Holding

The phrase "principal sum adjudged" includes capitalised interest under the contract or banking practice, and "such principal sum" refers to the same amount for the award of pendente lite and future interest, while penal interest cannot be capitalised.

Summary

The Supreme Court examined the meaning of "the principal sum adjudged" and "such principal sum" in Section 34(1) of the Code of Civil Procedure, 1908, in the context of bank loans that allow interest to be capitalised on periodical rests. It held that, subject to the contract or established banking practice, interest that has been capitalised becomes part of the principal sum and is therefore the basis for interest pendente lite and post‑decree interest. Penal interest, however, cannot be capitalised. The Court affirmed that RBI directives on interest rates and rests are binding and that any deviation must be shown by the borrower. It also clarified that the court has discretion to award or reduce interest and that the High Court's limitation of interest to only the original principal was erroneous. Consequently, the bank’s claim for interest on the whole adjudged amount was upheld.

Issues considered

The proper interpretation of "the principal sum adjudged" and "such principal sum" under Section 34(1) CPC.
Whether interest that has been capitalised under a banking contract forms part of the principal sum for purposes of interest pendente lite and post‑decree interest.
Whether penal interest can be capitalised.
The binding nature of RBI directives under the Banking Regulations Act, 1949.
The court's discretion in awarding interest under Section 34 CPC.

Legislation cited

Banking Regulations Act, 1949s. 21, s. 35A, s. 46(4)
Code of Civil Procedure, 1908s. 34(1)

Subjects

principal sum adjudgedinterest capitalisationSection 34 CPCbanking regulationsRBI directivespenal interestpre‑suit interestinterest pendente litefuture interestloan recovery

Judgment

CENTRAL BANK OF INDIA A
v.
RAVINDRA AND ORS.

OCTOBER 18, 2001

[DR. A.S. ANAND, C.J., K.T. THOMAS, R.C. LAHOTI, B
'N. SANTOSH HEGDE AND S.N. VARIAVA, JJ.]

Code of Civil Procedure, 1908: Section 34 [as amended by the Code
of Civil Procedure (Amendment) Act (66 of 1956) w.ej. 1.1.1957]

Recovery of money-Suits for-By Banking Institutions against their
c
borrowers-" Principal sum adjudged" and "such principal sum"-Bank sanc-
tioned loan to borrower-Loan carried 11% interest per annum-Bank insti-
tuted suit for recovery of money-Trial court decreed suit for the total outstand-
ing amount inclusive of interest on the date of institution of suit with 8% future
interest per annum-On appeal, High Court directed interest at 11% per D
annum to be payable only on the principal sum from the date of suit till
realisation though the decree for the original amount was maintained-Cor-
rectness of-Held : Subject to contract between parties interest on loans and
advances may be charged on periodical rests and also capitalised on remaining
unpaid-Principal sum actually advanced coupled with the interest on periodi- E
cal rests so capitalised is the principal sum on the date of suit-The principal
sum so adjudged is "such principal sum" on which interest pendente lite and
future interest i.e. post decree interest may be awarded by court-However,
penal interest cannot be capitalised.

Recovery of money-Suits for-By Banking institutions against their F
borrowers-Pleadings-Held: There must be an averment in the plaint that
interests and capitalisation thereof are in accordance with the directions of
RBI-A statement of account to this effect to be filed-Onus is on the borrower
to show why the principal sum as claimed cannot be accepted and adjusted-
This practice would narrow down the scope of controversy and enable expedi- G
tious disposal of suits-Banking Regulations Act, 1949.

Banking Regulations Act, 1949:

Sections 21 and 35-A-Banking practice-Role of RBI-Directives/
circulars-Held: RBI should continue to issue directives/circulars dealing with H
323
324 SUPREME COURT REPORTS (2001] SUPP. 4 S.C.R.
A rate of interest, periodical rests and capitalisation of interest-Such directives/
circulars are binding on the concerned parties-Such directives may be treated
as standards for deciding whether interest charged is excessive, usurious or
opposed to public policy.

Interpretation of Statutes.:
B
Rules of construction-Principles-Held: a construction, which leads to
repugnancy or inconsistency, has to be avoided-Ordinarily, a word or expres-
sion used at several places in an enactment should be assigned the same
meaning.
c Words and Phrases :

"The Principal sum adjudged" and "such principal sum"-Meaning
of-In the context of S.34( 1) of the Code of Civil Procedure, 1908.

D The petitioner-bank sanctioned a loan to respondent No. 1 on the
guarantee of respondent Nos. 2 and 3. Respondent No. 1 executed a de-
mand promissory note and also executed term agreement of hypothecation
of the vehicle. The loan carried interest at the rate of 11 % per annum with
quarterly rests. The total outstanding inclusive of the interest charged as
per agreement was Rs. 1,51,825 on the date the petitioner-bank filed a suit
E for recovery. The trial court passed a decree for Rs. 1,51,825 with future
interest at the rate of 8% per annum from the date of the suit till realisa-
tion. An appeal preferred by the Bank before the High Court was partly
allowed modifying the decree of the trial court by awarding interest at the
rate of 11 % per annum. However, the High Court directed the interest at .
F the rate of 11 % per annum to be payable only on Rs. 99,000, which was
stated to be the principal sum, from the date of the suit till realisation
though the decree for Rs. 1,51,825, the amount due and payable on the
date of the suit, was maintained. Hence this appeal.

The following question arose before the Court:
G
What is the meaning to be assigned to the phrases "the principal sum
adjudged" and "such principal sum" as occurring in Section 34(1) of the
Code of Civil Procedure, 1908 [as ahlended by the Code of Civil Procedure
(Amendment) Act (66 of1956) w.e.f.1.1.1957], a question of frequent recur-
H rence and having far reaching implications in suits for recovery of money,
CENTRAL BANK OF INDIA v. RAVINDRA 325
specially those filed by banking institutions against their borrowers? A
Disposing of the appeal, the Court

. HELD : 1. There is nothing wrong in the parties voluntarily entering
into transactions,--evidenced by deeds incorporating covenant or stipula-
tion for payment of compound interest at reasonable rates, and authoris- B
ing the creditor to capitalise the interest on remaining unpaid so as to
enable interest being charged at the agreed rate on the interest component
of the capitalised sum for the succeeding period. Interest once capitalised,
sheds its colour of being interest and becomes a part of principal so as to
bind the debtor/borrower. [351-C-D] C
2. Though interest can be capitalised on the analogy that the interest
falling due on the accrued date and remaining unpaid, partakes the char-
acter of amount advanced on that date, yet penal interest, which is charged
by way of penalty for non-payment, cannot be capitalised. Further inter-
est, i.e. interest on interest, whether simple, compound or penal, cannot be
D
claimed on the a~ount of penal interest. Penal interest cannot be capital-
ised. It will be opposed to public policy. [362-C]

3. Novation, that is, a debtor entering into a fresh agreement with
creditor undertaking payment of previously borrowed principal amount E
coupled with interest by treating the sum total as principal, any contract
express or implied and an express acknowledgment of accounts, are 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 converted into principal. A mere failure to protest is F
not acquiescence. [362-D-E]

4. 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 G
obligations of the parties as to recovery and payment of interest. [362-F]

5. Capitalisation method is founded on the principle that the borrower
failed to make the payment though he could have made and thereby ren-
dered himself a defaulter. To hold an amount debited to the account of the H
326 SUPREME COURT REPORTS [2001) SUPP. 4 S.C.R.
A borrower ~apitalised 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 d!le and
thereby avoiding capitalisation. Any debit entry in the account of the bor-
rower and claimed to have been capitalised so as to form an amalgam of the
B principal sum may W excluded on being show 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 the payment before capitalisation
thereby excluding its capitalisation. [362-G-H; 363-A]

6. The power conferred by Sections 21 and 35-A of the Banking
C Regulations Act, 1935 is coupled with duty to act. Reserve Bank of India i~
prime banking institution of the country entrusted with a supervisory role
over banking and conferred with the authority of issuing binding direc-
tions having statutory force, in the interest of public in general and pre-
venting banking affairs from deterioration and prejudice as also to secure
D the proper management of any banking company generally. 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 rate of
E interest which can be charged and the period 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 whether the interest charged is
F
excessive, usurious or opposed to public policy. [363-D-E]

7. 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 de-
G pending on the rotation of crops in the area. to which the agriculturist
borrowers belong. [363-E]

8. Any interest charged and/or capitalised in violation of RBI direc-
tives, as to rate of interest, or as to period at which rests can be arrived at,
shall be disallowed and/or excluded from capital sum and be treated only
H
CENTRAL BANK OF INDIA v. RAVINDRA 327
as interest and dealt with accordingly. [363-F) A

9. Award of interest pendente lite and post-decree is discretionary
with the Court as it is essentially governed by Section 34 of the Code of

. Civil Procedure, 1908 de hors the contract between the parties. In a given
case if the Court finds that in the principal sum adjudged on the date of the
B
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 exer-
cised fairly, judiciously and for reasons and not in an arbitrary or fanciful
manner. [363-G-H; 364-A) c
10.1. A construction, which leads to repugnancy or inconsistency,
has to be avoided. Ordinarily, a word or expression used at several places
on one enactment should be assigned the same meaning so as to avoid "a
head-on clash" between two meanings assigned to the same word or ex- D
pression occurring at two places in the same enactment. It should not be
lightly assumed that "Parliament had given with one hand what it took
away with the other''. That construction is to be rejected which will intro-
duce uncertainly, friction or confusion into the working of the system.
While embarking upon interpretation of words and expressions used in a
E
Statute it is possible to find a situation when the same word or expression
may have somewhat different meaning at different places depending on
the subject or context. This is, however, an exception, which can be re-
sorted to only in the event of repugnancy in the subject or context being
spelt out. [355-C-E]
F
Farrel v. Alexander, (1976] 2 All E.R. 721, referred to.

G.P. Singh; Principles of Statutory Interpretation, 7th Edn. 1999, pp.
113 and 119, referred to.

10.2. The Court having accepted invitation to embark upon inter- G
pretative expedition shall identify on its radar the contextual use of the
word or expression and then determine its direction avoiding collision with
icebergs of inconsistency and repugnancy. [355-G]

11.1. The use of the word "such" as an adjective prefixed to a noun is
H
328 SUPREME COURT REPORTS [2001) SUPP. 4 S.C.R.
A indicative of the draftsman's intention that he is assigning the same mean-
. ing or characteristic to the noun as has been previously indicated or that
he is referring to something which has been said before. This principle has
all the more vigorous application when the two places employing the same

B
expression, at earlier place the expression having been defined or charac-
terised and at the latter place having been qualified by use of the word
.
"such'', are situated in close proximity. [356-C]

New Websters Dictionary And Thesaurus, referred to.

