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Gulabchand Laxmichand Bhutada Vs. Central Bank of India and Another - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberSecond Appeal No. 77 of 1982
Judge
Reported in(1991)93BOMLR996; 1992(1)MhLj68
ActsBanking Regulation Act, 1949 - Sections 21 and 21A; Usurious Loans Act, 1918.
AppellantGulabchand Laxmichand Bhutada
RespondentCentral Bank of India and Another
Appellant Advocate Jugalkishore Gilda, Adv.
Respondent Advocate T.C. Jain, Adv.
Excerpt:
.....case under section 21-a of banking regulation act - applicable to pending appeals - provisions of usurious loans act are not applicable. - - 1 failed to clear all the dues in spite of notice of demand, ultimately in the year 1976, the bank filed civil suit no. 1 of the promissory notes as well as mortgage deed and the other documents, after discarding the plea of defendant no. 8. shri gilda, learned counsel appearing on behalf of the appellant, urged that although the provisions of the usurious loans act, 1918, are attracted in the present case, both the courts below failed to apply those provisions and reduce the rate of interest on the ground that it was excessive. in order to overcome this difficulty, parliament while enacting the banking laws (amendment) act, 1983 (act 1 of 1984),..........witnessing the said transaction. it was agreed that interest at 4.5 per cent. per annum over the bank rate subject to the minimum of 9.5 per cent. per annum subject to periodical changes in accordance with the change in the bank rate was to be paid by defendant no. 1. it was also agreed that interest was to be charged at six monthly rests. on july 26, 1973, after taking into account payment already made, a fresh promissory note for the balance amount was executed. since defendant no. 1 failed to clear all the dues in spite of notice of demand, ultimately in the year 1976, the bank filed civil suit no. 123 of 1976 to recover the amount of rs. 1,261.11 from defendant no. 1. 4. defendant no. 1, who is the principal debtor, by his written statement, contended that the rate of interest.....
Judgment:

B.V. Chavan J.

1. A substantial question of law that arises in the present appeal is :

Whether the interest awarded by the courts below was liable to be scaled down under the provisions of the Usurious Loans Act, 1918, or otherwise liable to reduction on account of breach of the circulars issued by the Reserve Bank of India under section 21 of the Banking Regulation Act, 1949

2. The relevant facts giving rise to the present second appeal are these :

3. The appellant, Gulabchand (hereinafter referred to as 'defendant No. 1'), who is an agriculturist by profession obtained a loan from respondent No. 1, Central Bank of India (hereinafter referred to as 'the bank') from its branch at Yeotmal, District Yeotmal, as a crop loan on August 5, 1970, in the sum of Rs. 4,000 and executed a promissory note, a mortgage deed and hypothecation deed witnessing the said transaction. It was agreed that interest at 4.5 per cent. per annum over the bank rate subject to the minimum of 9.5 per cent. per annum subject to periodical changes in accordance with the change in the bank rate was to be paid by defendant No. 1. It was also agreed that interest was to be charged at six monthly rests. On July 26, 1973, after taking into account payment already made, a fresh promissory note for the balance amount was executed. Since defendant No. 1 failed to clear all the dues in spite of notice of demand, ultimately in the year 1976, the bank filed Civil Suit No. 123 of 1976 to recover the amount of Rs. 1,261.11 from defendant No. 1.

4. Defendant No. 1, who is the principal debtor, by his written statement, contended that the rate of interest agreed between the parties was 9.5 per cent. per annum and whatever was alleged by the bank in the plaint and the calculation made being contrary to the said agreement, he denied the same.

5. The learned trial judge, after framing issues and recording evidence, held that the bank had proved that defendant No. 1 had borrowed a loan of Rs. 4,000 on August 5, 1970, and had agreed to repay the sum with interest at the stipulated rate. He further held that defendant No. 2 alone was a guarantor for the plaintiff in connection with the repayment of the said loan and the interest. The learned judge found that defendant No. 1 had committed default in repayment of the said loan amount with interest and, therefore, he was liable to pay penal interest as claimed and charged by the bank. The learned trial court found that the bank had proved the execution by defendant No. 1 of the promissory notes as well as mortgage deed and the other documents, after discarding the plea of defendant No. 1 to the contrary. Consistent with these findings, learned judge passed a decree for Rs. 1,261.11 inclusive of past interest with future interest at 4% per annum.

