JUDGMENT
T. N. Vallinayagam, J.
1. The Corporation Bank, who was the plaintiff in O. S. No, 2456 of 1990 on the file of the VIth Additional City Civil Judge, Bangalore city, is aggrieved by the part decree granted by the trial court in respect of the cash credit facility transaction, wherein interest has been reduced to 12 per cent. simple per annum from the date subsequent to the suit, has preferred the above regular first appeal.
2. The plaintiff’s case in brief is that the plaintiff-bank is a banking company wholly owned by the Government of India, having its branch at Lady Curzon Road, Bangalore ; the first defendant is a partnership firm and defendants Nos. 2 to 5 are its partners ; defendants Nos. 1 to 5 are joint borrowers and also defendants Nos. 2 to 7 are guarantors ; on an application of the defendants for financial assistance for running liquor business of the first defendant, the plaintiff bank granted them cash credit facility up to a limit of Rs. 2,00,000 on May 4, 1987, and the same has to be closed within 24 months with interest subject to a minimum of 17.5 per cent, per annum compounded quarterly ; accordingly a cash credit account No. 8 of 1987 was opened in the name of the first defendant ; the defendants have executed an on demand promissory note on May 4, 1987, and they also executed a deed of hypothecation, hypothecating the stock in their possession ; as a security for the said cash credit facility, the fourth and seventh defendants have executed an agreement on May 4, 1987, assigning his Life Insurance Corporation policy in favour of the plaintiff ; the first defendant has been a chronic defaulter and has failed to regularise the cash credit account satisfactorily despite repeated requests, a legal notice was issued to the defendant ; even after the issue of legal notice, the defendants have failed to repay the balance amount due to the plaintiff. Hence, the suit came to be filed for recovery of Rs. 2,06,438.50.
3. The defendants remained absent and ex parte and consequently accepting the evidence of PW-1 and the documents produced therein, the suit was decreed by the trial court.
4. It appears on May 12, 1993, the date on which exhibit P-9 was filed wherein the amount paid subsequent to the suit by realisation of Life Insurance Corporation policies has been given credit to. Consequently, the interest is calculated on Rs. 1,22,024.90 which was on the basis of latest accounts filed on May 12, 1993.
5. The facts are not in dispute. The defendants were given a facility of cash credit operation and when the amount become due, the suit was filed for recovery thereof.
6. It appears at the time of evidence PW-1 produced exhibit P-9, which was the latest statement of account for Rs. 1,22,024.90, the trial court relying upon the dictum of State Bank of Mysore v. G. P. Thulasi Bai [1985] ILR Kar 2976 and State of Madhya Pradesh v. Nathabai Desaibhai Paid, , has granted interest at the rate of 12 per cent, simple from the last date of exhibit P-9, i.e., from May 12, 1993, It is, therefore, clear that the claimed rate of interest at 19.5 per cent. per annum compounded was granted beyond the date of filing of the plaint from April 21, 1990, up to May 12, 1993.
7. The question now raised by the plaintiff in this appeal is that even beyond May 12, 1993, the interest should be at the contracted rate of 19.5 per cent, per annum.
8. Heard the respective counsel.
9. This is a suit for recovery of money. So far as the interest is concerned, the proviso to Section 34 of the Civil Procedure Code, 1908, is relied upon. Section 34 reads as follows :
“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 dafe 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.”
10. This proviso and Explanation to Section 34(1) were inserted by Section 13 of Act 104 -of 1976. This court in the dictum of Karnataka State Financial Corporation v. Nithyananda Bhavan, , held (head-note) :
“The discretion conferred on the court by the proviso to Section 34 to award interest exceeding 6 per cent. appears to have an object behind it. It expressly pertains to commercial transactions. Probably it expects a quick return from commercial investments unlike in the agricultural investments.
The Karnataka State Financial Corporation has been constituted to give only commercial loans at a concessional rate when the prevailing bank rate is about 18 per cent. The court, therefore, should give reason why the Corporation is not entitled to get more than 6 per cent, interest during the pendency of the proceedings till payment of the decretal amount. In every case, the court has to apply its judicial sympathy and must ‘act fairly’ on the long settled principle governing the exercise of discretion.”