11.2. The meaning assigned to the expression 'the principal sum
C adjudged' should continue to be assigned to 'principal sum' at such other
places in Section 34(1) CPC where the expression has been used qualified
by the adjective "such", that is to say, as "such principal sum". [356-D]

12. It is expected henceforth from the banks, bound by the directives
of the Reserve Bank of India, to make an averment in the plaint that
D interest/compound interest has been charged at such rates, and capitalised
at such periodical rests, as are permitted by, and do not run counter to, the
directives of the Reserve Bank of India. A statement of account shall be
filed in Court showing details and giving particulars of debit entries, and if
debit entry relates to interest then setting out also the rate of, and if the
E period for which, the interest has been charged. On the Court being prima
.facie satisfied, if a dispute is raised in that regard, of the permissibility of
debits, the onus would be on the borrower to show why the amount of debit
balance appearing at the foot of the account and claimed as principal sum
cannot be so accepted and adjudged. This practice would narrow down the
F scope of controversy in suits filed by banking institutions and enable an
expeditious disposal of the suits, the issues wherein are by and large
capable of being determined by documentary evidence. RBI directives
have not only statutory flavour, but also any contravention thereof or any
default in compliance therewith is punishable under Section 46(4) of the
G Banking Regulations Act, 1949. The Court can act on the assumption that
transactions or dealings have ·taken place and accounts maintained by
banks in conformity with RBI directives. [364-B-E]

13. The reference is answered in the following terms :

H (a) Subject to a binding stipulation contained in a voluntary contract
CENTRAL BANK OF INDIA v. RA VINDRA 329
between the parties and/or an established practice or usage interest on A
loans and advances may be charged on periodical rests and also capitalised
on remaining unpaid. The principal sum actually advanced coupled with
the interest on periodical rest so capitalised is capable of being adjudged as
principal sum on the date of suit.

(b) The principal sum so adjudged is "such principal sum" within the
B
meaning of Section 34(1) CPC on which interest pendente lite and future
interest i.e. post-decree interest, at such rate and for such period, which the
Court may deem fit, may be awarded by the Court. [364-H; 365-A-B]

Corporation Bank v. H.S. Gowda, [1994] 5 SCC 213 and Bank of c
Baroda v. Jagannath Pigment & Chems, [1996] 5 SCC 280, affirmed.

Pestonji Majoo v. Gangadhar Khomka, [1969] 1 SCC 220; M. V.
Mi1!zalinga Aiyar v. Union Bank Ltd., AIR (1943) Mad 216; I.K. Merchants
Ltd. v. Indira Prakash Karnani, AIR (1973) Cal 306; D.S. Gowda v. Mis.
Cmporation Bank Ltd., AIR (1983) Kar 143; Union Bank of India v. D
Gaurishankar Upadyay, AIR (1992) Bom 482; Gujarat Agro Oil Enterprises
Ltd. v. Arvind H. Pathak, AIR Guj. 47; Indian Bank v. P. Venkata Satyavathi,
(1993) 1AWR607; Ramshree Chandrakav v. Dena Bank, (1994) MPLJ 610
and Punjab National Bank v. Surinder Singh Mandyal, AIR (1996) HP 1, ~eld
inapplicable. E

Shiv Kissen Bhattar v. CIT, [1973] 4 SCC 115; Corporation Bank v.
D.S. Gowda, [1994] 5 SCC 213; Renusagar Power Co. Ltd. v. General Elec-
tric Co., [1994] Supp. 1 SCC 644; Secretary, Irrigation Department, Govern-
ment of Orissa v. G.C. Roy, [1992] 1 SCC 508; Dr. Sham/al Narula v. CIT,
F
[1964] 7 SCR 668; State Bank of India, Bhubaneswar v. Ganjam District
Tractor Owner's Association, [1994] 5 SCC 238; Jaffar Hussain v. Bishambhar
Nath, AIR (1937) All 442, Chotey Lal v. Mohammad Ahmad Ali Khan, AIR
(1933) Oudh 128; Rajendra Bhadur Singh v. Raghubir Singh, AIR (1934)
Oudh 473; Pazhaniappa Mudaliar v. Narayana Ayyar, AIR (1943) Mad 157;

- Palai Central Bank Ltd. v. C. Ramaswami Nadar, AIR (1959) Ker 194;
Thandamma v. Kuriakore Putherichal Iype, AIR (1962) Ker 235; K. Appa
Rao v. V.L. Varadaraj, AIR (1981) Mad 94, Syndicate Bank v. Mis. West
G

Bengal Cements Ltd., AIR (1989) Del l07; Sigappiachi v. M.A.P.A. Palaniappa
Chettiar, AIR (1972) Mad 463; Kalyanp11r Cold Storage v. Sohanlal Bt~jpai,
AIR (1990) All 218; Indian Bank v. Mis. Kamalalaya Cloth Store, AIR (1991) H
330 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A Ori 44; State Bank of India v. Advar Singh Saih, AIR (1986) P & H 381;
Nedungadi Bank Ltd. v. Mis. Aswathi Starch and Glucose (P) Ltd., AIR (1996)
Ker 112, State Bank of India v. Smt. Neela Ashok Naik, AIR (2000) Bom 151;
H.P. Krishna Reddy v. Canara Bank, AIR (1985) Kar 228, Bank of India v.
Kamam Ranga Rao, AIR (1986) Kar 242; K.C. Venkateswarlu v. Syndicate
B Bank, AIR (1986) AP 290; State Bank of India, Eluru: Re, AIR (1986) AP
291; Billamal v. Ahad Shah, AIR (1918) PC 249 and S.R.M.S. Chethambaram
Chettiar v. Loo Thon Pao, AIR (1940) PC 60, referred to.

Reddie v. Williamson, (1863] 1 Macph (Ct. of Sess.) 228; Yourell v.
Hibernian Bank Ltd., [1918] SC 372; Commissioners of Inland Revenue v. Sir
C H.C. Holder, Bt. [1931] 2 KB 81; Holder v. Inland Revenue Commissioners,
(1932] All E.R. 265; Paton (Fenton's Trustee) v. Inland Revenue Commission-
ers, (1938) All E.R. 786; National Bank of Greece S.A. v. Pinios Shipping Co.
No. I, [1990] 1 AC 637; Lyle v. Chappel, [1932] 1 KB 691, Paton v. Inland
Revenue Commissioners, [1938) AC 341; Carrington Ltd. Smith, (1906] 1 KB
D 79; Reading Trust v. Spero, [1930) 1 KB 492 and Riches v. Westminster Bank
Ltd., (1947] 1 All E.R. 469, referred to.

Mulla : Code of Civil Procedure, (1995 Edn.), Halsbury's Laws of
England 4th Edn. Vo. 3 p. 118, Blacks Law Dictionary 7th Edn., referred to.

E Deutsche Bank v. Banque des Marchands de Moscou, 4 L.D.B. 293,
cited.

CIVIL APPELLATE JURISDICTION : Special Leave Petition (C) No.
2421 of 1993.

F From the Judgm~nt and Order dated 15.7.92 of the Bombay High Court
in F.A. No. 227 of 1990.

WITH

C.A. Nos. 3964, 3967/92, S.L.P. (C) No. 3954/94, S.L.P.(C) No. 9082,
G SLP (C) No. 9088/95, S.L.P. (C) No. 4562/98, C.A. No. 4716/94 and C.A. No.
2496 of 1993.

Harish N. Salve, Solicitor General, Rakesh Dwivedi, K.N. Bhat, Ranjit
Kumar (AC), J.B. Dadachanji & Co., Janendra Lal, Ms. Yasmin Tarapore,
Siddharth Goswami, Siddarth Choudhary, Ms. Aprajita Singh, Ms. Gayatri
H Goswami, Prikesh Kapoor for Janendra Lal & Co., B.R. Narang, Amit P.
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 331

Deshpande, Balraj Dewan, V. Sudeer, Ugra Shankar Prasad, Rajiv Kapur, Ms. A
Shubhra Kapur, Sanjay Kapur, R.K. Kapoor, P. Verma for Anis Ahmad Khan,
M.K. Dua, Ms. Nina Gupta, Uday Gupta, Ms. Arpita Mahajan, Vineet Kumar,
K.M.K. Nair and A. Subba Rao (AC), Varun Goswami, R.C. Verma, Mukesh
Verma, Ms. Madhu Moolchandani, Ms. Sushma Manchanda, Dhruv Mehta,
Ms. Shobha, Ms. Anu Mehta, S.K. Mehta, Manoj Swarup, K.R. Nagarja, B
Shivaji M. Jadhav for the appearing parties.

Ex-parte for Respondent No. 4 in C.A. No. 4716/94.

The Judgment of the Court was delivered by
c
R.C. LAHOTI, J. What is the meaning to be assigned to the phrases "the
principal sum adjudged" and "such principal sum" as occurring in Section 34
of the Code of Civil Procedure, 1908 [as amended by the Code of Civil
Procedure (Amendment) Act (66 of 1956) w.e.f. l.l.1957], a question of
frequent recurrence and having far reaching implications in suits for recovery
D
of money, specially those filed by banking institutions against their borrowers,
has been referred by a three-Judge Bench of this court to the Constitution
Bench.

It will be useful to reproduce the order of reference dated 7th May, 1996
(since reported as [1996] 5 SCC 279) so as to highlight the nature and scope E
of controversy arising for decision before the Constitution Bench:

"ORDER

After hearing learned Attorney General and amicus curiae Shri
A. Subba Rao, Ranjit Kumar and K.M.K. Nair on (the interpretation F
of the provisions of Section 34 CPC on "the principal sum adjudged"
the matter is required to be considered by a Constitution Bench. The
learned Attorney General has drawn our attention to the judgments of
this Court in Corpn. Bank v. D.S. Gowda and Bank of Baroda v.
Jagannath Pigment & Chem., wherein he sought to draw the deduction G
that the principal sum adjudged and the principal sum mentioned later
would be the same. He seeks to take support from the word 'such' in
support of his contention. Preceding Amendment Act 66 of 1956, the
words were "aggregate sum so adjudged" and after amendment, were
substituted with the words "the principal sum adjudged", from the date H
332 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A of the suit to the date of the decree, in addition to any interest adj1,1dged
on such "principal sum" for any period prior to the institution of the
suit (with further interest on such date as the court deems reasonable
on the "principal sum")*. The distinction, therefore, was not drawn to
the attention of this Court in the aforesaid two judgments in particular
the later one. As a fact no argument in this behalf appears to have been
B
canvassed. Interpretation of the liability of the borrower to pay interest
on the principal sum to include interest that became merged with the
principal sum adjudged or principal sum as lent, is required to be
authoritatively laid down by a Bench of five Judges.

c The Registry is directed to place the matter before the Hon'ble the Chief
Justice for constituting the Constitution Bench.

*[Sic., should have been - with further interest at such rate not exceed-
ing six per cent per annum, as the Court deems reasonable on such 'principal
sum', in our opinion]
D
Section 34(1) of C.P. C. and 1956 Amendment

Sub-Section (1) of Section 34 abovesaid, as it stood prior to the 1956
amendment, and as it stands amended, are reproduced in juxta position here-
under:
E Prior to amendment As amended by Act No. 66 of 1956

34. (1) Where and in so far as a decree (1) Where and in so far as a decree is
is for the payment of money, the Court for the payment of money, the Court
may, in the decree, order interest at may, in the decree, order interest at
such rate as the Court deems reason- such rate as the Court deems reason-
F able to be paid on the principal sum able to be paid on the principal sum
adjudged, from the date of the suit to
adjudged, from the date of the suit to
the date of the decree, in addition to
the date of the decree, in addition to
any interest adjudged on such princi-
any interest adjudged on such princi- pal sum for any period prior to the
pal sum for any period prior to the institution of the suit, (with further
G
institution of· the suit, (with further interest at such rate not exceeding six
interest at such rate as the Court deems per cent. per annum, as the Court deems
reasonable on the aggregate sum so reasonable on such principal sum,)
adjudged.] from the date of the decree from the date of the decree to the date
to the date of payment, or to such of payment, or to such earlier date as
H earlier date as the Court thinks fit. the Court thinks fit.
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 333

(2) Where such a decree is silent with xxx xxx xxx xxx xxx A
respect to the payment of further in-
terest on such aggregate sum as afore- (2) Where such a decree is silent with
said from the date of the decree to the respect to the payment of further inter-
date of payment or other earlier date, est on such principal sum from the
the Court shall be deemed to have date of the decree to the date of pay-
ment or other earlier date, the Court B
refused such interest, and a separate
suit therefor shall not lie. shall be deemed to have refused such
interest, and a separate suit therefor
shall not lie.

