ORDER
K.S. Radhakrishnan, J.
1.
This appeal is preferred by the Indian Bank against the judgment and decree in O.S. No. 196 of 1986 of the Additional Sub Court, Cochin against the claim for interest on the principal sum adjusted as per S. 34 of the Code of Civil Procedure.
2. The suit was instituted by the Bank for recovery of an amount of Rs. 11,21,333.45 together with interest at 17% per annum with quarterly rests and charged on plaint schedule properties. The court below decreed the suit allowing the appellant to realise from the defendants a sum of Rs. 11,21,333.45 together with future interest at the rate of 17% per annum on the principal amount of Rs. 5,80,982.48 from the date of the suit till realisation of the whole amount. Question of interest was considered as issue No. 4 in the suit. The court below decided the issue as follows:
“As per the agreements executed be defendants 2 to 6 as also late M.R. Prabhu, the plaintiff bank is entitled to realise interest at 4.5% above the Reserve Bank of India rate, with quarterly rest. Therefore, it cannot be said that the plaintiff bank is not entitled to charge compound interest. Issue is answered inn favour of the plaintiff bank.”
However, while granting the relief the court below held as follows:
“In view of my findings on the above issues, I hold that defendants 2 to 6 are liable for the plaint claim of Rs. 11,21,333.45 with future interest at the rate of 17% per annum on the principal sum of Rs. 5,80,982.48 from the date of suit till the realisation of the whole amount. I also hold that the plaintiff bank is entitled to realise the decree debt charged and by sale of the properties scheduled under the plaint. The plaintiff bank is also entitled to the cost of the suit.”
3. Sri. Easwaran, learned counsel fro the Bank submitted that the court below has committed an error in not awarding interest on the principal sum adjudged, that is, Rs. 11,21,333.45. Counsel submitted that the Bank is entitled to get interest at the rate of 17% per annum with quarterly rests. Counsel submitted that S. 34 of the Code of Civil Procedure entitles the Bank to get future interest from the date of the decree till date of payment on the principal sum adjudged. The principal sum adjudged as far as the Bank is concerned is Rs. 11,21,333.45 and not Rs. 5,80,982.48. Counsel submitted that interest accured on quarterly rests has to be added to the principal. Interest thus accumulated with the principal at the end of each quarter become the principal and never thereafter ceases to be dealt with as principal. When the interest accrued on quarterly rests is added to the original plaint claim, it will come to Rs. 11,21,333.45. Counsel placed reliance on the Full Bench decision of this Court in Thandamma v. Kuriakose (1962 KLT 184) as well as Bench decision of this Court in Indian Bank v. Adyson Rubber Industries (ILR 1995 (1) Kerala 399). Even though notice was taken out to the respondents there was no appearance on their behalf.
4. S. 34 of the Code of Civil Procedure enables the court to award interest on the principal sum adjudged. The question that has to be considered in this case is whether interest at the rate of 17% per annum has to be charged on the original principal amount or on the amount adjudged as principal which takes in interest accrued on quarterly rests. A Full Bench of this Court in Thandamma’s case (1962 KLT 184), supra and held that interest accumulated with principal at the end of quarter becomes principal and never thereafter ceases to be dealt with as principal. The said decision was followed by a Bench of this Court in Bank of India v. Mary George (1991 (2) KLT 226). The Bench held as follows:
“The direction regarding interest in mortgage suits in governed by the provisions of O.34, R. 11. The interest that thus accumulated with principal at the end of each quarter becomes principal and never thereafter ceases to be dealt with as principal. Therefore, in construing the word ‘principal’ occurring in R. 11 of O. 34 C.P.C., the agreement between the parties has to be kept in mind. If the agreement provides that defaulted interest becomes added to the principal, the principal must be deemed to include such arrears of interest also”.