6. Feeling aggrieved by the said decree, the bank filed Civil Appeal No. 6 of 1980 on the point of the form of the form of the decree and the rate of interest from the date of the suit till payment awarded by the learned trial judge. On the other hand, defendant No. 1 filed Civil Appeal No. 30 of 1980 challenging the decree passed against him. The learned District Judge, Yeotmal, by his judgment and decree dated August 20, 1981, held that the plaintiff was entitled to a preliminary decree for sale of the mortgaged property in place of a simple decree passed by the learned trial judge and defendant No. 1 had agreed to pay interest as claimed by the bank. The learned appellate judge declined to increase the rate of future interest. Accordingly he partially allowed Civil Appeal No. 6 of 1980 filed by the bank and modified the trial court's decree by passing a preliminary decree for sale of the mortgaged property. He dismissed the appeal filed by defendant No. 1.

7. Feeling aggrieved by the said judgment and decree passed by the learned District Judge, Yeotmal, dated August 20, 1981, defendant No. 1 has filed the present second appeal.

8. Shri Gilda, learned counsel appearing on behalf of the appellant, urged that although the provisions of the Usurious Loans Act, 1918, are attracted in the present case, both the courts below failed to apply those provisions and reduce the rate of interest on the ground that it was excessive. He contended that the bank after initially charging interest at 9.5 per cent. had gone on increasing the rate of interest to 16 per cent. per annum plus 2 per cent. penal interest and that too at six monthly rests, which was nothing but usury and, therefore, this court in exercise of its powers under section 3 of the Usurious Loans Act, 1918, should reopen the account and reduce the rate of interest to 9% per annum, simple interest, which would be reasonable, having regard to the nature of transaction between the parties. He, therefore, contended that if account is taken at 9 per cent. per annum, there will be hardly an amount of Rs. 30, that will be found due by defendant No. 1 to the bank.

9. Shri Gilda, in support of his argument, relied upon certain authorities where a view has been taken under the Usurious Loans Act, 1918, that a court is entitled to examine the nature of a particular transaction in the background of the circumstances and come to the conclusion that the interest charged, even in accordance with the circulars issued by the Reserve Bank of India under section 21 of the Banking Regulation Act, 1949, was liable to be reduced, if it was found to be in the nature of usury. The second limb of the argument of Shri Gilda, which is developed in the course of his rejoinder, was that even assuming that in view of the change in law the courts were not entitled to exercise powers under section 3 of the Usurious Loans Act, 1918, yet if on examination of the material on record, it was found that the interest actually charged by the bank was not in accordance with the circulars issued by the Reserve Bank of India under section 21 of the Banking Regulation Act, 1949, then to that extent such Act of the bank being illegal, interest charged in excess of the rate prescribed by the Reserve Bank of India was liable to be reduced.

10. On the other hand, Shri T. C. Jain, learned counsel appearing on behalf of the bank, urged that this being a second appeal, the scope was very limited and it was only to the extent of examining substantial question of law without entering into question of facts. He pointed out that the courts below had as a matter of fact found on evidence that there was an agreement between the parties to charge interest at a particular rate over the prevailing bank rate with six monthly rests and also for payment of penal interest in case the amount remained overdue. He, therefore, urged that when the courts below had after accepting the evidence led on behalf of the bank, found that the account filed by the bank was correct and on that basis passed a decree for the amount claimed in the plaint, there was hardly any scope for exercising powers of the court under section 3 of the Usurious Loans Act, 1918. He contended that even assuming that there was such a power and as held by some of the authorities relied upon on behalf of the appellant, it was open to the court to reduce the rate of interest on the ground that it was excessive in spite of the rate being in accordance with the circulars issued by the Reserve Bank of India, yet on account of change in law brought about by the Banking Laws (Amendment) Act (1 of 1984), section 24 incorporating altogether a new section 21A in the Banking Regulation Act, 1949, whatever power the courts had previous to this amendment under the Usurious Loans Act, 1918, it was taken away by the said section 21A, which specifically prohibited the court from reopening a transaction between a banking company and its debtor on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive. He, therefore, contended that section 21A totally prohibits this court from reopening the transaction as is sought to be done on behalf of the appellant.

11. Now, so far as the legal position is concerned, the provisions of the Usurious Loans Act, 1918, which were framed by the then Central Government for the purpose of giving additional powers to courts to deal with certain cases of usurious loans are still in the statute book. It appears that since the subject of money lending was in the State list, even under the Government of India Act, 1935, there have been local amendments to this Act, but so far as the Bombay State and its successor State of Maharashtra are concerned, there has been no amendment as such to this Act except an amendment carried out by the C.P. and Berar Act (11 of 1934), which was in force in Madhya Pradesh of which the Vidarbha region of the State of Maharashtra was a part till the States Reorganisation Act, 1956, and it is only in this region that a local amendment carried out by the said C.P. and Berar Act is in force. However, it is not necessary to set out the amendment since it is not of much consequence so far as the present controversy is concerned. Although at the earlier stage of his argument, Shri Gilda cited authorities of different High Courts prior to the amendment of the Banking Regulation Act, 1949 by Act (1 of 1984), after the said amendment whatever has been held in those earlier cases decided before amendment has no relevance in the context of the change in law as it exists today and, therefore, I do not propose to refer to those authorities, except to the extend it is necessary to understand the context.