(Underlining by us)
c
[Portions affected by amendment placed in bracket]

By the 1956 amendment, in Section 34, for the words "with further
interest at such rate as the Court deems reasonable op the aggregate sum so
adjudged", the words "with further interest at such rate not exceeding six D
percent, per annum as the Court deems reasonable on such principal sum" have
been substituted in sub-section (1). In sub-section (2) the words "on such
aggregate sum as aforesaid " have been deleted and the words "on such
principal sum" have been substituted. The phrases "on the principal sum
adjudged" and "such principal sum", as occurring in the opening part of sub-
section (1) of Section 34, have not been touched by the amendment.
E

The report of the Joint Committee to which the Bill was referred stated,
inter alia, as under :

"11. Clause 2. - Section 34 of the Code empowers a Court to F
award further interest from the date of the decree upto the date of
payment on the 'aggregate sum' which comprises principal sum with
interest accrued thereon. The Committee are of the opinion that inter-
est should not be awarded on interest but only on the principal sum.
Suitable amendment has accordingly been incorporated in this clause."
G
11ze controversy and contending pleas:

There is batch of matters before us wherein the same common question
of law is arising'for decision. Inasmuch we propose (also as has been agreed
to by all the learned counsel appearing for the parties) to decide only the H
334 SUPREME COURT REPORTS [2001) SUPP. 4 S.C.R.
A question of law posed for decision and leave the individual cases to be decided
by appropriate Bench consistently with the law laid down by the Constitution
Bench, we are relieved of the need of noticing facts of individual cases. Suffice
it, for our purpose, to notice in very brief, by way of illustration, the facts of
S.L.P. (C) No. 2421of1993 - Central Bank of India v. Ravindra and Ors. to
demonstrate the nature of controversy. The petitioner bank sanctioned a loan
B
to the respondent no. 1 on the guarantee of respondents nos. 2 and 3. On
21.6.1979, the respondent no.I executed a demand promissory note for Rs.
1,37,720 and also executed term agreement of hypothecation of the vehicle.
The loan carried interest at the rate of 11 % per annum with quarterly rests as
on 31st March, 30th June, 30th September and 31st December every year. The
c total outstanding, inclusive of the interest charged as per agreement, was Rs.
1,51,825 on the date of the suit for the recovery whereof the suit was filed by
the petitioner bank. Relief was also prayed for the grant of interest pendente
lite and future interest till realisation. The trial court passed a decree for Rs.
1,51,825 with future interest at the rate of 8% per annum from the date of the
suit till realisation affording the respondents facility of payment of the decretal
D
amount in 6 quarterly instalments with exigibility clause. An appeal preferred
by the bank before the High Court was partly allowed modifying the decree
. of the trial court by awarding interest at the rate of 11 % per annum and setting
aside the facility of payment by instalments. However, the High Court directed
the interest at the rate of 11 % per annum to be payable only on Rs. 99,000,
E which was stated to be the principal sum, from the date of the suit till realisation
though the decree for Rs. 1,51,825, the amount due and payable on the date
of the suit, was maintained. The petitioner bank is aggrieved by the decree of
the High Court to the extent to which future interest at the rate of 11 % per_
annum has not been allowed on the entire sum of Rs. 1,51,825.
F
We have heard Shri Harish N. Salve, learned Solicitor General appearing
for Union of India, Shri Rak:esh Dwivedi, Sr. Advocate appearing for State
Bank of India and Shri K.N. Bhat, Sr. Advocate who has intervened on behalf
of the Indian Banks Association as also other learned counsel appearing for
several banks. We have also heard Shri Ranjit Kumar, Senior Advocate, the
G learned amicus appointed to assist the Court who highlighted the legal position
and judicial opinion clarifying by and large the fallacy - as per his submission
- in the stand taken by the banks. Other learned counsel appearing for other
borrowers were also heard.

H The learned Solicitor General submitted that the expression "the pri~ci-
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 335

pal sum adjudged" used in Section 34 may have two meanings : (i) the amounts A
actually disbursed to the borrower, or (ii) the amount due from the borrower
on the date of the suit which amount 1 ·"uld include the amount of interest due
and payable on the date of the institution of the suit in the Court. He made two
submissions. First is the wider submission, as he named it, that whatever is the
amount due and payable by the defendant on the date of the institution of the B
suit becomes 'the principal sum adjudged'· on which the judgment-debtor can
be directed to pay interest pendente lite and for future. The learned Solicitor
General however did not seriously press and pursue this wider submission and
gave it up soon after projecting the same before the Court. However, he
insistently pressed and pursued the second one, i.e. the narrower submission
that 'the principal sum adjudged' would include all sums as are due under the
c
contract between the parties and have stood capitalised with the amount actu-
ally disbursed to the borrower. The amalgam - an intimate mixture - would
be adjudged as the principal sum and would not permit any attempt at unscram-
bling. Developing the narrower argument further, the learned Solicitor General
submitted that the contract between the parties or an established bank practice D
(in the case of banking transactions) may provide for the interest on periodical
rests being compounded and capitalised with the principal, in which event, the
amount debited in the account of the borrower shall shed its character as·
interest and become the principal on being capitalised and therefore shall have
to be adjudged as 'the principal sum' on the date of the suit. The contract or E
established banking practice shall govern the relationship between the parties
and bind the Court. The Court will not reopen the account so as to separate
from the amalgam - the interest charged and the sums actually advanced, and
repaint the interest with the colour which had stood shed off unless mandate
of law overrides the contract or practice and enables or compels the Court to F
do so. Any view to the contrary, if accepted, would be destructive of banking
system which is functioning on a practice recognised for over a century over
the world, submitted the learned Solicitor General.

The learned Solicitor General further submitted that the position of law
remains the same in so far as the meaning of 'the principal sum adjudged' G
occurring in the first part of Section 34(1) is concerned and the principal sum
so adjudged shall be the amount on which the Court shall award interest
pendente lite, i.e., from the date of the suit to the date of the decree as also the
future interest. In other words, submitted the learned Solicitor General, the
Court shall adjudge the principal sum as it stands just anterior to the date of H
-~
\__
336 SUPREME COURT REPORTS [2001) SUPP. 4 S.C.R.
A the suit consistently with the contract or banking practice binding the parties
and once that is done 'the principal sum adjudged' shall be 'such principal sum'
for the purpose of interest pendente lite as also future interest. So far as the
'interest adjudged' in addition to 'the principal sum adjudged' for any period
prior to the institution of the suit is concerned, the learned Solicitor General
B submitted, that there may be cases where interest prior to the date of the suit
and included in the amount claimed by the plaintiff against the defendant on
the date of the suit may consist of (i) such interest as has stood capitalised and
hence become part of the principal sum, and (ii) such interest as ·has not been
capitalised or was incapable of being capitalised, and the later would be
'interest adjudged' in addition to the principal sum adjudged (which would be
c inclusive of interest capitalised) on the date of the institution of the suit. There
may be cases where the total amount debited to the account of the debtor as
interest has stood capit~lised in its entirety in which case there may not be any
sum of interest left and available to be treated as interest, other than the
principal sum for the pre-suit period. The correct way of reading the opening
D part of Section 34 would be - "the principal sum adjudged .................. in
addition to interest, if any, adjudged on such principal sum". 'Any interest
adjudged on such principal sum' mean and should be read as 'interest if any,
adjudged on such principal sum'. The learned Solicitor General went on to
submit that the 1956 amendment does not have any bearing on the meaning
E of words 'the principal sum adjudged' which remains the same pre and post
1956. The 1956 amendment, which has substituted the words "on such prin-
cipal sum" for the words 'on the aggregate sum so adjudged' has only this
effect that prior to the amendment future interest was capable of being awarded
on the aggregate of three components taken together, i.e. (1) the principal sum
p (so adjudged), (2) pre-suit interest (so adjudged), and (3) decretal costs. By
virtue of 1956 amendment, the amount of interest adjudged as interest on the
date of the suit and decretal costs cannot be ordered to carry future interest, .,
but the amount adjudged as principal sum though inclusive of interest which
has stood capitalised and has partaken character of principal by virtue of

G
contract or banking practice, is capable of bearing future interest because it will
be 'the principal sum adjudged'.

Shri Ranjit Kumar, Senior Advocate, the learned amicus as also the other
-
learned counsel appearing for the debtors have submitted that if the submission
made by the learned Solicitor General is accepted it would defeat the legislative
H intent behind the amendment as it would mean the Court awarding interest on
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 337
interest. It was submitted that without regard to the fact that the interest for the A
pre-suit period has stood capitalised by force of contract or banking practice
between the parties, and has assumed the colour and character of principal sum,
the contract or banking practice ceases to be applicable once the suit is filed
and the matter has entered the domain of Court under Section 34 of the CPC.
where after nothing prevents the Court from unscrambling the amalgam so as B
to sieve out the principal from interest and confine the award of interest
pendente lite post decree to principal sum only.

Capitalisation of interest debited on periodical rests - does it convert
interest into 'the principal sum'? - a survey of judicial opinion:
c
A host of authorities were cited at the Bar, throwing light on the issue
at hand. It will be useful to have a survey thereof.

