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  "non-obstante clause" in Section 21-A 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.  Roy the  Constitution  Bench  opined  that  a  person  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 CIT v.  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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