JUDGMENT

A.A. Halbe, J.

1. These appeals are taken up together as they raise common question relating to the propriety of the observations of the Full Bench of this Court in the case of Union Bank v. Dalpat Gaurishankar Upadyay . Whereas the main grievance of the appellant original loanee of the Bank is that the respondent/Bank is not entitled to interest on interest in terms of the ratio laid down in the above case, the grievance of the Bank is that this view needs reconsideration as that would deprive the Bank of the sizeble income by way of interest on the interest, which stands merged in the main principal and that this would seriously erode the financial strength of the Banking operations in this country. Large chunk of the amounts of interest merged in the original advances given by the Bank would stand frozen with reference to the interest income available from those amounts, which at least constitute 1/3rd to 1/2 of the total claims. It is also urged that the banks are put to further losses when claims are filed in courts because they cannot avail of terms relating to quarterly or half yearly rests and add to their final claim amounts. It is, therefore, urged on behalf of the respondent/Bank that the view taken in the above case of Union Bank of India v. Dalpat, cited supra, should be reconsidered and that it should be observed that under section 34 of the C.P.C. the principal sum adjudged should include not only the principal amount of advance but the interest accruing thereon and merged therein under the scheme of either quarterly rests of six monthly rests.

2. Our attention is also drawn to the latest view of the Supreme Court, reported in the case of Renusagar Power Company Limited v. General Electric Company, , wherein, according to

the Respondent/Bank even the Supreme Court has approved by way of obiter observations if not in the ratio that the Banks are entitled to file the suits both for recovery of the principal amount of advance and the interest merged with the main advance and future interest thereon. Briefly speaking the interest on interest is permissible as not being opposed to public policy. To put it differently the scheme of compound interest is not against the public policy in India and that the Banks and financial institutions are quite competent and eligible to enforce the recovery of loans comprising of principal amount and interest accruing thereon prior to the filing of the suit with interest on the total sum of principal advance and the interest merged therein. The compound interest is certainly recoverable and this view is quite contrary to the view cited in the above judgment of this Court. In this light, according to the respondent/Bank, the ratio needs to be reconsidered and reviewed.

3. In order to appreciate the real question behind these arguments, few facts will have to be noted from these three appeals. In First Appeal No. 56/87, which arises from Special Suit No. 34/79, the Bank and State Industrial and Investment Corporation had advanced the loan of Rs. 80,000/- to the defendant. Rs. 50,000/- were advanced by the Bank of Maharashtra, whereas Rs. 30,000/- by the Corporation, under the capital participation scheme. The terms of the loan were, the loan so far as it was advanced by the Bank was to carry 41/2 per cent interest over the Bank rate and that the defendant executed pro-note and has also hypothecated the machinery, tools, etc. lying with the Factory of the defendant. The Corporation was to charge uniform interest of 141/2 per cent. The loan was to be repaid by certain instalments prescribed in the hypothecation scheme. On the date of the suit, the amount of outstanding loan in favour of Bank was Rs. 38,837.50 ps. inclusive of interest of Rs. 177.40 ps. and the loan outstanding in favour of the Corporation was Rs. 85,584.74 ps. comprising principal amount of Rs. 30,000/- and interest of Rs. 55, 584.70 ps. It was stated that the present appellant/defendant had confirmed the balance of outstanding principal amount comprising original loan and interest amount from time to time. Since the amount was to be computed with quarterly rests, the defendant had accepted that the interest had become the part of the principal from time to time. However, as there was default on the part of the appellant/defendant, the suit was filed for total amount of Rs. 1,16,000/- and odd amount. The defendant had contended that he had paid some amount and that the same was liable to be adjusted and further that the interest was to be computed correctly. The appellant/defendant did not question the merging of the accrued interest in the principal at any stage and accordingly the decree was passed. This appeal was filed only to dispute the amount of repayment and the computation of interest.

