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Punjab National Bank Vs. Surinder Singh Mandyal and ors. - Court Judgment

LegalCrystal Citation
SubjectBanking;Contract
CourtHimachal Pradesh High Court
Decided On
Case NumberCivil Suit No. 61 of 1986
Judge
Reported inAIR1996HP1
ActsContract Act, 1872 - Sections 59, 61 and 126; ;Code of Civil Procedure (CPC) , 1908 - Section 34
AppellantPunjab National Bank
RespondentSurinder Singh Mandyal and ors.
Appellant Advocate Ajay Kumar, Adv.
Respondent Advocate S.S. Kanwar and; Om Parkash Sharma, Advs.
Cases Referred(supra) and Kalyanpur Cold Storage v. Sohan Lal Bajpai
Excerpt:
- devinder gupta, j. 1. the plaintiff-bank has claimed a decree for rs. 2,34,722.05 against defendants nos. 1 and 2 as principal debtors and defendants nos. 3 and 4 as guarantors.2. it is alleged that the plaintiff through its branch at kotwali bazar, dharamshala, at the behest of defendants nos. 1 and 2 agreed to make available to them a term loan of rs. 1,96,000/- for purchase of a tata 1985 model chassis and for fabrication of bus body thereupon, which was to be plied by them. this financial assistance by way of transport loan was agreed to be made available with condition of repayment of the amount of loan with interest at 2.5% above the reserve bank of india rate of interest with minimum of 12.5% per annum with quarterly rests, payable in 42 regular monthly instalments and ondefendants.....
Judgment:

Devinder Gupta, J.

1. The plaintiff-bank has claimed a decree for Rs. 2,34,722.05 against defendants Nos. 1 and 2 as principal debtors and defendants Nos. 3 and 4 as guarantors.

2. It is alleged that the plaintiff through its Branch at Kotwali Bazar, Dharamshala, at the behest of defendants Nos. 1 and 2 agreed to make available to them a term loan of Rs. 1,96,000/- for purchase of a Tata 1985 Model Chassis and for fabrication of bus body thereupon, which was to be plied by them. This financial assistance by way of transport loan was agreed to be made available with condition of repayment of the amount of loan with interest at 2.5% above the Reserve Bank of India rate of interest with minimum of 12.5% per annum with quarterly rests, payable in 42 regular monthly instalments and ondefendants Nos. 1 and 2 furnishing adequate security for repayment of the amount of loan. Defendants Nos. I and 2 accepted the conditions and provided defendants Nos. 3 and 4 as guarantors. Defendant No. 2 also pledged his fixed deposit receipt dated I3th November, 1984, which he had taken from the State Bank of India Yol Camp Branch, District Kangra for Rs. 20,000/-. Necessary loan documents were executed by defendants Nos. 1 and 2. Defendants Nos. 3 and 4 also furnished guarantee deedsguaranteeing the repayment of the amount of loan with interest. Loan amount was availed and utilised for the purpose for which it was obtained. Defendants Nos. 1 and 2 had been irregular in making the payment due to some dispute amongst them. Bus was also not being plied since April 1986. A notice was served on all the defendants to repay the amount of loan. Defendants Nos. 1 and 2 had also confirmed the balances. As per the statement of account, the suit amount was due and payable, which the defendants are liable to pay with costs and furture interest.

3. Defendant No. 1 though served personally but remained absent and accordingly was proceeded against ex parte. The other defendants have contested the suit. Defendant No. 2, the principal debtor in the written statement did not dispute the fact that the loan was obtained on the terms as alleged in the plaint, but has averred that defendant No. 1 solely appropriated the entire amount of the bus fare for which there has litigation amongst them and as such defendant No. 1 alone is responsible for the payment of the amount of loan. It is also alleged that he had left Yol and joined services in the Welfare Department. Rs. 50,000/- had been spent by him on the repairs of the bus and in making the bus road-worthy. Lastly, it is averred that he is prepared to pay his half share in instalments.

4. Defendants Nos. 3 and 4 filed their separate written statements, in which the only plea taken was that their responsibility was to pay only a sum of Rs. 1, 96,000/- without interest and that the amount is first recoverable from defendants Nos. 1 and 2 since they had been plying the bus and appropriating the entire bus fare. It was not disputed by them that the loan was procured by defendants Nos. 1 and 2 on the terms stated in the plaint or that they had duly furnished bank guarantee, guaranteeing the repayment of the amount of loan to the bank.

5. On the pleadings of the parties, following issues were framed on 3rd May, 1988 :

' 1. Whether the suit has been instituted by a person competent to do so? OPP.

2. Whether guarantors -- defendants Nos. 3 and 4 are only liable to the extent of Rs. 1,86,000/- 1,96,000/-? OPD 3 and 4.