We would begin with the statement of law in Reddie v. Williamson,
[1863] 1 Macph (Ct. of Sess.) 228, as we find that the law propounded therein
D
has been referred to in a number of decisions rendered by the Court of Appeals,
House of Lords, this Court and several High Courts. Lord Cowan said:

"This account, from its origin, is kept in the usual mode of stating such
accounts. It is balanced at the close of each year, and the periodical
interest on advances accruing in the course of the year is placed to the E
debit side of the account, and to the extent of its amount the balance
carried to the debit at "the commencement of next year is increased.
That amount is dealt with as a principal sum, on which interest is
calculated, - the bank thereby securing, as they were entitled to do,
interest on the accumulated amount each year, or, as it is generally p
stated, but not quite correctly, compound interest. The true view is, that
the periodical interest at the end of each year is a debt to be then paid,
and which must be held to have been p:tid when placed to the d~bit of
the account as an additional advance by the bank for the convenience
of the obligants." (at p. 238) G

Lord Justice Clerk said :

"The parties must of course have had in view that this account-current
would be kept in the way, in which bankers always keep such accounts,
balancing the account at the e~d of the year; and, in the event of the H
'
338 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A interest accruing during the past year not being otherwise paid or
provided for, placing the amount of such interest as the last item to the
debit of the account, and accumulating such interest along with the
prinbipal sum due on the account, and bringing dowri the bal~ce thus
ascertained, consisting partly of principal, and partly of interest, to the
B new account for the ensuing year, and placing the accumulated balance
as the first article of debit in that new account. Where an account is
kept in this way consistently throughout its whole course, the interest
thus accumulated with principal, at the end of each year not only
becomes principal, but never thereafter ceases to be dealt with as
principal. " (at p. 236)
c
"The privilege of a banker to balance the account at the end of the year,
and accumulate the interest with the principal, is founded on this plain
ground of equity, that the interest ought then to be paid, and, because
it is not paid, the debtor becomes thenceforth debtor in the amount, as
D a principal sum itself bearing interest. This principle of equity must be
consistently carried out in keeping an account on the bank's books, in
which other parties are interested as obligants, besides the party op-
erating on the account; and, if it be, then the moment that interest is .
thus converted into principal, the amount of it must be reckoned as part
E of the drafts on the credit, or beyond the credit, for which the party
operating on the account will be liable as principal in any event,
............. " (at p.237)

In Yourell & Anr. v. Hibernian Bank Ltd., [1918] AC 372, interest was
charged from day to day with half yearly: rests, so that the interest was
F capitalised every half year in accordance with the terms of the deed which also
contained ceiling on the principal sum which could be recoverable on the
security. Lord Atkinson observed in his speech that whenever on balancing the
mortgagor's current account with the bank a debit balance was found against
him, that balance, by force of the covenant, became part of the principal money
G secured by the mortgage, subject however, to the covenant limit. Lord Wrenbury
opined that the interest upon the overdraft was capitalised half yearly and as
against the bank the capitalised interest must be regarded as principal and
hence· the debit balance of the overdraft banking account was principal. In
Commissioners of Inland Revenue v. Sir H.C. Holder, Bt., & Am:, [1931] 2 KB
H 81, the bank debited half yearly interest to the borrower's bank account on the

..
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 339
amount owing !rom time to time. It was held that the interest due each half year A
which, upon the.failure of the company to pay it, was, according to the regular
practice of bankers, added to the capital sum advanced, was thereby capitalised
and could not thereafter be treated as interest. Lord Hanworth MR noted in his
speech that the plan of capitalising interest at the end of each half year was
adopted by bankers in order to enable them in effect to secure what is usually B
termed compound interest, which could not have otherwise been claimed by
reason of the usury laws. Later his Lordship noted that under consideration was
not the terms of a particular deed entered into between the parties but a practice
which has been adopted by bankers for over a century, and which has had
certain qualities attributed to it. Lord Romer concurring with Lord Hanworth
opined that having regard to the method in which, with the concurrence of the
c
company, the account was kept by the bank, the company must be deemed to
have paid each half year the accruing interest by means of an advance made
for this purpose by the bank to the company.

Holder & Am: v. Inland Revenue Commissioner, [1932] All E.R. 265 and b
Paton (Fenton's Trustee) v. Inland Revenue Commissioners, [1938] All E.R.
786, are cases under the Income Tax Law. In Holder's case it was held that in
view of the bank's practice of adding the interest each half-year to the amount
advanced, the interest was in effect paid each half year to the bank by means
of advances made for the purpose by the bank to the customer and for this E
reason no part payment (later) made by the tax payer was payment of interest
and hence the tax payer was not entitled to the relief claimed. In Paton's case
each half year interest at an agreed rate, and without deduction tax, was placed
to the debit of the account of the borrower and the aggregate amount was then
treated as principal for the following half year. Question arose, whether the
interest in question which· was capitalised could be said to have been in fact
F
paid by the borrower so as to attract applicability to him of certain beneficial
provision of the Income Tax Act, 1918? Lord Atkin opined- "The simple fact
is that the amount of interest accruing during the half year is ascertained at the
end of the half-year, and is added to the account as a debt in precisely the same
position as the other debit items, whether for money lent, the price of securities G
bought, commission, or other source of debt. It takes its position as part of the
whole debt due to the bank, and, as part of the whole debt, is in the next half-
yea'r chargeable with interest." His Lordship approved the view of Rusell, J.
of Court of Appeal taking the view that because of a provision contained in
the deed between the parties which enables the interest to be capitalised, the H
340 SUPREME COURT REPORTS (2001] SUPP. 4 S.C.R.
A interest is not capitalised because it is in fact paid, but because it has in fact
not been paid. Lord Macmillan opined - "It may well be that, in a question
between a bank and its customer, and equally between a bank and its
customer's cautioner, the interest accruing annually may, by the sanctioned
method of accounting, cease to be interest when it is accumulated with the
B principal, so that the bank can thereafter no longer sue for the interest as
interest. .. .. .. .. .. . It is manifest, however, that it is only by a legal fiction that
the interest ill such cases as the present can be said to have been paid. After,
as before, the striking of the balance, the same sum remains due, no longer, it
may be, as interest, but still due as part of the principal debt. In construing the
extent of the cautioner's liability under the case credit bond, the court would
c appear to have been well-founded in their view that the bank's own method of
accounting, assented to by the principal debtor, and recognised as ordinary
practice, precluded any claim for past interest as interest prior to the last
balance. The caution was liable for whatever was drawn upon the cash credit
account up to £400, and the unpaid interest was debited in account just like the
D ordinary drafts upon it, and became part of the principal debtor's capital
indebtedness for which the cautioner was liable up to £400, with interest
subsequent to the last balance."

In National Bank of Greece S.A. v. Pinios Shipping Co. No. 1 & Am:,
E (1990] 1 AC 637, House of Lords upheld the entitlement of the bank to the
principal sum due to it, with interest thereon, as agreed, until payment or
judgment in the usual way, and that the agreement included the term, implied
by the usage of bankers, that the bank was entitled to capitalise interest which
in the case before their Lordships was (by concession) at quarterly rests and
that such entitlement continued until judgment or payment. In the Court of
F Appeal, Lloyd LJ, who wrote the pending order, was of the opinion that an
implied agreement to pay compound interest with quarterly re~t based on the
banking practice exists during the currency of the banker-customer relationship
but once the banker-customer relationship ceases the bank cannot charge
compound interest and only simple interest would be payable. His Lordship
G traced the history of banking practice as borne out by judicial precedents, and
held:

"(i) There is no right to compound interest save by agreement,
express or implied, or custom binding on the parties; (ii) there wa8 no
express agreement to pay compound interest in the present case; (iii)
H
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 341

an agreement to pay compound interest may be implied by virtue of A
acquiescence (Lorri Ciancarly v. Latouche), but (iv) such an agreement
is not normally implied except as to "mercantile accounts current for
mutual transactions" (Deutsche Bank v. Banque des Marchands de
• Moscou, 4 L.D.B. 293, 296, per Greer L.J.; (v) it is open to question
whether the agreement between the bank and Pinios dated 8 February, B
1977 was an account current for mutual transactions; but, even if it
was, it ceased to be such an account when the bank closed the account
and demanded repayment on 13 November 1978; (vi) the bank never
pleaded or proved a custom entitling it to continue to charge compound
interest after the account had been closed, or, a fortiori, after it had
issued proceedings for the recovery of debt."
c
The bank appealed to the House of Lords. The House of Lords allowed
the appeal and preferred by the bank and modified the judgment of the Court
of Appeal by holding that no reason can be seen why that relationship should
not be continued until repayment of the debt, or judgment, whichever first D.
occurred, with the effect that, so long as the contractual interest w~s payable,
the bank continued to be entitled to capitalise it. The House of Lords did not
agree with the Court of Appeal that the relationship of banker and customer
stood terminated by the bank's demand for payment.
E
In Billamal v. Ahad Shah, AIR (1918) PC 249, the Privy Council rec-
ognised the justification for adding on the accumulated interest under an earlier
transaction in the fresh transaction and observed as under :

"A borrower who obtains a loan secured by a promissory note on
quite reasonable terms, by neglecting to pay the note on maturity,
F
further neglecting to pay the accruing interest for the several years
following and then giving a renewal note for the original debt plus the
capitalised interest, could produce a result which might at first sight
appear oppressive, and yet there would be nothing harsh or uncon-
scionable in the creditor's demand, since the added interest only G
accumulated while he forebore to enforce the payment ofthe sums from
time to time due to him."

S.R.M.S. Chethambaram Chettier v. Loo Thon Poo, AIR (1940) Privy
Council 60, was a dispute between money lenders and borrowers atising fronr
.. i .··
it-
342 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A the State of Johore. Interest was charged@ 24% and was then capitalised and
made payable by monthly instalments. Question arose whether the interest so
charged was excessive and unfair. Their Lordships held that where a loan ha~
been incurred for interest and this interest is added to the amount agreed to be
due when a new transaction is agreed between the parties which includes that
.,
B payment of interest as an acknowledged debt this is not in principle open to
any sound objection. Their Lordships referred to the decision of the Court of
Appeal in Lyle v. Chappel, [1932] 1 KB 691, speech of Lord Atkin in Paton
v. Inland Revenue Commissioners, [1938] AC 341, decision of Channel, J, in
Carrington Ltd. v. Smith, [1906] 1 KB 79, and the decision by the Court of
Appeal in Reading Trust v. Spero, [1930] 1 KB 492, and held that a willing
c and intelligent borrower had agreed to the interest charged is one of the
circumstances to be taken into account though not conclusive. Their Lordships
upheld the charge of 15% interest payable on the sums from time to time
acknowledge to be owing by the borrowers to the lenders and thus allowing
interest on interest. However, interest charged @ 24% on the loan and charges
D which were amply secured by charges on rubber estate which had been well
looked after and kept in good order was held unreasonable, excessive and ..;.
unfair. The fact remains that Their Lordships approved charging of interest@
15% and capitalisation of the same by means of acknowledgment to that effect
by the borrowers and also upheld permissibility of.further 15% interest being
E charged on the sum so capitalised.

· It was pointed out in Lyle v. Chappel, (Supra, at p;, 706) that it ought
not to make any difference to the validity of a transaction by way of a renewal
of a loan, whether the parties go through the form of payment by the borrower
of .the whole amount due and a re-landing of the same amount by the money
F
lender, or the transaction is carried out without any such payment by treating
the amount of principal and interest still due as a debt acknowledged by the
borrower together with an undertaking by the borrower to pay the amount of
the agreed debt.

