Interest as Compensation

AIR 2001 SC 3095 [Constitution Bench]

Para 17: In Billamal v. Ahad Shah, [AIR 1918 PC 249], the Privy Council recognised the justification for adding on the accumulated interest under an earlier transaction in the fresh transaction and observed as under :

"A borrower who obtains a loan secured by a promissory note on quite reasonable terms, by neglecting to pay the note on maturity, further neglecting to pay the accruing interest for the several years following and then giving a renewal note for the original debt plus the capitalised interest, could produce a result which might at first sight appear oppressive, and yet there would be nothing harsh or unconscionable in the creditor's demand, since the added interest only accumulated while he forebore to enforce the payment of the sums from time to time due to him."

Para 18: S.R.M.S. Chethambaram Chettiar v. Loo Thon Poo, [AIR 1940 Privy Council 60], was a dispute between money lenders and borrowers arising from the State of Johore. Interest was charged @ 24% and was then capitalised and made payable by monthly instalments. Question arose whether the interest so charged was excessive and unfair.

Their Lordships held that where a loan has been incurred for interest and this interest is added to the amount agreed to be due when a new transaction is agreed between the parties which includes the payment of interest as an acknowledged debt this is not in principle open to any sound objection. Their Lordships referred to the decision of the court of appeal in Lyle v. Chappel, [(1932) 1 KB 691], speech of Lord Atkin in Paton v. Inland Revenue Commissioners, [AC 341], decision of Channel, J, in Carrington Ltd. v. Smith, [(1906) 1 KB 79], and the decision by the court of appeal in Reading Trust v.Spero, [(1930)  1 KB 492], and held that a willing and intelligent borrower had agreed to the interest charged is one of the circumstances to be taken into account though not conclusive.

Their Lordships upheld the charge of 15% interest payable on the sums from time to time acknowledged to be owing by the borrowers to the lenders and thus allowing interest on interest. However, interest charged @ 24% on the loan and charges which were amply secured by charges on rubber estate which had been well looked after and kept in good order was held unreasonable, excessive and unfair. The fact remains that Their Lordships approved charging of interest @ 15% and capitalisation of the same by means of acknowledgement to that effect by the borrowers and also upheld permissibility of further 15% interest being charged on the sum so capitalised.

Para 19: It was pointed out in Lyle v. Chappel (supra, at p. 706) that it ought not to make any difference to the validity of a transaction by way of a renewal of a loan, whether the parties go through the form of payment by the borrower of the whole amount due and a relending of the same amount by the money lender, or the transaction is carried out without any such payment by treating the amount of principal and interest still due as a debt acknowledged by the borrower together with an undertaking by the borrower to pay the amount of the agreed debt.

Para 20: 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 in 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 accourdance 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 Lal 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 1934 Oudh 473]. In Pazhaniappa Mudaliar and Ors. v. 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 this system is to capitalise the interest at the end of each year and treat it as 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 acknowledgement were renewals and only the sums advanced as principal were repayable notwithstanding its capitalisation of interest from time; the interest being still treated as interest and wiped out. The Division Bench speaking through Patanjali Sastri, J. (as His Lordshop 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 interest in the indebtedness of the customer is treated as a principal sum advanced by the bank.

Para 21: Two decisions by Kerala High Court may now be noticed. Palai Central Bank Ltd. v. C. Ramaswami Nadar, [AIR 1959 Kerala 194], is a Division Bench decision which noticed a line of Full Bench decisions of the Travancore High Court taking the view that when the agreement between the parties to a litigation sanctioned arrears of interest remaining unpaid for any specified period being treated as principal, the principal amount sued for within the meaning of the concerned provision would be the amount claimed in the plaint as principal on that basis. It was held that the terms 'principal' used in Section 31 of Travancore Civil Procedure Code (8 of 1100) is not restricted in its meaning to the original sum lent and that an agreement to treat arrears of interest, at fixed periods, as principal, which is to carry interest, is valid. It was further held that the word 'principal amount' are not restricted to the original sum lent but are comprehensive to include arrears of interest, on which interest is agreed to be paid.