Later another Bench of this Court in Negungadi Bank Ltd. v. M/s. Aswathi Starch & Glucose (P) Ltd. (1995 (2) KLJ 407) referred to the term ‘principal sum adjudged’ under S. 34 of the Code of Civil Procedure and held that the said provision indicates that it is not the original principal amount but it could be an amount so adjudged as principal. If, as per the contract between the parties, interest also is to be granted, the amount so adjudged is to be taken as principal for granting future interest.
5. Interest has been regarded as the factor earning of capital. One school of thought is that interest is to be recovered with the productivity of capital. One of the most commonly accepted theories of interest was the Liquidity Preference Theory of Interest of Prof. J.M. Keynes. Interest is often described as the price paid for the funds borrowed. It can also be described as incentive to borrow with liquidity preference. Granting of interest in civil suit is dealt with under S. 34 of the Code of Civil Procedure. The modes of interest can be awarded in a suit for money under S. 34 CPC which are as follows
;
“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.”
Interest upto date of institution of the suit is a matter of substantive law and S. 34 does not refer to payment of interest accrued prior to the institution of the suit. It applies only to second and third heads mentioned above. In other words S. 34 confers power on the courts to award contractual rate of interest on money during the period in which proceedings were pending before the court till the payment of the decreetal amount when the decree pertains to commercial transactions under the head mentioned hereinbefore. Court could exercise a discretion to award more than 6% per annum. While awarding higher rate of interest, ie., more than 6% the court must have regard to, among others, the object sought to be served by the loan transaction, and the condition of the business of the person; whether the person has suffered a heavy loss or whether his business is otherwise affected or crippled and such other cause, if any, for committing default in repaying the loan.
6. The banking transactions in our country are controlled by Banking Regulations Act, 1949. Amendments are made to that legislation from time to time so as to provide sufficient power to the Reserve Bank of India to control the functioning of the Commercial Banks and other banking companies. According to S. 21 of the Banking Regulations Act, 1949, powers have been given to the Reserve Bank of India to control advances by banking companies. Nationalized banks charge a particular rate of interest in pursuance of the Reserve Bank’s direction and those Banks are justified in demanding such interest, otherwise the banks would be violating S. 21 attracting penalty provided under S. 46 of the Banking Regulations Act. The Banking Regulations Act, 1949, is the most important enactment which governs the charging of the rate of interest by the banks. In fact sweeping powers have been given to the Reserve Bank of India for issuing proper directives to that effect. Nationalised banks and banks in the co-operative sector are also bound by the directives given by the Reserve Bank of India. Such directives oblige the bank to charge interest with quarterly rests and half-yearly rests interest on commercial and other transactions.
7. Supreme Court in Corporation Bank v. D.S. Gowda & Anr. held that there may not be no common law right to charge interest on an overdraft by universal customs of bankers, a reasonable rate of interest on overdrafts is permissible charging to interest with personal rest or compounding of interest would be allowed if there is evidence of the customer having acquiesced therein, provided the relation of banker and customer subsists. The Apex Court held that the calculation of interest due on the overdraft facility at the specified rate with quarterly rests was perfectly justified as the relationship of banker and customer subsisted.
8. S.21 enables the Reserve Bank of India to take note of public interest to regulate the charging of interest on loan advanced from time to time. It is in exercise of that power that Reserve Bank of India issues circulars fixing rate or interest. Any breach of that directives is liable to be penalised under S. 47 of the Banking Regulation Act. In this case 17% interest has been charged by the Bank on the basis of the Reserve Bank of India directives. It is the specific case set up by the bank in the plaint which has not been denied by the defendants.
9. In the above mentioned circumstance we are of the view the court below is not justified in denying interest on the principal sum adjudged, that is Rs. 11,21333.45. We therefore modify the judgment and decree declaring that the appellant-Bank is entitled to get interest at the rate of 17% per annum on the amount of Rs. 11,21,333.45, the principal sum adjudged from the date of the suit till realisation of the whole amount. All other directions of the trial court would stand.
The appeal is allowed to the above extent with costs.