IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA. RSA No.250/1998 Decided on:28.11. 2008 Himachal Gramin Bank, Bali Chowki. …Appellant. Versus Naraingir and others. …Respondents Coram The Hon’ble Mr. Justice Rajiv Sharma, J. Whether approved for reporting ?1. For the appellant : Ms. Devyani Sharma., Advocate. For the Respondents : Mr. Ashwani Sharma, Advocate. Rajiv Sharma, J. This Regular Second Appeal is directed against the judgment and decree dated 17.12.1997 passed by the learned District Judge, Mandi in Civil Appeal No.6 of 1995. Brief facts necessary for the adjudication of this Regular Second Appeal are that the appellant-plaintiff (hereinafter referred to as ‘the plaintiff’ for convenience sake) filed a suit in the Court of learned Sub Judge, 1st Class (1), Mandi, H.P. for recovery of Rs. 31,307/-. The suit was resisted by the respondents-defendants (hereinafter referred to as ‘the defendants’ for convenience sake). The learned Sub Judge decreed 1 Whether the reporters of Local Papers may be allowed to see the judgment? 2 the suit on 30.12.1994 with costs for recovery of Rs. 31,307/- with future interest @ 14% per annum with quarterly rests from the date of filing of the suit till the final realization of the decretal amount. The defendants feeling aggrieved by the judgment dated 30.12.1994 preferred an appeal before the learned District Judge, Mandi. The learned District Judge, Mandi came to a conclusion that the defendants could not escape from the liability to pay the loan amount along with interest. However, the learned District Judge directed the defendant to pay a sum of Rs. 31,307/- along with costs on or before 30.9.1998 and in the event he failed to pay the amount by 30.9.1998, the plaintiff-bank was entitled to future interest from the date of decree @ 14% per annum till the realization of the decretal amount in full. The Regular Second Appeal has been filed only on the question of interest. The Regular Second Appeal was admitted on the following substantial question of law: 1. Whether the impugned judgment and decree can be passed by the learned lower appellate court particularly in view of the provisions of the Banking Regulation Act as amended from time to time and section 34 of the Code of Civil Procedure? Ms. Devyani Sharma, Advocate has strenuously argued that the learned District Judge could not alter the judgment and decree passed by the learned Sub Judge whereby he had directed the payment of interest @ 14% per annum with quarterly rests. She has strongly relied upon Corporation Bank versus D.S. Gosda and another, (1994) 5 SCC 213 and State Bank of India versus M/s Himalaya Engineer Works and others, 1997 (2) Sim.L.C. 373. She has further argued that the directions/circulars issued by the Reserve Bank of India under the Banking Regulation Act, 1949 are binding and they cannot be deviated from. She 3 lastly contended that the District Judge could not alter the contract by making the payment of interest conditional. Mr. Ashwani Sharma, Advocate has supported the judgment and decree dated 17.12.1997 passed by the District Judge whereby the defendants have been directed to pay the decretal amount by 30.9.1998 failing which the bank could recover interest @ 14% per annum till the realization of the decretal amount in full. I have heard the learned counsel for the parties and perused the record carefully. The defendants have admitted taking of loan from the plaintiff-bank and execution of all the documents i.e. Ex.PW-1/C, Ex.PW-1/B, Ex. PW- 2/B, Ex.PW-2/C, Ex.PW-2/D, Ex.PW-2/E, Ex.PW-2/F, Ex.PW-2/H, Ex.PW- 4/A, Ex.PW-3/A, ExPW-5/A, Ex.PW-5/C and mark ‘X’. The learned Sub Judge decreed the suit with future interest @ 14% per annum with quarterly rests. The learned District Judge taking a sympathetic view had directed that the interest would be payable if the decretal amount is not paid on or before 30.9.1998. The question raised in this Regular Second Appeal is no more res integra in view of the law laid down by their Lordships of the Hon’ble Supreme Court in Corporation Bank versus D.S. Gowda and another, (1994) 5 SCC 213. Their Lordships have held as under: “The real question, therefore, is whether the charging of interest at 16.5% per annum with quarterly rests is so obnoxious as would attract the provisions of the Usurious Loans Act, in this case the Mysore Act. Section 3(1 indicates that if in any suit the court has reason to believe that the transaction in question was substantially unfair the court may reopen the transaction provided that it shall not reopen any agreement purporting to close previous dealings and to create a new obligation entered into by the parties. Explanation I says that if the interest is 'excessive', the court shall presume that the transaction was 'substantially unfair' 4 but the said presumption could be rebutted by proof of 'special circumstances' justifying the rate of interest. Clause (a) of Explanation II says that the term 'excessive' means in excess of what the court