12. The main question to be decided in the present appeal is : Whether on account of incorporation of section 21A in the Banking Regulation Act, 1949, additional power conferred on the court to reopen the loan transactions under the provisions of the Usurious Loans Act, 1918, has been taken away so that debtors of the banking companies cannot approach the courts to reopen the loan transactions entered into by them with the banking companies on the ground that the interest charged by the banking companies in respect of such transactions is excessive. Section 21A of the Banking Regulation Act, 1949, reads thus :

'Rate of interest charged by banking companies not to be subject to scrutiny by courts. - Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be reopened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.'

13. On the face of it, it is clear that by the said section, Parliament intended that notwithstanding the provisions contained in the Usurious Loans Act, 1918, or any other law relating to indebtedness in force in any State, courts will not be entitled to reopen any transaction between a banking company and its debtor on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive. Therefore, if it is held that so far as this matter is concerned, the provisions of section 21A of the Banking Regulation Act, 1949, are applicable then certainly the appellant will not be entitled to ask this court to exercise its power under the provisions of the Usurious Loans Act, 1918.

14. Shri Gilda, however, contended that section 21A is prospective in its application and, therefore, it will not apply to a suit in this case, which was instituted in the year 1976, long before the amendment was brought about by Act (1 of 1984). In support of this argument, Shri Gilda relied upon Muthian v. Syndicate Bank, : AIR1987Mad248 . No doubt, it has been held in the case cited above that section 21A of the Banking Regulation Act, 1949, which came into existence by the Amendment Act (1 of 1984) with effect from February 15, 1984, only, evidently was without any retrospective effect and the application of he said provision can be only with reference to cases that come into existence as disputes before courts subsequent to February 15, 1984. Shri Gilda also fairly brought to my notice another another decision in Bank of India v. Karnam Ranga Rao, AIR 1986 Kar 242; [1988] 64 Comp Cas 477 (Kar) though for a different purpose, in which it has been accepted by referring to the earlier decision of the High Court in Krishna Reddy v. Canara Bank, : AIR1985Kant228 , that the courts in view of the mandate of section 21A cannot exercise jurisdiction under the Usurious Loans Act, 1918, or any other law relating to indebtedness for the purpose of giving relief to any party. It must be said that in this case the question whether section 21A is prospective or retroactive was not specifically raised and decided.

15. However, reading section 21A as it is, which has been quoted above, 'it appears to be retroactive in operation, if effect is to be given to the language and intent behind the said provision. Prior to 1984, different High Courts had taken different views holding that even in respect of loans advanced by the nationalised banks to debtors, though the rate of interest charged by them was in accordance with the circulars issued by the Reserve Bank of India, still it was open to the courts to reopen such transactions in exercise of power under the provisions of the Usurious Loans Act, 1918, and give relief by reducing the rate of interest in appropriate cases on the ground that it was unreasonable and harsh. In order to overcome this difficulty, Parliament while enacting the Banking Laws (Amendment) Act, 1983 (Act 1 of 1984), took an opportunity to incorporate section 21A for the purpose of providing that the rate of interest charged by the banking companies to the debtors shall not be subjected to scrutiny by courts notwithstanding anything contained in the Usurious Loans Act, 1918, or any other State law relating to indebtedness, by providing section 24 in the said Act (see Statement of Objects and Reasons and the Notes on clauses annexed thereto, Bill No. 70 of 1983 published in the Gazette of India, Extraordinary, Part 2, section 2, dated May 10, 1983). Apart from this, if one looks to the provision itself, it clearly says that although additional power was given to the courts to scrutinise loan transactions on the ground of excessive charging of interest under the provisions of the Usurious Loans Act, 1918, it was no longer open to the courts to reopen such transactions between a banking company and its debtor on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive. It is, therefore, clear that the intention was that if in any matter, a debtor sought to reopen the transaction between himself and the bank on the ground of charging interest at an excessive rate before any court, it was not open to such court to do it under the provisions of the Usurious Loans Act, 1918. The use of the words 'any court would in the context include every court existing in the hierarchy of law courts and, therefore, so long as a court is asked to exercise its powers under the provisions of the Usurious loans Act, 1918, in a matter pending before it, the provisions of section 21A of the Banking Regulation Act, 1949, will be attracted and the court is prohibited from undertaking that exercise. Although strictly speaking, it may not be appropriate to consider the interpretation given to another statute of similar nature, yet it will be useful to refer to the decision of the Supreme Court in Mithilesh Kumari v. Prem Behari Khare, : [1989]177ITR97(SC) where the provisions of section 4 of the Benami Transactions (Prohibition) Act (45 of 1988) fell for consideration. The relevant provision reads thus :

