1. This is an appeal against an order of our learned brother Venkataramana Rao J., on an application under Section 19 of Madras Act IV of 1938 to scale down the debt due under a decree on a mortgage. The mortgage was for an amount of Rs. 7,500 and it was dated the 30th August, 1925. It was assigned to one Jagannatham Chetty who sued on the mortgage in C S. No. 42 of 1933. There was a preliminary decree for the principal amount with Rs. 3,311-140 interest and Rs. 336-8-0 subsequent interest up to the date fixed for redemption and Rs. 1,515-8-0 taxed costs. Final decree was passed in February, 1935. In October 1935, the judgment-debtors obtained the leave of the Court to raise a sum of Rs. 8,500 on a first mortgage of one item of the hypotheca, the amount so raised being paid to the credit of the decree. And in pursuance of this arrangement, on the 14th November, 1935 the Insurance Company which had taken the mortgage deposited Rs. 8,500 towards the decree. In June of the following year, the decree was assigned to one Krishnayya Chetti and on 13th August, 1936 a further sum of Rs. 500 was paid into Court to the credit of the decree. On the 16th April, 1937 part satisfaction was recorded to the extent of Rs. 9,000 and execution proceeded for the balance.
2. In the view which we have taken on similar cases, it cannot be contended that after the recording of part satisfaction on the 16th April, 1937, any portion of this sum of Rs. 9,000 paid towards the decree remained unappropriated. The only question is how it was appropriated. If a definite appropriation can be proved it will stand except so far as an adjustment towards suit costs may be necessary. To the extent to which the debtor cannot show an appropriation in his favour, it will have to be presumed that the appropriation was towards interest and that to this extent interest is not available for cancellation on 1st October, 1937. The learned trial judge did not go into the rather meagre evidence of actual appropriation but proceeded solely on the legal inferences in the absence of evidence of definite appropriation and arrived at a conclusion which cannot be supported in view of subsequent bench decisions arising out of Act IV of 1938. There was however, some evidence of actual appropriation of this payment of Rs. 8,500 adduced before the Official Referee, both on behalf of the judgment-debtors and on behalf of the decree-holder. The judgment-debtor stated in his evidence before the Official Referee that this sum of Rs. 8,500 was 'paid towards principal' and that the sum of Rs. 500 subsequently paid was 'paid towards the decree.' He gave no reason for an appropriation of this payment of Rs. 8,500 towards principal and it is difficult to see how, before the passing of Act IV of 1938, the judgment-debtor would have been benefited by such an appropriation, since both the principal and the interest included in the decree would bear interest at the same rate. In cross-examination he was apparently asked some further question about these payments and he said that these payments were 'towards the decree debt'. There the matter stands so far as the oral evidence goes, no one having been examined on behalf of the decree-holder. But at the close of the enquiry, the decree-holder exhibited an order assessing him to income-tax on the basis of the accounts covering this payment under the mortgage to the Insurance Company. The assessment order is Ex. VII. The Income-tax Officer apparently by a mistake speaks of a payment of Rs. 8,000 not of Rs. 8,500 and he says that the assessee has appropriated Rs. 3,500 out of this amount towards interest in his accounts and he proceeds for income-tax purposes to treat the payment as if it had been appropriated towards the full amount of interest due under the decree and assesses the decree-holder accordingly. Now, there is no reason to doubt that this order of the Income-tax Officer shows the actual state of the decree-holder's accounts at a time before any question arising under Act IV of 1938 was under consideration, the assessment being made in 1936. It is possible that, in order to escape income-tax, the decree-holder might have appropriated towards interest a less amount than he ought to have appropriated according to the revenue point of view. If so, it was apparently to his own disadvantage so far as proceedings under Act IV of 1938 are concerned. But the appropriation made by him towards interest in his books is to our minds a clear indication that the judgment-debtor is not speaking correctly when he says that the whole of this sum of Rs. 8,500 was at the time of the payment definitely appropriated towards principal. Had this been the case, the decree-holder would for income-tax purposes certainly have taken advantage of such an appropriation, which as things stood then would be very much in his favour.
3. We have come to the conclusion, therefore, that there was no appropriation at the time of the payment by the judgment-debtor, but that there was a subsequent appropriation by the entry in the decree-holder's books of Rs. 3,500 towards interest and the balance towards principal. This sum of Rs. 8,500 cannot therefore be treated as not definitely appropriated by the act of the creditor and the creditor's appropriation must stand, except in so far as the proviso to Section 19 requires re-appropriation.
4. So far as the later payment of Rs. 500 is concerned, there is no evidence of any actual appropriation towards either principal or interest. The amount was definitely adjusted to the decree when part satisfaction was recorded and it can no longer be treated as an unappropriated payment; and to the extent of this sum of Rs. 500, the debtor is not in a position to show that interest was outstanding on 1st October, 1937 for cancellation under Section 8 (1) of the Act,
5. There remains a question regarding the re-appropriation of the first payment towards costs with reference to the proviso to Section 19, Under this proviso all payments made in respect of the decree must first be applied in payment of all costs as originally decreed to the creditor. The first payment was the payment of Rs. 8,500 and it has to be treated as having been made in the first instance towards costs of the suit. We have come to the conclusion that this sum of Rs. 8,500 was appropriated, as to Rs. 5,000, towards principal and, as to Rs. 3,500 towards interest by the subsequent act of the creditor. When this appropriation has to be undone with reference to the proviso, it seems equitable that the amount appropriated towards principal and the amount appropriated towards interest should contribute rateably in making up the amount required for re-appropriation towards costs. The decree will be amended accordingly.
6. Parties will pay and receive costs in this appeal according to their failure and success.