Thandamma and Ors. v. Kuriakore Putherickal lype, [AIR 1962 Kerala 235], is Full Bench decision which, though did not notice the Division Bench decision in Palai Central Bank Limited (supra), laid down the same law. An overdraft agreement entered into by the defendants with the plaintiff bank provided that the interest at 7% as agreed upon will be calculated quarterly, four times ever year, and added to the principal. On the balance shown as due on 31-12-1952 in the account maintained by the bank in pursuance of such agreement, the suit was filed for recovery of the amount due on 31-12-1952 as principal with future interest till the date of the suit. It was held that the effect of the agreement was to wipe off all interest outstanding at the end of each quarter by means of further advances from the bank of similar amounts which are debited to the account of the debtor. It was further held that the interest that thus accumulated with principal at the end of each quarter became principal and never thereafter ceased to be dealt with as principal. The amount was treated as the principal amount outstanding on 1-11-1953. However, in passing the Full Bench noted that the position may have been different if under a local debt relief law it was subsequently provided that the principal would mean the amount originally advanced together with sum, if any subsequently advanced, notwithstanding any stipulation to treat any interest as principal.

Para 22: In K. Appa Rao v. V. L. Varadaraj & Ors., [AIR 1981 Madras 94], the Division Bench, speaking through Nainar Sundram, J., pointed out that the charging of compound interest by itself is not per se usurious except in the case of an agriculturist protected by the Usurious Loans Act, 1918 as amended in its application in Madras. However, the Division Bench, by reference to an earlier decision of that High Court, pointed out that for the purpose of determining whether interest would be excessive or not the risk incurred by the creditor by advancing the loan (whether it was secured or not and if secured to what extent) and if compound interest is charged, the periods at which it is calculated and the total advantage which may be reasonably expected to have accrued from the transaction, are important factors.

Para 23:. In Syndicate Bank v. M/s. West Bengal Cements Limited and Ors. [AIR 1989 Delhi 107], Y. K. Sabharwal, J. (as His Lordship then was) rejected the contention of learned counsel for the borrower that the interest can never become principal and the words 'principal sum' in Section 34, Code of Civil Procedure should be given the ordinary meaning as given in the dictionaries, and termed as misconceived the argument that the interest under Section 34 could be awarded only on the original sum advanced as the argument ran counter to the normal banking practice, and which, if accepted, would act as a premium for those not paying the amount of interest when it is due at the cost of those making payment of interest when it is due. It was held that the bank was entitled to the sum claimed as due from and payable by the defendants as the principal sum with future interest on such amount from the date of suit to the date of realisation. Reliance was placed on Division Bench decision of Madras High Court in Sigappiachi v. M.A.P.A. Palaniappa  Chettiar, [AIR 1972 Madras 463], holding that the 'principal sum adjudged' (within the meaning of Section 34 of the Code of Civil Procedure) is the amount found due as on the date of the suit.

Para 29: In Corporation Bank v. D. S. Gowda & Anr. [JT 1994 (7) SC 87 =(1994) 5 SCC 213]a batch of appeals against three decisions of Karnataka High Court [reported as D. S. Gowda v. Corporation Bank [AIR 1983 Karnataka 143], H. P. Krishna Reddy v. Canara Bank [AIR 1985 Karantaka 228] and Bank of India v. Karnam Ranga Rao and Ors. [AIR 1986 Karnataka 242] were disposed of and while doing so two decisions of Andhra Pradesh High Court, namely, K. C. Venkateswarlu v. Syndicate Bank [AIR 1986 AP 290] and State Bank of India, Eluru, Re [AIR 1986 AP 291] were also noticed and dealt with. D. S. Gowda's case was if a commercial advance taken by the borrower for the purpose of construction residential flats on a building site allotted by Bangalore Development Authority. Interest at the rate of 16.5% per annum, with quarterly rests, was charged. Interest, penal interest and service charges were debited to the account and capitalised. In the cases of H. P. Krishna Reddy (supra) and Karnam Ranga Rao (supra), loans, were advanced for agricultural purposes. Directions made by Reserve Bank of India were violated and the interest was charged at rates far excess of the limit prescribed by the Reserve Bank. One of the questions having a bearing on the day-to-day transactions of loan/advance entered into by the banks was : Whether the bank is entitled to claim interest with periodical rests, e.g., a monthly rest, a quarterly rest, a six-monthly rest, or a yearly rest, or compound interest in any other manner, from a borrower who has obtained a loan or an advance for agricultural/commercial purposes, as the case may be ? During the course of its judgment the court observed (vide para 14) :