'4. (1) No suit claim or action to enforce any right in respect of any property held benami against a person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property;

(2) No defence based on any right in respect of any property held benami whether against the person in whose name the property is held or against any other person shall be allowed in any suit, claim or action by or on behalf of a person claiming to be in the real owner of such property.'

16. While considering the question whether by the coming into force of the Benami Transactions Act on May 19, 1988, when the appeal was pending before the Supreme Court, a suit itself can be said to be pending, the Supreme Court held, in para 24, that hearing of an appeal under the processual law of India is in the nature of rehearing and, therefore, in moulding the relief to be granted in case of appeal, the appellate court is entitled to take into account even the facts and events, which have come into existence after the decree appealed against. It is held (at page 109 of 177 ITR) : 'consequently, the appellate court is competent to take into account legislative changes since the decision under an appeal was given and its powers are not confined only to see whether the lower court's decision was correct according to the law as it stood at the time when its decision was given.' The Supreme Court held (at page 109 of 177 ITR) 'once the decree of the High Court has been appealed against, the matter became sub-judice again and thereafter this court had seisin of the whole case, though for certain purposes, e.g., execution, the decree was regarded as final and the courts below retained jurisdiction in that regard.' Relying on its earlier decision in Dayawati v. Inderjit, : [1966]3SCR275 , holding that the word, 'suit' includes an appeal from the judgment in the suit, the Supreme Court held that the plaintiff/respondent's suit cannot be decreed under the law as it stood when the appeal before the Supreme Court came to be decided and consequently they allowed the appeal and dismissed the suit.

17. In the present case, as stated earlier, what Parliament has done is that the power given to the court under the Usurious Loans Act, 1918, has been taken by enacting section 21A by the Act I of 1984, and, therefore, every court, which would include also the appellate court and the High Court in second appeal, before whom a debtor seeks to reopen such a transaction between himself and a bank would be barred from doing so on the ground that the rate of interest charged by the bank was excessive. In my view, therefore, this court in second appeal before which the appellant/debtor is asking to reopen the account between the appellant and the bank on the ground that the rate of interest charged is excessive, both because of high rate and on account of compounding the same by six monthly rests, is prohibited from entertaining this plea by virtue of section 21A of the Banking Regulation Act, 1949, although the suit out of which this plea arises may have been instituted in 1976, when section 21A was not on the statute book. In this view that I am taking, it is not necessary to refer to certain other authorities that were cited by Shri Gilda, since they pertain to the pre-1984 position. Having regard to the legal position with respect, I do not agree with the view expressed in Muthian v. Syndicate Bank, : AIR1987Mad248 , wherein a view has been taken that section 21A of the Banking Regulation Act, 1949, applies only in respect of actions, which are brought before the court after February 15, 1984. On the other hand, I hold that section 21A applies to all actions that were and are pending before any court on the date when the said provision was brought into force, i.e., with effect from February 15, 1984, and if such suit, appeal or proceeding is pending before any such court on or after February 15, 1984, such court is prohibited from entertaining any plea to reopen any transaction between a debtor and a bank on the ground of excessive charging of interest under the provisions of the Usurious Loans Act, 1918.