11. The reliance was placed upon the dictum of a Division Bench of this court in Vijaya Bank Ltd. v. Ganapathy Filaments [1993] ILR Kar 1427, wherein the Division Bench has held as follows (page 1428) :
“In the instant case, there is no doubt that the liability was incurred in connection with the business of the defendants. On the face of it defendant No. 1 is a firm carrying on business at Bangalore. The loan was obtained by the defendants for the purpose of the business of defendant No. 1. It is not the case of the defendants that the liability was incurred by them in respect of any transaction other than the one referred to in Explanation II to Section 34. The plaintiff has restricted the claim of interest at the rate of 15 per cent, without insisting that it should be at a higher rate having regard to the rate of interest charged by the Reserve Bank of India. The trial court has not given any reason as to why the interest should be restricted to 6 per cent. only. Obviously, the trial court was carried away by the language employed by Section 34(1) of the Civil Procedure Code. The remaining part of the said section was omitted to be considered. The trial court acted mechanically in awarding the interest at the rate of 6 per cent. By restricting the rate of interest, the court will be encouraging the borrowers to commit defaults so that the banks would be constrained to approach the court for recovery and in that process the borrowers would stand to gain. Obviously to avoid such a situation and to compel the borrowers to pay interest promptly and to reduce the litigation, the proviso to Section 34 has provided for awarding the contractual rate of interest in the case of commercial transactions. The courts cannot be unduly generous when the situation does not call for the application of any equitable doctrine. In a simple suit for the recovery of money from an industry or a commercial concern, we fail to understand as to how it will be inequitable to award the interest at the agreed rate.”
12. The very same Division Bench in Vijaya Bank v. S. Bhathija [1993] 2 Kar LJ 609 ; [1993] ILR Kar 2035 ; [1995] 82 Comp Cas 161 has held (page 174) :
“In Central Bank of India v. PR Garments Industries Pvt. Ltd., the Gujarat High Court has held that in regard to commercial transactions of public financial institutions, the contractual rate of interest should be the rule and departure, a rare exception, while granting current interest and future interest. In S. K. Engineering Works v. New Bank of India, the Punjab High Court held that the bank will be entitled to compound interest at contract rates, compounded in accordance with the contract, from the date of suit to the date of realisation. We are in respectful agreement with the aforesaid views expressed by the High Courts of Delhi, Gujarat and Punjab.
13. Though Section 34 of the Civil Procedure Code provides that the rates of current interest and future interest are within the discretion of the court, the proviso to Section 34 indicates the guideline for exercise of such discretion. It shows that grant of interest at the contract rate should be the normal rule, the use of discretion to refuse interest or reduce the contract rate, being” the exception. When the borrower has promised to pay a particular rate of interest and availed of credit and on default by the borrower, when an action is commenced ending in a decree, the proper exercise of the discretion would be to grant interest at the contract rate from the date of suit to date of realisation. To reduce or deny; the interest would amount to penalising the creditor for approaching the court and encouraging the debtor to deliberately and unjustly prolong the litigation. In particular, habitual reduction or refusal of interest in cases of lending by banks, by courts, will play havoc with banking and commerGe. It should not be forgotten that every lending by a bank has a corresponding borrowing by the bank in the form of deposits and the banks have an obligation to pay interest on such deposits at rates fixed by the Reserve Bank of India. It should also be borne in mind that the Reserve Bank of India regulates the rates of interest chargeable on several types of loans, by taking note of the rate of interest payable to depositors, costs of servicing and other relevant factors. Of course, if the facts of a particular case warrant reduction, as illustrated by the Delhi High Court in Syndicate Bank v. West Bengal Cements Ltd., AIR 1989 Delhi 107 ; [1991] 71 Comp Cas 602 the court may reduce the contract rate of interest by giving reasons justifying such reduction.
14. Thus, the following position emerges in regard to interest chargeable by banks :
(a) Banks are entitled to interest at contract rates, subject to the ceiling or limitations placed by the Reserve Bank of India in its circulars/ directives ;
(b) Whenever the contract provides for compounding of interest, either specifically or impliedly by use of the words ‘with rests’, the banks are entitled to compound interest, except in the case of agricultural advances ;
(c) The courts can only examine whether the rate of interest claimed is excessive or not with reference to the directives of the Reserve Bank of India. The courts cannot reduce the contract rate of interest either under the provisions of the Usurious Loans Act or any other law relating” to indebtedness or principles of equity ;
(d) Normally, in regard to bank claims, the courts should award current interest (from the date of suit to date of decree) and future interest (from the date of decree to the date of realisation) under Section 34 of the Civil Procedure Code at the contract rates. ‘Contract rate of interest’ refers not only to the ‘rate of interest’, but refers also to compounding of interest. Thus if the contract provides for quarterly rests, the interest granted under Section 34 should be at the contract rate with quarterly rests (except in the case of agricultural advances). If the courts want to reduce the rate of interest, either current or future, such reduction should be supported by reasons.”
