THE HONOURABLE SRI JUSTICE A.GOPAL REDDY and THE HONOURABLE SRI JUSTICE NOUSHAD ALI W.P.Nos.9269 & 12268 of 2008 Date of Order: 09-02-2010 C.T.W.P.No.9269 of 2008: Between: 1.M/s. Adarsh Industries, Partnership Firm, rep. by its Managing Partner, Sri Vinod Kumar Agarwal and others. ..Petitioners and 1. State Bank of India, Charminar Branch, Hyderabad and others. ..Respondents The Court made the following Common Order: THE HONOURABLE SRI JUSTICE A.GOPAL REDDY and THE HONOURABLE SRI JUSTICE NOUSHAD ALI W.P.Nos.9269 & 12268 of 2008 Common Order: (Per Honourable Sri Justice A.Gopal Reddy) These two applications under Article 226 of the Constitution of India are filed for issuing a writ of Certiorari by calling upon the order passed by the Debts Recovery Appellate Tribunal, Chennai in R.A.No.2 of 2008, dated 14-03-2008 and to quash the same. Relevant facts, shorn out of details, which give rise to filing these writ petitions, are as under: M/s.Adarsh Industries a partnership firm (hereinafter called as “borrower”)—1st petitioner in W.P.No.9269 of 2008, which was manufacturing and selling of different types of biscuits under the name and style M/s.Paro Food Products, availed cash credit limit of Rs.55 lakhs from State Bank of India—petitioner in W.P.No.12268 of 2008 in the year 1993 which was enhanced to Rs.60 lakhs in the year 1996. While so, in May, 1996 a fire accident had occurred in the company premises thereby the entire machinery, raw-material, finished and un-finished goods were reduced into ashes. Therefore, the borrower lodged a claim with the Insurance Company for R.65,82,000/-. The same was settled in July, 1997 for a sum of Rs.52,50,542/- only under the influence of bank. As the borrower committed default in repaying the loan amount, a legal notice was issued by the bank on 10-11-1998 for recovery of Rs.63,29,044/- including the differential amount of Rs.13,33,942/- payable by the Insurance Company, which was disallowed, and interest of Rs.26,30,000/- claimed by the bank after the fire accident, with future interest at 16.37% p.a. with quarterly rests. As the demand has not been complied with by the borrower, the bank filed O.A.No.335 of 1999 against the defendants 1 to 28 before the Debt Recovery Tribunal, Bangalore, later it was transferred to Debt Recovery Tribunal, Hyderabad and numbered as O.A.No.2024 of 1999. The borrower resisted the claim of the bank contending that the short fall amount of Rs.13,33,942/- is receivable from the Insurance Company against the claim made by it and the same could not be received as the Bank has settled the matter with the Insurance Company. It is further contended that interest of Rs.26,30,000/- added to the loan account after the fire accident should be given credit and cannot be included in the claim. The Tribunal after taking into consideration the fire accident which took place in the year 1996; bank applying interest even after the fire accident, due to which the very purpose of the loan availed by the borrower was defeated; they could not run the industry and suffered heavy loss; taking sympathetic view reduced the rate of interest to 6% p.a. (simple) from the date of filing of O.A. till the date of realisation. It is admitted that the borrower had paid the entire decretal amount as decreed by the Debts Recovery Tribunal, Hyderabad. Feeling aggrieved by the reduction of interest the bank carried the matter in appeal. The Appellate Tribunal by the impugned order dated 14-03-2008 allowed the appeal holding that in spite of fire accident at the premises, the firm continued to carry on business and eared profit to a tune of Rs.5,62,921/- for the financial year 1998-99. In view of the same, sympathetic view taken by the Debts Recovery Tribunal for reduction of interest on the ground that fire accident took place in the borrower’s business premises and they suffered loss cannot be justified, as it is not supported by any record placed by the borrower for scrutiny and accordingly allowed the appeal modifying the rate of interest awarded by the Debts Recovery Tribunal awarding interest at 13.5% p.a. (simple) from the date of filing O.A. till the date of passing the impugned order and thereafter at 12% p.a. (simple) till realisation with proportionate costs. Questioning the same the borrower and its guarantors filed W.P.No.9269 of 2008 and the bank filed W.P.No.12268 of 2008. Sri D.Prakash Reddy, learned senior counsel for the petitioners in W.P.No.9269 of 2008 contended the observation of the Appellate Tribunal that nothing is lost in the fire accident is erroneous. Whereas the conclusion arrived by the Debts Recovery Tribunal on account of fire accident the borrower suffered loss is based on the fact that they made a claim for Rs.65,82,000/- out of which Rs.52,50,542/- has been received by the bank itself shows that the borrower suffered loss. Under sub-section (20) of 19 of Recovery of Debts (Due to Banks and Financial Institutions) Act, 1993 (for short “the Act”) the Primary Tribunal can exercise discretion to award interest to meet the ends of justice, which cannot be interfered by the Appellate Tribunal without assigning any cogent reasons. The