1. This appeal is directed against the judgment and decree of the learned Principal Subordinate Judge, Tenali in OS No. 127 of 1990, dated 26-7-1996.

2. Appellant is the Plaintiff. Plaintiff filed a suit against the Defendant-Bank for recovery of a sum of Rs. 2,64,163-47 with interest @ 12% from 10-7-1987 till the date of filing of the suit.

3. As per the averments in the plaint, the Plaintiff is the Co-operative Society established under the provisions of the Cooperative Societies Act for the economic empowerment of its members by encouraging them to attain high yielding in the sugar cane production. The Plaintiff Society established a factory for manufacture of sugar, jaggery and other bye-products. It has resolved to issue shares mainly to the farmers for its capital requirement for expansion of the sugar factory. As most of the prospective share buyers are the agriculturists, who are to produce the sugarcane and supply the same to the factory and since they are not having sufficient money to pay the share amount in cash, an arrangement has been carved out, under which the Defendant-Bank has agreed to lend the amount to the extent of share amount to be purchased by each agriculturists. Thus, the share amount is treated as a loan on the part of the agriculturists/shareholders, who have to execute separate documents for the amount taken. However, it has been further agreed that the amount so sanctioned as loans shall be kept in the defendant-Bank in a separate saving account and with a condition that the sum shall not be operated until the block capital release Orders are issued by the IDBI and other financial institutions. Accordingly, two SB Accounts were opened by the plaintiff. They are 7/C-89, which was opened on 23-4-1977 and 8/1103, which was opened on 7-10-1977. Since the share amount had run into several lakhs, the same was kept in SB Accounts. The bank has charged the interest from the loanee agriculturists ranging from 10.5% to 11.35%, but, however, agreed to allow the plaintiff interest @ 4.45%. It is only after the release of the block capital, the plaintiff was authorised to operate the two accounts. It is the case of the plaintiff that it has been drawing the interest amount accrued on the amount transferred by the bank towards the share amount contributed by the agriculturists/loanists. However, on 10-7-1987, an amount of Rs. 1,94,237-79 was lying under the S.B. Accounts. While so, a strange incident took place namely the Defendants appears to have realised that opening of S.B. Account and crediting the interest to the said account by trading concerned was not permissible as per the guidelines issued by the Reserve Bank of India. This was came to be known to the Defendant- bank only when a complaint was lodged by the Indian Banks Association. The defendant issued a notice on 10-7-1987 informing the plaintiff that an amount of Rs. 7,77,443-42 was credited towards the interest in the S.B. Account. It has to be paid back as the same is credited by mistake. A sum of Rs. 1,94,237-79 was lying in the credit as on 10-7-1987. The same was appropriate towards the part satisfaction of the entire interest and also demanded balance payment of Rs. 5,83,205/-. Notice was replied denying the right of the Bank to appropriate the amount. Since, the Defendant wrongly appropriated the amount, the suit came to be filed by the plaintiff for recovery of a sum of Rs. 2,64,163-47 with interest @ 12% from 10-7-1987. It was also stated that the plaintiff was not a trading concern when the same S.B. Account was opened. It is also submitted that the Defendant is estopped from contending that he is not liable to pay interest having agreed to pay 4.5% per annum on the amount, which is lying in the credit in the S.B. Account. The Defendant has filed written statement contending that it is a trading concern. It is stated that the activities of Defendant-Bank are controlled by the Reserve Bank of India by the provisions contained under Banking Regulation Act. The circular issued in 1974 by the Reserve Bank of India which was forwarded to the Bank only in 1984. Under the said Circular, the bank was prohibited from paying the interest on the S.B. Accounts of trading concerns. The said circular has got statutory force and it was issued in the public interest. It binds the bank as well as the Society. In view of the circular, the very opening of the account is against the circular and therefore, payment of interest is illegal and contrary to law. Under those circumstances, the bank is entitled to recover the interest amount paid. Inasmuch as, when this was noticed the account had a credit balance of Rs. 1,94,237-79 and the same was appropriated. Thus, it is stated that the action of the bank is quite legal and valid. It is also stated that the plea of estoppel is not sustainable as the Plaintiff cannot plead the principle of estopped against law, inasmuch as the circular issued by the Reserve Bank of India has force of law and no estoppels can be pleaded against the circular issued by the Reserve Bank of India.

4. Plaintiff has also filed rejoinder taking alternative pleas under Sections 65 and 70 of the Contract Act on the ground that the Plaintiff-Bank has enjoyed the amount and it is liable to pay the interest, the bank cannot be allowed to have unjust enrichment. In view of the respective pleadings, the Trial Court framed the following issues:

1. Whether the plaintiff is entitled for the suit amount from the Defendant as prayed for?

2. To what relief?

The Trial Court also framed an additional issue to the following effect on 14-6-1996

1. Whether the alternative plea of the plaintiff for refund of the suit amount is barred by time?

5. On behalf of the plaintiff two witnesses were examined Ex.A-1 to A-11 were marked. On behalf of the Defendant, one witness was examined and Exs.B-1 to B-7 were marked.

