Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8443 OF 2010
(Arising out of S.L.P. (C) No. 24745 of 2007)
Punjab & Sind Bank .... Appellant (s)
Versus
M/s Allied Beverage Company
Pvt. Ltd. & Ors. .... Respondent(s)
WITH
CIVIL APPEAL NO. 8444 OF 2010
(Arising out of S.L.P. (C) No. 3373 of 2008)
M/s Allied Beverage Company
Pvt. Ltd. & Ors. .... Appellant (s)
Versus
Punjab & Sind Bank & Ors. .... Respondent(s)
J U D G M E N T
P. Sathasivam, J.
1) Leave granted.
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2) These appeals are directed against the judgment and
order dated 24.08.2007 passed by the High Court of Delhi
at New Delhi in Writ Petition (C) No.6069 of 2007 wherein
the Division Bench of the High Court disposed of the writ
petition filed by M/s Allied Beverage Company Pvt. Ltd.
(hereinafter referred to as “the Company”) modifying the
order dated 09.06.2005 passed by the Debts Recovery
Tribunal-III, Delhi (hereinafter referred to as “the DRT”) in
Original Application No. 47 of 2003 preferred by the
Punjab & Sind Bank (hereinafter referred to as “the Bank”)
to the extent by reducing the pendente lite and future
interest w.e.f. 04.07.2003 to 14% p.a. with annual rests,
which would be the simple interest, against the rate of
interest @ 18% p.a. with monthly rests, awarded by the
DRT, Delhi.
3) Brief facts:
(a) Vide application dated 28.04.1997, the Company
approached the Bank and requested for grant of financial
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facilities in its name. After verifying the documents
submitted by the Company, the Bank acceded to the
request and granted the Cash Credit (CC) (Hypothecation)
limit to the tune of Rs. 60,00,000/-, Term Loan of
Rs.20,00,000/-, FOBLC/FOBP facility to the tune of
Rs.10,00,000/- and Import/Inland Letter of Credit facility
to the tune of Rs.25,00,000/-. However, the Cash Credit
and the Import/Inland Letter of Credit limit was not to
exceed Rs.60,00,000/-. The aforesaid credit facilities
given by the Bank were duly secured by way of
hypothecation over stock of raw materials, finished
products, goods in transit and in process, finished goods,
generator sets and tanks on which the first charge has
been created by the Haryana Financial Corporation
(hereinafter referred to as “the Corporation”) and the Bank
had the second charge over all the above materials.
Additionally, the said credit facilities were also secured by
way of equitable mortgage by deposit of original Title
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Deeds in respect of immovable property bearing Plot No. 9,
Road No. W-8, DLF Qutab Enclave, Phase-III, village
Nathurpur, Teh. and Dist. Gurgaon measuring about
450.78 sq.mts. belonging to Shri Surinder Kumar Sadhu -
Director of the Company. On 16.07.1997, the Bank
sanctioned and granted the abovementioned loan/credit
facilities to the Company. The Company submitted all the
required documents with the Bank. Because of certain
reasons, the business of the Company suffered a set back
and its account with the Bank was declared as Non-
performing Assets (NPA) on 31.03.1999. As on that date,
an amount of Rs.60,99,482.77/- was due in Cash credit
account and Rs.15,05,470/- in respect of the Term loan
account. The account of the Company was transferred to
NPA Account on 01.04.1999.
(b) On 16.09.2002, the Bank sent a legal notice to the
Directors of the Company under the Securitization and
Reconstruction of Financial Assets and Enforcement of
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Security Interest Act, 2002 (in short ‘the Securitization
Act’) through its Manager, calling them to regularize the
account by paying the outstanding dues payable to the
Bank along with interest due thereon and that in failure of
the same, the Bank would be constrained to take
appropriate legal action under the Securitization Act
against them. On receipt of the notice, the Company
approached the Bank for settlement of accounts and gave
a proposal in writing and also deposited a sum of
Rs.2,50,000/- towards token money. However, the
settlement could not be materialized as the same was on
the lower side and as such the amount of token money
was credited to the Company’s account.