'...charging of interest with periodical rests or compounding of interest would be allowed if there is evidence of the customer having acquiesced therein, provided the relation of banker and customer is subsisting However, if the relationship undergoes a change into that of mortgagee and mortgaor by the taking of a mortgage, the charging of interest would be governed in accordance with the terms of the mortgage. The taking of a mortgage to secure the fluctuating balance of an overdrawn account, being not inconsistent with the relationship of banker and customer, would not displace an earlier right to charge compound interest. Thus, the practice of bankers to debit the accrued interest to the borrower's current account at regular periods is a recognised practice.'

Para 30:. Their Lordships cited with approval the following passage from Halsbury's Laws of England (4th Edition) (Vol. 3, at page 118 para 160) :

'160. Interest . By the universal custom of bankers, a banker has the right to change simple interest at a reasonable rate on all overdrafts. An unusual rate of interest, interest with periodical rests or compound interest, can only be justified, in the absence of express agreement, where the customer is shown or must be taken to have acquiesced in the account being kept on that basis. Whether such acquiescence can be assumed from his failure to protest at an interest entry in his statement of account is doubtful.

Acquiescence in such charges only justifies them so long as the relation of banker and customer exists with respect to the advance. If the relation is altered into that of mortgagee and mortgagor by the taking of a mortgage, interest must be calculated according to the terms of the mortgage, or according to the new relation.

The taking of a mortgage to secure a fluctuating balance of an overdrawn account, is not, however, inconsistent with the relation of a banker and customer, so as to displace a previously accrued right to charge compound interest.

It is the practice of bankers to debit the accrued interest to the borrower's current account at regular period (usually half yerly), where the current account is overdrawn or becomes overdrawn as the 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.

Para 31: Their Lordships reversed the judgment of the Karnataka High Court which was under appeal and approved and affirmed view of the same High Court in H. P. Krishna Reddy v. Canara Bank, [AIR 1985 Karnataka 228], and Bank of India v. Karnam Ranga Rao, [AIR 1986 Karnataka 242]. Universal banking practice of usually charging interest on periodical rests and compounding interest on remaining unpaid was specifically dealt with and approved. The principal relevant consideration which prevailed with the court were, continuing judicial upholding of such practice over a length of time and the Reserve Bank of India by issuing circulars/directives from time to time and on paying 'adequate attention' having accorded its approval to permissibilty of such practice but intervening in the interest of streamlining the same.

Conclusion which follows :

Para 36: The English decisions and the decisions of this Court and almost all the High Courts of the country have noticed and approved long established banking practice of charging interest at reasonable rates on periodical rests and capitalising the same on remaining unpaid. Such a practice is prevalent and also recognized in non-banking money lending transaction. Legislature has stepped in from time to time to relieve the debtors from hardship whenever it has found the practice of charging compound interest and its capitalization to be oppressive and hence needing to be curbed. The practice is permissible, legal and judicially upheld excepting when superseded by legislation. There is nothing wrong in the parties voluntarily entering into transactions, evidenced by deeds incorporating covenant or stipulation for payment of compound interest at reasonable rates, and authorising the creditor to capitalise the interest being charged at the agreed rate on the interest component of the capitalised sum for the succeding period. Interest once capitalised sheds its colour of being interest and becomes a part of principal so as to bind the debtor/ borrower.

