JUDGMENT
1. This second appeal preferred by the Life Insurance Corporation of India is confined only to rate of interest payable after filing of the suit in a mortgage deed. When the Corporation paid contractual rate of interest 15% per annum i.e., contractual rate of 12 1/2% plus 2 1/2% default interest from the date of suit till the date of payment. But the Courts below have granted only 6% interest per annum from the date of suit till the date of payment.
2. The question in this second appeal is therefore, whether the Court has got power under Order 34 Rule 11 of the CPC and what is the scope of interaction of under Order 34, Rule 11 of the CPC.
3. Order 34, Rule 11 gives a certain amount of discretion to the Court so far as interest pendente lite and subsequent interest is concerned and it is no longer absolutely obligatory on the Courts to decree interest at the contractual rates upto the date of redemption in all circumstances even if there is no question of the rate being penal, excessive or substantially unfair. (As held by the Supreme Court in Soli Pestonji Majoo v Gangadhar Khemka).
In another ruling , it is held as under.-
“Section 34 and Order 34, Rule 11 Court has discretion to reduce the contractual rate of interest to 6% from the date of suit till the date of realisation, even in mortgage suit”.
In another ruling reported in Divisional Manager, LIC of India v Bhagavathy Amma and Others, it is held as under:
“Mortgagee can claim interest at stipulated rate upto date of suit unless it is penal or excessive. It is absolutely within discretion of Court whether to allow contractual rate from the date of suit to date fixed for redemption”.
3-A. On the question of interest under Order 34, Rule 11 of the CPC the Full Bench of Bombay High Court in Union Bank of India v Dalpat Gaurishankar Upadyay, held.-
“Under Section 34 of the CPC, 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 not 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 of 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. Hence, the “Principal sum adjudged” used in Section 34 of the CPC means the original amount lent 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”.
A Division Bench of Punjab and Haryana High Court in Jagdish Chander v Punjab National Bank, has held.-
“Interest upto the date of suit is a matter of substantive law and the section does not refer to payment of interest under the first head. It applies only to 2nd and 3rd heads. Interest pendente Lite is one of the procedure within the discretion of the Court, Interest on the principal amount adjudged from the date of the decree to the date of payment cannot be allowed at a rate higher than 6% per annum under the first proviso to Section 34 of the Code. Future interest exceeding 6% per annum can be granted if the liability adjudged has arisen out of a commercial transaction. The executing Court can examine if the decree was passed by the Court in conformity with the first proviso to Section 34 to the Code”.
It is further held that under proviso to Section 34 so long as the loan is not a commercial loan and only an agricultural loan, interest exceeding 6% per annum is not proper.
In N.M. Veerappa v Canara Bank , The Supreme Court while referring to Section 21A of Banking Regulation Act, observed as follows.-
“Section 21A of the Banking Regulation Act, 1949 does not come to the aid of Banks vis-a-vis, Order 34, Rule 11 of the CPC, the question whether for the period during the pendency of mortgage suits in Courts, the Court’s discretion should continue or whether it should be fettered and if so, to what extent and as to what rate of interest and whether there should be any distinction between different kinds of debtors, these are all matters of policy for the legislature and it will be for parliament to lay down its policies and bring forward such legislation as it may deem fit in accordance with the provision of the Constitution of India”.
“Section 34 of the Civil Procedure Code applies to simple monies decrees and payment of interest pending such suits. Order 34, Rule 11 of the CPC deals with mortgage suits and payment of
interest. It is obvious that so far as mortgage suits are concerned, the special provision in Order 34, Rule 11 alone is applicable and not Section 34”.
“But after 1929, as new Rule 11 was introduced, which used the words, “the Court may order payment of interest”. The new rule was explained by the Federal Court in Jaigobind Singh v Lachmi Narain Ram, and it was held that this provision gave a certain amount of discretion to the Court so far as interest after date of suit was concerned and it was no longer obligatory after date of suit was concerned and it was no longer obligatory after the 1929 amendment on the Courts to direct interest at contractual rates upto the date of redemption in all circumstances even if there is no question of the rate being penal excessive or substantially unfair within the meaning of the Usurious Loans Act, 1918. Approving the above observation of the Federal Court, this Court held on facts, that the mortgagee should be granted interest on the principal sum at the contractual rate till the date of suit and only simple interest at 6% p.a. On the principal sum at the contractual rate till date of the suit and only simple interest at 6% p.a. on the principal sum adjudged from the date of suit till date of preliminary decree and again at same 6% p.a. from the date of preliminary decree till date of realisation”.