(c) On 04.07.2003, the Bank filed an application before
the DRT being O.A. No. 47 of 2003 for recovery of
Rs.1,47,42,616.77 along with pendente lite and future
interest. During the pendency of the application, the
Company further gave a proposal for settlement but the
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same could not be materialized. However, on 09.06.2005,
the Presiding Officer allowed the application and directed
the Company to pay the outstanding amount with
pendente lite and future interest. The Presiding Officer
further directed that a Recovery Certificate be prepared
and the parties therein should appear before the Recovery
Officer-I, DRT-III Delhi on 09.08.2005 for execution of the
same. Being aggrieved by the order passed by the
Presiding Officer, the Company preferred an appeal being
Appeal No. 70 of 2006 before the Debts Recovery Appellate
Tribunal (hereinafter referred to as ‘the DRAT’), Delhi and
the same was dismissed vide order dated 29.03.2007.
(d) Challenging the order dated 29.03.2007 passed by
the DRAT, the Company preferred Writ Petition (C) No.
6069 of 2007 before the High Court on 10.07.2007. Vide
order dated 24.08.2007, the High Court disposed of the
writ petition modifying the order in respect of interest to
the extent mentioned therein. Dissatisfied with the order
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passed by the High Court, the Bank filed appeal arising
out of S.L.P.(C) No. 24745 of 2007 and the Company
preferred appeal arising out of S.L.P.(C) No. 3373 of 2008
before this Court.
4) Heard learned senior counsel for the Bank as well as
learned senior counsel for the Company.
5) The following questions arise for consideration:
(i) Whether the High Court is justified in reducing the
interest @ 18% p.a. with monthly rests to 14% p.a.
with 12 monthly rests without appreciating the
contractual rate of interest.
(ii) Whether the High Court has power and jurisdiction
under Section 34 of the Code of Civil Procedure, 1908
(hereinafter referred to as ‘CPC’) to change the
periodicity of the payment of interest as has been
done in the present case, wherein as per the original
judgment and decree dated 09.06.2005 passed by the
DRT, the interest was payable at 18% p.a. with
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monthly rests, whereas the Division Bench of the
High Court has reduced the rate of interest from 18%
p.a. to 14% p.a. with 12 monthly rests.
(iii) Whether the claim of the Company for further
reduction of the rate of interest to the extent of 12%
p.a. is feasible and acceptable.
6) Inasmuch as we are only concerned with the rate of
interest in these appeals, there is no need to traverse all
the factual details as placed before the High Court and the
Tribunal except certain facts which we have adverted to in
the earlier paragraphs.
7) In order to appreciate the claim of the Bank as well
as the Company with regard to interest, it is useful to refer
the relevant provisions as applicable to the case on hand.
Chapter IV of the Recovery of Debts due to Banks and
Financial Institutions Act, 1993 deals with procedure of
Tribunals. Among the various provisions, we are
concerned about Section 19 (20) which reads as under:
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“ 19. Application to the Tribunal:-
(20) The Tribunal may, after giving the applicant and
the defendant an opportunity of being heard, pass such
interim or final order, including the order for payment of
interest from the date on or before which payment of the
amount is found due upto the date of realization or
actual payment, on the application as it thinks fit to
meet the ends of justice.”
8) In order to regulate the banking companies, the
Government of India brought legislation, namely, the
Banking Regulation Act, 1949. Here again, we are
concerned about the provision relating to rate of interest
which is provided in Section 21A which reads thus:
“21A. Rates 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
re-opened by any court on the ground that the rate of
interest charged by the banking company in respect of
such transaction is excessive.”
9) In addition to the above statutory provisions, Section
34 CPC is also relevant while considering the rate or
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quantum of interest payable pendente lite and after
passing of the decree. It reads thus:
“34. 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 (5 of 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.”
