Case: Bank of Baroda Vs. Perchem Industries & Others

H.D. PATEL, J.The aforesaid two appeals arise from a common judgment and, therefore, they are heard and disposed of together.2. Two Civil Suits were filed by the appellant Bank against the same set of respondents. They were registered as Special Civil Suit No. 167/79 and 168/79 . The first respondent in either of the two suits is a partnership firm dealing in the business of manufacturing aromatics and allied chemical having its factory at Hingna Road, Nagpur. The respondent Nos. 2 to 6 are the partners of the firm. The respondent No. 2 is the Managing Partner of the firm.3. The first respondent approached the appellant Bank for financial assistance upto a limit of one lakh for erection of the factory and for purchase and installation of machinery. After due scrutiny and verification of the requirements of the first respondent, sanctioned a term loan of Rs. 30,000/- against the equitable mortgage of the plot and building and Rs. 70,000/- against the hypothecation of machinery on 10-8-1974. The first respondent and respondent Nos. 2 to 6 executed a demand promissory note agreeing to pay jointly and severally a sum of Rs. 70,000/- with interest at 4 per cent over and above the Reserve Bank rate with minimum of 11% per annum with monthly rests. An agreement of hypothecation also came to be executed. In consideration of the facilities granted, one Jaywant Ramchandra Deshpande, the father of respondent No. 2, executed a letter of guarantee in favour of the Bank. The said guarantor expired prior to the filing of the suit leaving behind respondent No. 2 and respondent Nos. 7 to 10 as legal heirs, in possession of the property left by the deceased. These respondents are equally liable for the amount claimed in the suit.4. The first respondent again approached the bank for working capital facility upto the limit of Rs. 25,000/-. The plaintiff after due scrutiny of the requirements sanctioned cash credit limit of Rs. 25,000/-. The respondents/partners executed a demand promissory note on 26-9-1975 agreeing to pay the amount jointly and severally with interest at 4% over the Reserve Bank rate with minimum of 13 % per annum with quarterly rests. Again an agreement for hypthecation of goods in favour of the plaintiff Bank was also executed.5. The respondents 1 to 6 and the deceased guarantor Shri J.R. Deshpande acknowledge their indebtedness in the sum of Rs. 93,544.71 in term loan on 11-8-1977 and in the sum of Rs. 30,018.16 in cash credit account on 31st August, 1977. Since the amounts were not paid, the plaintiff Bank claimed Rs. 1,23,329.51 with interest at the contractual rate amounting to Rs. 28,630.88, the total claim being Rs. 1,51,960.39 in Civil Suit No. 167/79.6. As stated above, the appellant Bank had after due scrutiny and verification sanctioned a term loan limit of Rs. 30,000/- against equitable mortgage of the plot and building. For this amount the respondents 1 to 6 executed a demand promissory note agreeing to pay the same with interest at 4% over the Reserve Bank Rate, minimum being 11% per annum with monthly rests. This amount the defendants agreed to pay in 60 equal instalments of Rs. 525/- each. As usual, the guarantor was late Shri J.R. Deshpande, whose legal heirs were as stated above respondents Nos. 2 and 7 to 10. They are jointly and severally liable for repayment of the amount. The appellant Bank claimed Rs. 55,850.60 including interest at the contractual rate. In default, the plaintiff Bank claimed sale of the property mortgaged by public auction and amount realised be applied towards the satisfaction of the appellants claim. This was the claim filed in Civil Suit No. 168/79.7. The respondents contested the claim on various grounds. In either of the suit filed by the plaintiff the respondent contended that the interest charged by the plaintiff Bank as per contractual rate is excessive and hit by section 3 as amended by C.P. Amendment Act No. 11 of 1934 which is still operative in Vidarbha area. It was also the defence of the respondents that the period of rests being less than six months, presumption of interest being excessive under the usurious loans Act 1918 can be drawn and, therefore, the accounts should be ordered to be reopended under section 3 thereof. We are not concerned with