G Jafar Husain v. Bishambhar Nath, AIR 1937 Allahabad 442; was a case
of recovery due on a mortgage and considered by reference to Order 34, Rule
11 of the Code of Ciyil Procedure. The words 'on the principal amount found
r
or declared due on the mortgage' came up for the considera~on of Division
Bench. It was contended for the borrower that in calculating the amount due
H to the mortgagee up to the date fixed for redemption, interest from the date of
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 343
the decree till the date fixed for redemption should be calculated on the A
principal sum secured by the deed and not on the total amount due on the date
of the decree on account of principal as well as compound interest. The

.. mortgage deed provided for interest being calculated six monthly and that if
it was not paid then it would become a part of the principal. The Division Bench
held that the words 'on the principal amount found or declared due' refer not
B
only to the principal sum secured by the mortgage deed but also to the amount
due on account of interest which has become a part of principal in accordance
, with the terms of the deed on the date when the preliminary decree is prepared.
The Division Bench pointed out that reliance by the borrower on a ruling of
the Oudh Chief Court in Chotey I.Al v. Mohammad Ahmad Ali Khan, AIR
(1933) Oudh 128, which appeared to be taking a view to ,the contrary was not c
good law inasmuch as a different view was taken by the same Court in
Rajendra Bahadur Singh v. Raghubir Singh, AIR (1034) Oudh 473. In
Pazhaniappa Mudaliar and Ors. v. Narayana Ayyar and Ors., AIR (1943)
Madras 157, the mode_ of dealing adopted by the parties was what is usually
followed between banker and customer. The effect of the system is to capitalise D
the interest at the end of each year and treat it is a fresh advance by the bank.
The Division Bench noted that according to the usage prevailing between
bankers and customers, it is an implied term of their dealing that the banker
is to be treated as having made an advance to the customer at the end of each
year or half year, as the case may be, of a sum equivalent in amount to the E
interest accruing during that period, so as to enable the customer to discharge
the interest, increasing the principal of his debt by a corresponding amount. It
was urged that the periodical settlement of accounts evidenced by the borrow-
er's letter of acknowledgment were renewals and only the sums advanced as
principal were repayable notwithstanding its capitalisation of interest from time
F'
to time the interest being still treated as interest and wiped out. The Division
Bench speaking through Patanjali Sastri, J. (as his Lordship then was) noted
that if the effect of the mode of dealing adopted between banker and customer
is according to the long standing usage governing their relations, to treat the
interest accruing in any year as discharged by a borrowing of an equivalent sum
.from the bank in precisely the same way as if the customer had given the bank G
a cheque upon the account for the amount in question with which the bank
extinguished the interest and then placed the amount of the cheque to the debit
of the account as an ordinary draft." it is difficult to see how the operation of
this principle is affected by anything contained in the explanation to be found
in the relevant provision of Madras Agriculturists' Relief Act, 1938 which H
344 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A merely provides that in cases of renewal of the debt, the sums advanced as
principal shall alone be treated as the principal sum repayable by the agricul-
·turists; for, the interest of the previous year is, under the rule, discharged, and
the corresponding increase in the indebtedness of the customer is treated as a
principal sum advanced by the bank. .
B Two decisions by Kerala High Court may now be noticed. Palai Central
Bank Ltd. v. C. Ramaswami Nadar, AIR 1959 Kerala 194, is a Division Bench
decision which noticed a line of Full Bench decisions of the Travancore High
Court taking the view that when the agre~ment between the parties to a
litigation sanctioned arrears of interest remaining unpaid for any specified
C period being treated as principal, the principal amount sued for within the
meaning of the concerned provision would be the amount claimed in the plaint ,
as principal on that basis. It was held that the terms 'pn..::-ioal' used in Section
31 of Travancore Civil Procedure Code (8 of 1100) is not re;stricted in its
meaning to the original sum lent and that an agreement to treat arrears of
D interest, at fixed periods, as principal, which is to carry interest, is valid. It was
further held that the word 'principal amount' are not restricted to the original
sum lent but are comprehensive to include arrears of interest, on which interest
is agreed to be paid. Trandamma and Ors. v. Kuriakore Patherichal lype, AIR
(1962) Kerala 235, is Full Bench decision which, though did not notice the
Division Bench decision in Palai Central Bank Limited (supra), laid down the
E
same law. An overdraft agreement entered into by the defendants with the
plaintiff bank provided that the interest at 7 1/2% as agreed upon will be
calculated quarterly, four times every year, and added to the principal. On the
balance shown as due on 31.12.1952 in the account maintained by the Bank
in pursuance of such agreement, the suit was filed for recovery of the amount
F due on 31.12.1952 as principal with future interest till the date of the suit. It
was held that the effect of the agreement was to wipe off all interest outstanding
at the end of each quarter by means offurther advances.from the bank of similar
amounts which are debited to the account of the debtor. It was further held that
· the interest that thus accumulated with principal at the end of each quarter
G became principal and never thereafter ceased to be dealt with as principal. The
amount due on 31.12.1952 in the account was treated as the principal amount
outstanding on 1.1 L1953. However, in passing the Full Bench noted that the
position may have been different if under a local debt relief law it was subse-
quently provided that the principal would mean the amount originally ad-
vanced together with sum, if any subsequently advanced, notwithstanding any
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOT.I, J.] 345
stipulation to treat any interest as principal. A
In K. Appa Rao v. V.L Varadaraj & Ors. AIR {1981) Madras 94, the
Division Bench, speaking through Nainar Sundram, J., pointed out that the
charging of compound interest by itself is not per se usurious except in the case
of an agriculturist protected by the Usurious Loans Act, 1981 as amended in
B
its application in Madras. However, the Division Bench, by reference to an
earlier decision of that High Court, pointed out that for the purpose of deter-
mining whether interest would be excessive or not the risk incurred by the
creditor by advancing the loan (whether it was secured or not and if secured
to what extent) and if compound interest is charged, the periods at which it is
calculated and the total advantage which may be reasonably excepted to have c
accrued from the transaction, are important factors.

In Syndicate Bank v. Mis. West Bengal Cements Limited and Ors., AIR
(1989) Delhi 107, Y.K. Sabharwal, J. (as his Lordship then was) rejected the
contention of learned counsel for the borrower that the interest can never D
become principal and the words 'principal sum' in Section 34, Code of Civil
Procedure should be given the ordinary meaning as given in the dictionaries,
and termed as misconceived the argument that the interest under section 34
could be awarded only on the original sum advanced as the argument ran
counter to the normal banking practice, and which, if accepted, would act as
E
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. It was held that the bank
was entitled to the sum claimed as due from and payable by the defendants as
the principal sum with future interest on such amount from the date of suit to
the date of realisation. Reliance was placed on Division Bench decision of
Madras High Court in Sigappiachi v. M.A.P.A. Palaniappa Chettiar, AIR F
(1972) Madras 463, holding that the 'principal sum adjudged' (within the
meaning of Section 34 of the Code of Civil Procedure) is the amount found
due as on the date of the suit.

Division Bench decision in Kalyanpur Cold Storage, Kalyanpur and G
Ors. v. Sohanlal Bajpai (deceased by L.Rs.) and Am:, AIR (1990) Allahabad
218, and Single Bench decision in Indian Bank v. Mis. Kamalalaya Cloth Store
and Anr., AIR (1991) Orissa 44, have taken the view, though they do not
contain any elaborate reasoning, that under Section 34 of the Code of Civil
Procedure the expression 'principal sum adjudged' is to be distinguished from H
I
346 - SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A principal sum advanced. The Orissa High Court has followed the Delhi deci-
sion above said. It was a case of commercial loan. The amount of interest
quarterly added to the amount of loan was held entitled as principal amount
on the date of the suit for the purpose of future interest.

In State Bank of India v. Advar Singh Saih and Ors., AIR (1986) Punjab
B
& Haryana 381, while rejecting the borrower's application under Order 6, Rule
5 of the Code of Civil Procedure seeking direction to the bank to point out
separately by breaking up its claim so as to show the amount of the principal
and the interest separately, it was held that the principal amount found due not
only means the principal amount but also the amount due as interest which has
c become part of the principal.

In Nedungadi Bank Ltd. v. Mis. Aswathi Starch and Glucose ( P) Ltd.,
Anamangad & Ors., AIR (1996) Kerala 112, K.G. Balakrishnan, J. (as his
Lordship then was), speaking for the Division Bench, held that the expression
D "principal sum adjudged" used in Section 34 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 treated as principal, the
amount so adjudged is to be taken as principal for granting future interest.

In State Bank of India v. Smt. Neela Ashok Naik & Anr., AIR (2000)
E
Bombay 151, Y.K. Sabharwal, C.J. (as his Lordship then was) speaking for the
Division Bench, dealing with Section 34 of the Civil Procedure Code, held that
legal position clearly was that the principal sum adjudged' can include iri it
interest as well, depending upon the contract between the parties. The contract
for payment of interest with quarterly rests resulted into the interest being
F capitalised so as to make sum total of the principal advanced plus interest
accrued thereon "principal sum adjudged" on the date of the suit, the expres-
sion as em.ployed under Section 34.

In Shew Kissen Bhattar v. The Commissioner of Income Tax, Calcutta,
G [1973] 4 sec 115, this Court has observed that on failure of the borrower to
pay in accordance with the terms of the contract he is liable to pay compound
interest. In other words, if he fails to pay interest in accordance with the
-
contract, he is liable to pay interest on interest. To put it differently, when the
interest payable is not paid, the same becomes a part of the principal and
thereafter interest has to be paid not only on the original principal but also on
H
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 347
that part of the interest which had become a part of the principal. A

In Corporation Bank v. D. S. Gowda & Am:, [1994] 5 SCC 213 a batch
of appeals against three decisions of Karnataka High Court [reported as D.S.
Gowda v. Corporation Bank, AIR (1983) Karnataka 143, H.P. Krishna Reddy
v. Canara Bank, AIR (1985) Karnataka 228 and Bank of India v. Kamam
Ranga Rao and Ors., AIR (1986) Karnataka 242] were disposed of and while
doing so two decisions of Andhra Pradesh High Court, namely, K. C.
Venkateswarlu v. Syndicate Bank, AIR (1986) AP 290 and State Bank of India,
Eluru, Re, AIR ( 1986) AP 291, where also noticed and dealt with D.S. Gowda s
case was of a commercial advance taken by the borrower for the purpose of
constructing residential flats on a building site allotted by Bangalore Develop- c
ment Authority. Interest at the rate of 16.5% per annum, with quarterly rests,
was charged. Interest, penal interest and service charges were debited to the
account and capitalised. In the cases of H.P. Krishna Reddy, (supra) and
Karnam Ranga Rao (supra), loans were advanced for agricultural purposes.
Directions made by Reserve Bank of India were violated and the interest was D
charged at rates far excess of the limits prescribed by the Reserve Bank, also
by compounding at quarterly rests, not permitted by Reserve Bank. One of the
questions having a bearing on the day to day transactions of loan/advance
entered into by the banks was: Whether the bank is entitled to claim interest
with periodical rests, e.g., a monthly rest, a quarterly rest, a six-monthly rest, E
or a yearly rest, or compound interest in any other manner, from a borrower
who has obtained a loan or an advance for agricultural/commercial purposes,
as the case may be? During the course of its judgment the Court observed (vide
para 14) :-
F
" ...... charging of interest with periodical rests or compounding of
interest would be allowed if there is evidence of the customer having
acquiesced therein, provided the relation of banker and customer is
subsisting. However, if the relationship undergoes a change into that
of mortgagee and mortgagor by the taking of a mortgage, the charging
of interest would be governed in accordance with the terms of the G
mortgage. The taking of a mortgage to secure the fluctuating balance
of an overdrawn account, being not inconsistent with the relationship
of banker and customer, would not displace an earlier right to charge
compound interest. Thus, the practice of bankr,;·s to debit the accrued
interest to the borrower's current account at regular periods is a H
348 SUPREME COURT REPORTS {2001] SUPP. 4 S.C.R.
A recognised practice."