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10) In N.M. Veerappa vs. Canara Bank , (1998) 2 SCC
317 = AIR 1998 SC 1101, this Court while considering
Section 21A of the Banking Regulation Act, 1949 which
was introduced by Act 1 of 1984, w.e.f. 15.02.1984 has
held, in para 23, as follows:-
“ … …. Firstly, it will be noticed that the effect of the
21-A
"non-obstante clause" in Section is to override the
Central Act, namely, the Usurious Loans Act, 1918 and
any other "law relating to indebtedness in force in any
State". Obviously it does not expressly intend to override
the Code of Civil procedure among the Central statutes.
It is now well settled that the scope and width of the
non-obstante Clause is to be decided on the basis of
what is contained in the enacting part of the provision.
Aswini Kumar Ghosh vs. Arabind Bose. Further, by no
stretch of imagination can the Code of Civil Procedure,
1908 be described as a 'law relating to indebtedness in
force in any State'. As stated above, the provision in
Section 21-A refers, so far as Central legislation is
concerned, only to the Usurious Loans Act. 1918 and
not to the Code of Civil Procedure, 1908 and it then
refers to other laws relating to indebtedness in force in
any State. Therefore, the provision of Section 21-A of the
Banking Regulation Act, 1984 cannot be held to have
intended to override a Central legislation like the CPC or
Order 34 Rule 11 CPC.”
(Emphasis supplied)
11) Learned senior counsel appearing for the Bank as
well as the Company and even the High Court heavily
relied on the ratio laid down in the Constitution Bench
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decision in Central Bank of India vs. Ravindra and
Others , (2002) 1 SCC 367. The question before the
Constitution Bench was as to the meaning to the phrases
“the principal sum adjudged” and “such principal sum” as
occurring in Section 34 CPC as amended by the Code of
Civil Procedure (Amendment) Act (66 of 1956) w.e.f.
01.01.1957.
12) While considering the above issue, the Constitution
Bench has also considered “interest”, “penal interest”,
several “usury laws” and finally made certain observations
which are binding on the banking institutions as well as
all others dealing with money transactions with them.
“Interest and its classes
37. Black’s Law Dictionary (7th Edn.) defines “interest”
inter alia as the compensation fixed by agreement or
allowed by law for the use or detention of money, or for
the loss of money by one who is entitled to its use;
especially, the amount owed to a lender in return for the
use of the borrowed money. According to Stroud’s
Judicial Dictionary of Words And Phrases (5th Edn.)
interest means, inter alia, compensation paid by the
borrower to the lender for deprivation of the use of his
money. In Secy., Irrigation Deptt., Govt. of Orissa v. G.C.
the Constitution Bench opined that a person
Roy
deprived of the use of money to which he is legitimately
entitled has a right to be compensated for the
deprivation, call it by any name. It may be called
interest, compensation or damages ... this is the
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principle of Section 34 of the Civil Procedure Code. In
Sham Lal Narula (Dr) v. CIT this Court held that interest
is paid for the deprivation of the use of the money. The
essence of interest in the opinion of Lord Wright, in
Riches v. Westminster Bank Ltd. All ER at p. 472 is that
it is a payment which becomes due because the creditor
has not had his money at the due date. It may be
regarded either as representing the profit he might have
made if he had had the use of the money, or,
conversely, the loss he suffered because he had not that
use. The general idea is that he is entitled to
compensation for the deprivation; the money due to the
creditor was not paid, or, in other words, was withheld
from him by the debtor after the time when payment
should have been made, in breach of his legal rights,
and interest was a compensation whether the
compensation was liquidated under an agreement or
statute. A Division Bench of the High Court of Punjab
speaking through Tek Chand, J. in v.
