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The report of the Joint Committee to which the Bill was referred stated, inter alia, as under :
"11. Clause 2. - Section 34 of the Code empowers a Court to award further interest from the date of the decree upto the date of payment on the s aggregate sum' which comprises principal sum with interest accrued thereon. The Committee are of the opinion that interest should not be awarded on interest but only on the principal sum. Suitable amendment has accordingly been incorporated in this clause."
"The parties must of course have had in view that this account-current would be kept in the way, in which bankers always keep such accounts, balancing the account at the end of the year; and, in the event of the interest accruing during the past year not being otherwise paid or provided for, placing the amount of such interest as the last item to the debit of the account, and accumulating such interest along with the principal sum due on the account, and bringing down the balance thus ascertained, consisting partly of principal, and partly of interest, to the new accounr. for the ensuing year, and placing the accumulated balance as the first article of debit in that new account. Where an account is kept in this way consistently throughout its whole course, the interest thus accumulated with principal, at the end of each year not only becomes principal, but never thereafter ceases to be dealt with as principal. " (at p. 236) 'The privilege of a banker to balance the account at the end of the year, and accumulate the interest with the principal, is founded on this plain ground of equity, that the interest ought then to be paid, and, because it is not paid, the debtor becomes thenceforth debtor in the amount, as a principal sum itself bearing interest. This principle of equity must be consistently carried out in keeping an account on the bank's books, in which other parties are interested as obligants, besides the party operating on the account; and, if it be, then the moment that interest is thus converted into principal, the amount of it must be reckoned as part of the drafts on the credit, or beyond the credit, for which the party operating on the account will be liable as principal in any event, ............." (at p.237) In Yourell & Anr. v. Hibernian Bank Ltd., [1918] AC 372, interest was charged from day to day with half yearly rests, so that the interest was capitalised every hall7 year in accordance with the terms of the deed which also contained ceiling on the principal sum which could be recoverable on the security. Lord Atkinson observed in his speech that whenever on balancing the mortgagor's current account with the bank a debit balance was found against him, that balance, by force of the covenant, became part of the principal money secured by the mortgage, subject however, to the covenant limit. Lord Wrenbury opined that the interest upon the overdraft was capitalised half yearly and as against the bank the capitalised interest must be regarded as principal and hence the debit balance of the overdraft banking account was principal. In Commissioners of Inland Revenue v. Sir H.C. Holder, Bt., &Anr., [1931] 2 KB 81, the bank debited half yearly interest to the borrower's bank account on the amount owing from time to time. It was held that the interest due each half year which, upon the failure of the company to pay it, was, according to the regular practice of bankers, added to the capital sum advanced, was thereby capitalised and could not thereafter be treated as interest. Lord Hanworth MR noted in his speech that the plan of capitalising interest at the end of each half year was adopted by bankers in order to enable them in effect to secure what is usually termed compound interest, which could not have otherwise been claimed by reason of the usury laws. Later his Lordship noted that under consideration was not the terms of a particular deed entered into between the parties but a practice which has been adopted by bankers for over a century, and which has had certain qualities attributed to it. Lord Romer concurring with Lord Hanworth opined that having regard to the method in which, with the concurrence of the company, the account was kept by the bank, the company must be deemed to have paid each half year the accruing interest by means of an advance made for this purpose by the bank to the company.