18. The next argument as I stated earlier, which developed by Shri Gilda in the course of his rejoinder was that even assuming that the court was not entitled to reopen the transaction under the provisions of the Usurious Loans Act, 1918, because of the bar created by section 21A of the Banking Regulation Act, 1949, yet as held by the Karnataka High Court in Bank of India v. Karnam Ranga Rao, AIR 1986 Kar 242; [1988] 64 Comp Cas 477, this court was entitled to hold that a debtor was entitled to relief against a bank if it is proved that the bank in question in that particular transaction charged compound interest with quarterly rests or at rates higher than prescribed by the Reserve Bank of India by its directives under section 21 of the Banking Regulation Act, 1949, it would be clearly illegal and the bank would not be entitled to recover such excess amount. True, the Karnataka High Court in Bank of India v. Karnam Ranga Rao, AIR 1986 Kar 242; [1988] 64 Comp Cas 477 has taken the view that banks are bound to follow the directives or circulars issued by the Reserve Bank of India prescribing the structure of interest to be charged on loans and any interest charged by banks in excess of the prescribed limit as well as against the circulars/directives regarding charging of compound interest would be illegal and void because such circulars/directives are binding on the banks. Strictly as a matter of law, I see no reason to disagree with this statement of law. It is clear that section 21 of the Banking Regulation Act has conferred powers on the Reserve Bank of India, inter alia, to prescribe rates of interest and other terms and conditions on which advances or other financial accommodation may be made or may be given and every banking company is bound to comply with these directives given under this section, failing which it is liable to penal action. Therefore, if in a given case, it is proved as a matter of fact that the bank has charged interest at a higher rate than prescribed by the directives of the Reserve Bank of India or has charged compound interest in respect of a loan to an agriculturist contrary to the directives issued by the Reserve Bank of India, it would be open to a court of law to examine the said question and give appropriate relief consistent with the directives of the Reserve Bank of India. In fact, Shri Jain appearing on behalf of the bank said in so many words that the banks are bound to follow the directives issued by the Reserve Bank and, therefore, any action contrary to such directives will certainly make it open to be examined by the court. In such a case, the prohibition imposed by section 21A of the Banking Regulation Act, 1949, would not come into the picture because such examination by a court would not be either under the provisions of the Usurious Loans Act, 1918, or under the Debt Relief Act prevailing in a State but it will be an action to examine whether the act of a bank is in consonance with the directives of the Reserve Bank, which are statutorily binding on it.

19. Although, as stated above, I have taken a view that in any circumstances, it would be open to a court of law to give relief to a debtor in case it is found that a bank has in contravention of the directives of the Reserve Bank charged a higher rate of interest, yet so far as the facts of the present case are concerned, it is difficult for me to examine the present case from this angle. The reason is, for want for adequate data in the form of necessary Reserve Bank circulars and perhaps the Reserve Bank itself as a party, as it happened to be in Bank of India v. Karnam Ranga Rao, AIR 1986 Kar 242; [1988] 64 Comp Cas 477. I would not be justified in embarking upon a fishing enquiry particularly in a suit filed in the year 1976 in a second appeal with its limited scope. Shri Gilda tried to persuade me to enlarge the enquiry by giving an application for additional evidence under Order 41, rule 27 of the Civil Procedure Code at the fag end of his argument but I have rejected the same on the same ground as stated earlier and particularly when the claim involved in the present appeal was only Rs. 1,200 odd.

20. I may also mention that Shri Gilda relied upon the provisions of Order 31, rule 11 of the Civil Procedure Code, and two decisions in Vasudeo Govind v. Mahadeo Bhaskar, AIR 1956 Nag 105 and Mrs. I. K. Sohan Singh v. State Bank of IndiaAIR 1964 Punj 123, and urged that the decree passed by the lower court has not distinguished the award of interest for the amount of principal as determined from the date of the suit until the date of payment stipulated in the preliminary decree and the rate of interest on the amount found due under the decree from the date of payment stipulated by the decree till the date of realisation as contemplated by Order 34, rule 11 of the Civil Procedure Code. In the present case, as it could be seen from the true extract of the ledger account, exhibit 29, of the loan taken by the appellant, agreed interest has been charged at six monthly rests and added to the principal from 1970 till the filing of the suit and the suit has been filed only for the balance of the amount due after giving credit for the payments made. It is not a case of charging of simple interest so that at the foot of the mortgage, the principal amount and the interest due could be ascertained. Here the interest being compound interest in pursuance of the agreement between the parties at every six monthly rest, it was added to the principal amount and, therefore, whatever amount has been claimed in the plaint and decreed by the trial court as well as by the appellate court is the amount due at the foot of the account and it is only on this amount that the court has awarded interest at four per cent. per annum at a flat rate. I do not think, therefore, the authorities relied upon by Shri Gilda have any bearing on the facts of the present case nor do I find any material irregularity or illegality in the decree that has been passed by the trial court as slightly modified by the appellate court.

21. The result is that the decree passed by the trial court and as modified by the appellate court deserves to be confirmed and the second appeal will have to be dismissed. As regards costs, Shri Jain submitted that exemplary costs should be awarded but since the point involved is one on which there is no reported authority of this court. I do not think that the bank is entitled to any exemplary costs.

22. The result is that the appeal is dismissed with costs.


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