4. In First Appeal No. 57/87, the Bank and the CICOM Corporation had advanced total amount of Rs. 52,000/- comprising Rs. 32,000/- by the Bank and Rs. 20,000/- by the Corporation to the present appellant/defendant for which the immovable property of the Factory belonging to the defendant was mortgaged. There was mortgage-deed, promissory note and the amount was to be repaid with interest four per cent above the Bank rate and that the same was to be computed with quarterly or half yearly rests. So far as the Corporation is concerned, the rate of interest is 141/2 per cent. As the defendant did not repay, the suit for approximately Rs. 82,000/- was filed. Here also the defendant agreed with the condition that with quarterly rests the amount of interest was to be merged in the principal amount. All that was contested was repayment and the computation of interest. The decree was passed in favour of the Bank which has been challenged in this appeal. In this case, it would be found that property was mortgaged and there was a clear agreement between the parties that the interest was to be merged in the principal.

5. In Second Appeal No. 223/87, which arise out of Civil Appeal No. 115/85, the same appellant/defendant had obtained loan from the respondent/Bank of the amount of Rs. 30,000 under cash credit facility. There was hypothecation of raw material and finished products and the loan was to be repaid with 41/2 per cent interest above the Bank rate with minimum of 91/2 per cent. Here also there was provision for quarterly rests meaning thereby that the interest accruing at the rate of 41/2 per cent above the bank rate was to be merged with the principal amount. The suit was filed for Rs. 48,877/- and the same was decreed as against the defence by the appellant/defendant that he had practically squared off the loan and the computation of interest was not correct.

6. When these appeals came up for final hearing, the learned Advocate for the appellant besides disputing the question of repayment, which is essentially a question of fact, also raised an important point and that is in all these matters, the respondent/Bank had charged interest on interest which would be compounded with the principal amount of loan and for that purpose he took recourse to the above judgment of the Full Bench of this Court, , in the case of

Union Bank of India v. Dalpat cited supra. At the out set, it is vehemently urged by the learned Advocate for the appellant that this is a Full Bench judgment and the Division Bench is bound by the same and the ratio laid down in that ruling is that the interest is chargeable on the original amount of advance or loan and not on the amount of loan plus the interest accrued thereon prior to the suit. The claim would amount to levying compound interest which is not permissible under section 34 of C.P.C. Section 34 deals with the money decrees and reads as follows.

"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.

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 reused such interest, and a separate suit therefor shall not lie."

Section 34 C.P.C. as it stood before the amendment of 1956 was worded as follows :

"34. (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;

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 of further interest (on such principal sum) 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 therefore shall not lie."

In view of this amendment, the Full Bench observed as follows:-

"The expression "principal sum adjudged" used in section 34 of the Code of Civil Procedure means the original amount lent without the addition thereto of any interest whatsoever. This would be the position notwithstanding any agreement between the parties or any prevailing banking or trade practice to the contrary. A reading of section 34 shows 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 the 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. Interest under section 34 is not payable on such aggregate amount. It is made payable only on the principal sum adjudged. No interest under section 34 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. Interest under section 34, therefore, can be allowed only on the principal sum and not on the principal sum plus interest accrued thereon till the filing of the suit."

The Court further observed, "this is notwithstanding any agreement between the parties or any prevailing banking or trade practice to the contrary.

7. Deriving the support from this ratio, the learned advocate for the appellant has contended that the bank should be called upon to furnish the statement regarding the interest that is chargeable only on the principal sum originally advanced and not on the interest having merged in the principal and to that extent the amount of decree should be reduced. Incidentally, we may also observe that the appellant who is the loanee has referred to some amount, which he has repaid and which it is submitted should be adjusted. We do not propose to go into that aspect; firstly, because in case of review the original decree will stand and the question of repayment could be independently considered. The learned advocate for the appellant has contended that since this Bench desires that the ratio in Dalpat's case should be reviewed, the matter of repayment may not be decided at this stage and the same could be adjudged at the time of final hearing of these appeals after the review is decided. The entire controversy would, therefore, boil down to two propositions, one whether the clause used in section 34, "the principal sum adjudged" would only relate to principal or original amount advanced or whether it should include the interest computed prior to the institution of the suit and whether the interpretation made by the Full Bench is contrary to the observations of the Supreme Court in the Case of Renusagar Power Co. v. General Electric Company .