3. Whether the plaintiff-bank is entitled to recover Rs. 2,34,722.05 P or any other amount from the defendants. OPP.

4. Relief.'

6. By moving OMP No. 206/92, defendants Nos. 3 and 4 sought amendment of the written statement alleging that they were not disputing their liability as guarantors, but wanted to take up pleas due to subsequent developments, which had taken place. They were permitted to amend the written statement, wherein they have now taken up a stand that they were asked to sign printed forms of guarantee with blank columns therein. At the time of putting their respective signatures, they were apprised that the guarantee was only for Rs. 1,96,000/-. The contents of guarantee deed were not made known to them. Recommendation was made in favour of defendants Nos. 1 and 2 for advancement of loan for rehabilitation under the self employment scheme for Ex-servicemen, but the defendants after obtaining loan had sought employment in the Himachal Pradesh Government. The plaintiff-bank never intimated defendants Nos. 3 and 4 that principal debtors were not adhering to the payment schedule. It was also obligatory for the plaintiff-bank to have been taken custody of the bus, when principal debtors defaulted in paying the instalments. Having failed to take any action, the plaintiff-bank is precluded to recover the amount. In addition, it has been pleaded by them that they had revoked the guarantee by addressing notices dated 8th April, 1986 to the plaintiff-bank. Thus, their liability, if any, under the deed of guarantees, stood discharged. In any case since during the pendency of the suit, the matter stood settled between plaintiff and defendant No. 2 as regards the suit amount and due to this act on the part of the plaintiff and the principal borrower, their liability also stood absolved. Possession of the bus had been delivered by defendant No. 2 to One Jaan Mohammad, who had purchased the same and agreed to make the payment of the loan to the bank.With these averments, defendants Nos. 3 and 4 have pleaded that the suit amount cannot be recovered from them.

7. After defendants Nos. 3 and 4 had amended the written statement, following additional issues were framed:

'3A. Whether the Bank had obtained signatures of defendants Nos. 3 and 4 on guarantee deed form with blank columns?

OPD Nos. 3 and 4.

3B. If issue No. 3A is decided in the negative, whether defendants Nos. 3 and 4 ever revoked their guarantee for and on behalf of defendants Nos. 1 and 2, as alleged?

OPD Nos. 3 and 4.

3C. Whether the effect of alleged sale of the bus, in question, is on defendants Nos. 3 and 4, in the instant suit? OPD Nos. 3 and 4.'

8. Issue No. 3C is not happily worded and deserves to be re-cast as under:

What is the effect of alleged sale of the bus, in question, on the liability of defendantsNos. 3 and 4 in the instant suit?

OPD Nos. 3 and 4.

9. The plaintiff-bank examined three witnesses in affirmative, namely, PW 1 Mr. V. N. Gupta, Manager, PW 2 Gurbachan Singh, Accountant, PW 3 Amar Singh Thakur, Assistant Manager. Defendants Nos. 3and 4 appeared their own witnesses as DW 1 and DW2, respectively. Plaintiff also examined PW 4 Mr. A.K. Sood, the Assistant Manager and PW-5 Mr. Bakshi Chand. No evidence was led on behalf of defendant No. 2. I have heard learned counsel for the parties and have been also taken through the entire oral and documentary evidence.

Issue No. 1:

10. The plaintiff is a nationalised bank established under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. Authorisation to sign and verify the plaint and engage counsel on its behalf by Shri V. N. Gupta is on the basis of the general power of attorney, copy of which has been proved on record as Ex. P-l in the statementoi PW 1 Shri V.N. Gupta. There is no rebuttal to this evidence. By virtue of power of attorney Shri Vishwa Nath Gupta, the Manager of the plaintiff bank has been duly authorised 10 sign and verify the pleadings, to engage counsel and to otherwise act for and on behalf of the plaintiff-bank. In view of the contents of Ex. P-l, there is no manner of doubt that the suit has been properly instituted by a PERSON competent to do so.

Issue No. 3A :

11. This issue was framed after defendants Nos. 3 and 4 were permitted to amend the written statement. Before doing so, they had not disputed the due execution of the deeds of guarantee. Ex. P-6 and Ex.P-7 are the guarantee deeds dated 21st December, 1984 executed by defendants Nos. 3 and 4, respectively. Both of them have not disputed the fact of having put their signatures on these two documents. At the stage of admission and denial, before framing issues, before the Deputy Registrar (Rules) on 29th April, 1988, counsel for defendants Nos. 3 and 4, without any reservation had 'admitted1 the documents. In other words, the admission of the documents was made without any reservation. Due execution of the documents has formally been proved on record in the statement of Gurbachan Singh, PW-2, Accountant of the Bank, who stated that the loan documents were duly filled in by him in his hand in presence of the parties, who had also signed the same thereafter. Not even a single question was put to this witness on behalf of defendants Nos. 3 and 4 that when defendants Nos. 3 and 4 put their respective signatures, the blanks in the documents were not filled in. Defendants Nos. 3 and 4 while appearing as their witnesses stated that the documents were printed and blanks had not been filled, when they put their signatures, Both of them are' well educated. Defendant No. 3 is a registered medical practitioner and is running a Dental Clinic. It is not disputed by defendants Nos. 3 and 4 that before institution of the instant suit, a suit was filed by them jointly in the Court of Senior Sub-Jude, Kangra at Dharamshala against the plaintiff-bank and defendants Nos. I and 2, for declaration that they had ceased to be guarantors. Copy of the plaint in the suit has been duly proved on record as Ex.P-17. Even in the said suit, defendants Nos. 3 and 4 had not taken up a plea that the deeds of guarantee were not duly executed by them and were not binding on them since the blanks therein were not filled in. Rather they admitted having guaranteed the repayment of the loan by executing valid deeds of guarantee, but ailged therein that by subsequent act, they stood absolved of their liability, under the deeds of the guarantee. From this evidence on record, it is not at all possible to record a finding that the plaintiff-bank had obtained signatures of defendants Nos. 3 and 4 on blank form of guarantee. Otherwise also, this defence is not available to defendants Nos. 3 and 4, in view of their clear admission contained in their respective affidavits Ex.P-8 and Ex.P.9, which they furnished to the Bank, in which, after mentioning the details of their property, stated that they had furnished guarantee for the loan of defend ants Nos. I and 2 and till the entire loan is paid off, they will not dispose of their properties. Consequently, issue No. 3A is decided in negative.