6. The Trial Court held that the plaintiff was not entitled for interest on S.B. Account as per the directive of the Reserve Bank of India and hence dismissed the suit by judgment and decree dated 26-7-1996 against which the present appeal has been filed by the plaintiffs.

7. The issue that arises for consideration is whether suit contract is prohibited by the circulars of Reserve Bank of India and whether the judgment and decree of Trial Court is valid and sustainable in law?

8. It is the contention of the plaintiff that the bank has agreed to lend money to the agriculturists, borrowers to enable them to acquire the shares of the plaintiff Co-operative Sugar Factory and that the bank has agreed to sanction the said share amount as loan to the respective agriculturists on the condition that the amounts shall be kept in deposit with the bank in S.B. Accounts and it shall carry interest @ 4.5%. It is also in evidence that when the loan was sanctioned to the cane growers, an agreement covering various aspects was entered. Under Ex.A1 letter was issued by the Defendant-Bank to the President of the Plaintiff-Sugar Factory under which various terms and conditions were prescribed for granting of the loan to the borrowers. While accepting the proposal of the plaintiff for sanction of the advance to the individual sugarcane growers to enable them to subscribe share capital of the society, the bank has also agreed to extend financial assistance of 20/25 lakhs. The following are the details of the proposals accepted by the bank:

"With reference to your letter dated 9-8-1976 requesting for action of advances to individual sugarcane growers who are willing to register themselves with you as sugarcane suppliers and are already growing/ intend to grow sugarcane in the area of operation of the proposed sugar factory and to enable them to subscribe to the share capital of the Society, I have pleasure in advising you that you proposal has been approved by our Local Head Office and the bank is prepared to extend such finance upto an extent of Rs. 20/25 lakhs.

3. The details of the scheme and the terms and conditions on which we are agreeable to entertain the individual applications are as under:

(i) Only non-members of primary Cooperative Society will be financed;

(ii) The scheme of individual farmers should be viable;

(iii) The sugarcane growers should register themselves with the sugar factory before availing of the loan;

(iv) The farmers proposed to be financed by us should deal exclusively with us for all their agricultural credit requirements and to this effect they should give us an undertaking;

(v) Loans upto Rs. 4,500/- (i.e., after retaining a margin of 10% will be sanctioned to fanners owning lands upto 5 acres at the rate of Rs. 1,000/- per acre;

(vi) Two years start up period would be allowed for repayment of the proposed loans;

(vii) Interest on the advances will be charged as follows:

With holdings upto 5 acres wet land or 10 acres dry land With holdings exceeding 5 acres wet land or 10 acres dryland.

Upto Rs. 2,000/-

11% 13% Over Rs. 2,000/-

12% 13% Upto Rs. 4,500/-

(viii) Mortgage free loans will be permitted only in the case of smaller farmers for loans upto Rs. 1,000/- subject to the approval of Central Office of our Bank which is awaited.

(ix) Group guarantee should be given in the case of each loan granted to small farmers upto Rs. 1,000/- where mortgage is waived as stated in column (viii) above.

(x) All the borrowers should deposit with the Bank the share certificates issued by you with the transfer deeds by way of collateral security. Besides his, crops now raised or to be raised by the farmers on their lands should be hypothecated to us.

(xi) The loans should be repaid within a maximum period of 7 years (including the start-up period of 2 years permitted for repayment).

(xii) The factory should register the Bank's lien over the shares purchased with our financial assistance by virtue of which the loan installments should be recovered by you from the proceeds of the cane supplied by the shareholders and an undertaking to this effect should be given to us both by your factory and the farmers.

(xiii) Loans will be granted to farmers in the area of operation of your factory hailing from adopted/proposed to be adopted villages and the sanction of loans will be restricted to this office only. Please advise us the area of operation of your proposed factory to enable us to prepare a list of adopted villages and also consider adopting new villages on their merits if necessary.

(xiv) Approval for block capital of the loan to be raised from IFC LIC should be produced before we start our lending operations to individual ryots.

2. We have sought our Central Office permission for relaxing the stipulations made against item 1(i), (viii) and (xiv) as compliance of these conditions would entail delay/hardship. We shall advise you when the requisite sanction is obtained.

3. You should deposit with us the entire amount of loans sanctioned by us to individual farmers for subscribing to the share capital by way of short-terms deposits. You should also deposit with us the share capital collected by your Society from promoter-members without the assistance of financial institutions, as we have agreed to your proposals to extend financial assistance to the extent of Rs. 25 lakhs as desired by you. You should also deposit with us a major portion of the factory's deposits till such time the construction of the factory and installation of machinery are completed.

4. We are also prepared to extend to you any other assistance you would need in your efforts to take up the construction of the factory and installation of the machinery as also your future working capital requirements.

5. Assuring you of our best at all times."

9. Another letter was issued by the Defendant-Bank on 8-9-1976, which reads thus:

"Please refer to our letter F.No. 4, dated 1.9.1976.

