation Bank v. D. S. Gowda [1994] 81 Comp Cas 842, 871 (SC) in the following terms :
"We are in respectful agreement with the above interpretation placed on section 21A of the Banking Regulation Act."
8. Thus, there can be no doubt whatsoever that the respondent-bank is bound by the circulars/directives issued by the Reserve Bank of India regarding the rate and mode of charging interest on loans advanced for agricultural purposes.
9. There is no dispute that regarding agricultural advances the Reserve Bank of India issued circulars/directives dated March 14, 1972, October 5, 1974, March 13, 1976, August 17, 1976, and February 27, 1978, which have been extracted in extenso in Bank of India v. Karnam Ranga Rao . The point for consideration therein was whether the bank can charge compound interest with monthly, quarterly, or half-yearly rests on overdue agricultural loans. The facts of that case are : Bank of India filed a suit for recovery of a sum of Rs. 30,564, said to be due from defendants Nos. 1 and 2 on a loan of Rs. 10,000 granted to them for raising a sugarcane crop. The rate of interest agreed between the parties was 4 per cent. above the rate prescribed by the Reserve Bank of India subject to a minimum of 13 per cent. with quarterly rests. However, the bank laid the suit, charging interest at the agreed rate with half-yearly rests. The defendants while admitting the loan denied their liability to pay interest with quarterly rests on the ground that the loan was sanctioned for agricultural purpose and the bank has no right to compound interest periodically. One of the issues framed in the suit was whether the plaintiff was not entitled to charge compound interest. The trial court, having held that the plaintiff would not be entitled to charge compound interest on the loans advanced for agricultural purpose, directed the plaintiff to submit a revised statement of account charging simple interest on the amount due. Accordingly, the plaintiff submitted a revised statement showing Rs. 19,851.66 as the sum due from the defendants. The court then decreed the suit for the said amount with future interest at 6 per cent. payable in two instalments. Aggrieved by the said decree, the bank carried the matter in appeal to the High Court of Karnataka. The appeal was. heard by a Division Bench, consisting of K. Jagannatha Shetty, Acting Chief justice, as he then was, and M. S. Patil J. K. Jagannatha Shetty j., speaking for the Division Bench, on an elaborate consideration of the real object and purpose of the circulars/directives dated March 14, 1972, October 5, 1974, March 13, 1976, August 17, 1976, and February 28, 1978, issued by the Reserve Bank of India, concluded as under (page 491) :
"The circulars/directives of the Reserve Bank direct that agricultural advances should not be treated on par with the commercial loans in the matter of application of the system of compounding interest. The farmers do not have any regular source of income other than sale proceeds of their crops is an acknowledged fact. They get income generally only once a year. They are, therefore, not in a position to pay interest at usual fixed intervals like monthly, quarterly and half-yearly. Banks should not compound interest on current dues. Banks should not also charge interest with monthly, quarterly or half-yearly rests on overdue loans. Perhaps, it may not be illegal to charge interest with yearly rests." Consequently, the appeal was dismissed. Then, the matter was carried by the Bank of India to the Supreme Court, in Civil Appeal No. 544 of 1986. This appeal was heard along with Civil Appeal No. 4214 of 1982 arising out of the judgment dated October 22, 1982, in First Appeal No. 107 of 1981, on the file of the High Court of Karnataka, reported as Corporation Bank v. D. S. Gowda , and a common judgment was rendered. We are not concerned with the principles enunciated by the Supreme Court in Civil Appeal No. 4214 of 1982 since it related to charging interest at 161/2 per cent. with quarterly rests on a loan advanced for a commercial purpose. For our purpose, it is sufficient to refer to the following observations of the Supreme Court made in Corporation Bank v. D. S. Gowda :
