PRINCIPAL SUM ADJUDGED AND SUCH PRINCIPAL SUM
Central Bank of India v. Ravindra and Others
AIR 2001 SC 3095: (2002) 1 sec 367: 2001 (7) SCALE 351: 2002 (2) BCR 616
Special Leave Petition (Civil) 2421 of 1993
Dated: October 18, 2001
BENCH: Justices A.S. Anand, K.T. Thomas, R.C. Lahoti,
N. Santosh Hegde and S.N. Variava.
Meaning of the phrases ”the principal sum adjudged” and ”such principal sum” as occurring in section 34 of the Code of Civil Procedure, 1908.
In view of the law having been settled with this judgment, 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 capitalized 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 the 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 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, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of Section 46 of Banking Regulation 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.
We have dealt with the law governing the debtor and creditor relationship. We have not dealt with any provision or principle of taxation law where under deemed payment of interest consequent upon capitalisation and actual payment whenever made may be treated as capital or revenue which question shall have to be determined under the scheme of relevant statutory enactment.
Subject to the above we answer the reference in following terms:
(1) Subject to a binding stipulation contained in a voluntary contract between the parties and/or an established practice or usage interest on loans and advances may be charged on periodical rests and also capitalized on remaining unpaid. The principal sum actually advanced coupled with the interest on periodical rests so capitalized is capable of being adjudged as principal sum on the date of the suit.
(2) The principal sum so adjudged is ‘such principal sum’ within the meaning of Section 34 of the Code of Civil Procedure, 1908 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.
(3) Corporation Bank v. HS. Gowda and Anr., [1994] 5 SCC 213 and Bank of Baroda v. jagannath Pigment & Chem. have been correctly decided.-18
Banking Regulation Act, 1949 – 19
However, we propose to place on record a few incidental observations, without which, we feel, our answer will not be complete and that we do as under:-
1. Though interest can be capitalized on the analogy that the interest falling due on the accrued date and remaining unpaid, partakes the character of amount advanced on the date, yet penal interest, which is charged by way of penalty for non-payment, cannot be capitalized. Further interest, i.e., interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalized. It will be opposed to public policy.
2. Novation, that is, a debtor entering into a fresh agreement with a creditor undertaking payment of previously borrowed principal amount coupled with interest by treating the sum total as principal, any contract express or implied and an express acknowledgement 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 not acquiescence.
3. The prevalence of banking practice legitimizes 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 obligations of the parties as to recovery and payment of interest.
4. Capitalisation method is founded on the principle that the borrower failed to make payment though he could have made and thereby rendered himself a defaulter. To hold an amount debited to the account of the borrower capitalized 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 due and thereby avoiding capitalization. Any debit entry in the account of the borrower and claimed to have been capitalized so as to form an amalgam of the principal sum may be excluded on being shown 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 payment before capitalisation and thereby excluding its capitalisation.
5. The power conferred by sections 21 and 35A of the Banking Regulation Act, 1935 is coupled with duty to act. Reserve Bank of India is the 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 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 interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalized. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transactions which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy.