learned counsel further contended that once the Debts Recovery Tribunal taking into consideration the loss suffered by the borrower and the disallowance made by the Insurance Company plus interest component of Rs.26,30,000/- in the suit claim thought it fit in reducing the rate of interest, which cannot be held to be erroneous by placing reliance on the judgment of the Supreme Court in STATE BANK OF INDIA v. SARATHI TEXTILES[1] Sri M.Narender Reddy, learned counsel for the bank contended that on Insurance Company depositing the amount into cash credit loan, again the borrower by availing cash credit loan run the business and earned profit, which is evident from the balance sheet filed by the bank and the same was taken into consideration by the Appellate Tribunal but wrongly restricted the rate of interest at 13.5% as against the agreed rate of interest. By placing reliance on the judgments of the Supreme Court in STATE BANK OF INDIA v. YASANGI VENKATESWARA RAO[2] and CENTRAL BANK OF INDIA v. RAVINDRA[3] he contends that once the parties accorded to schedule rate of interest under a contract the Courts cannot reduce the interest. From the facts and contentions, as referred to above, it is manifest that the bank issued a legal notice dated 10-11-1998 calling upon the borrower to pay the entire loan amount with interest for which the borrower executed revival letter dated 09- 03-1996 acknowledging their liability. The 1st petitioner—firm confirmed the balance in the loan account executing debit confirmation letter dated 04-04-1994. It is also not disputed that fire accident took place on 21- 05-1996 within two months from the date of revival letter executed by the borrower, where the property has been reduced to ashes and immediately they lodged a claim with the Insurance Company for a sum of Rs.65,82,000/-. According to the borrower, without its consent the bank settled the claim with the Insurance Company for Rs.52,50,542/-. Therefore, there is a short fall of Rs.13,33,942/-. The bank in the suit claim claimed interest of Rs.26,30,000/- on the liability acknowledged by the 1st petitioner—firm (principal borrower) for the period from the date of acknowledgment till the date of filing the suit. When the borrower pleaded that short fall of insurance sum Rs.13,33,942/- and Rs.26,30,000/- towards interest component should be given credit from the suit claim and claimed for adjustment of the said amount, the Debts Recovery Tribunal after taking into consideration the loss suffered by the borrower due to fire accident observed that a sympathetic view has to be taken in awarding the interest and accordingly held the defendants are liable to pay Rs.63,29,044/- which includes interest component of Rs.26,30,000/- and short fall of cash credit facility availed by the borrower, which was disallowed by the Insurance Company. No doubt cogent reasons were not given by the Debts Recovery Tribunal for exercising the discretion except stating sympathetic view has to be taken due to fire accident, but the Appellate Tribunal has not allowed the claim of the bank as per the contract rate of interest and enhanced the interest to 13.5%, as referred to above, only on the ground that the balance sheet for the year 1998-99 discloses the firm continued to carry on business and earned profit to a tune of Rs.5,62,921/- for the relevant period holding that the conclusion arrived by the Debt Recovery Tribunal on account of fire accident borrower suffered loss cannot be justified, as the same is not supported by any record placed by the borrower for scrutiny. It is not disputed that the principal borrower availed working capital of Rs.60 lakhs; as per the terms and conditions stipulated in the revival letter dated 19-03-1996, and as per the needs of the principal borrower they can draw the money upto Rs.60 lakhs and after the borrower doing the business can deposit the sale proceeds, so that the bank can adjust from out of the amount so deposited in the above loan account. The borrower who availed the working capital could not deposit the amount into the said loan account for the entire loan availed by it and acknowledged the liability by executing the revival letter; within two months thereafter the fire accident took place where the borrower suffered a loss of Rs.65,82,000/- for which insurance claim was made, but only a sum of Rs.52,50,542/- was allowed which was deposited to the above loan account. The Manager of the Bank, who examined as A.W.1, filed his affidavit in lieu of chief examination admitting issuance of legal notice dated 10-11-1998 to repay the entire loan amount. In the cross-examination he admitted by the date of filing OA the amount due is Rs.56,55,366.73 ps. and unapplied interest from 01-07-1998. The interest will not be applied after the account is classified as NPA. The amount of Rs.14,232/- in the account is towards valuation fee of the assets. The valuation details are not filed into the Tribunal and he is not aware whether the amount was deducted with the information of the defendants and he do not know what for the legal expenses of Rs.10,589/- was incurred and it may be for the filing of O.A. The amount