Holder & Anr. \. Inland Revenue Commissioner, [1932] All E.R. 265 and Paton (Fenton's Trustee) v. Inland Revenue Commissioners, [1938] All E.R. 786, are cases under the Income Tax Law. In Holder's case it was held that in view of the bank's practice of adding the interest each half-year to the amount advanced, the interest was in effect paid each half year to the bank by means of advances made for the purpose by the bank to the customer and for this reason no part payment (later) made by the tax payer was payment of interest and hence the tax payer was not entitled to the relief claimed. In Paton's case each half year interest at an agreed rate, and without deduction tax, was placed to the debit of the account of the borrower and the aggregate amount was then treated as principal for the following half year. Question arose, whether the interest in question which was capitalised could be said to have been in fact paid by the borrower so as to attract applicability to him of certain beneficial provision of the Income Tax Act, 1918? Lord Atkin opined - "The simple fact is that the amount of interest accruing during the half year is ascertained at the end of the half-year, and is added to the account as a debt in precisely the same position as the other debit items, whether for money lent, the price of securities bought, commission, or other source of debt. It takes its position as part of the whole debt due to the bank, and, as part of the whole debt, is in the next half-year chargeable with interest." His Lordship approved the view of Rusell, J. of Court of Appeal taking the view that because of a provision contained in the deed between the parties which enables the interest to be capitalised, the interest is not capitalised because it is in fact paid, but because it has in fact not been paid. Lord Macmillan opined - "It may well be that, in a question between a bank and its customer, and equally between a bank and its customer's cautioner, the interest accruing annually may, by the sanctioned method of accounting, cease to be interest when it is accumulated with the principal, so that the bank can thereafter no longer sue for the interest as interest............It is manifest, however, that it is only by a legal fiction that the interest in such cases as the present can be said to have been paid. After, as before, the striking of the balance, the same sum remains due, no longer, it may be, as interest, but still due as part of the principal debt. In construing the extent of the cautioner's liability under the case credit bond, the court would appear to have been well- founded in their view that the bank's own method of accounting, assented to by the principal debtor, and recognised as ordinary practice, precluded any claim for past interest as interest prior to the last balance. The caution was liable for whatever was drawn upon the cash credit account up to 400, and the unpaid interest was debited in account just like the ordinary drafts upon it, and became part of the principal debtor's capital indebtedness for which the cautioner was liable up to 400, with interest subsequent to the last balance."

Jafar Husain v. Bishambhar Nath, AIR 1937 Allahabad 442, was a case of recovery due on a mortgage and considered by reference to Order 34, Rule 11 of the Code of Civil Procedure. The words 'on the principal amount found or declared due on the mortgage' came up for the consideration of Division Bench. It was contended for the borrower that in calculating the amount due to the mortgagee up to the date fixed for redemption, interest from the date of the decree till the date fixed for redemption should be calculated on the principal sum secured by the deed and not on the total amount due on the date of the decree on account of principal as well as compound interest. The mortgage deed provided for interest being calculated six monthly and that if it was not paid then it would become a part of the principal. The Division Bench held that the words 'on the principal amount found or declared due' refer not only to the principal sum secured by the mortgage deed but also to the amount due on account of interest which has become a part of principal in accordance with the terms of the deed on the date when the preliminary decree is prepared. The Division Bench pointed out that reliance by the borrower on a ruling of the Oudh Chief Court in Chotey Lai v. Mohammad Ahmad Ali Khan, AIR (1933) Oudh 128, which appeared to be taking a view to the contrary was not good law inasmuch as a different view was taken by the same Court in Rajendra Bahadur Singh v. Raghubir Singh, AIR (1034) Oudh 473. In Padianiappa Mudaliar and Ors. \. Narayana Ayyar and Ors., AIR (1943) Madras 157, the mode of dealing adopted by the parties was what is usually followed between banker and customer. The effect of the system is to capitalise the interest at the end of each year and treat it is a fresh advance by the bank. The Division Bench noted that according to the usage prevailing between bankers and customers, it is an implied term of their dealing that the banker is to be treated as having made an advance to the customer at the end of each year or half year, as the case may be, of a sum equivalent in amount to the interest accruing during that period, so as to enable the customer to discharge the interest, increasing the principal of his debt by a corresponding amount. It was urged that the periodical settlement of accounts evidenced by the borrower's letter of acknowledgment were renewals and only the sums advanced as principal were repayable notwithstanding its capitalisation of interest from time to time the interest being still treated as interest and wiped out. The Division Bench speaking through Patanjali Sastri, J. (as his Lordship then was) noted that if the effect of the mode of dealing adopted between banker and customer is according to the long standing usage governing their relations, to treat the interest accruing in any year as discharged by a borrowing of an equivalent sum from the bank in precisely the same way as if the customer had given the bank a cheque upon the account for the amount in question with which the bank extinguished the interest and then placed the amount of the cheque to the debit of the account as an ordinary draft." it is difficult to see how the operation of this principle is affected by anything contained in the explanation to be found in the relevant provision of Madras Agriculturists' Relief Act, 1938 which merely provides that in cases of renewal of the debt, the sums advanced as principal shall alone be treated as the principal sum repayable by the agriculturists; for, the interest of the previous year is, under the rule, discharged, and the corresponding increase in the indebtedness of the customer is treated as a principal sum advanced by the bank.