Issue No. 2:

12. The case of defendants Nos. 3 and 4 is that they are liable only to the extent of principal amount and not for interest, in terms of the deeds of guarantee. This stand of the defendants also, in view of the contents of documents Ex. P-6 and Ex.P-7 cannot be accepted. Para 2 of the deed of guarantee, in clear terms stipulates that guarantors hereby guarantee to pay the bank, on demand, all principal, interest, costs, charges and expenses due and which may at any time become due to the Bank from the borrowers, including all loss or damages, costs, charges, and expenses etc. and the legal costs of getting the amount recovered. There is no other evidence or circumstance brought on record by defendants Nos. 3 and 4 in order to justify a finding in their favour that they are liable only to the extent of principal amount and not interest. This issue is also held in negative.

Issue No. 3B:

13. Case of the defendants is that they had revoked their guarantee by serving notice Ex. D-l dated 8th April, 1986. This notice was served on behalf of defendants Nos. 3 and 4 by their counsel on the plaintiff-bank that there is a long standing dispute amongst defendants Nos. 1 and 2 and there is no hope of is coming to an end. The vehicle is in possession of' defendant No.2, but due to the disputes, defendants Nos. 1 and 2 were likely to go in for further loss, which will also add to the difficulties of the guarantors and the vehicle can be produced by them before the Bank. Since the principal debtors had tailed 10 pay the amount, they were ready and willing to pay the entire loan amount provided the vehicle is transferred in their names and its possession handed over to them. Seven days time was allowed to the bank to take a decision in transferring the vehicle in defendants' name, so that they could liquidate their liability. It is the case cf the defendants that neither any decision was conveyed by the Bank to them, nor any steps were taken in taking the possession of the vehicle. They accordingly filed a suit for declaration (vide copy of plaint Ex. P-17), which ultimately was got dismissed, after the instant suit had been filed by the Bank. Inaction on the part of plaintiff, after service of notice Ex.D-l and failure to accept ihe offer of defendants Nos. 3 and 4 has the effect of absolving of their liability under the guarantee or in other words the same stood revoked.

14. The aforementioned plea of defendants Nos. 3 and 4 is also not capable of being accepted, in view of the dear terms of the deeds of guarantee. Both in Ex.P-6 and Ex.P-7, it is clearly stipulated that the guarantee is a continuing guarantee and shall not be considered to be cancelled or in any way affected for any reasons whatsoever till the entire debt is cleared off. Clauses 3 and 13 to this effect may be quoted as under :

'3. The Guarantors hereby declare that this guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time the said accounts may show no liability against the Borrower or may even show a credit in his favour but shall continue to be a guarantee and remain in operation in respect of all subsequent transaction.'

'13. The guarantee hereby given shall not be determinable by the Guarantors except or, the terms of their making full payment up to the limit of their guarantee for any then outstanding liabilities or obligations on the said account. The guarantee shall not be affected by their death or insanity until the Bank shall have received formal authentic notice in writing thereof.'

15. Connected with this are the further submissions made by the learned counsel for defendants Nos. 3 and 4 that due to the subsequent acts also, the liability of defendants Nos. 3 and 4 has ceased, namely, inaction on the part of the plaintiff to take possession of the vehicle and to get recovered its amount expeditiously. This submission also cannot be accepted. Plaintiff in their plaint, in clear and categorical terms averred that defendants Nos. 1 and 2 become irregular in payment of the amount and differences arose amongst them, where after they stopped plying the bus from April 1986 and on 12th April, 1986, a notice was served on all the defendants recalling the amount of loan. Notice, which defendants Nos. 3 and 4 served on the plaintiff is dated 8th April, 1986. The suit was instituted on 4th September, 1986. Along with the suit, application being OMP No. 331/86 was moved under Order 39, Rule 6 of the Code of Civil Procedure by the plaintiff praying therein that the bus in question may be caused to be sold, after taking its possession from defendant No. 2. The application stood disposed of on 10th December, 1987, when on behalf of defendant No. 2, a statement was made that he would continue depositing a sum of Rs. 3,000/- per month, during the pendency of the suit. From the narration of these circumstances, it becomes apparent that when the loanees made default and stopped plying the bus, the plaintiff served a notice callingupon the defendants to pay the amount due. On failure to pay promptly suit was filed and steps were also taken in moving an application for the sale of the vehicle. Neither any negligence on the part of the plaintiff is proved on record, nor any conduct is brought to the notice. Plaintiff did whatever was possible in the circumstances in praying for an order for the disposal of the vehicle. No act or conduct on the part of the plaintiff has been brought on record, prior to the institution of the suit, which might be taken to be an act of omission or commission thereby absolving defendants Nos. 3 and 4 of their liability. This issue accordingly is decided against defendants Nos. 3 and 4.

