1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN JAIPUR BENCH, JAIPUR J U D G M E N T Inder Kant Garg & ors. Vs. Punjab National Bank S.B. CIVIL FIRST APPEAL NO.106/1993. UNDER SECTION 96 OF THE CPC. DATE OF JUDGMENT: 27th August, 2009. HON'BLE MR.JUSTICE S.P.PATHAK Mr. Anant Bhandari for the appellants. Mr. V.K. Tamolia for the respondent. BY THE COURT: This civil first appeal has been filed against the judgment and decree dated 8th April, 1993 passed by the District Judge, Dholpur in Civil Suit No.9/1984 whereby the suit has been decreed in favour of the respondent Punjab National bank (here-in-after referred to be as 'the PNB') and against the defendant-appellant for a sum of Rs.1,11,014.95 with cost along with interest from the date of filing the suit till the amount is recovered @ 12.5% per annum (as per agreed rate of interest). Briefly stated, the facts are that the plaintiff- respondent bank is a corporate body and is constituted under the provisions of the Banking Companies (Acquisition and Transfer of Undertaking) Act No.5, 1970 having its head office at New Delhi and its branches at different States, cities and 2 towns. One of the branch of the plaintiff-bank is at town Badi District Dholpur. The bank had authorised Mahesh Chand Mittal as lawful power of attorney to file suit on behalf of the bank. The main business of the bank is to disburse loan amongst the borrowers and other banking business as per the Banking Regulations Act, 1949. The appellant-defendant applied for a term loan for the purchase of a truck by moving an application on 12.2.1981 at the bank branch at Badi. It was also stated in the application that the sanctioned loan shall be under the terms and conditions of contract agreement between the parties. The defendant also requested by moving application that the truck will be purchased from the United Motors of Rajasthan, Jaipur, therefore, the bank should directly make payment of sanctioned loan of Rs.1,50,000/- to firm M/s United Motors of Rajasthan. It is also averred in the plaint that the defendant-appellant executed a promissory note for the security of loan on 25.2.1981 in favour of the bank and also agreed that interest on the amount shall be payable in excess of 4.5% over and above the Reserve Bank of India's rate but it shall never be less than 13.5% per annum with quarterly rest till the loan is repaid. It is also averred that the defendant- appellant by a letter of hypothecation dated 25.2.1981 agreed that after purchase of truck from the sanctioned loan amount the truck shall remain hypothecated and it shall be the duty of the defendant-appellant to get comprehensively insured the 3 truck and shall also pay the premium in time. The instalments were fixed @ Rs.5,000/- per month along with interest after one month of the date of receipt of loan and in case of any default made in payment of instalments the plaintiff bank shall be entitled to recover the entire amount along with excessive 3% rate of interest agreed between the parties. It is also averred that on the basis of above document executed by the plaintiff in favour of the bank, the sanctioned loan along with marginal loan money of Rs.16,000/- was paid to the United Motors of Rajasthan, Jaipur under a debit transfer voucher dated 25.2.1981. It is also averred that the defendant-appellant purchased Tata truck 1210-SE Model 42, engine no.692-D 01730327 and chasis no. 344073728809. The truck was registered and its registration number was RSD 1825. In the registration certificate of the truck, a note was appended of hire purchase in the name of the plaintiff. It was also averred that the defendant also agreed that as and when there is enhancement of the rate of interest by the Reserve Bank of India, the enhanced rate of interest shall be charged on the loan sanctioned and if any default is made in making payment of instalment then penal interest will also be charged. The loan account no.7/1981 was opened and was maintained regularly. On 23.1.1984 the amount due on defendant was Rs.1,53,483.95 (in proof thereof true copy of the account has been enclosed with the plaint). It is also averred that the 4 defendant appellant did not make payment even of one instalment in time as per the contract agreement, therefore, the bank was entitled to recover the aforesaid amount of Rs.1,53,483.95 by auctioning the truck and the properties of the defendant. It was also averred that the defendant nos. 2 and 3 Shiv Kumar and Sunheri Lal stood surety and also executed documents in this regard (agreement of guarantee dated 25.2.1981). It is also averred that several times notices were sent to the defendant to confirm the amount and to return the loan amount. The defendant accepted the loan amount, interest thereon on various occasions uptil 16.9.1983 and since the amount was not paid, the terms and conditions of the agreement having been violated, therefore, a prayer was made in the plaint to decree the suit for a sum of Rs.1,53,483.95 along with interest from 24.1.1984 till the amount is recovered from the defendant and his guarantors severally and jointly. The defendant in his statement only admitted that he applied for term loan. As regards, contents of promissory note and other documents are concerned, denial was made of the execution. In para 7 of the written statement it was admitted that a loan in the sum of Rs.1,50,000/- was obtained by him. In para 12 of the written statement the defendant disputed the correctness of the statement of account and also question of entitlement of plaintiff bank to charge penal interest. In para 21 of the written statement it is stated that the 5 plaintiff was not entitled to