“The Court has also power to award from date of suit under Order 34, Rule 11(a)(iii) a rate of interest on costs, charges and expenses as per the contract rate or failing such rate, at a rate not exceeding 6%. This is the position of the discretionary power of the Court, from date of suit upto date fixed in the preliminary decree as the date for payment”.
Ultimately, the Supreme Court has granted interest at the rate of 6% per annum from the date of suit till the date of realisation.
In the Division Bench of this Court to which I was a party in State Bank of India v M/s. Bangalore Sheet Metal Associates and Others, it was held.-
“On going through the above agreement, though there is provision for calculating interest at quarterly rests, we do not find any provision whereby the defaulter had agreed to treat the interest also as part of the principal in case there is default in payment of interest. Such provision is completely absent in the agreement.
In that view of the matter, by virtue of Order 34, Rule 11 and following the decision referred to above, we are of the opinion that the plaintiff is entitled to interest only on the principle amount from the date of suit and not on the whole amount claimed in the plaint or decreed by the Trial Court. Accordingly, the Trial Court was right in restricting the interest from the date of suit on the
principal amount alone and accordingly we do not find any ground to interfere with the decree passed by the Trial Court”.
4. Another Division Bench of this Court in Bank of India v Karnam Ranga Rao, has held as follows:
“The Courts cannot reopen any account maintained by Banks relating to transaction with its customers on the ground that the rate of interest charged, in the opinion of Courts, is excessive or unreasonable, Section 21A of the Banking Regulation Act is a restraint on such power of Courts. However, in any case if it is proved that the interest charged by Banks on loans advanced is not in conformity with the rate prescribed by the Reserve Bank, then the Court disallow such excess interest and give relief to the party notwithstanding the provisions of Section 21A. Banks are bound to follow the directives or circulars issued by the Reserve Bank prescribing the structure of interest to be charged on loans and any interest charged by the Banks in excess of the prescribed limit would be illegal and void. Banks cannot charge compound interest with quarterly rests on agricultural advances.
(ii) The circulars/directives of the Reserve Bank direct that agricultural advances should not be treated on par with the commercial loans in the matter of application of the system of compounding interest. The farmers do not have any regular source of income other than sale proceeds of their crops is an acknowledged fact. They get income generally only once a year. . . They are, therefore, not in a position to pay interest at usual fixed intervals like monthly, quarterly and half yearly. Banks should not compound interest on current dues. Banks should not also charge interest with monthly, quarterly or half yearly rests on overdue loans. Perhaps, it may not be illegal to charge interest with yearly rests”.
In the above case the Bench has held that the Court was justified in reopening the interest charged from the date of loan and allowed interest only at the Reserve Bank rate of 10%, however not compound but only a simple.
5. The resultant effect of all the above dicta goes to establish.– (i) If the loan is not of commercial transaction, then notwithstanding Section 21A of the Banking Regulation Act, the interest has to be charged by the Banks at the rate prescribed by the Reserve Bank of India circular. But simple interest till the date of suit and subsequently if it be the mortgage, the provision of Order 34 will apply. I am of the view that Court has discretion to award interest under Order 34, Rule 11. The Courts below have granted only 6% p.a. interest by exercising its discretion in favour of the defendants.
6. The Life Insurance Corporation of India, is a public oriented organisation which is created for the purpose of serving the general public. In
fact the money that is lent at comprehensively lower rate of interest is from and out of the money collected from the policy holders of the LIC. Inasmuch as the public money involved, I feel that the discretion of the Court must be held to be respected and complied with in the interest of the public at large. In this view, I direct that the interest payable in this particular case wherein the money involved is the money belonging to Life Insurance Corporation of India, shall be 12 1/2% p.a. simple interest and the claim of penal interest is disallowed.
7. In this view, the second appeal is allowed modifying the rate of interest at 12 1/2% subsequent to the suit instead of 6% p.a. granted by the Courts below. No costs.