Issue No. 3C:

16. The aforesaid issue was framed on the plea of defendants Nos. 3 and 4 that vehicle stands transferred by defendant No. 2 in favour of one Jaan Mohammad. At the outset, it may be observed that sufficient and cogent evidence has not been adduced on record that vehicle has been sold by defendants Nos. 1 and 2. On 27th May, 1993, an elaborate order was passed while dealing with three miscellaneous applications, namely, OMPS No. 150/88, 350/90 and 137/93. Noticing therein some of developments,. which took place during the pendency of the suit, when the plaintiff sought direction and prayed for taking possession of the bus in question and for its sale. On behalf of defendant No. 2, a statement was made on 10th December, 1987 that he would start depositing a sum of a Rs. 3,000/ per month, during the pendency of the suit. Instead of doing so, defendant No. 2 approached this Court that through private negotiations, he intended to sell the bus in question for an amount, which would almost clear off the outstanding amount. Permission was not granted to him. The Court, however, made a reference to the Regional Transport Authority, Dhararnshala as to what objection the said authority would have in case the route permit is transferred in the name of a transferee, who would purchase the bus through Court. Till date, there is neither any sale of the vehicle in question nor there is any circumstance on record to show that vehicle has been transferred by defendant No. 2 through Court. However, from the material on record, it appears that possession of the vehicle stands delivered by defendant No. 2 to either one Jaan Mohammad or to one Jagar Nath. Such delivery of possession cannot be construed as sale of the vehicle. Delivery of possession of the vehicle, if any, as per terms of deed of hypothecation Ex. P-4 and as per terms of guarantee deeds Ex. P-6 and Ex.P-7 is subject to the rights of the plaintiff to recover the amount by sale of the vehicle in question. Neither any permission was granted by this Court to transfer the vehicle, nor there is evidence on record that the vehicle has been sold. There it no question of recording any finding as to the effect of so-called sale of the vehicle. The vehicle as per deed of hypothecation Ex.P-4 stands hypothecated with the plaintiff as a security for the repayment of the amount of loan. Assuming that defendants Nos. 1 and 2 are not in possession of the vehicle and they for any reasons have parted with the possession of the vehicle to any other person including Jaan Mohammad or Jagar Nath, the same, as noticed above, is subject to the rights of the plaintiff, as incorporated in the document Ex.P-4 to recover the suit amount. This issue is decided accordingly.

Issue No. 3:

17. Ex.P-4 is the deed of hypothecation, which has been proved by PW-2, the Accountant of the Kotwali Branch. It is stated that the amount of loan was made available to defendants Nos. 1 and 2 on terms stated in Ex.P-4. As per terms, as amount of Rupees 1,96,000/ - was advanced to defendants Nos. 1 and 2, who agreed to repay the same with interest at the rate of 2.5% per annum over and above the Reserve Bank of India rate of interest with minimum of 12.5% per annum with quarterly rests. The amount was agreed to be repaid in regular monthly instalments of Rs. 5,000 / - besides interst thereon, commencing after one month from the date of making available the amount of loan. In case of default on the due date, defendants Nos. I and 2 had agreed to pay interest at an enhanced rate by 3% per annum over and above the agreed rate of interest. On failure to pay three instalments, plaintiff was entitled to recall the entire outstanding by serving a demand notice. Ex.P-5 is proved to be the demand promissory note by which defendants Nos. 1 and 2 agreed to pay on demand a sum of Rs. 1,96,000/- to the plaintiff along with interest at the aforementioned rate. Ex.P-16 is proved to be the balance confirmation dated 1st January, 1986 duly executed by defendants Nos. I and 2 confirming the correctness of balance of Rs. 2,12,371.65 inclusive of interest at the rate of 12.5% per annum with quarterly rests as on 31st December, 1985. Ex.P-3 is the statement of account duly certified under the Bankers Book Evidence Act, which has been proved by PW-1. In addition to the amount of principal as advanced by the plaintiff to the defendants, there are additional amounts which are reflected in the statement of account, namely, the amount of interest and the insurance premium.

18. It has been the plaintiffs case that by virtue of the terms of the agreement, vehicle was to be got insured by defendants Nos. 1 and 2 and on failure the plaintiff was entitled to have the vehicle insured and since this amount has been spent by plaintiff on behalf of defendants Nos. 1 and 2, this amount is also recoverable from the defendants. There is no rebuttal to the oral and documentary evidence adduced on behalf of the plaintiff. From the statement of account and from the afore mentioned documents, it stands established that the suit amount is due and payable to the plaintiff by the defendants. This amount includes the principal amount, the amounts spent by the plaintiff on behalf of the defendants and interest calculated on the amounts due at the stipulated rate of interest i.e. 12.5% per annum with quarterly rests up to the date of suit. In the statement of account, the amounts received from the defendants till the filing of the suit also stands duly adjusted. Admittedly during the pendency of the suit some payments have been made by defendant No. 2. Learned counsel for defendant No. 2 states that the same deserves to be adjusted first towards the principal amount and may be ordered to be so adjusted. Learned counsel for the plaintiff states that while tendering or depositing the amounts, defendant No. 2 had not imparted any instructions to the plaintiff to adjust the same towards the principal and accordingly the same is liable to be adjusted towards interest first and balance, if any, towards the principal, as is the usual banking practice. In addition to these amounts, the learned counsel for the plaintiff states that additional amounts spent towards the insurance premium by the plaintiff are also liable to be made recoverable from the defendants.