other defences since not under challenge in these appeals.8. The learned trial Judge decreed both the suits but ordered the appellant Bank to reopen the accounts and charge interest at 10% per annum with quarterly rests on the principal amount right from the inception of the accounts and in compounding manner for the defaulted period on the amount accrued due from time to time till the filing of the suit. That sum would be the decretal amount which the appellant Bank would be entitled to. The appellant Bank was called upon to submit the calculations within stipulated period. Accordingly the decree for Rs. 1,31,264.15 was passed in Civil Suit No. 167/79 and Rs. 47,683.45 in Civil Suit No. 168/79. In terms of the decree, future interest was awarded at the rate of 6% per annum of the principal amount from the date of suit till realisation. That amount was also computed by this appellant Bank while submitting the accounts. The future interest upto 31-8-1988 was Rs. 51,300.00 in Civil Suit No. 167/79 whereas the future interest upto 31-7-1988 was Rs. 16,050/-. The respondents have paid the amounts before the due dates. Not satisfied with either of the decrees, the appellant Bank filed F.A. No. 345/89 against judgment and decree in Civil Suit No. 167/79 against the judgment and decree in Civil Suit No. 168/79.9. The appellant Bank challenges the direction of the trial Court to reopen the accounts and calculate interest at there rate of 10% per annum with quarterly rests. According to them, the Usurious Loans Act has ceased to apply to Banking transactions and, therefore, their entitlement to interest will be at the contractual rate. Similarly, the appellant Bank also claims future interest out the contractual rate.10. In order to find out the applicability of the Usurious Loans Act and particularly section 3 thereof, it is necessary to examine section 21-A of the Banking Regulation Act which came to be incorporated therein by Banking Laws (Amendment) Act (I of 1984) which came into force with effect from 15th February, 1984. The said section totally prohibits the Courts from reopening a transactions between a Banking Company and its debtor on the ground that the rate of interest charged by the banking company in respect of the transaction is excessive. It was urged on behalf of the appellant that though section 21-A of the Banking Regulation Act came into existence on 15th February, 1984, it applied to all pending cases like the claim of the appellant Bank. This contention was opposed by and on behalf of respondents according to whom the provision did not apply to suits filed before the provision came to be incorporated in the Banking Regulation Act. Therefore, the question that falls for determination is whether the power conferred on the Court to reopen a loan transaction under section 3 of the Usurious Loans Act, 1918, has been taken away so that the debtors of the Banking Companies cannot approach the Court to reopen the transaction entered into by them with Banking companies on the ground that the interest charged by the Banking Companies in respect of such transaction is excessive.11. It cannot be denied that the provisions of Usurious Loans Act, 1918 giving power to the Courts to deal with certain cases of Usurious Loans are still on the statute book. It appears that since the subject of money lending was in the State List, even under the Government of India Act, 1935 there has been local amendments to the Act, but so far as Maharashtra is concerned, there has been no amendment as such to this Act, except an amendment carried out by C.P. Act No. XI of 1934 which was brought into force in Central Province of which Vidarbha Region of Maharashtra State was a part till states Reorganisation Act, 1956 and it is only in this region the amendments made by C.P Act XI of 1934 are in force. We are not concerned with the amendment for resolving the controversy involved in these appeals.12. Reverting back to the controversy in question, section 21-A is reproduced below :"21-A. Rate of interest charged by Banking Companies not to be subject to scrutiny by court:---Notwithstanding anything contained in the Usurious Loans Act, 1918, (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a Banking Company and its debtor shall not be reopened by any Court on the ground that