15. Another Division Bench decision of this court in State Bank of Mysore v. G. P. Thulasi Bai [1985] ILR Kar 2976 is relied upon to the following effect:
“This contention would have been accepted if the trial court could not call into aid the provisions of Section 34 in a case governed by Order 34, rule 11. The scope of the interaction of Section 34 and Order 34, rule 11 was considered by the Supreme Court in Soli Pestonji Majoo v. Gangadhar Khemka, , in which after approving the principles stated by the Privy Council in Jagannath Prosad Singh Chowdhury v. Surajmul Jalal, AIR’1927 PC 1, and the Federal Court in Jaigobind Singh v. Lachmi Narain Ram, AIR 1940 FC 20, observed that after the period for redemption has expired the matter passes from the domain of contract to that of judgment, The right of the mortgagee will henceforth depend not on the contents of his bond but on the directions of the decree. 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 up to the date of redemption in all circumstances even if there is no question of the rate being penal, excessive or substantially unfair.
In view of these observations, we do not think that the trial court has committed an error in exercising the discretion in reducing the contractual rate of interest to 6 per cent, from the date of suit till the date of realisation. The defendants have not even contested the suit, perhaps they were financially not in a position to do so. The interest awarded by the court appears to be also in accordance with the terms of the order of the Supreme Court in Soli Pestonji Majoo’s case, , where the interest at 6 per cent, per annum on the principal amount adjudged from the date of suit till the date of preliminary decree and also at the same rate till the date of realisation was awarded.”
16. Of course, the above dictum is in respect of a mortgage decree.
17. In the dictum of this court in Canara Bank v. Milan Medicals, the following observations are found (page 449 of 95 Comp Cas) :
“The mere substantial argument that is canvassed by the respondents’ learned counsel centres around the justification for the charging of the higher rate. He has relied on a decision of this court reported in Vijaya Bank v. S. Bhathija [1993] ILR Kar 2035 ; [1995] 82 Comp Cas 161 which has already been referred to by me, wherein, the Division Bench of this court did have occasion to observe that in a given set of facts, it is within the discretion of the court to award a lower rate of interest. One such situation that is illustrated is where a genuine effort has been made to repay and where by insisting on the contractual rate, the borrower would be completely ruined. Undoubtedly, such a discretion does vest in appropriate cases but it is very necessary for the defendant to place sufficient material before the court in support of the plea that there is a valid justification for the reduction in the rate of interest.”
18. The dictum in State of Madhya Pradesh v. Nathabai Desaibhai Patel, , was relied upon to the following effect :
“The question, whether interest should be awarded on the principal amount claimed from the date of the suit, was within the discretion of the court. In our opinion, the High Court rightly exercised that discretion. It disallowed the interest claimed by the plaintiff-respondent up till the date of the suit. Coming to the question of interest subsequent to the date of the institution of the suit, it was found that the appellant had unlawfully withheld the amount due to the respondent even after coming to know that the collection made was an illegal one. Before instituting the suit, the respondent, had issued a notice to the appellant, calling upon the appellant to pay the money illegally collected from it ; but despite that notice, the appellant failed to pay back the amount illegally collected from the respondent. That being so, in our opinion, the High Court was justified in awarding the interest on the principal amount from the date of the suit.”
19. In the light of the dictum of this court referred to above and the Supreme Court, the discretion of the court under Section 34 of the Civil Procedure Code to grant interest at simple from the date of suit is always protected and the courts are given the discretion to decide the payment of interest subsequent to the filing of the suit, taking into consideration the circumstances that are available in each of the cases.
20. In this case, it is unfortunate that the defendant did not contest the suit and as observed in one of the dicta mentioned above, he was able to manage and pay the amount borrowed and due to the set back in his financial position, he could not survive and pay out the due. In these circumstances, I find, grant of interest at 12 per cent, per annum is certainly correct and if the position has to be properly understood and appreciated, it should be from the date of suit and not mid way. Therefore, I am inclined to grant the rate of interest at 12 per cent, per annum simple from April 21, 1990. The decree shall stand amended accordingly.
21. The conduct of the bank is certainly not appreciable. They have suppressed the material fact that in the statement of account submitted by them, they have debited the account of the defendants that the cost of filing of the suit at Rs. 15,644. But they have not excluded the court fee paid along with the plaint, wherein the suit was decreed with costs, the defendants claimed the amount once again adding Rs. 5,000 more and claiming totally Rs. 22,500. In all fairness, they should have deducted Rs. 15,644 which they have added again in the statement of account. But this has not been done. It is quite unfortunate, a bank of such repute could misrepresent the facts and mislead the court and tried to charge the defendants on a claim for which he is not liable to pay.
22. Taking into consideration, the conduct of the bank in not bringing the true facts before the court, I disallow the costs awarded in the suit.
23. The decree also stands accordingly amended. Accordingly, the appeal is disposed of. No costs.