19. From the evidence on record, there is nothing to suggest that while making p-w-ment, during pendency of the suit, defendant No. 2 imparted any instructions to the plaintiff about the manner of appropriation of the amounts.

20. Sections 59, 60 and 61 of the Contract Act, 1872 embody the general rules as regards the appropriation of payments in cases where a debtor owes several distinct debts to one person and voluntarily makes payment to him. The said provisions, however, do not deal with those cases in which principal and interest are due on a single debt for which as regards appropriation, ordinary rules as have been noticed in number of judgments will have to be applied.

21. The Judicial Committee of Privy Council in Meka Venkatadn Appa Rao Bahadur Zamindar Garu v. Raja Partha-sarathy Appa Rao Bahadur Zamindar Garu, AIR 1922 PC 233 referring to the rule enunciated by the Lord Justice Rigby in the case of Parr's Banking Company v. Yates (1898) 2 QBD 460 that money is first to be applied in payment of interest and on its satisfaction the balance to be applied in payment of the capital. This will be where a debt is due which carries interst and there are moneys that are received without definite instructions as regards appropriation.

22. The rule in Parr's Banking Company's case (supra) as regards appropriation was followed by the Division Bench of Allahabad High Court in Banarsi Das v. Collector of Saharanpur, AIR 1936 All 712. Question had arisen as regards appropriation where the debt carried compound interest. The distinction between simple interest and compound interest was drawn and the rule was applied holding that in ordinary cases the money received is first applied in paymentof interest and when that is satisfied the remaining in payment of the capital. It will be in the absence of the specific instructions from the debtor.

23. A Full Bench of Lahore High Court in Jai Ram v. Sulakhan Mal, AIR 1941 Lahore 386 dealing with the scope of Ss. 59 to 61 of the contract Act held that they do not deal with the cases in which principal and interest are due on single debt, to which only general rule of appropriation of payments towards a debt will apply, namely, in the absence of a specific indication to the contrary by the debtor, the money is first applied in payment of interest and then when interest is satisfied towards the payment of the principal.

24. This normal rule of appropriation of applying the payment made by the debtor in the first instance towards the satisfaction of interst and thereafter towards principal, in the absence of specific directions from the debtor has been approved by the Supreme Court in Meghraj v. Mst. Bayabai, AIR 1970 SC 161.

25. Division Bench of Orissa High Court in a case pertaining to the loan transaction between the Orissa State Financial Corporation and its debtor, which was governed by the provisions of the State Financial Corporation Act also applied this rule by following the ratio of the judgment in Meghraj's case (supra).

26. In view of the above, it being a case where the debtor, namely, defendant No. 2 at the time of making payment did not leave any instructions with the creditor-plaintiff, the ordinary rule of appropriation will apply and thus the plaintiff will be entitled to adjust the amount of Rs. 1,28,000/-, received during the pendency of the suit, first towards the satisfaction of interest and then towards the discharge of principal.

27. It is also not in dispute that the plaintiff has also spent a sum of Rs. 41,154/-during the pendency of the suit under the terms of loan document Ex.P-4 towards the payment of insurance premium on behalf of the defendants Nos. 1 and 2 for getting the vehicle in question insured. The plaintiffs, therefore, are also held entitled to a sum of Rs. 41,154/- spent by it during the pendency of the suit on behalf of defendants Nos. 1 and 2 towards the insurance premium.

28. Over and above, the aforementioned two amounts, defendant No. 2 had pledged fixed deposit receipt with the plaintiff. In OMP No. 445/93, it is claimed by the plaintiff that presently fixed deposit receipt is not traceable but a prayer has been made for adjusting the said amount towards the loan amount. To this prayer, there is no objection on behalf of the learned counsel for defendants that the amount of fixed deposit along with interest accrued thereupon, till the date of adjustment, be directed to be adjusted towards the loan amount. Accordingly, it is held that the amount due on the fixed deposit receipt, which is payable to defendant No. 2 by the State Bank of India Yol Camp (FDR No. 110268 dated 13th November, 1984), inclusive of interest accrued thereupon, after getting the same reinvested and renewed from the date of maturity till payment shall be adjustable by the plaintiff towards loan amount. However, adjustment will be in accordance with the instructions of the defendants, namely, towards the principal amount only.

29. In view of the discussion aforementioned, it is held that as on the date of suit, plaintiff-bank was entitled to recover a sum of Rs. 2,34,772.05 from the defendants jointly and severally towards the principal along with interest accrued thereupon and towards the amount spent by it on behalf of defendants Nos. 1 and 2.

30. The next question, which arises for consideration is as to the relief to be granted by the plaintiff. A decree has been prayed by the plaintiff for the suit amount along with interest pendente lite and future interest at the agreed rate. The learned Counsel for the defendants contended that under Section 34 of the Code of Civil Procedure, grant of pendente lite and future interest is in the discretion of the Court and the same cannot be allowed on the consolidated amount of the suit amount, which includes therein the component of interest also. The language of Section 34 is clear, which empowers the Court to allow interest pendente lite and future interest on the 'principal sum adjudged'. Since the suit amount includes therein the component of interest, therefore future interest, if any, can be allowed only on the principal sum adjudged and not on the consolidated amount of principal and interest.

