1. This petition arises out of an application under Section 19 of Madras Act IV of 1938. The petitioner was the debtor. The transactions between the parties started with a promissory note for Rs. 200 in 1925. In 1928 there was a payment which cleared off all outstanding interest and a small portion of the principal and a fresh note was executed for Rs. 197-7-3. On 23rd August, 1931, there having been no further payment, a third promissory note was executed for Rs. 259-9-6. Towards this note there was a payment of Rs. 150 on 9th October, 1932, which was not expressly appropriated at that time towards principal or interest. On 17th August, 1934, the suit promissory note was executed for Rs. 162-10-0. This figure was arrived at by allowing counter interest on the payment of Rs. 150 and subtracting this payment and the interest thereon from the total amount due on the third note with interest up to the date of the renewal. The decree passed on this promissory note has been scaled down by the District Munsif in a manner which has been criticised on various grounds.
2. Firstly, it is contended that the act of the parties in calculating counter interest on this payment of Rs. 150 at the time of the last renewal must be taken to indicate that this payment was treated as a payment towards principal. The argument is that the effect of allowing counter interest is that interest on the debt ceased to the extent of this payment with effect from the date of the payment and that therefore the payment must be treated as having been appropriated towards principal. Now, in fact, there was no appropriation whatever on 9th October, 1932. The only appropriation was made on 17th August, 1934, when the debt was renewed. Is it a legitimate inference from the mere fact that counter interest was calculated on the unappropriated payment up to the date of its appropriation, that the parties considered the matter and decided to appropriate this sum towards principal and not towards interest? It must be remembered that in order to get the benefit of the first clause of Section 8 of the Act, the debtor has to show that there was on 1st October, .1937, interest outstanding which has to be cancelled. He can do this by showing that although payments have been made, they have been actually appropriated towards principal or have been kept unappropriated. But the burden lies upon the debtor to prove that interest is outstanding. We doubt very much whether the mere calculation of counter interest in circumstances such as these is any sure indication that the parties intended to go against the usual practice of crediting the payment first towards interest and secondly towards principal. This certainly is not a case of an unappropriated payment after 17th August, 1934 and certainly after this date the whole of the balance of the debt was to bear interest, so that if we have to infer appropriation towards principal, we have also to infer an undertaking by the debtor to pay interest on a large sum made up mostly of interest. The probability seems to be on the facts of this case that when the parties were negotiating for a renewal, a concession was given to the debtor in respect of this unappropriated payment whereby he was given credit for the interest which it would carry up to the time when it was appropriated. But we do not consider that this circumstance justifies the inference that the parties decided to appropriate this payment towards principal with retrospective effect to the date of payment.
3. The other contention is that even appropriating the payment towards interest, it should be appropriated only towards interest outstanding on 9th October, 19.32. This again seems to be misconceived, for the appropriation having been actually made on 17th August, 1934, it should be made with reference to the state of facts as on that date.
4. Lastly, it is contended that the lower Court is wrong in applying the third clause of Section 8 without regard to the effect of the first clause. This contention must be upheld. The principal of the note as on 17th August, 1934, was Rs. 162-10-0. The decree was passed on 8th February, 1937, without any further payment having been made and in scaling down this decree the principal sum cannot be more than Rs. 162-10-0 and the interest outstanding up to 1st October, 1937, must be cancelled.
5. In the result therefore the petition must be allowed and the lower Court's order modified by substituting Rs. 162-10-0 for Rs. 185-8-0. In other respects the order is confirmed. Each party will bear his own costs.