Interest and its classes :

Para 37: Black's Law Dictionary (7th Edition) defines 'interest' inter alia as the compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use; especially, the amount owed to a lender in return for the use of the borrowed money. According to Stroud's Judicial Dictionary of Words and Phrases (5th edition) interest means, inter alia, compensation paid by the borrower to the lender for deprivation of the use of his money. In Secretary, Irrigation Department, Government of Orissa & Ors. v . G. C. Roy, [JT 1991 (6) SC 349 = (1992) 1 SCC 508], the Constitution Bench opined that a person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages .... this is the principles of Section 34, Civil Procedure Code. In Dr. Shamlal Narula v.C.I.T., Punjab, [(1964) 7 SCR 668], this Court held that interest is paid for the deprivation of the use of the money. The essence of interest in the opinion of Lord Wright, in Riches v. Westminster Bank, Ltd. [(1947) 1 All E R 469, 472], is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he has had the use of the money, or, conversedly the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation; the money at the due date. It may be regarded either as representing the profit he might have made if he has had the use of the money, or, conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation; the money due to creditor was not paid, or, in other words, was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation whether the compensation was liquidated under an agreement or statute.

A Division Bench of the High Court of Punjab speaking through Tek Chand, J. in C.I.T., Punjab v. Dr. Sham Lal Narula [AIR 1963 Punjab 411] thus articulated the concept of interest - "the words "interest" and "compensation" are sometimes used interchangeably and on other occasions they have distinct connotation. "Interest" in general terms is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. In its narrow sense, "interest" is understood to mean the amount which one has contracted to pay for use of borrowed money.... In whatever category "interest" in a particular case may be put, it is a consideration paid either for the use of money or for forbearance in demanding it, after it has fallen due, and thus, it is a charge for the use or forbearance of money. In this sense, it is a compnsation allowed by law or fixed by parties, or permitted by custom or usage, for use of money, belonging to another, or for the delay in paying money after it has become payable." It is the appeal against this decision of Punjab High Court which was dismissed by Supreme Court in Dr. Shamlal Narula's case (supra)

Para 38: However 'penal interest' has to be distinguished from 'interest'. Penal interest is an extraordinary liability incurred by a debtor on account of his being a wrong-doer by having committed the wrong of not making the payment when it should have been made, in favour of the person wronged and it is neither related with nor limited to the damages suffered. Thus while liability to pay interest is founded on the doctrine of compensation, penal interest is a penalty founded on the doctrine of penal action. Penal interest can be charged only once for one period of default and therefore cannot be permitted to be capitalised.

Para 39: Mulla on the Code of Civil Procedure (1995 Edition) sets out three divisions of interest as dealt in Section 34 of CPC. The division is according to the period for which interest is allowed by the court, namely - (1) interest accrued due prior to the institution of the suit on the principal sum adjudged; (2) additional interest on the principal sum adjudged, from the date of the suit date of the decree, at such rate as the court deems reasonable; (3) further interest on the principal sum adjudged, from the date of the decree to the date of the payment or to such earlier date as the court thinks fit, at a rate not exceeding 6 per cent per annum. Popularly the three interests are called pre-suit interest, interest pendente lite and interest post-decree or futher interest. Interest for the period anterior to institution of suit is not a matter of the procedure; interest pendente lite is not a matter of substantive law (See, Secretary, irrigation Department, Government of Orissa & Ors. v. G.C.Roy, [JT 1991 (6) SC 349 =(1992) 1 SCC 508, Pr.44-iv]. Pre-suit interest is referable to substantive law and can be sub-divided into two sub-heads: (i) where there is a stipulation for the payment of interest at a fixed rate; and (ii) where there is a no such stipulation. If there is a stipulation for the rate of interest, the court must allow that rate upto the date of the suit subject of three exceptions: (i) any provisions of law applicable to money lending transactions, of usury laws or any other debt law governing the parties and having an overriding effect on any stipulation for payment of interest voluntarily entered into between the parties; (ii) if the rate is penal, the court must award at such rate as it deems reasonable; (iii) even if the rate is not penal the court may reduce it if the interest is excessive and the transaction was substantially unfair. If there is no express stipulation for payment of interest the plaintiff is not entitled to interest except on proof of mercantile usage, statutory right to interest, or an implied agreement. Interest from the date of suit to date of decree is in the discretion of the court. Interest from the date of the decree of the payment or any other earlier date appointed by the court is again in the discretion of the court - to award or not to award as also the rate at which to award. These principles are well established and are not disputed by learned counsel for the parties. We have stated the same only by way of introduction to the main controversy before us which has a colour little different and somewhat complex. The learned counsel appearing before us are agreed that pre-suit interest is a matter of substantive law and voluntary stipulation entered into between the parties for payment of interest would bind the parties as also the court excepting any case out of the three exceptions set out hereinbefore.