deems to be reasonable having regard to the risk incurred by the creditor while advancing the loan. Clause (d) of that Explanation further provides that in considering whether the transaction was 'substantially unfair' regard shall be had to the various factors set out therein. Therefore, before the court can direct reopening of the transaction it must have reason to believe that the transaction is substantially unfair as the interest charged is excessive. If compound interest is charged from an agriculturist a presumption of the transaction being unfair can arise which can be rebutted. If it is shown that the transaction in question is substantially unfair and the court must reopen the same, the question may arise whether the newly added Section 21-A to the Banking Regulation Act bars such an enquiry. It may be mentioned that this provision was inserted after the High court's judgment and, therefore, the view of the High court on this point is not available. It may also have to be considered if Section 21-A would apply to pending proceedings like the present one. The point boils down to whether interest rate of 16.5% per annum with quarterly rest on a secured loan can be said to be so excessive as to render the transaction substantially unfair? Now, as we have pointed out earlier, the said rate of interest with the duration of the rest was prescribed and claimed consistently with the Reserve Bank directions. Having regard to the powers and functions of the Reserve Bank to which we have drawn attention, can it be said that interest rates prescribed by the Reserve Bank with the minima and maxima fixed, are unfair particularly when they have been fixed in public interest? Can the court have reason to so believe? Do the facts of the case warrant a conclusion of the interest rate being excessive? The term 'excessive' is a relative term; what may be excessive in one case may not be so in another. Much will depend on the circumstances obtaining at the material date. In our view if the Reserve Bank, keeping in view the economic scenario of the country and the impact that interest rates would have on the economy, fixes the minimum and the maximum interest rates 5 that banks can charge on loans/advances, the same cannot be termed to be unreasonable or excessive and would, in any case, amount to a 'special circumstance' within the meaning of the Explanation to Section 3(1 of the Mysore Act. In the present case the borrower did not specifically contend in his written statement that the interest charged was excessive but merely contended that the Bank was not entitled to quarterly rest and hence the claim made in the plaint on that basis was not admitted. Secondly he had shifted ground on what was the principal sum and interest which went to make the total of Rs. 5,00,000.00. Admittedly he had not paid a farthing towards the loan or interest till the date of the execution of the mortgage. This shows he was a bad pay master. The property was still under construction and did not yield any income on the date of the mortgage and so it could not be said that the security was sound. True it is that in his re- examination he came out with a statement that the property was worth Rs. 20-25 lakhs. But the value of the property at the date of the mortgage is relevant for which there is no evidence. The benefit of the rise in value will ensure to the borrower but that subsequent fact cannot help in evaluating the risk factor at the date of the mortgage. Admittedly at no point of time, not even at the time of confirmation of balance, did he protest that the interest charged was excessive. He went to the length of saying: 'Even now I cannot say what is excessive interest'. That is because he never bothered to repay any part of the loan nor did he attempt to pay interest. He was totally indifferent. He led no evidence to show that the prevailing market rate was lower than the interest charged by the Bank. Nor is it shown that any other bank would have charged less. There is no mention of deposit rates, etc., in his written statement or oral testimony on which the High court has based its opinion. The learned counsel for the Bank was justified in contending that the decision of the High court is based on no evidence since the borrower did not lead any evidence and if he had done so the Bank would have led evidence to rebut the same. Track record of the borrower was poor. Till 1975, admittedly, he a had not paid a single paisa by way of installment or interest. Presumably because he was an influential person, the Bank granted him further indulgence 6 on his agreeing to execute a mortgage. Till that date the building was not complete and did not yield any income. In the circumstances the Bank was justified in being cautious. The guidelines issued by the Reserve Bank permitted a maximum interest rate of 16.5% per annum with quarterly rests. The fluctuations in the rates of interest between 1973 and 1975 on borrowings in the mercantile community is not on record. There