31. Learned counsel for the plaintiff has vehemently contended that since as per terms of the loan transaction, interest was payable at quarterly rests, therefore, on default being committed, after every quarter, interest on being worked out, as per the normal banking practice is added towards the principal and the aggregate amount of principal and interest is then treated as principal for the next quarter. The amount of interest after every quarter gets sunk into the principal and the entire amount becomes principal. While adjudging the 'principal sum' under Section 34 of the Code, the agreement between the parties will have to be taken into consideration and in case the same provide for payment of interest as quarterly, six monthly or periodical rests in that case the principal sum would be the amount originally advanced inclusive of interest accrued thereupon and this consolidated figure will be treated as principal on which interest pendente lite and future interest will be chargeable. Learned counsel for the parties have also referred to number of decisions, which are being noticed.

32. Section 34 of the Code as it earlier existed, stood amended by the Code of Civil Procedure (Amendment) Act, 1956. In Sub-clause (1), the words 'on such sum with further interest at such rate as the Court deems reasonable on the correct sum so adjusted' as they stood earlier were substituted by the words 'with further interest at such rate not exceeding 6% per annum as the court deems reasonable on such principal sum'. For the words 'on such aggregate sum as aforesaid' in Clause (2) the words 'on such aggregate sum as aforesaid were substituted.

33. Section 34 of the Code again underwent further amendment by the Code of Civil Procedure (Amendment) Act, 1976 by addition of a proviso and two explanations. Proviso enables the Court to award interest at a rate higher than 6% per annum, but not exceeding contractual rate or where no such contractual rate is provided, at the rate charged by the nationalised bank on loans or advances in relation to commercial transactions. Explanations I and II define Nationalised Banks and Commercial Transactions, respectively. Section 34 of the Code as it stands reads:

'Interest-- (1) Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six per cent per annum, as the Court deems reasonable on such principal sum, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit.

Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent, per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions.

Explanation I: In this Sub-section, 'nationalised bank' means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

Explanation II: For the purposes of this section, a transaction is a commercial transaction, if it is connected with the industry, trade or business of the party incurring the liability.

(2) Where such a decree is silent with respect to the payment of further interest on such principal sum from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefor shall not lie.'

34. In a suit for money, interest that may be awarded by the Court may be divided into three heads according to the period for which it is allowed, namely, (a) interest accrued due prior to the institution of the suit; (b) additional interest on the principal sum adjudged from the date of suit to the date of decree, namely, interest pendente lite and (c) further interest on the principal sum adjudged from the date of decree to the date of payment i.e. future interest.

35. In so far as interest prior to the date of suit is concerned, the same is not governed by the provisions of Section 34 of the Code. It is a matter of substantive law, usage, trade or agreement. See the decision of the Supreme Court in Secretary, Irrigation Department, Government of Orissa v. G. C. Roy (1992) 1 SCC 508 : AIR 1992 SC 732.

36. Section 34 of the Code thus classifies the interest pendente lite and future interest, which are awardable solely at the discretion of the Court. Such discretion, which is exercis-able by the Court is not excluded by agreement to pay a certain rate of interest till realisation. There is nothing in the Code as to how and in what manner the discretion is to be exercised. Therefore, as per the normal practice, the discretion must be exercised on sound judicial principles. The normal rule being that pendente lite of future interest should not be refused except for sufficient reasons and it will be for the party resisting the grant of pendente lite and future interest to being on record circumstances justifying exercise of discretion in its favour by disallowing interest. Not only the grant of pendente lite and future interest is at the discretion of the Court, but also Section 34 makes it clear that the rate of interest is also at the discretion of the Court, namely, 'not exceeding 6% per annum, as the Court may deem reasonable.'

37. The proviso to Sub-clause (2) of Section 34, however, in so far as the liabilities arising out of commercial transactions, empowers the Court to grant pendente lite and future interest exceeding 6% per annum, but not exceeding the contractual rate of interest. In case, there is no contractual rate, the rate of interest to be allowed cannot exceed the rate at which moneys are lent or advanced by the nationalised banks in relation to commercial transactions. This discretion also must be exercised on sound judicial principles and ordinarily pendente lite and future interest at the contractual rate is not to be refused except for sufficient reasons. Refusal to award pendente lite and future interest at the contractual rate, thus being only an exception and not a rule. The Section does not require reasons to be recorded for grant of interest at a lesser rate than the contractual rate, but there must be some material on record justifying the exercise of discretion, in departing from the normal rule that where liability is arising out of commercial transaction, the rate of pendente lite and future interest shall be the contractual rate.

38. Both the components of interest, namely, pendente lite and future interest are awardable on the 'principal sum adjudged', therefore, it becomes important to ascertain the meaning of the expression 'principal sum adjudged'.

39. The submission of the learned counsel for the plaintiff is that the expression 'principal sum adjudged' means the principal amount lent or advanced by the bank to the defendant, which has remained unpaid on the date of suit, which should also include the interest adjudged on such unpaid principal for the date immediately prior to the institution of the suit. The submission of the learned counsel for the defendants is that while adjudging the principal, the Court is required not to include therein any amount other than the principal outstanding, after deducting payments, if any, received till the date of institution of the suit. Neither interest, nor any other sum other than the principal can be 'included therein since other items cannot be termed as the principal.