CIT Dr Sham Lal
Narula thus articulated the concept of interest: (AIR
p. 414, para 8)
“ 8 . The words ‘interest’ and ‘compensation’ are
sometimes used interchangeably and on other
occasions they have distinct connotation. ‘Interest’
in general terms is the return or compensation for
the use or retention by one person of a sum of
money belonging to or owed to another. In its
narrow sense, ‘interest’ is understood to mean the
amount which one has contracted to pay for use of
borrowed money. ... In whatever category ‘interest’
in a particular case may be put, it is a
consideration paid either for the use of money or
for forbearance in demanding it, after it has fallen
due, and thus, it is a charge for the use or
forbearance of money. In this sense, it is a
compensation allowed by law or fixed by parties,
or permitted by custom or usage, for use of
money, belonging to another, or for the delay in
paying money after it has become payable.”
It is the appeal against this decision of the Punjab High
Court which was dismissed by the Supreme Court in Dr
Sham Lal Narula case.
38. However “penal interest” has to be distinguished
from “interest”. Penal interest is an extraordinary
liability incurred by a debtor on account of his being a
wrongdoer by having committed the wrong of not
making the payment when it should have been made, in
favour of the person wronged and it is neither related
with nor limited to the damages suffered. Thus, while
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liability to pay interest is founded on the doctrine of
compensation, penal interest is a penalty founded on
the doctrine of penal action. Penal interest can be
charged only once for one period of default and
therefore cannot be permitted to be capitalised.
39. Mulla on the Code of Civil Procedure (1995 Edn.) sets
out three divisions of interest as dealt in Section 34
CPC. The division is according to the period for which
interest is allowed by the court, namely,— ( 1 ) interest
accrued due prior to the institution of the suit on the
principal sum adjudged; ( 2 ) additional interest on the
principal sum adjudged, from the date of the suit to the
date of the decree, at such rate as the court deems
reasonable; ( 3 ) further interest on the principal sum
adjudged, from the date of the decree to the date of the
payment or to such earlier date as the court thinks fit,
at a rate not exceeding 6 per cent per annum. Popularly
the three interests are called pre-suit interest, interest
pendente lite and interest post-decree or future interest.
Interest for the period anterior to institution of suit is
not a matter of procedure; interest pendente lite is not a
matter of substantive law (see Secy., Irrigation Deptt.,
Govt. of Orissa v. G.C. Roy SCC para 44-iv).
In conclusion, the Constitution Bench formulated certain
principles. They are:
“( 1 ) Though interest can be capitalised on the analogy
that the interest falling due on the accrued date and
remaining unpaid, partakes the character of amount
advanced on that date, yet penal interest, which is
charged by way of penalty for non-payment, cannot be
capitalised. Further interest i.e. interest on interest,
whether simple, compound or penal, cannot be claimed
on the amount of penal interest. Penal interest cannot
be capitalised. It will be opposed to public policy.
( 2 ) Novation, that is, a debtor entering into a fresh
agreement with a creditor undertaking payment of
previously borrowed principal amount coupled with
interest by treating the sum total as principal, any
contract express or implied and an express
acknowledgement of accounts, are the best evidence of
capitalisation. Acquiescence in the method of
accounting adopted by the creditor and brought to the
knowledge of the debtor may also enable interest being
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converted into principal. A mere failure to protest is not
acquiescence.
( 3 ) The prevalence of banking practice legitimatises
stipulations as to interest on periodical rests and their
capitalisation being incorporated in contracts. Such
stipulations incorporated in contracts voluntarily
entered into and binding on the parties shall govern the
substantive rights and obligations of the parties as to
recovery and payment of interest.
( 4 ) Capitalisation method is founded on the principle
that the borrower failed to make payment though he
could have made and thereby rendered himself a
defaulter. To hold an amount debited to the account of
the borrower capitalised it should appear that the
borrower had an opportunity of making the payment on
the date of entry or within a reasonable time or period of
grace from the date of debit entry or the amount falling
due and thereby avoiding capitalisation. Any debit entry
in the account of the borrower and claimed to have been
capitalised so as to form an amalgam of the principal
sum may be excluded on being shown to the
satisfaction of the court that such debit entry was not
brought to the notice of the borrower and/or he did not
have the opportunity of making payment before
capitalisation and thereby excluding its capitalisation.