Their Lordships cited with approval the following passage from Halsbury's
Laws of England (4th Edition) (Vol. 3, at page 118, para 160) :-

"160. Interest. By the universal custom of bankers, a banker has the
B right to charge simple interest at a reasonable rate on all overdrafts. An
unusual rate of interest, interest with periodical rests, or compound
interest can only be justified, in the absence of express agreement,
where the customer is shown or must be taken to have acquiesced in
the account being kept on that basis. Whether such acquiescence can
c be assumed from his failure to protest at an interest entry in his
statement of account is doubtful.

Acquiescence in such charges only justifies them so long as the
relation of banker and customer exists with respect to the advance. If
the relation is altered into that of mortgagee and mortgagor by the
D
taking of a mortgage, interest must be calculated according}o the terms
of the mortgage, or according to the new relation.

The taking of a mortgage to secure· a fluctuating balance of an
overdrawn account, is not, however, inconsistent with the relation of
E a banker and customer, so as to displace a previously accrued right to
charge compound interest.

It is the practice of bankers to debit the accrued interest to the
borrower's current account at regular periods (usually half-yearly);
where the current account is overdrawn or becomes overdrawn as the
F
result of the debit the effect is to add the interest to the principal, in
which case it loses its quality of interest and becomes capital." ..
Their Lordships reversed the judgment of the Karnataka High Court
which was under appeal and approved and affirmed view of the same High
G Court in H.P. Krishna Reddy v. Canara Bank, AIR (1985) Karnataka 228, and
Bank of India v. Kamam Ranga Rao, AIR (1986) Karnataka 242. Universal
banking practice of usually charging interest on periodical rests and com-
pounding interest on remaining unpaid was specifically dealt with and
approved. The principle relevant consideration which prevailed with the
H Court were : continuing judicial upholding of such practice over a length
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 349
of time and the Reserve Bank of India by issuing circulars/directives from time A
to time and on paying 'adequate attention' having accorded its approval to
permissibility of such practice but intervening in the interest of streamlining the
same.
) .
Bank· of Baroda v. Jagannath Pigment & Chemicals & Ors., (Civil
B
Appeal No. 2785/1987) decided on September 21, 1994 [see [1996) 5 SCC,
at p. 280) is a short judgment delivered by three-Judge Bench of this Court
approving the two-Judge Bench decision of this Court in Corporation Bank
(supra). Therein the sum borrower by the debtor was Rs. 1,20,675.59p to which
compound interest was added and a suit to recover a sum of Rs. 1,66,759.29p.
with interest was filed claiming that the interest charged and added to the sum c
borrowed would be the principal sum adjudged on which future interest could
be granted under section 34 of the Civil Procedure Code. This plea found
favour with the Trial Judge. On appeal the High Court modified the decree by
directing that future interest should be calculated on the sum borrowed viz. Rs.
1,20,675.59 and not the principal sum adjudged i.e. Rs. 1,66,759.29. This D
Court set aside the appellate judgement of the High Court and restored the
decree passed by the Trial Judge.

In Renusagar Power Co. Ltd. v. General Electric Co., [1994) Supp. 1
SCC 644, pp. 89-93 a three-Judge Bench of this Court has noted the practice E
of charging interest as prevalent in Australia, Canada and India and held that
compound interest can,.be awarded by Courts in India when justice so demands
and is not to be regarded as being against public policy. The Court noted that
it is a common knowledge that provision is made for the payment of compound
interest in contracts for loans advanced by banks and financial institutions and
F
such contracts are enforced by Courts.

Shri Ranjit Kumar, the learned amicus brought to the notice of the Court
a few decisions taking the view that under Section 34 of the CPC principal sum
has to be read as consisting of the amounts actually advanced and hence the
Court must unscramble the amalgam and segregate such principal sum from G
the amount of interest compounded and capitalised and confine award of
interest pendente lite and post-decree only to such principal sum. He referred
to Soli Pestonji Majoo & Ors. v. Gangadhar Khomka, [1969) 1SCC220; M. V.
Mahalinga Aiyar v. Union Bank Ltd., Kumbakonam, AIR (1943) Madras 216;
l.K. Merchants Ltd. v. lndra Prakash Karnani, AIR (1973) Calcutta 306; D.S. H
350 SUPREME COURT REPORTS (2001) SUPP. 4 S.C.R.
A Gowda v. Mis. Corporation Bank, AIR (1983) Karnataka 143; Union Bank of
India v. Gaurishankar Upadyay, AIR (1992) Bombay 482; Gujarat Agro Oil
Enterprises Ltd. Ahmedabad v. Arvind H. Pathak, AIR (1993) Gujarat 47,
Indian Bank, rep. by the 'Zonal Manager, Hyderabad v. P. Venkata Satyavathi.
& Ors., (1993) 1 Andhra Weekly Reports 607, Ramashree Chandrakar v.
B Dena Bank & Anr., (1994) MPLJ 610 and Punjab National Bank v. Surinder
Singh Mandyal & Ors., AIR (1996) HP 1. Obviously he could not have
multiplied the authorities which are bound to be few being not in line with the
weight of the judicial authority which we have already dealt with. Having gone
through all the cited rulings we are of the opinion that no dent .results in the
view we are taking.
c
Soli Pestonji Majoo & Ors. s case decided by this Court was a case of
mortgage d!!cided by reference to Order 34 of the C.P.C. wherein it was held
that till the period for redemption expired, the matter was in domain Of contract
but after the period of redemption the matter passed to that of judgment. Vide
D para 5, the Court has said that the special provision of Order 34 would apply
in preference to the general provisions in Section 34 in the case of mortgage.
Clearly this Court has not laid down any principle dealing with Section 34 of
the C.P.C .. In M. V. Mahaling Aiyar's case Division Bench of Madras High
Court has not dealt with the principle of capitalisation. The case has no rel-
E evance for the issue at hand. Full Bench decision of Bombay High Court in
Union Bank of India v. Gaurishankar Upadyay proceeds on the assumption
that the 'principal sum' can never include interest whatever be the agreement
between the parties and this hypothesis is itself incorrect as we have dealt with.
The Full bench dissented from the view taken by a number of High Courts and
F chose to follow a Division Bench decision of that very High Court in the case
of Mis. Jagannath Pigment & Chemicals v. Bank of Baroda, which has been
reversed by this Court (See - (1996) 5 SCC 279). D.S. Gowdas. case of
Karnataka High Court was also reversed by this Court. Himachal Pradesh,
Madhya Pradesh, Andhra Pradesh and Punjab High Court decisions cited by
G the learned amicus, are based on Bombay High Court Full Bench view. In I.K.
Merchants Ltd. '.s case, the learned single Judge of Calcutta High Court has not
approved interest being awarded on the sum adjudged as interest for the pre-
suit period (See, Para 31 of the Report). To the same effect is the Division
Bench decision of Gujarat High Court in Gujarat Agro s case. These two
decisions have no relevance to the issue before us.
H
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 351
Conclusion which follows : A

The English decisions and the decisions of this Court and almost all the
High Courts of the country have noticed and approved long established bank-
ing practice of charging interest at reasonable rates on periodical rests and
capitalising the same on remaining unpaid. Such a practice is prevalent and also
B
recognised in non-banking money lending transactions. Legislature has stepped
in from time to time to relieve the debtors from hardship whenever it has found
the practice of charging compound interest and its capitalisation to be oppres-
sive and hence needing to be curbed. The practice is permissible, legal and
judicially upheld excepting when superseded by legislation. There is nothing
wrong in the parties voluntarily entering into transactions, evidenced by deeds c
incorporating covenant or stipulation for payment of compound interest at
reasonable rates, and authorising the creditor to capitalise the interest on re-
maining unpaid so as to enable interest being charged at the agreed rate on the
interest component of the capitalised sum for the succeeding period. Interest
once capitalised, sheds its colour of being interest and becomes a part of D
principal so as to bind the debtor/borrower.

Interest and its classes :

Black's Law Dictionary (7th Edition) defines 'interest' inter alia as the
compensation fixed by agreement or allowed by law for the used or detention E
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 edition)
interest means, inter alia, compensation paid by the borrower to the lender for
deprivation of the use of his money. In Secretary, Irrigation Department, F
Government of Orissa & Ors. v. G. C. Roy, [ 1992] 1 SCC 508, 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 principles of Section 34, Civil Procedure Code. In Dr. Sham/al Narula v. G
C.I.T., Punjab, [1964] 7 SCR 668, 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. Westminister Bank Ltd., [1947] 1 All ER 469, 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
H
t

352 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A 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 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
B 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 C./.T., Punjab v. Dr. Shanilal Narula, AIR (1963) Punjab 411 thus
articulated the concept of interest - "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
c use or retention by one person of a sum of money belonging to or owned 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 whenever
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
D 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
Punjab High Court which was dismissed by Supreme Court in Dr. Sham/al
E Narula's case (supra).

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 wrong-doer 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
F
related with nor limited to the damages suffered. Thus, while 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.
G
Mulla on the Code of Civil Procedure (1995 Edition) sets out three ...
divisions of interest as dealt in Section 34 of CPC. The division is according
to the period for which interest is allowed by the Court, namely - ( 1) interest .
I-
,
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
H
CENTRAL BANK OF INDIA y. RAVINDRA [LAHOTI, J.] 353
to the date of the decree, at such rate as the Court deems reasonable; (3) further A
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; B
interest pendente lite is not a matter of substantive law (See, Secretary, Irri-
gation Department, Govemm{!nt of Orissa & Ors. v. G.C. Roy, [1992] 1 SCC
508, Pr. 44-iv). Pre-suit interest is referable to substantive law and can be sub-
divided into two sub-h~ads; (i) where there is a stipulation for the payment of
interest at a fixed rate; and (ii) where there is no such stipulation. If there is C
a stipulation for the rate of interst, the Court must allow that rate upto the date
of the suit subject to three exceptions; (i) any provision of law applicable to
money lending transactions, or usury laws or any other debt law governing the
parties and having an overriding effect on any stipulation for payment of
interest voluntarily entered into between the parties; (ii) if the rate is penal, the
D
Court must award at such rate as it deems rel!SOnable; (iii) even if the rate is
not penal the Court may reduce it if the interest is excessive and the transaction
was substantially unfair. If there is no express stipulation for payment of
interest the plaintiff is not entitled to interest except on proof of mercantile
usage, statutory right to interest, or an implied agreement. Interest from the date
of suit to date of decree is in the discretion of the Court. Interest from the"date E
of the decree to the date of payment or any other earlier date appointed by the
Court is again in the discretion of the Court - to award or not to award as also
the rate at which to award. These principles are well established and are not
disputed by learned counsel for the parties. We have stated the same only by
way of introduction to the main controversy before us which has a colour little F
different and somewhat complex. The learned counsel appearing before us are.
agreed that pre-suit interest is a matter of substantive law and a voluntary
stipulation entered into between the parties for payment of interest would being
the parties as also the Court excepting in any case out of the three exceptions
set out hereinbefore. G

"Such Principal Sum"-meaning of"

Let us paraphrase the relevant part of Section 34( 1) as under and then
deal with the question posed before us: H
354 SUPREME COURT REPORTS . . [2001) SUPP. 4 S.C.R.
A "Where and in so far as a decree is. for th~ paymentof money, the· .
Court may, in the decree, order interest at such rate a8 the Court deems
reasonable to be paid on the principal .sum adjudged, ·
. .

from the. date of the suit to the date of the decree,
,- .. . . . . . . . .