the rate of interest charged by the Banking company in respect of such transaction is excessive."Apparently, it is clear that the Courts will not be entitled to reopen any transaction between a Banking Company and its debtor on the ground that the rate of interest charged by the Banking Company in respect of such transaction is excessive. An overriding effect is given by using the words "Notwithstanding anything contained in the Usurious Loans Act, 1918 or any law a relating to indebtedness in force in any State." Therefore, if the provisions of section 21-A of the Banking Regulation Act are held to be applicable to the transactions in the two suits, the respondents will not be entitled to call upon the Court to exercise power under sub-section 1(a) of section 3 of the Usurious Loans Act, 1918.13. The respondents while contending that section 21-A is prospective in its application relied upon the decision in (Muthian and another v. Syndicate Bank, Pollachi)1, A.I.R. 1987 Madras 248. It is held therein that section 21-A of the Banking Regulation Act which came into existences by Act No. 1 of 1984 with effect from 15-2-1984 only, evidently was without any retrospective effect. It also went on to observe that the provision of section 21-A can apply only with reference to cases that came into existence as disputes before the Courts subsequent to 15-2-1984. For this purpose, the Court relied upon section 24 of the Act No. 1 of 1984.14. A contrary view has been expressed in (Koramsetty C. Venkatswarlu v. Syndicat Bank, Udayagire and another )2, A.I.R. 1986 Andhra Pradesh, 290. It is held in paragraph 5 of the judgement as under :---"It is clear that the said provision makes the provisions of Usurious Loans Act inapplicable to any transaction between a Banking Company and its debtor. The Courts power to re-open the transaction under the provisions of the Usurious Loans Act on the ground that the rate of interest charged is excessive is no longer available. It is not disputed that it affects the pending proceedings also though the Act came into force on 15-2-1984. Thus it is clear that the Usurious Loans Act is no linger applicable to any debt due to a Banking Company."The above observation is also referred in the decision of (Bank of Baroda v. Reduum Nagachaya Devi)3, 1989(4) S.C.C. 470 but the Supreme Court did not decide the controversy.15. The learned Single judge of this Court had an occasion to deal with the point involved in (Gulabchand Laxmichand Bhutada v. The Central Bank of India and another )4, 1992 Mh.L.J. 68, wherein it was held that section 21-A of the Banking Regulation Act, 1918 is applicable even to pending appeals and Second Appeals and Courts are prohibited from entertaining the plea to re-open a transaction between a debtor and a Banking Company on charging excessive interest under the provisions of Usurious Loans Act. This view was taken in Second Appeal although the suit out of which the plea arises was filed in 1976. In other words, section 21 is held to be applicable to pending proceedings.16. Reading section 21-A as it is, it appears to be retroactive in operation, if effect is to be given to the language and also the intent of the provision. A retrospective operation is not to be given to a statute so as to impair the existing rights or obligations, otherwise than as regards matter of procedure unless that effect cannot be avoided without doing violence to the language of the enactment. The Court has to interpret that language used in the Act and when the language is clear and unambiguous, it must be given effect to. The language used in the section and particularly the words "shall not be reopened by any Court" clearly indicates the intent to cover the pending suits which will include even appeals or second appeals on the date the provision is brought into force. It is at that stage the prohibition to reopen the account can be enforced. It seems that the provisions was enacted with a purpose and that purpose is to avoid different views being taken by various Courts in the matter of re-opening of the accounts of transactions between the Nationalised Banks and its debtors despite the fact that the rate of interest is charged by them in accordance with the circulars issued by the Reserve Bank of India. To avoid this difficulty, section 