( 5 ) The power conferred by Sections 21 and 35-A of the
Banking Regulation Act, 1949 is coupled with duty to
act. The Reserve Bank of India is the prime banking
institution of the country entrusted with a supervisory
role over banking and conferred with the authority of
issuing binding directions, having statutory force, in the
interest of the public in general and preventing banking
affairs from deterioration and prejudice as also to
secure the proper management of any banking company
generally. The Reserve Bank of India is one of the
watchdogs of finance and economy of the nation. It is,
and it ought to be, aware of all relevant factors,
including credit conditions as prevailing, which would
invite its policy decisions. RBI has been issuing
directions/circulars from time to time which, inter alia,
deal with the rate of interest which can be charged and
the periods at the end of which rests can be struck
down, interest calculated thereon and charged and
capitalised. It should continue to issue such directives.
Its circulars shall bind those who fall within the net of
such directives. For such transaction which are not
squarely governed by such circulars, the RBI directives
may be treated as standards for the purpose of deciding
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whether the interest charged is excessive, usurious or
opposed to public policy.
( 6 ) Agricultural borrowings are to be treated on a
pedestal different from others. Charging and
capitalisation of interest on agricultural loans cannot be
permitted in India except on annual or six-monthly
rests depending on the rotation of crops in the area to
which the agriculturist borrowers belong.
(7 ) Any interest charged and/or capitalised in violation
of RBI directives, as to rate of interest, or as to periods
at which rests can be arrived at, shall be disallowed
and/or excluded from capital sum and be treated only
as interest and dealt with accordingly.
( 8 ) Award of interest pendente lite and post-decree is
discretionary with the court as it is essentially governed
by Section 34 CPC dehors the contract between the
parties. In a given case if the court finds that in the
principal sum adjudged on the date of the suit the
component of interest is disproportionate with the
component of the principal sum actually advanced the
court may exercise its discretion in awarding interest
pendente lite and post-decree interest at a lower rate or
may even decline awarding such interest. The discretion
shall be exercised fairly, judiciously and for reasons and
not in an arbitrary or fanciful manner.”
13) By drawing our attention to the decision of this Court
in Syndicate Bank, Chennai vs. Mohan Brothers and
Ors., (2004) 10 SCC 549, it is contended that in view of
proviso to Section 34(1) CPC, if the liability in relation to
the sum adjudged had arisen out of commercial
transaction, the rate of such further interest may exceed
6% p.a. but shall not exceed the contractual rate of
interest and the bank is entitled to claim interest as per
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the contract. It is true that in this decision, a three-Judge
Bench, after finding that the decision in Central Bank of
India’s case (supra) shows that no reference has been
made to the proviso which specifically deals with the
awarding of interest arising out of commercial transaction,
referred the issue to a larger bench. We were not informed
about any decision by a larger Bench contrary to the
decision in Central Bank of India (supra). Even
otherwise, considering factual aspects, even the Company
agreed for settlement but it was not successful due to
financial difficulties and all other circumstances, we feel
that the High Court has fairly neutralized the claim of the
Bank as well as the sufferings of the Company and passed
a workable order by reducing the rate of interest to 14%
p.a., which would be simple interest, in respect of period
pendente lite and future interest with effect from
04.07.2003, the day on which the Bank filed an
application before the DRT. Though request was made by
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the Company for further reduction upto 12% p.a., since it
was a commercial transaction and the Bank being a
nationalized bank, we are not inclined to accede to their
request.
14) The approach and the course adopted by the High
Court is acceptable and we are not inclined to either
enhance the rate of interest as claimed by the Bank or
order further reduction as requested by the Company.
Consequently, both the appeals are dismissed with no
order as to costs.
...…………………………………J.
(P. SATHASIVAM)
...…………………………………J.
(DR. B.S. CHAUHAN)
NEW DELHI;
OCTOBER 1, 2010.
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