B in addition to any intere~t adjudged o~ such prin~ipdl su;,,,for ~y
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
c Court thinks fit."

A few points are clear .from a bare ·reading of the pr~vision. While
decreeing a suit if the decree be for payment of money, the Court would
. -,
adjudge the principal sum on the date of the suit. The Court may also be called
D upon to adjudge interest due and payable by the defendant to the plaintiff for
the pre-suit period which interest would, on the findings arrived at and noted
by us hereinabove, obviously be other than such interest as has already stood
capitalised and having shed its character as interest; has acquired the colour of
the principal and having stood· amalgamated in the principal sum would· be
E adjudged so. The principal sum adjudged would be the sum actually loaned
plus the amount of interest on periodical rests which according to the contract
between the parties or the established banking parties has stood capitalised.
Interest pendente lite and future interest (i.e. interest post-decree not exceeding f
6 per cent per annum) shall be awarded on such principal sum i.e. the principal
sum adjudged on the date of the suit. It is well settled that the use of the word
F
'may' in Section 34 confers a discretion on the Court to award or not to award
interest or to award interest at such rate as it deems fit. Such interest, so far
as future interest is concerned may commence from the date of the decree and
may be made to stop running either with payment or with such earlier date as
the Court thinks fit. Shortly hereinafter we propose to give an indication of the
G circumstances in which the Court may decline award of interest or may award
interest at a rate lesser than the permissible rate.

It was submitted by the learned amicus and other counsel for the bor-
rowers, that the expression "on such principal sum" as occurring twice in the
H latter part of Section 34(1), which refers to interest pendente lite ~d post-
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 355
decree, should be interpreted to mean principal sum arrived at by excluding the A
interest even if it has stood capitalised. This would be consistent with the
legislative intent as reflected in the report of Joint Committee and sought to be
fulfilled by 1956 Amendment. For two reasons chis contention has to be
rejected. Firstly, entertaining such a plea amounts to begging the question. As
we have already held that the interest once capitalised ceases to be interest and B
becomes a part of principal sum or capital. That being so the interest forming
amalgam with the principal, in view of having been capitalized, is principal
sum and therefore the question of awarding interest on interest does not arise
at all. Secondly, well-settled principles of interpretation of statutes would
frown upon such a plea being entertained. A construction which leads to
repugnancy or inconsistency has to be avoided. Ordinarily, a word or expres-
c
sion used at several places in one enactment should be assigned the same
meaning so as to avoid "a head-on clash" between two- meanings assigned to
the same word or expression occurring at two places in the same enactment.
It should not be lightly assumed that "Parliament had given with one hand what
it took away with the other" [See - Principles of Statutory Interpretation, Justice D
G.P. Singh, 7th Edition 1999, p.113]. That construction is to be rejected which
will introduce uncertainty, friction or confusion into the working of the system
(ibid, p.119). While embarking upon interpretation of words and expressions
used in a Statute it is possible to find a situation when the same word or
expression may have somewhat different meaning at different places depend- E
ing on the subject or context. This is however an exception which can be
resorted to only in the event of repugnancy in the subject or context being
spelled out. It has been the consistent view of Supreme Court that when the
Legislature used same word or expression in different parts of the same section
or statute, there is a presumption that the word is used in the same sense F
throughout. (ibib, p.263). More correct statement of the rule is, as held by
House of Lords in Farrell v. Alexander, [1976] 2 All E.R. 721, 736, "where
the draftsman uses the same word or phrase in similar contexts, he must be
presumed to intend it in each place to bear the same meaning". The Court
having accepted invitation to embark upon interpretative expedition shall iden-
G
tify on its radar the contextual use of the word or expression and then determine
its direction avoiding collision with icebergs of inconsistency and repugnancy.

Webster defines "such" as "having the particular quality or character
specified; certain; representing the object as already particularised in terms
which are not mentioned. In New Webster's Dictionary And Thesaurus, mean- H
356 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A ing of "such" is given as "of a kind previously or about to be mentioned or
implied; of the same quality as something just mentioned (used to avoid the
repetition of one word twice in a sentence); of a degree or quantity stated or
implicit; the same as something just mentioned (used to avoid repetition of one
word twice in a, sentence); that part of something just stated or about to be
B stated." Thus,· gen~rally speaking, the use of the word "such" as an 'adjective
prefixed to a noun is indicative of the draftsman's intention that he is assigning
the same meaning or characteristic to the noun as has been previously indicated.
or that he is referring to something which has been said before. This principle
has all the more vigorous application when .the two places employing the same
-
expression, at earlier place the expression having been defined or characterised
c and at the latter place having been qualified by use of the word "such", are
situated in clo~e proximity.

We are of the opinion that the meaning assigned to the expression 'the
principal sum adjudged' should continue to be assigned to "principal sum" at
D such other places in Section 34( 1) where the expression has been used qualified
by the adjective "such" that is to say, as "such principal sum". Recognition of
the method of capitalisation of interest so as to make it a part of the principal
consistently with the contract between the parties or established banking prac-
tice does not offend the sense of reason, justice and equity: As we have noticed
such a system has a long established p~ac.tice and a series of judicial precedents
E
upholding the same. Secondly, the underlying principle as noticed in several
decided cases is that when interest is debited to the account of the borrower
on periodical rests, it is debited because of its having fallen due on that day.
Nothing prevents the borrower from paying the amount of interest on the date
it falls due. If the amount of interest is paid there will be no occasion for ·
F capitalising the amount of interest and converting. it into principal. If the
. interest is not paid on the date due, from that date the creditor is deprived ·of
such· use of the money which it would have made if the debtor had paid the
' '

amount of interest on the date due. The creditor needs to be compensated for
deprivation. As held in Palhaniappa Mudaliar and Ors. v. Narayana Ayyar
G and Ors. (supra) the fact-situation is analogous to one as if the creditor has
advanced money to the borrower equivalent to the amount of interest debited~
We are, therefore, of the opinion th.at the expression "the principal sum ad-
judged" may include the amount of interest, charged on periodical rests, and
capitalised with the principal sum actually advanced, so as to become ail
.H amalgam of principal in such cases where it is permissible or obligatory for the
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 357
Court to hold so. Where the principal sum (on the date of suit)' has been so A
adjudged, the same shall be treated as "principal sum" for the purpose of "such
principal sum" - the expression employed later in Section 34 of C.P.C .. The
expression "principal sum'' cannot be given different meanings at different
places in the language of same section, i.e. Section 34 of C.P.C..

The 1956 amendment serves two-fold purpose. Firstly, it prevents award B
of interest on the amount of interest s~ adjudged on the date of suit. Secondly,
... it brings the last clause of Section 34, by narrowing down its ambit, in con-
formity with the scope of the first clause in so far as the expression "the
principal sum adjudged" occurring in the first part of Section 34 is concerned
I
which has been left untouched by amendment. The meaning to be assigned to c
this expression in the first part remains the same as it was even before the
amendment However, in the third part of Section 34 the words used were "on
the aggregate sum so adjudged". The judicial opinion prevalent then was (to
wit, see Prabirendra Mohan v. Berhampore Bank Ltd. & Ors., AIR (1954)
Calcutta 289, 295 that 'aggregate sum' contemplated the aggregate of (i) the
D
principal sum adjudged, (ii) the interest from the date of the suit to the date of
decree, and (iii) the pre-suit interest. Future interest was capable of being
awarded also on the amount of pre-suit interest - adjudged as such, that is, away
from such interest as was adjudged as principal sum having amalgamated into
in by virtue of capitalisation. The amendment is intended to deprive the court
of its pre-amendment power to award interest on interest i.e~ interest on interest E
adjudged as such. The amendment cannot be read as intending, expressly or
by necessary implication, to deprive the court of its power to award future
interest on the amount of the principal sum adjudged, the sense in which the
expressio!_l was understood, also judicially expounded even before 1955; the
expression having been left untouched by the 1956 amendment. F
It was submitted from borrowers' side that such an interpretation of
Section 34 of the Civil Procedure Code as canvassed on behalf of the banks,
if accepted, may result in anomalous situations emerging. To wit, it was pointed
out that if the bank deliberately and unscrupulously delays the suit being· filed,
for such period of delay the bank would grun an advantage by· continuing to G
charge interest at the contract rate and by capitalising the same. If the suit was
filed promptly then the contract would cease to operate and debtor would be
relieved from the rigour of the contract and find solace under the operation of
Section 34 of the Civil Procedure Code. True it is that once a suit is filed in
the Court, so far as Section 34 of the C.ivil Procedure Code is concerned, the H
358 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A relationship of parties ceases to be governed by contract between the parties
and comes to be governed by Section 34 of the Civil Procedure Code. Still the
submission has to be repelled for several reasons·. Firstly, the bank can afford
to wait or delay the filing of the suit only during the period of limitation which
delay would not be illegitimate. Secondly, noting prevents the debtor, even
during the period of this delay, to pay or tender the amount of interest as and
B
when it falls due and thereby prevent its capitalisation. Thirdly, the court is not
powerless to deny the bank's claim for interest, if in the facts and circumstances
of a given case the court is persuaded to hold that filing of the suit was delayed
for the purpose of deliberately gaining an unfair advantage over adverse finan-
cial condition of the defendant. In such cases the pre-suit· interest though
c claimed in accordance with the contract would be denied by the Court on the
ground of public policy and on the ground of the creditor having tried to gain
an unfair advantage over the debtor by a deliberate inaction of himself, no one
can take advantage of its own wrong.

It was further submitted that if the expression "the principal sum ad-
D judged" was to be interpreted and assigned a meaning as inclusive of the
interest capitalised and therefore being the principal sum to be adjudged so
at the date of the suit then there would be left nothing to be adjudged by way
of interest for the pre-suit period and therefore a part of Section 34(1) "and in
addition to any interest adjudged on such principal sum for any period prior
E to the institution of the suit" -·shall be rendered redundant. We cannot subscribe
to this submission. We give just an illustration or two to demonstrate reasons
for our such opinion. The same plaintiff while suing the same defendant may
join in the suit more causes of action then one; one permitting capitalisation
of interst, and the other, not permitting the same. There may be a case, as was
Gowda s case decided by this Court, wherein interest is capitalised with quar-
F
terly rests on a particular date, says 31st March and so on and the suit is filed
before the date on which interest will be capitalised. The amount of interest
charged for the period of time less than the quarter would remain an interest,
not capitalised. Then there may be a case where interest may have been charged
and capitalised at a rate exceeding the one permitted in which case the amount
G of interest charged and capitalised beyond the quantum permissible shall have
to be separated. In all such cases the principal sum inclusive of capitalised
interest to the extent permissible shall be adjudged as 'principal sum' and there
would .also be 'in addition any interest adjudged by way of interest on such
principal sum' for the pre-suit period. We therefore find force iri the submission
of the learned Solicitor General that in that part of Section 34(1) which speaks
H
CENTRAL BANK Of INDIA v. RAVINDRA (LAHOTI, J.] 359
of "interest adjudged on such principal sum" for pre-suit period, the text should A
be read as if by reading "interest" qualified 'by "if any" so as to make it
meaningful.