"In so far as Civil Appeal No. 544 of 1986 is concerned it relates to the bank's right to charge compound interest, i.e., interest with periodical rests on agricultural advances. We have already referred to the various circulars issued by the Reserve Bank from time to time in exercise of power conferred by section 21/35A of the Banking Regulation Act. We have pointed out that the said circulars/directives provide that agricultural advances should not be treated on par with commercial loans in so far 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 a year. The question of recovery of interest with quarterly or six-monthly rests from 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/interest on advances. Therefore, to allow the banks to charge interest on quarterly or half-yearly rests from farmers would be tantamount to virtually compelling them to pay 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 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. It has, therefore, been emphasised by the Reserve Bank that interest should be charged once a year to coincide with the point of time when the farmer is fluid and interest on current dues should not be compounded although it may be done when the advance/instalment becomes overdue. Thus, according to the circulars/directives, so far as loans for agricultural purposes are concerned, at best interest may be charged with yearly rests and may be compounded if the loan/instalment becomes overdue. In the present case, since interest was charged with six monthly rests that, was clearly in contravention of the Reserve Bank circulars/directives. Compounding of interest on current dues on agricultural advances having been discouraged, the bank was not entitled to charge interest with shorter periodical rests and compound the same. The bank could add interest outstanding to the principal and compound the interest when the crop loan or term loan becomes overdue having regard to the tenor of the circular dated March 14, 1972. The High Court was, therefore, fully justified in coming to the conclusion that the bank was not entitled to charge interest with half-yearly rests."
10. In view of the above, there should be no hesitation to conclude that the respondent-bank is not justified in compounding interest with halfyearly rests. It follows that, the contention of learned counsel for the respondent that when a borrower, who availed of agricultural loan, defaults, it would be open to the bank to charge compound interest with half-yearly rests is totally devoid of substance, for, acceptance of such contention would amount to according permission to the bank to convert agricultural loans into commercial loans the moment the agricultural debtor commits default. None of the circulars/directives of the Reserve Bank of India referred to supra permits the banks to resort to such a course. In this view of the matter, the inevitable conclusion could be that the respondent-bank is totally unjustified in compounding interest with half-yearly rests, but it would be entitled to compound the same with yearly rests. This point is, accordingly, answered.
11. Point No. 2 : As per exhibit A-34, a sum of Rs. 6,432.48 was debited to the appellants' account from time to time towards service or other charges. Learned counsel for the respondent-bank admits that interest was charged thereon, as usual, with half-yearly rests. However, he is unable to show and provision of law or term or condition in the hypothecation deed dated April 10, 1974, which entitles the respondent-bank to charge interest on such charges. The plaint as well as the evidence of P.W. 1 is silent on this aspect. There can be little doubt that it is for the respondent-bank to plead and prove its entitlement to charge interest on service/incidental/other charges too. But, in the case on hand, it has failed to prove the same. In the circumstances, I hold that charging of interest on service/incidental/other charges debited to the appellants' account from time to time is unsustainable in law. This point is, thus, answered.
12. In view of the above conclusions, the judgment under appeal awarding interest at 14 per cent. per annum on principal and service/incidental/other charges, compounded with half-yearly rests cannot be sustained. Instead, the suit shall stand decreed in favour of the respondent/plaintiff and against the appellants/defendants for a sum of Rs. 55,000 together with interest thereon at 14.5 per cent. per annum from April 10, 1975, to December 31, 1977, at 11 per cent. per annum from January 1, 1978, to November 30, 1980, and at 12.5 per cent. per annum from December 1, 1980, to August 25, 1986, the date of institution of the suit, compoundable with yearly rests and service/incidental/other charges of Rs. 6,432.48, of course, after deducting the repayments made by the appellants from time to time and future interest at 6 per cent. per annum on Rs. 55,000 from the date of the institution of the suit till the date of redemption. The decree under appeal shall stand, accordingly, modified.
13. The appellants as well as the respondent shall file a statement of account prepared as per the above terms into the Registry within two weeks from today and the Registry shall prepare the decree within four weeks thereafter, after giving notice to the counsel on either side. Time for redemption is four months from the date of preparation of the decree.
14. In the result, the appeal is allowed to the extent mentioned above. No costs.