Patanjali Sastri, J.
1. This appeal arises out of a suit brought by the respondents 1 to 3 (hereinafter referred to as the respondents) who were carrying on business as bankers, for recovery of the balance due to them on account of dealings had with the appellants. The dealings are said to have commenced in or about 1903 and though there were payments by the appellants from time to time, it would appear that their account was largely overdrawn during most of the period. The main contention of the appellants in the Court below--and their sole contention before us--was that they were 'agriculturists' within the meaning of the Madras Agriculturists' Relief Act, 1938, and as such were entitled to the benefits thereof, and that if the debt due to the respondents was scaled down in accordance with the provisions of that Act, practically nothing would be found payable in respect of the debt. It is not disputed that the appellants are agriculturists as that term is defined in the Act, but their contention that all the accrued interest should be deemed to be discharged, and that the payments made from time to time should be applied in reduction of the principal sums advanced by the respondents was rejected by the lower Court which accordingly passed a decree for a sum of Rs, 23,219-2-0 with interest at 6 1/4 per cent. from 1st October, 1937, till date of plaint, with further interest at 6 per cent. with proportionate costs.
2. In order to appreciate the contentions raised in the appeal it is necessary to describe briefly the course of dealings followed by the parties. The extracts from the books produced by the respondents, all of which relate to the period subsequent to 1924, show that the account opened in the name of the appellants' firm is a running account in three columns in which were entered the advances made to the firm, the payments received from them and the balance at credit or debit, as the case may be, resulting from each transaction. Each year interest was calculated at the rate of .12 per cent. per annum on the appellant's overdraft and after deducting counter interest at the same rate on the payments made by the appellants, the amount of the interest was entered on the debit side of the account and a balance was then struck, such balance bearing interest at the same rate during the next year. Before the account was thus balanced, a vaddi chitta or memo. showing the calculation of interest was sent to the appellants for their verification and their acknowledgment as to its correctness was obtained. That is to say, at the end of each year's operations, the account was settled by the parties and the resulting balance was treated as the principal carrying interest during the next year.
3. The latest of these settlements relating to the year ending 30th June, 1934, appears from the entries in the books to have taken place on 15th July of that year when a sum of Rs. 3,141-8-3 was debited as interest due up to the 30th June, and a balance was struck showing a sum of Rs. 25,177-2-8 as due from the appellants as for that date. After the account was thus balanced there were no advances, but only two payments of Rs. 2,000 and Rs. 1,750 on 15th July, 1934 and 20th June, 1935, respectively, after which the dealings ceased altogether, and the respondents have brought the suit, after a preliminary demand for payment, for recovery of the said balance of Rs. 25,177-2-8 with further interest up to date of plaint after giving credit for the two payments aforesaid.
4. Now, the question arises whether the interest accruing each year and dealt with in the accounts in the manner indicated above comes within the mischief of Section 8 (1) of the Act which provides,
All interest outstanding on the 1st October, 1037, in favour of any creditor of an agriculturist whether the same be payable under law, custom or contract or under a decree of Court and whether the debt or other obligation has ripened into a decree or not, shall be deemed to be discharged, and only the principal or such portion thereof as may be outstanding shall be deemed repayable by the agriculturist on that date.
It will be seen that the mode of dealing adopted by the parties is what is usually followed between banker and customer; and it is well established that the effect of this, system is to capitalize the interest at the end of each year and treat it as a fresh advance by the bank; in other words, 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. As pointed out in Inland Revenue Commissioners v. Holder (1931) 2 K.B. 81, this usage which has been adopted by bankers in England for over a century had its origin as a device to secure compound interest by circumventing the usury laws under which agreements for charging compound interest were usurious and illegal; and though the usury laws were subsequently repealed and the necessity for such mode of dealing disappeared, the usage which ascribes to it, as a matter of implied term of contract, the effect referred to above has remained. In the case cited the English Court of Appeal had to deal with a claim to refund of income-tax. The claimants had guaranteed the repayment of monies owing to a bank by one of its customers and were called upon to pay the balances accumulated over a period of years, on the customer's default. Having paid the amount to the bank, they claimed refund of income-tax on BO much of the sum paid as was said to be attributable to interest on the advances made by the bank to the principal debtor. The claim could succeed only if the guarantors could be said to have paid to the bank any interest on advances made by the bank, and the question accordingly arose whether the interest which, as between the bank and its customer, was capitalized at the end of each half year and carried forward into the next half year as principal advanced, could still be treated as accumulated interest paid by the guarantors. The Court held that it could not and rejected the claim Romer, L.J., after quoting the following observations in Reddie v. Williamson 1 Macph. 223.
Where an account is kept in this way, 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' (per Lord Inglis).
'The true view is that the periodical interest at the end of each year is a debt to be then paid and which must be held to have been paid when placed to the debit of the account as an additional advance by the bank (per Lord Cowan).
and expressing his concurrence with them, concluded thus:
I am therefore of opinion that having regard to the method is which, with the concurence 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 that purpose by the bank to the company.
These observations are equally applicable here, with the result that the interest accruing due each year up to 30th June, 1934, must be deemed to have been paid and discharged, and to be no longer, 'outstanding' to be wiped out under Section 8 (1) of the Madras Agriculturists' Relief Act,
5. It was, however, said that the provisions of the Explanation to Section 8 had the effect of overriding this result. The Explanation says,
Where a debt has been renewed or included in a fresh document in favour of the same creditor, the principal originally advanced by the creditor together with such sums, if any, as have been subsequently advanced as principal shall alone be treated as the principal sum repayable by the agriculturist under this section.
It was urged that the periodical settlement of accounts evidenced by the appellant's letters of acknowledgment were renewals within the meaning of the Explanation, and that only the sums advanced as principal were repayable under this provision, the interest, notwithstanding its capitalisation from time to time, being still treated as interest and wiped out. But if, as pointed out in the case referred to above, the effect of the mode of dealing adopted between banker and customer is, according to the longstanding 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 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 agriculturist; 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. It is also doubtfu1 whether the system under which unpaid interest of any year was turned into capital during the subsequent year by the process of debiting the sum and carrying it forward as part of the interest bearing principal can be said to involve a 'renewal' of the debt according to the ordinary connotation of the term. It is, however, unnecessary to pursue this point further, as we are inclined to hold that the explanation to Section 8 cannot, in any view, .affect the operation of the principle referred to above.
6. Nor can it be said that the application of the principle in scaling down debts due to banks renders superfluous the exemption of certain liabilities due to 'scheduled banks' under Section 10 (2) (in) of the Act, as such exemption can still apply in respect of interest due to such banks but not yet capitalised.
7. In the view we have expressed above, the interest debited in the accounts prior to 1st October, 1932, will be deemed to have been paid and no question of scaling down such interest can arise. The interest found debited subsequently will also be treated as paid but the debits will be liable to be scaled down under Section 9 of the Act as advances made after that date. Interest on the rest of the amount from 30th June, 1934, up to 1st October, 193T, will be wiped out. The settlement of account up to 30th June, 1934, will stand except in so far as it is necessary to reduce the interest on the interest capitalised after 1st October, 1932, from 12 per cent. per annum to 5 per cent. The amount due to the respondent will be ascertained on the basis indicated above after giving credit to the two payments received subsequent to the date of the last settlement and the decree of the Court below will be modified accordingly. The parties will pay and receive proportionate costs throughout.