It was also submitted that Section 34 of the CPC is. general in its
application to all money .suits ~d if banking practice or banking contracts
providing for capitalisation of interest charged on periodical rests were to be B
recognised it will mean that application of Section 34 would be different in
suits filed by banks and in suits filed by creditors other than bankers. In our
opinion it is bound to be so. Section 34 is a general procedural provision and
whether it would apply or not and if apply then to what extent would obviously
depend on the fact situation of each case. .... c
We are, therefore, of the opinion that two-Judge Bench decision of this
Court in Corporation Bank v. D.S. Gowda & Anr., and three Judge Bench
decision in Bank of Baroda v. Jagannath Pigment & Chemicals & Ors., are
correctly decided and are, therefore, affirmed. A creditor can charge interest
D
from his debtor on periodical rests and also capitalise ~he same so as to make
it a part of the principal. Such a course can be justified by stipulation in a
contract voluntarily entered into between the parties or by a practice or usage
well established in the world to which the parties belong. Such practice is to
be found already in vogue in the field of banking business. Such contract or
usage or practice can stand abrogated by legislation such as Usury Laws or E
Debt Relief Laws and so on.

A Few Notes of Caution:

Though we have answered the question of law before us, but we cannot
F
leave the matter at that alone without sourtding notes of caution, lest our view
of the law should be misconstrued and misapplied. Before we do so, it would
be appropriate to refer to the decision of this Court in Corporation Bank v. D.S.
Gowda (supra) in somewhat details.

The Banking Regulations Act, 1949 empowers Reserve Bank, on its G
being satisfied that it is necessary or expedient in the public interest or in the
interest of depositors or banking policy so to do, to determine the policy in
relation to advances to be followed by banking companies generally or by any
banking company in particular and when the policy has been so determined it
has a binding effect. In particular, the Reserve Bank of lridia may give direc- H
360 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
I
A tions ~to the rate of interest and other terms and conditions on which advances .
or other financial accommodation may be made. Such directions are also
binding on every banking company. Section 35A also empowers Reserve Bank
1
of Indi a in the public il).terest or in the interest of banking policy or in the
i_nterests of depositors (ano so o~) to issue direcliops generally or in particular
which-shall be binding. With effect from 15.2.1984 Section 21A has been
B
inserted in the Act which takes away power of the Court to re-open a trans-
action between a banking company and its debtor on the ground that the rate
of interest charged is excessive. The provision has been given an overriding
effect over the Usury Loans Act, 1918 and any other provincial law in force
relating to indebtedness.
c
This Court held in D.S. Gowda s case that the directions issued by the
Reserve Bank of India have statutory flavour. The Court noted that agricultural
finance stands on a different footing for the reason that agriculturists do not
have any regular source of income other than the sale proceeds of their crops
D and therefore agricultural loans have to be treated differently from other loans.
and borrowings. Reserve Bank of India has also shown its concern towards
agriculturist loances by devising separate policy to govern them and not per-
mitting capitalisation of accrued interest on agricultural loans except on annual
rests or when the loan/instalment has become overdue.

E As to capitalisation of interest charged on periodical rests this Court
·.found the High Court of Karnatakahaving noticed that banks in India were not
following a uniform practice ·and some banks charged interest with monthly or
quarterly rests while others charged with yearly or six monthly rests and hence
the Reserve Bank of India had to issue directives to bring about uniformity in
that behalf. In conciusion this Court held that if bank was claiming interest in
.F
excess of that permitt~d by the circular/direction of the Reserve Bank, the Court
could give relief to the aggrieved party notwithstanding Section 21A to the
extent of interest charged in excess of the rate prescribed by the Reserve Bank
of India. A .distinction was drawn between Court's power to interfere on .the
premise that the interest charged is excessive under the general law and courts.
G interference on the premise that the interest charged is in contravention of the
circulars/directions issued by the Reserve Bank of India. In the former case it
would not be permissible in. view of the bar. enacted by Section 21A of the
Sanking R~gulatio~sAct ~hile in the latter case it ~ou.lci. be permissible
be~ause of.the Reserve Bank's circulars and dir~ctions having statutory force
H under Sections 21/35A of the.Act having been violated. The question whether
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 361
interest charged in excess of the minimum rate of interest appointed by the A
Reserve Bank without fixing a ceiling and levying higher rate to be charged
at the discretion of each bank can be treated as excessive and unconscionable
and whether in such situation Section 21A would debar the Court from reduc-
ing the rate of interest. to a reasonable limit was left open and undecided as the
same did not arise in the case before the Court. However it was made very clear B
that if the Reserve Bank has fixed the maximum rate of interest under Sections
21/35A of the Act any transaction charging interest within the limit so ap-
. pointed would not be treated as excessive.

It is interesting to note that the sanie Bench which decided D.S. Gowda s
ca5e also decided State Bank of India, Bhubaneswar v'. Ganjam Di~trict Tractor C
Owners Association and Ors., [1994] 5 SCC 238, and held that where the
agreement between the bank and the borrower did not provided for payment
of compound interest or interest with periodical rests, the bank could not have
charged the same.
D
During the course of hearing it was brought to our notice that in view
of several Usury Laws and Debt Relief Laws in force in several States private
money lending has almost come to an end and needy borrowers by and large
depend on banking institutions for financial facilities. Several unhealthy prac-
tices having slowly penetrated into prevalence were pointed out. Banking is an
organised institution and most of the banks press into service long running E
documents wherein the borrowers fill in the b_lanks, at times without caring to
read what has been provided therein, and bind themselves by the stipulations
articulated by best of legal brains. Borrowers other than those belonging to
corporate sector, find themselves having unwittingly fallen into a trap and
rendered themselves liable and obliged to pay interest the quantum whereof F
may at the end prove to be ruinous. At times the interest charged and capitalised
is manifold than the amount. actually advanced. Rule of damdupat does not
apply. Penal interest, service charges and othe. over-heads are debited in t'he
account of the borrower and capitalised of which debits the borrower may not
even be aware. If the practice of charging interest on quarterly rests is upheld G· _,
and given a judicial recognition, unscrupulous banks may resort to charg.ing
interest even on monthly rests and capitalising the same. Statements of Ac-
counts supplied by banks to borrowers many a times do not contain particulars
or details of debit entries and. when written in hand are worse than rr..::dical ·
prescriptions putting to test the eyes and wits of the borrowers. Instances of H .
362 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A unscrupulous, unfair and unhealthy dealings can be multiplied though they
cannot be generalised. Suffice it to observe that such issues shall have to be
left open to be adjudicated upon in appropriate cases as and when actually
arising for decision and we cannot venture into laying down law on such issues
as do not arise for determination before us. However, we propose to place on
B record a few incidental observations, without which, we feel, our answer will
not be complete and that we do as under :
,,
(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
c 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, debtor entering into a fresh agreement with creditor
D 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 best evidence of capitalisa-
tion. Acquiescence in the method of accounting adopted by the creditor an?
brought to the knowledge of the debtor may also enable interest being con-
E verted 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
F 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
G . 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 capitalisa-
tion. 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
H 011 being shown to the satisfaction of the Court that such debit ·entry was not
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 363
brought to the notice of the borrower and/or he did not have the opportunity .A
of making payment before capitalisation and thereby excluding its capitalisa-
tion.

(5) The power conferred by Sections 21 and 35A of the Banking Regulations
Act, 1935 is coupled with duty to Act. Reserve Bank of India is prime banking
B
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 public in general and preventing banking affairs from
deterioration and prejudice as also to secure the proper management of any
banking company generally. 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.
c
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 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 D
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 direc-
tives may be treated as standards for the purpose of deciding whether the
interest charged is excessive, usurious or opposed to public policy.
E
(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 voilation of RBI directives, as
F
to rate of interest, or as to periods at which rests can be arrived at, shall be dis-
allowed 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 G
Court as it is essentially governed by Section 34 of the CPC de hors 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 .'.ldvanced the Court may
exercise its discretion in awarding interest pendente lite and post-decree inter- H
364 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A est 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.

In view of the law having been settled with this judgment, it is expected
henceforth from the banks, bound by the directives of the Reserve Bank of
B
India, to make an averment in the plaint that interest/compound interest has
been charged at such rates, and capitalised at. such periodical rests, as are
permitted by, and do not run counter to, the directives of the Reserv~ Bank of ·
India. A statement of account shall be filed in Court showing details and giving
particulars of debit entries, and if debit entry relates to interest then setting out
c also the rate of, and the period for which, the interest has been charged. On
the Court being prima facie satisfied, if a dispute is raised in that regard, of
the permissibility of debits, the onus would be on the borrower to show why
the ainount of debit balance appearing at the foot of the account and claimed
as principal sum cannot be so accepted and adjudged. This practice would
D · narrow down the scope of controversy in suits filed by banking institutions and.
e.nable an expeditious disposal of the suits, the issues wherein are by and large
capable of being determined by documentary evidence. RBI directives have noi
only statutory flavour, any contravention thereof or any default in compliance
therewith is punishable under sub-section (4) of Section. 46 of Banking Regu-
. E lations Act, 1949. The Court can act on assumption that transacti~ns or dealings
. have taken place and acco.unts maintaine<;l by banks in conformity with RBI
directives .

. We have dealt with the. law governing the debtor and creditor relation-
ship. We have not dealt with any provision or principle of taxation law
F
whereunder deemed payment of interest consequent upon capitalisation and
actual payment whenever ma~e may be. tr~ated as capital or revenue which
question shall ha.ve to be determined under the scheme of relevant statutory
enactment.

·. G Subject
.
to the. above we answer the reference in. followi~g
- .
tenris :
'. /
. .

(1) Subject to a bi~ding stipulati~n contained in.a voluntary contract. between.
the parties and/or an established practice or usage interes(on loans an"d ad- :. .
yances may ·be charged on penodiCal rests and also ~~pitalised on remaining
.H unpaid. T)Je principal sum actually advanced cou~led. with the 'interest on ·

/
/
/
/
/
CENTRAL BANK OF INDIA v. RAVINDRA [LAHOTI, J.] 365
periodical rests so capitalised is capable of being adjudged as principal sum on A
the date .of the suit.

(2) The principal sum so adjudged is 'such principal sum' within the meaning
of Section 34 of the Code of Civil Procedure Code, 1908 on which interest
pendente lite and future interest i.e. post~decree interest, at such rate and for
such period which the Court may deem fit, may be awarded by the Court.
B

(3) Corporation Bank v. H.S. Gowda and Am:, [1994] 5 SCC 213 and Bank
of Baroda v. Jagannath Pigment & Chem have been correctly decided.

All the learned counsel for the parties did their best to assist the Court
in arriving at a just decision on the issues of significance and far reaching
c
implications. However, we would like to place on record our appreciation of
· valuable assistance given to Court by Shri Ranjit Kumar, Sr. Advocate assisted
by Shri K.M.K. Nair and Shri A. Subba Rao, Advocates, who appeared as
. amicus curiae on Court's request and with objectivity placed before the Court
relevant material, judicial view-points and several authorities. As most of the D
borrowers were unrepresented, the Court needed their assistance.

Let all these appeals and SLPs be now placed before appropriate Bench
for decision.

V.S.S. Appeals disposed of.