Para 55: During the course of hearing it was brought to our notice that in view of several Usury Laws and Debt Relief Law in force in several states private money lending has almost come to an end and needy borrowers by and large depend on banking institutions for financial facilities. Several unhealthy practices having stowly penetrated into prevalence were pointed out. Banking is an organised institution and most of the banks press into service long running documents wherein the borrowers fill in the blanks at times without caring to read what has been provided therin, and bind themselves by the stipulations articulated by best of legal brains. Borrowers other than those belonging to corporate sector, find themselves having unwitting fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous. At times the interest charged and capitalised is manifold than the amount actually advanced. Rule of damdupat does not apply. Penal interest, service charges and other over-heads are debited in the account of the borrower and capitalised of which debits the borrower may not even be aware. If the practice of charging interest on quarterly rests is upheld and given a judicial recognition, unscrupulous banks may resort to charging interest even on monthly rests and capitalising the same. Statements of accounts supplied by banks to borrowers many a times do not contain particulars or details of debit entries and when written in hand are worse than medical prescriptions putting to test the eyes and wits of the borrowers. Instances of unscrupulous, unfair and unhealthy dealings can be multiplied though they cannot be generalised. Suffice it to observe that such issues shall have to be left open to be adjudicated upon in appropriate cases as and when actually arising for decision and we cannot venture into laying down law on such issues as do not arise for determination before us. 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 that 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 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 capitalization. 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 legitimatize stipulations as to interest on periodical rests and their capitalization being 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) Capitalization 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 capitalization and thereby excluding its capitalization.

(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 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 transaction 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.

(6) Agricultural borrowings are to be treated on a pedestal different from others. Charging and capitalization of interest on agricultural loans cannot be permitted in India except on annual or six monthly rests depending on the rotation of crops in the area to which the agriculturist borrowers belong.

(7) Any interest charged and/or capitalized in violation of RBI directives, as to rate of interest, or as to periods at which rests can be arrived at, shall be disallowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly.

(8) Award of interest pendente lite and post-decree is discretionary with the court as it is essentially governed by Section 34 of the CPC dehors the contract between the parties. In a given case if the court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced, the court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercised fairly, judiciously and for reasons and not in an arbitrary or fanciful manner.

Para 56: 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 suit filed by banking institutions and enable an expeditious disposal of the suits, the issues wherein are by and large capable of being determined by ducumentary 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 assumption that transations or dealings have taken place and accounts maintained by banks in conformity with RBI directives.

Para 57: We have dealt with the law governing the debtor and creditor relationship. We have not dealt with any provision or principle of taxation law whereunder deemed payment of interest consequent upon capitalization 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.

Para 58: 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 capitalised is capable of being adjudged as principal sum on the date of the suit.

(2) The principal sum so adujudged 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. H. S. Gowda and Anr. [JT 1994 (7) SC 87 = 1994 (5) SCC 213] and Bank of Baroda v Jagannath Pigment & Chem. have beet correctly decided.

Sandeep Jalan

Advocate

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