40. Learned counsel for the plantiff has placed reliance upon a decision of Delhi High Court in Syndicate Bank v. M/s. West Bengal Cements Ltd., AIR 1989 Delhi 107 and that of a Division Bench of Gauhati High Court in United Bank of India v. M/s. Jorhat FuelBriquetting Industry, AIR 1992 Gauhati 116, whereas reliance on behalf of the learned Counsel for the defendants is placed upon a Full Bench decision of Bombay High Court in Union Bank of India v. Dalpat Gaurishankar Upadyay, AIR 1992 Bom 482.

41. In Syndicate Bank's case (supra), learned single Judge of the Delhi High Court held that for the purpose of Section 34 of the Code, the expression 'principal sum adjudged' would mean the principal sum originally advanced inclusive of the interest calculated thereupon after making adjustment of the amount received towards the principal and interest till the date of institution of the suit. It was observed that between bank and its customer, by virtue of an agreement and as per the usual banking practice, interest is added towards the principal loan periodically thereby the original principal ceases and become merged in the principal loan along with the outstanding interest and thus the entire sum becomes the principal, which has to be taken as the principal sum adjudged for the' purpose of Section 34 of the Code. Reliance was placed on the ratio of a judgment of House of Lords in Paton v. Inland Revenue Commissioners (1938) AC 341 and few more decisions including those of Allahabad High Court in Jafar Hussain v. Bisham-bhar Nath, AIR 1937 All 442 and Division Bench decision of High Court of Madras in Sigappiachi v. M.A.P.A. Palaniappa Chet-tiar, AIR 1972 Mad 463.

42. The Division Bench of Gauhati High Court in United Bank of India's case (supra) relied upon the decision of the Delhi High Court in Syndicate Bank's case (supra) in coming to the conclusions that when a bank advances a loan with interest at quarterly rests, the interest is worked out at the close of every quarter. After every quarter the interest worked out is added towards the outstandng balance and is then treated as the principal sum for the next quarter for computing interest. Thus, it was held that the term principal sum adjudged would by the sum total of the original sum inclusive of the unpaid interest.

43. The Full Bench of Bombay High Court in Union of India's case (supra) dissented from the decision of Delhi High Court in Syndicate Bank's case (supra) and came to a different conclusion that after amendment was carried out in Section 34 of the Code by the Amendment Act, 1956, the intention of the legislature was made clear that the interest under Section 34 of the Code is not payable on the aggregate amount of principal and interest, but on the 'principal sum adjudged'. For the purpose of Section 34 of the Code, the principal sum is required to be adjudged, which cannot include any interest whatever may be the agreement between the parties.

44. Similar view as that of Delhi High Court was taken by the Punjab and Haryana High Court in Food Corporation of India v. Samana Co-operative Marketing-cum-Processing Society Ltd. samans Mandi, 1987 (1) Current Law Journal (Civil), Criminal and Revenue) 778 (wrongly referred to in Union Bank of India's case as decision of Orissa High Court). It was also followed by the Division Bench of the same High Court in State of Punjab v. Scheduled Caste Co-op. D.O.S. Ltd., AIR 1988 Punjab and Haryana 192. The Full Bench of the Bombay High Court in Union Bank of India's case (supra), on the language of Sec. 34 that after the amendment in the year 1956 intention of legislature has been not to include any component of interest in the principal and to keep the two items separate, while allowing pen-dente lite and future interest dissented from the view taken in the Scheduled Caste's Coop.'s case (supra) of the Punjab and Haryana High Court.

45. Neither in the Syndicate Bank's case (supra) nor in Food Corporation of India's case (supra) the purpose for which the amendment was carried out by the 1956 amendment Act was noticed for interpreting the expressing 'principal sum adjudged. Though in Syndicate Bank's case (supra) and that of Sigappiachi's case (supra), the amendment was noticed for the purpose of award of higher rate of interest than the outer limit of 6% on commercial transactions, yet it was not noticed for the purpose of understanding the meaning of the expression'principal sum adjusted'. In Union Bank of India's case (supra) in order to distinguish the reasonings of the decision of House of Lords in Paton's case (supra), which virtually is the base of the view taken in Delhi, Punjab and Haryana, Madras and Gauhati High Courts in the above referred decisions in Syndicate Bank's case, Scheduled Caste Co-op.'s case, Sigappiachi's case and United Bank of India's case, respectively, and those of High Court of Orissa in Indian Bank v. Kamalaya Cloth Store, AIR 1991 Orissa 44, Allahabad High Court in Jafar Hussain's case (supra) and Kalyanpur Cold Storage v. Sohan Lal Bajpai, AIR 1990 All 218, reference was made to the object of amendment carried out to Section 34 by 1956 Amendment Act. It was observed in Union Bank of India's case :

'.............. this section was amended by Code of Civil Procedure (Amendment) Act 1956 (Act LXVI of 1956) and the words 'with further interest at such rate not exceeding six per cent per annum as the Court deems reasonable on such principal sum' were substituted for the words 'with further interest at such rate as the Court deems reasonable on the aggregate sum so adjudged', and the words 'on such principal sum' were substituted for the then existing words 'such aggregate sum'. The object of the aforesaid amendment to Section 34 is evident from the Report of the Joint Committee on the Bill as published in the Gazette of India, Extraordinary Part II, Section 2, dated December 13, 1955. The relevant part of the Report reads as under :--

'Section 34 of the Code empowers a Court to award further interest from the date of the decree up to the date of payment on the 'aggregate sum' which comprises principal sum with interest accrued thereon. The Committee are of the opinion that interest should not be awarded on interest but only on the principal sum. Suitable amendment has accordingly been incorporated in this clause'.