claim interest more than 12% of the principal amount. The defendant also stated regarding certain payments made by him up to 1996 and prayed that he had already paid major part towards interest on the loan amount, therefore, the bank was entitled to recover only a sum of Rs.21,882/- along with interest @ 12% p.a. Defendant nos. 2 and 3 filed a joint written statement and admitted that the defendant applied for term loan and disputed that he ever executed a promissory note or made any contract with the bank that he would pay interest 4.5% over and above the Reserve Bank of India's rate prevailing at the relevant time. It was also the stand of the defendant that the bank account was not properly maintained and the suit filed by the plaintiff was liable to be decreed only for a sum of Rs.65,351/- along with interest @ 12% p.a. Learned trial court on the basis of pleadings of the parties framed five issues including relief. Issue no.1 was in relation to entitlement of the plaintiff to recover a sum of Rs.1,53,483.95 from the defendants severally and jointly. Issue no.2 was whether the suit was filed by a competent person. Issue no.3 was regarding entitlement of the plaintiff bank to auction the truck for the purpose of making recovery of the loan amount. Issue no.4 was in relation to the entries made by the defendant and signature of the defendant as the same were disputed. Issue no.4-A was in relation to claim of defendant in 6 para 23A of written statement to the effect that a sum of Rs.42,465/- was paid towards principal. Issue no.5 was of relief. In support of its case, the plaintiff produced in evidence PW-1 Mahesh Chand Mittal, Manager of the plaintiff bank, PW-2 Kailash Prasad Modi, Manager of the plaintiff bank at Dholpur branch. In documentary evidence 19 documents were tendered in evidence. On behalf of the defendant- appellants, Inder Kant Garg, defendant examined himself as DW-1 and tendered one document Ex.A-1. The learned trial court after hearing both sides recorded its findings on issues in favour of plaintiff-respondent and against defendant-appellants and decreed the suit as indicated here-in-above. Hence, the present appeal has been filed. The only argument which has been advanced before this court is that the rate of interest was never certain and on different dates rate of interest mentioned in various documents executed at the time of obtaining the loan was different and on non-payment of instalment, the interest was added towards principal which is not permissible under law. According to learned counsel, only on principal amount interest was required to be charged. On the other hand, it has been contended that mere denial of the loan amount sanctioned is not enough for absolving the defendant-appellant of his this liability to make 7 payment of the amount of loan obtained by him from the plaintiff-bank along with agreed rate of interest. It is contended that during the pendency of appeal under the court's order, the truck was auctioned and the money received from auction was adjusted towards interest and that has been done as per rules, regulations and prevailing practice in the bank. It is contended that firstly the interest is to be paid, thereafter the amount of instalment is adjusted towards principal amount and this practice has been approved not once but various times by the courts. It is also contended that when interest payable is not paid, the same becomes a part of principal amount and thereafter interest has to be paid not only on the original principal but also on that part of interest which became part of principal amount. I have considered the submissions made before me and perused the impugned judgment and decree and also the material available on record. In the present case, the points for determination are; (1) Whether the defendant-appellant took the loan; (2) Whether the loan account of the defendant appellant was regularly maintained by the bank in accordance with law and the bank is entitled to recover the same; and (3) Whether when interest is not paid, the same becomes a part of the principal amount and thereafter interest has to be 8 paid not only on the original principal amount but also on that part of the interest which became part of the principal amount. POINTS NO.1 AND 2: PW-1 Mahesh Chand Mittal in his statement has stated that in the year 1984 he was working as Manager, Punjab National Bank, Badi and is general power of attorney holder to file suit on behalf of the bank. He has proved original power of attorney Ex.-11. He has also stated that he filed suit for recovery of loan amount of Rs.1,53,483.95 against the defendant-appellant and his guarantors. He has stated that the loan was obtained by defendant Inder Kant Garg for purchase of truck. A sum of Rs.1,50,000/- was sanctioned on 25.2.1981 and entries in this regard were made in the bank loan account of defendant. He has produced copy of the accounts, Ex.