of Rs.9,000/- is towards processing charges of the loan account which will be debited to the account at the time of giving loan. Ex.D3 is the letter dated 02-07-1997 stating that insurance claim amount of Rs.25,46,551/- was adjusted to the loan account on 10-07-1997. He is not aware of rate of penal interest and why it was debited to the loan account. Further, as per Ex.P26, bank addressed a letter dated 24-07-1997 acknowledging receipt of cheque dated 02-07-1997 for rs.25,46,551/-. The Supreme Court in SARATHI TEXTILES case (1 supra) considered the discretion exercised by the Debts Recovery Tribunal in grant of interest and held in a proceeding arises out of an application filed before the Debts Recovery Tribunal under the provisions of Recovery of Debts (Due to Banks and Financial Institutions) Act, 1993 and the discretion exercised by the Appellate Tribunal reducing to 10% interest as against grant of 19½% by the Debts Recovery Tribunal is justified holding that the Act clearly stipulated that the provisions of the Code of Civil Procedure will have no application except certain provisions thereof as mentioned in Section 22. Section 19 deals with the procedure to be followed by Tribunal on an application being filed by Bank and Financial Institutions and sub-section (2) deals with the power of the Tribunal in the matter of grant of interest. A special procedure having been provided in the special enactment for recovery of Debts due to the Banks and Financial Institutions and special procedure having been provided therein, the question of considering the provisions of Order XXXIV, Rules 2, 3,4 and 11 of the CPC in the case on hand, does not arise. Prima-facie, sub-section (20) of Section 19 confers a discretion on the Tribunal to award interest on an application being filed as it thinks fit to meet the ends of justice. In YASANGI VENKATESWARA RAO’s case (2 supra) the Supreme Court held when a security is offered in the case of mortgage of property, charging of compound interest would be regarded as excessive. Entering into a mortgage is a matter of contract between the parties. If the parties agree that in respect of the amount advanced against a mortgage compound interest will be paid, we fail to understand as to how the Court can possibly interfere and reduce the amount of interest agreed to be paid on the loan so taken. Similar view was taken by the Constitutional Bench of the Supreme Court in RAVINDRA’s case (3 supra) wherein it was held subject to a binding stipulation contained in a voluntary contract between the parties and/or an established practice or usage interest on 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 rests so capitalised is capable of being adjudged as principal sum on the date of the suit. The principal sum so adjudged is 'such principal sum' within the meaning of Section 34 of the Code of Civil Procedure, 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 t by the Court. In the above case it was categorically held in para-46 that 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 financial condition of the defendant. In such cases the pre-suit interest though 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 or himself, no one can take advantage of its own wrong. The Bank has not given any explanation for issuing notice in the year 1998 when the insurance claim was settled for Rs.52,50,542/- only on 02-07-1997 and added interest to the balance claim amount, which is not allowed, and other amounts, referred to above. In the case on hand, the borrower pleaded that the bank acted in a negligent manner and settled the claim with the Insurance Company without its consent over an extent of Rs.52,50,542/- as against the claim of Rs.65,82,000/- where the borrower suffered a loss of Rs.13,33,942/- and interest was also charged for the period when the fire accident took place and claim was settled. The very fact that Insurance Company admitted the fire accident and came forward to compensate the loss of Rs.52,50,542/- itself shows that the borrower suffered loss and until the amount is deposited to the loan account they could not do their business and only on deposit of insurance amount to the loan account, in the next financial year i.e. 1998-99 the borrower earned profit. Therefore, in the absence of any finding recorded by the lower Appellate Tribunal that the borrower earned profit in the years 1996-97, 1997-98, reversing the finding of the Debts Recovery Tribunal on the ground that on deposit of insurance claim borrower earned profit cannot be a ground for interfering with the discretion exercised by the lower Tribunal. Therefore, the impugned order passed by the Appellate Tribunal, awarding interest at 13.5% as against 6% simple interest awarded by the Debts Recovery Tribunal, is erroneous and the same is accordingly set aside. In view of the same, W.P.No.9269 of 2008 filed by the borrower is allowed and W.P.No.12268 of 2008 filed by the bank is dismissed. No order as to costs. ________________ A.GOPAL REDDY, J. ______________ NOUSHAD ALI, J. 09-02-2010 Murthy [1] II (2009) Banking Cases 696 (SC) [2] AIR 1999 SC 896 = (1999) 2 SCC 375 [3] AIR 2001 SC 3095