The aforesaid observations of the Joint Committee make it abundantly clear that the intention of the legislature was not to allow the award of compound interest by the Courts and to give effect to that intention the expression 'principal sum' was introduced which fundamentally means the 'principal sum' only without addition of amount of interest, if any, accrued thereon till the date of filing of the suit..........'

xxxxxxxxxxxxxxxx

'..................,... position has since been completely changed by 1956 Amendment whereby Section 34 was amended and expression 'principal sum' was incorporated in the context of award of interest under that section. The object of the amendment, as is evident from the report of the Joint Committee was to prohibit award of interest on interest and was to restrict it only on the principal sum. Under Section 34, as amended, the interest can be awarded only on the principal sum and not on the aggregate sum comprising of principal and interest accrued thereon.'

46. On going throught the decisions cited at the Bar and referred to above, the line of reasoning followed in Union Bank of India's case (supra) is in consonance with the intention of the legislature and for the same reasons and with due respect to the learned Judges of High Courts of Delhi, Punjab and Haryana, Gauhati, Madras, Allahabad and Orissa, the same are clearly distinguishable.

47. The words 'with further interest at such rate as the Court deems reasonable on the aggregate sum so adjudged', when substituted by the words 'with further interest at such i ate not exceed ing 6% per annum, as the Court deems reasonable on such principal sum' by the Amendment Act of 1956, made a vital difference and lends support to the submissions made on behalf of the counsel for the defendants. Words 'such principal' has reference to the earlier expression 'principal sum adjudged'. While discretion has been left to the Court to award interest 'at such rate', as the Court deems reasonable, for the two periods, namely, from the date of suit to the date of decree and from the date of decree to the date of payment or even to an earlier date than the date of payment, as the Court may think proper, Section 34 also says that 'in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit'.

48. In other words, Section 34 says that in addition to pendente lite and future interest, additional interest adjudged on such principal sum for the period prior to the institution of the suit can also be granted by the Court. This interest adjudged for the period prior to the institution of the suit also has to be on 'such principal sum' and this also has reference to the earlier expression 'principal sum adjudged'.

49. I fully agree with the ratio of the decision in Union Bank of India's case (supra) of Full Bench of Bombay High Court, wherein while concluding, after noticing the opposite view, it was observed :

'A clear picture which emerges from reading of this section is that the Court while decreeing the suit will adjudge, (i) the principal sum and (ii) any interest on such principal sum prior to the date of institution of the suit. Both amounts adjudged by the Court by way of 'principal sum' as well as 'interest' thereon for the period prior to the institution of the suit together may be termed as 'aggregate amount adjudged' as payable on the date of the suit. But interest under Section 34 is not payable on such aggregate amount. It is made payable only on the principal sum adjudged. No interest is payable on the amount of interest adjudged on such principal sum. Interest, whether simple or compound will remain 'interest' for the purpose of Section 34 and shall never merge in the principal. The legislature while using the expression 'in addition to any interest adjudged on such principal for any period prior to the institution of the suit' in Section 34 in contradistinction to the expression 'principal sum' has not made any distinction between the interest computed by way of simple interest or compound interest. The legislative scheme and indent being so clear, there is no scope for doubt that the expression 'principal sum adjudged' would mean only the 'principal sum'. It will never include the interest whatever be the agreement between the parties. Interest under Section 34, therefore, can be allowed only on the principal sum and not on the principal sumplus interest accrued thereon till the filing of the suit. In view of foregoing discussion, we hold that the principal sum adjudged used in Section 34 of the C. P. (''. means the original amount lend without the addition thereto of any interest whatsoever. This will be the position notwithstanding any agreement between the parties or any prevailing banking or trade practice; to the contrary...........''

50. In the instant case, it is not in dispute that principal amount advanced was a sum of Rs. 1,96,000/ -. The suit amount include therein the interest, which has remained unpaid till the date of institution of the suit as also a sum of Rs. 3,398/- spent by ihe plaintiff towards insurance premium on behalf of the defendant. Till date of the institution of the suit, no adjustment had been made towards the principal. Thus, the principal sum. for the purpose of Section 34 of the Code is adjudged as Rs. 1,96,000/-.

51. In the result, a decree for Rs. 2,34,722.05 paise with costs of suit is passed in favour of the plaintiff against the defendants jointly and severally. The plaintiff is also held entitled to pendente lite interest on the principal sum adjudged, namely, Rs. 1,96,000/- at the rate of 12.5% per annum with quarterly rests and future interest from the date of passing of decree till payment at the same rate. Rs. 1,28,000,'- paid by defendant No. 2 to the plaintiff is held liable for being adjusted firstly towards the interest and balance, if any, towards the principal. The amount accrued due on fixed deposit receipt, pledged by defendant No. 2, inclusive of interest till the date of realisation, is, however, made liable for being adjusted towards the principal. Insurance premium of Rs. 44,154/-for the period till September, 1993 is also held liable for being included in the amount recoverable by the plaintiff from the defendants. After the adjustments have been made in the manner aforementioned, the balance outstanding at the first instance is made recoverable by sale of the hypothecated vehicle in question, namely, Bus HPK-2I70 and balance, if any, against the person and property of the defendants.


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