is also no evidence on record as to the rate at which loans could be had in 1975 on the security of immoveable property in the open market. The High court has concluded that the rate of interest charged was excessive solely on the basis of rates of interest allowed by banks on deposits and the interest charged by the Reserve Bank on borrowings by banking institutions. The High court concludes as under: "It is thus seen that as on today banks get advances from the Reserve Bank at 10% and pay the interest on deposits not more than 10% for deposits of three years and above." On this finding the High court thought that 12.5% interest with annual rests from the date of equitable mortgage would meet the ends of justice. The learned counsel for the Bank pointed out that since no evidence was led in this behalf the Bank could not draw the attention of the High court to the fact that out of every hundred rupees mobilised as deposit by banks, 7% has to be deposited with the Reserve Bank of India free of interest, 35% has to be invested in the form of cash and government securities (government securities yield a low rate of simple interest), 10% has to be compulsorily lent to the Food Corporation of India carrying interest at 12.5% per annum and the remaining 48% becomes available to the banks for lending purposes out of which 40% goes to priority sectors which yield interest at 10.5% to 11.5% per annum, 1% has to be compulsorily lent to members of the weaker S. at simple interest of 4% per annum under the DIR Scheme and the balance has to be utilised in other sectors. Thus the cost of acquisition of funds by banks average at 12% per 7 annum and if the High court judgment is upheld the Bank will earn 0.5% only. The learned counsel pointed that if the Bank had an opportunity to place these facts before the High court, the High court would not have sliced down the rate of interest to 12.5% as it did by the impugned judgment. It was further contended that the rates of interest' prescribed by the Reserve Bank take into consideration the true financial and economic policy of the country and operate as benchmarks against which private lending parties are supposed to adjust and compare their own rates of interest and, therefore, the court should ordinarily show reluctance to interfere in such matters as it may have the effect of disturbing the economic policy meticulously framed and implemented in the country. We find considerable substance in this line of reasoning, particularly where the minima and the maxima are prescribed by the Reserve Bank.” Similarly, a Division Bench of this Court in State Bank of India versus M/s Himalaya Engineer Works and others, 1997 (2) Sim.L.C. 373 has held as under: “Though, section 34, Code of Civil Procedure, provides that the court ‘may’ order interest at such rate as the court may deem reasonable to be paid on the principal sum adjudged from the date of suit to the date of decree, the High Court of Calcutta in West Bengal Financial Corporation and another v. Bertram Scott (1) Ltd. (In Liquidation), AIR 1983 Cal. 381 (DB), has held that the Court has no discretion as to whether pendente lite interest could be granted or not. The Court is bound to grant such interest. The court has the discretion only as to the rate of interest. We are in agreement with the said view and endorse the same. Even if it be assumed that the court has the discretion even with regard to the refusal or award of 8 pendente lite interest, such a discretion has to be exercised on sound judicial principles. In the present case, no reasons have been recorded by the learned single Judge is not awarding future interest from the date of the suit. Therefore, it cannot be said that the discretion was exercised on sound judicial principles. We, therefore, hold that the plaintiff is entitled to future interest at the rate awarded by the learned single Judge, with quarterly rests, from the date of the suit, that is, 7.10.1985, till the date of payment or realization.” The interest is to be awarded from the date of decree passed by the learned Sub Judge and the learned District Judge could not slash down the rate of interest from 14% per annum with quarterly rests to 14% and that too by making it conditional to be paid if the defendants failed to make the payment on or before 30.9.1998. In view of the definitive law laid down by their Lordships of the Hon’ble Supreme Court and this Court, which is binding on the Single Judge, the direction issued by the District Judge in the operative portion of the judgment are liable to be set aside. Accordingly, the Regular Second Appeal is allowed. The defendants are directed to pay the decretal amount with interest @ 14% per annum with quarterly rests from the date of filing the suit till the final realization of the decretal amount. The judgment and decree passed by the learned District Judge stands modified to this extent. There will, however, be no order as to costs. 28.11.2008 (Rajiv Sharma ), J. *awasthi*