8. Our attention has been drawn to the various Rulings of different High Courts which support the contention of the respondent/Bank that the principal sum adjudged would include not only the original amount of loan but also the additional interest whatsoever thereto before the institution of the suit. We may take the brief review of those cases.

9. In A.I.R. 1934 Bombay 86, in the case of Kaluram Bholaram v. Chimniram Motilal, it was observed that the Court has jurisdiction to give compound interest under section 34 C.P.C. In that case under the original contract between the parties, the rate of interest was in effect six percent per annum and according to the practise of the parties accounts were made up annually at Diwali and the amount due for the principal and interest was carried forward to the next year and simple interest was charged on that amount, so that the result was that in practise compound interest was paid. This was with reference to phrase "principal sum adjudged". No doubt the contract came to an end when the suit was started. The question of interest payable was held to be in terms of the business practice and accordingly the Court found that when the accounts were settled at the time of Diwali every year, the principal and interest which was carried to the next year became infact the principal for the next year and the latter was liable to pay interest thereon. The Court approved this practice in view of the prevailing trade practice. The ground for payment of interest was retention of goods by the defendant beyond the stipulated period and in breach of terms of sale. This view was upheld by Blackwell, J. in his separate judgment. The view, therefore, supports the contention of the learned advocate for the respondent /Bank. We may make it clear that his view was based on principal sum adjudged and not with reference to later part of section 34 which according to the Full Bench comprehends only principal sum advanced.

10. The next case, which needs to be referred is the case of Sigappiachi and others v. M.A.P.A. Palaniappa Chettiar, . The Court while considering the question of interest under section 34, observed that the principal sum adjudged would be the sum found due as on the date of the suit. This would mean that the sum has to be arrived at after various calculations and would not simply rest on the principal sum advanced.

11. In in the case of Kalyanpur Cold Storage v.

Sohanlal Bajpai, the Court held that it is the duty of the Court under section 34 C.P.C. to award interest on final amount adjudged and not on original amount advanced. The principal sum adjudged in ordinary parlance means the amount which the Court determines after adjudicating upon the rights of the parties in a suit. The final amount which has been adjudged by the Court in case must be deemed to be the principal amount adjudged and the interest, therefore, accruing on this amount and not on the original amount advanced to the defendant. This view is in accord with the argument on behalf of the respondent/Bank.

12. The Delhi High Court, in the case of Syndicate Bank v. M/s. West Bengal Cements Ltd., reported in A.I.R. 1989 Delhi 107, while dilating on the principal sum adjudged made the observations, which are as follows:

"Where the statement of account of the bank showed that the bank computed interest with quarterly rests and after the quarter the interest was added to the last balance and that amount was treated as "principal sum" for computing interest for the next quarter and so on and so forth and no contract was either pleaded or proved by borrower showing that amount inclusive of interest could not be treated as "principal sum" and the borrower acknowledged liability for the sum arrived at by the bank in the aforesaid manner the amount so arrived at would be the principal sum for purpose of interest under section 34. The plea that the interest under section 34 can be awarded only on the original sum advanced would be misconceived as such interpretation would run counter to the normal banking practise and act as a premium for those not paying the amount of interest when it is due at the cost of those making payment of interest when it is due."

The same view seems to have been reiterated in , in the case of Indian Bank v. M/s. Kamalalaya Cloth Store and another, wherein the Court held that in the case of loan advanced by Bank, loanee has to pay interest from the date of loan till the date of payment in full with quarterly rests and that interest accrued and added to principal amount on the date of suit is the principal amount for the purposes of interest and not amount of loan originally advanced. The Court emphasized that this view was wholly permissible in view of the conditions of loan reduced to writing and agreed to by the loanee. It can be generally observed that if the loanee agrees for the quarterly rests the interest merges into the principal and that becomes the principal amount adjudged under section 34 C.P.C. The question of interest retaining separate identify from the principal really does not survive.