21-A came to be incorporated in the Banking Regulation Act. The use of the words "any Court" would in the context include every Court existing in the hierarchy of law Courts and, therefore, so long as the Court is asked to exercise its powers under the provisions of Usurious Loans Act, 1918, in a matter pending before it, provisions of section 21-A of the Banking Regulation Act will be attracted and the Court is prohibited from undertaking that exercise. In our opinion also, the Court is prohibited from entertaining the plea for re-opening the various accounts of the transactions between parties on the ground that the rate of interest is excessive, although the two suits were filed in the year 1979. In other words, the provision of section 21-A is applicable even to pending suits. The learned Trial Court was not right in re-opening the accounts of the appellant Bank and reducing the interest as stated above.17. There is yet another obstacle in the way of the respondents. Though section 21-A forbids the Courts from re-opening the transaction only on the ground of excessive interest, there are grounds in section 3 of the Usurious Loans Act which still empower the Court to open the transaction. By issuance of a notification in exercise of the powers conferred by sub-section (3) of section 1 of the Usurious Loans Act, 1918 on 29th April, 1985, the State Government issued a direction that the said Act shall not apply to loans given by all categories of Bank in the State. Clearly enough, the Usurious loans Act itself is made inapplicable to the transaction covered by the notification and the power conferred on the court to reopen such transaction as are covered by the notification is thus taken away by force of the notification itself.18. The trial Court has awarded future interest at 6% per annum on the principal sum from the date of suit till realisation. Such a grant is obviously wrong. It is a settled law that under section 34, Civil Procedure Code the liability in relation to the sum so adjudged has arisen out of a commercial transaction, the rate of such further interest may exceed 6% per annum, but shall not exceed the contractual rate of interest, or where there is no contractual rate, the rate at which moneys are lent or advanced by Nationalised Bank, in relation to commercial transactions. A commercial transactions is defined to be connected with industry, trade or business of the party incurring the liability. The transactions in two suits were commercial transactions and, therefore, ordinarily the rate of interest would be the contractual rate; otherwise, it will amount to Court granting credit facility of somebody else money at a lower rate of interest. The Banks will not grant loans at lower rate of interest. Only because the party has committed default in payment, the suit is required to be filed against such party, and such a defaulting party cannot enjoy the facility of lesser rate of interest. Therefore, ordinarily the contractual rate of interest should be the rule and departure a rare exception. In case of a mortgage suit, Order 34, Rules 2 and 4 would apply. Till the period of redemption expires the matter is considered to be in the domain of contract and the interest has to be paid at the contractual rate but after the period of redemption has expired the matter passes on from the domain of contract to that of judgment. It is, therefore, clear that the rate of interest to be charged is the contractual rate both in money decree or in a suit of mortgage (at least upto the periods of redemption). The appellant is entitled to claim interest at the contractual rate. However, in Civil Suit No. 167/79 the appellant Bank has claimed future interest at 14% per annum on the decretal amount from the date of suit till realisation and in Civil Suit No. 168/79 future interest is claimed at 13% per annum for the same period. There can be no objection for granting this relief.19. The appellant Bank is hence entitled to claim the amounts of Rs. 1,51,960.39 in Civil Suit No. 167/79 and Rs. 55,850.60 in Civil Suit No. 168/79. Future interest would be at the rate of 14 % per annum on the decretal amount from the date of suit till realisation in Civil Suit No. 167/79 and at the rate of 13% per annum on the decretal amount from the date of suit till realisation.