-12 which is a certificate in his hand at place 'A' to 'B' containing his signature at place 'C' to 'D'. He has also stated that interest was to be charged quarterly @ 13.5%. He has further stated that he was aware of the signatures of Anandilal who was at the relevant time Manager of the bank from whom he took charge. He has also seen him writing. He has proved signatures on Ex.13 and 14 which is balance confirmation receipt given by the defendant in his own hand-writing and contains his signature at place 'A' to 'B'. He has also proved signatures of Anandilal, Manager on the seal of the bank at place 'C' to 'D' and 'E' to 'F'. He has also proved the signatures 9 of Shiv Kumar and Kailash Modi on Ex.P-15 agreement of guarantee. He has also poved the letter written by Sunheri Lal who also stood surety in favour of defendant Inder Kant Garg and the letter written by Shiv Kuamr to the effect that after considering pros and cons he stood surety. PW-2 is Kailash Prasad. He has stated that he was Manager, Badi branch from July, 1979 to July, 1982. He has also stated that Inder Kant Garg defendant took loan of Rs.1,50,000/- from the bank and his guarantors were Shiv Kumar and Sunheri Lal. He has stated that the letter Ex.P-15 was in his hand writing. He has also stated that defendant Shiv Kumar and Sunheri Lal both executed guarantee deeds. He has also proved the loan account of the defendant which was properly maintained. He has also stated that the truck was hypothecated vide Ex.P-18 which contains the signatures of defendant-appellant. As against the above evidence, the statement of DW-1 Inder Kant Garg when read as a whole, it does not disclose that the defendant never took loan from the bank for the purchase of the truck. He has stated that there was no agreement to charge excess rate of interest in view of reserve bank of India rate. In the cross-examination he has disputed at some places the writings on the documents but in my opinion that is not enough to discard the documentary as well as the oral evidence led by the bank, therefore, I am of the opinion 10 that Mahesh Chand Mittal was authorised by the bank to file suit as he was a general power of attorney holder on behalf of the bank to file suit against the defendant. I am also of the opinion that the bank account was regularly maintained by the bank and the bank is entitled to recover the amount due against the defendant appellant as stated in the plaint. POINT NO.3: Ex.-1 is the promissory note which states that the defendants jointly and severally promised to pay the plaintiff bank Rs.1,50,000/- with interest @ 4.5% over and above the Reserve Bank of India's rate with minimum rate of 13.5% per annum with quarterly rest till the date of its realisation in full. Ex.-2 is letter of hypothecation. Clause 4 states that the defendant agreed to pay interest @ 5% per annum over and above the Reserve Bank of India's rate with minimum of 14% p.a. with quarterly rests. Ex.3 is a letter written by the borrower defendant-appellant wherein he has admitted that a pro-note of Rs.1,50,000/- was written by him on 25.2.1981. There are various documents where calculations have been made by the bank in relation to balance amount which were confirmed by the defendant. Ex.-8 is one of such document. Ex.-12 is the loan account of defendant-appellant up to 1983 showing amount due of the bank of Rs.1,53,483.95. Ex.-13 is the confirmation letter. It is dated 7.2.1983. Ex.-14 is again the letter of confirmation of balance amount. It is for the amount of 11 Rs.1,56,945.05. It is dated 16.9.1983. All the above documents without any manner of doubt suggest that before the loan was sanctioned, the documents were executed and quarterly rest interest was to be charged and in case of non-payment of interest the same was liable to be added in the principal amount and was thereafter liable for interest. In the case of Shew Kissen Bhattar Vs. CIT- (1973) 4 SCC 115 it has been observed that on failure of the borrower to pay in accordance with terms of 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 that part of the interest which had become a part of the principal. In State Bank of India Vs. Neela Ashok Naik- AIR 2000 Bom. 151, the Division Bench of Bombay High Court while dealing with section 34 of the Code of Civil Procedure, held that legal position clearly was that “the principal sum adjudged” can include in it interest as well, depending upon the contract between the parties. The contract for payment of interest with quarterly rests resulted in the interest being capitalised so as to make sum total of the principal advanced 12 plus interest accrued thereon “principal sum adjudged” on the date of the suit, the expression as employed under section 34. In Nedungadi Bank Ltd. Vs. Aswathi Starch and Glucose (P) Ltd.- AIR 1996 Ker 112, it has been held that the expression “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 Vs. Avtar Singh Saih- AIR 1986 P&H 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 become part of the principal. In Syndicate Bank Vs. W.B. Cements Limited- Air 1989 Del 107, Y.K. Sabharwal, J (as His Lordship then was), rejected the contention of learned counsel for the borrower that the interest can never become principal and the words “principal sum” in Section 34 of the Code of Civil Procedure should be given the ordinary meaning as given in the dictionaries, and termed as misconceived the argument that 13 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 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 the Division Bench decision of the Madras High Court in Sigappiachi Vs. M.A.P.A. Palaniappa Chettiar- AIR 1972 Mad 463. After carefully examining the law laid down in relation to quarterly rest charging interest on principal amount and quarterly interest added in the principal amount, it becomes absolutely clear that under banking practice, the bank is entitled to add quarterly interest in the principal amount and thereafter the same becomes the principal amount and interest is chargeable on that amount. In the present case, as per the agreed rate of interest, the interest has been charged, therefore, answer to the point no.3 is accordingly. 14 In view of the fore-going discussion and answer to the points nos.1 to 3, there does not appear any merit in this appeal and the same is liable to be dismissed. In the result, this appeal is dismissed. (S.P.PATHAK) J. bblm