13. The learned advocate for the appellant has relied on A.I.R. 1943 Madras 216, in the case of M.V. Mahalinga Aiyar v. Union Bank Ltd., Kumbakonam, wherein the Court observed that the interest awarded under section 34 for the period from the date of plaint to the date of decree must be only on the sum due and not on the suit amount which includes interest. We may here observe that there was no stipulation between the parties regarding quarterly or half yearly rests, that was a simple matter resting on the promissory note where no such conditions were stipulated.

14. The other case cited is , in the case of State of Punjab v. The Scheduled Caste Co-operative Land Owning Society Ltd., Bhatinda. The matter related to the land acquisition compensation. There was no agreement regarding the payment of interest, much less regarding the compound interest. The Court, therefore, observed that no interest was payable on the interest merged with the compensation. Such a concept could not be invoked in absence of agreement and hence this view is of no assistance to the learned advocate for the appellant.

15. On the other hand, we find that in the case of M/s. Jagdamba Rice Mills and others v. Oriental Bank of Commerce, Karnal, , the Court permitted charging of interest on the interest merged in the capital in terms of the agreement. The Court negatived the claim of the loanee that he was liable to pay future interest under section 34 C.P.C. only on the principal amount and not the interest on interest, namely compound interest. This was in view of the fact that the defendant did not contest the suit nor raised any plea in that behalf, on the terms of the contract provided for rests and accordingly the principal sum adjudged was the original sum of advance plus the interest accruing thereon prior to filing of the suit.

16. We may generally observe that the courts would award compound interest where there is a clear agreement more so when the compound interest is at the same rate and not at the higher rate because that does not amount to charging penalty. We may further observe without citing the particular cases that stipulation for payment of compound interest in absence of any question of default is not penal. Such stipulation is enforceable. Where interest is not fully paid, the payment of compound interest would not be treated as penal unless it is payable at a higher rate. In few cases, it was observed that if the interest is chargeable at the rate of 60 percent or 75 percent, the same within the mischief of usurious loans and the courts could give relief to the debtors.

17. Now, reverting back to the phrase, "principal sum adjudged", the Full Bench has taken a view that it simply relates to the original advance or the loan due on the date of the suit. The word "adjudged" according to the Full Bench would not include any other thing. However, the dictionary meaning of word "adjudged" is pronouncement of judgments or adjudication of rights between the parties. The word "adjudged" involves process of calculation-plus minus, calculation relating to the interest and the calculating the adjustment in the account. The word "adjudged" in our view cannot be said to be a word which has no meaning except that it relate only to the principal amount advanced. The view cited in the foregoing cases rather indicate that the word "adjudged" would include not only the determination of the original loan advanced but also the interest that gets merged in the principal amount.

18. We may now turn to the observations of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co., appearing in para 93 of the judgment at page 897.

"Interest for the period prior to the date of the suit may be awarded, if there is an agreement for the payment of interest at the fixed rate, or it is payable by the usage of trade having the force of law, or in the provision of any substantive law entitling the plaintiff to recover interest.

In the absence of any agreement, express or implied, or for any provision of law, it is not possible to award interest by way of damages. This would show that there is no absolute bar on the award of interest by way of damages and it would be permissible to do so if there is usage or contract, express or implied or of any provision of law to justify the award of such interest. Merely because in section 5(3)(c) of the Interest Act, 1978, the Court is precluded from awarding interest on interest does not mean that it is not permissible to award such interest under a contract or usage or under the statute. It is common knowledge that provision is made for the payment of compound interest in contracts for loans advanced by banks and financial institutions and the said contracts are enforced by courts. Hence, it cannot be said that award of interest on interest i.e. compound interest is; against the public policy of India. "

These observations would make it abundantly clear that if there is contract or trade practice almost equivalent to law, the compounding of interest with the principal appears to be legally permissible. In view of this situation, we feel that the phrase "Principal sum adjudged" and the observation of the Full Bench in the above judgment of Union Bank that this would be the position notwithstanding any agreement between the parties or any prevailing banking practice or trade practice to the contrary should be reviewed.

19. The Additional Registrar shall forward these papers to the learned Chief Justice for being put up before an appropriate Bench for fresh consideration of these questions arising out of the above judgment. He shall forward the necessary papers to the Registrar, High Court, Bombay.

Reference to larger Bench.