Decision reasoning: 1[ds]15. The learned Single judge of this Court had an occasion to deal with the point involved in (Gulabchand Laxmichand Bhutada v. The Central Bank of India and another )4, 1992 Mh.L.J. 68, wherein it was held that sectionof the Banking Regulation Act, 1918 is applicable even to pending appeals and Second Appeals and Courts are prohibited from entertaining the plea toa transaction between a debtor and a Banking Company on charging excessive interest under the provisions of Usurious Loans Act. This view was taken in Second Appeal although the suit out of which the plea arises was filed in 1976. In other words, section 21 is held to be applicable to pending proceedings.16. Reading sectionas it is, it appears to be retroactive in operation, if effect is to be given to the language and also the intent of the provision. A retrospective operation is not to be given to a statute so as to impair the existing rights or obligations, otherwise than as regards matter of procedure unless that effect cannot be avoided without doing violence to the language of the enactment. The Court has to interpret that language used in the Act and when the language is clear and unambiguous, it must be given effect to. The language used in the section and particularly the words "shall not be reopened by any Court" clearly indicates the intent to cover the pending suits which will include even appeals or second appeals on the date the provision is brought into force. It is at that stage the prohibition to reopen the account can be enforced. It seems that the provisions was enacted with a purpose and that purpose is to avoid different views being taken by various Courts in the matter ofof the accounts of transactions between the Nationalised Banks and its debtors despite the fact that the rate of interest is charged by them in accordance with the circulars issued by the Reserve Bank of India. To avoid this difficulty, sectioncame to be incorporated in the Banking Regulation Act. The use of the words "any Court" would in the context include every Court existing in the hierarchy of law Courts and, therefore, so long as the Court is asked to exercise its powers under the provisions of Usurious Loans Act, 1918, in a matter pending before it, provisions of sectionof the Banking Regulation Act will be attracted and the Court is prohibited from undertaking that exercise. In our opinion also, the Court is prohibited from entertaining the plea forthe various accounts of the transactions between parties on the ground that the rate of interest is excessive, although the two suits were filed in the year 1979. In other words, the provision of sectionis applicable even to pending suits. The learned Trial Court was not right inthe accounts of the appellant Bank and reducing the interest as stated above.17. There is yet another obstacle in the way of the respondents. Though sectionforbids the Courts fromthe transaction only on the ground of excessive interest, there are grounds in section 3 of the Usurious Loans Act which still empower the Court to open the transaction. By issuance of a notification in exercise of the powers conferred by(3) of section 1 of the Usurious Loans Act, 1918 on 29th April, 1985, the State Government issued a direction that the said Act shall not apply to loans given by all categories of Bank in the State. Clearly enough, the Usurious loans Act itself is made inapplicable to the transaction covered by the notification and the power conferred on the court to reopen such transaction as are covered by the notification is thus taken away by force of the notification itself.18. The trial Court has awarded future interest at 6% per annum on the principal sum from the date of suit till realisation. Such a grant is obviously wrong. It is a settled law that under section 34, Civil Procedure Code the liability in relation to the sum so adjudged has arisen out of a commercial transaction, the rate of such further interest may exceed 6% per annum, but shall not exceed the contractual rate of interest, or where there is no contractual rate, the rate at which moneys are lent or advanced by Nationalised Bank, in relation to commercial transactions. A commercial transactions is defined to be connected with industry, trade or business of the party incurring the liability. The transactions in two suits were commercial transactions and, therefore, ordinarily the rate of interest would be the contractual rate; otherwise, it will amount to Court granting credit facility of somebody else money at a lower rate of interest. The Banks will not grant loans at lower rate of interest. Only because the party has committed default in payment, the suit is required to be filed against such party, and such a defaulting party cannot enjoy the facility of lesser rate of interest. Therefore, ordinarily the contractual rate of interest should be the rule and departure a rare exception. In case of a mortgage suit, Order 34, Rules 2 and 4 would apply. Till the period of redemption expires the matter is considered to be in the domain of contract and the interest has to be paid at the contractual rate but after the period of redemption has expired the matter passes on from the domain of contract to that of judgment. It is, therefore, clear that the rate of interest to be charged is the contractual rate both in money decree or in a suit of mortgage (at least upto the periods of redemption). The appellant is entitled to claim interest at the contractual rate. However, in Civil Suit No. 167/79 the appellant Bank has claimed future interest at 14% per annum on the decretal amount from the date of suit till realisation and in Civil Suit No. 168/79 future interest is claimed at 13% per annum for the same period. There can be no objection for granting this relief.19. The appellant Bank is hence entitled to claim the amounts of Rs. 1,51,960.39 in Civil Suit No. 167/79 and Rs. 55,850.60 in Civil Suit No. 168/79. Future interest would be at the rate of 14 % per annum on the decretal amount from the date of suit till realisation in Civil Suit No. 167/79 and at the rate of 13% per annum on the decretal amount from the date of suit till realisation.