(2) As indicated in paragraph 2 of the letter of Central Office have agreed to relax the stipulations made against Item No. 1 (i), (viii) and (xiii) subject to the following conditions:

(i) The Bank will finance the members of the Co-operative Societies also for purchase of shares in the co-operative sugar mill subject to their objection and production of no dues/no-objection certificates from the Co-operative Societies of their area. Such applicant farmers should, however, also furnish suitable letters of understanding whereby they should undertake not to borrow from co-operative societies in future. As a corollary thereof all their credit needs will be met by this Bank.

(ii) Our financing of individual farmers will not await the receipt of the formal sanction of block capital loans. However, the sugar factory should keep in deposit the loan proceeds with us until sanction of block capital loan and to that effect they should furnish a suitable letter to the bank long with each application undertaking to produce the formal sanction of block capital loan in due course and also confining the Bank's right of set off over the proceeds of the loan (s) disbursed in case the project does not turn up.

(iii) Loans over Rs. 1,000/- and up to Rs. 4,500/-will be sanctioned on creation of equitable mortgage in lieu of the registered mortgage subject to these loans being guaranteed by at least one surety.

4. In this connection we confirm having today sent to you through your representative a draft of the undertaking to be furnished by you as per Item No. 1 above and also handed over to him 100 application forms for your use. The application forms duly completed in all respects should be submitted to us in duplicate along with

(a) Title deeds of the collateral offered;

(b) Encumbrance certificate for a period of 12 years immediately preceding the application;

(c) Three passport size photographs of the applicant farmer.

5. On receipt of the above we will obtain the required legal opinion on the title deeds and fix up a date, as soon as possible, for the disbursal of the loan. The applicant will have to bear the cost of the legal opinion fees as also the cost of the hypothecation agreement which will be stamped with a non-judicial stamp of value of Rs. 5/-

6. Please acknowledge receipt and arrange accordingly. Supply of suitable number of additional application forms will be arranged to meet your requirements."

10. By its letter dated 18-10-1977, the Plaintiff-Society demanded 11% interest on the amounts, which were kept in the share deposit account. But, however, the bank by its letter dated 28-11-1977 Ex.A-5 has agreed to grant 5% interest as applicable to S.B. Accounts. The following is the extract:

"In the interim we undertake to keep the share amounts raised by individual ryots and paid to us by the bank on their behalf from out of the loans sanctioned by the State Bank of India, Morripet, Tenali to those ryots, in a separate account in our name with that bank with rate of interest at 5%. The bank will have a right of set off on our account with them with our prior approval in case the project does not turn up, over such amounts credited by them to our account until the sanction for block capital is produced. We, however, bring to your notice in this connection that the Director of Sugar, Hyderabad and the Government of Andhra Pradesh have addressed letters to Development Manager (Agrl.), State Bank of India, Hyderabad for release of funds and we have addressed a letter on 6-4-1977 and again on 17-8-1977 to your Regional Manager, Hyderabad (copy enclosed) to relax this condition. Our general letter of undertaking as detailed above issued today is subject to our above request."

11. It is also not in dispute that the amount was deposited in the special account called share deposit account. The interest was allowed to be credited to the said account as per the rates applicable to S.B. Account. The interest was being credited to the said account from time to time and the total interest up to October, 1987 was more than Rs. 7.77 lakhs.

12. It is the case of the Defendant-Bank that as per the guidelines issued by the Reserve Bank of India by virtue of the provisions contained under Section 35-A of the Banking Regulation Act, trading concerns are prohibited from opening S.B. Accounts and consequently no interest is permissible. The bank tried to heavily rely on the circular issued by the Reserve Bank of India in 1974.

13. The only legal issue that arises for consideration in this appeal is whether the amount deposited under two accounts styled, as S.B. Accounts are the accounts in conformity with the guidelines issued by the Reserve Bank of India or whether they carry any interest. Under the provisions of the Banking Regulation Act, the Reserve Bank of India is entitled to issue circulars from time to time. These directives are traceable to Sections 21 and 35-A, which are extracted below:

"Section 21 Power of Reserve Bank to control advances by banking companies--(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may 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, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.

(2) Without prejudice to the generality of the power vested in the Reserve Bank under Sub-section (1), the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to-

(a) the purposes for which advances may or may not be made,

(b) the margins to be maintained in respect of secured advances,

(c) the maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual,

(d) the maximum amount up to which, having regard to the considerations referred to in Clause (e), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and

(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given;] (3) Every banking company shall be bound to comply with any directions given to it under this section.

Section 35-A Power of the Reserve Bank to give directions-

(1) Where the Reserve Bank is satisfied that--(a) in the public interest; or (aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company: or

(c) to secure the proper management of any banking company generally: it is necessary to issue directions to banking companies generally or to any banking company in particular, it may from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under Sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect."

14. It is the case of the bank that since the Reserve Bank of India has issued circular as early as in 1974 not to permit the opening of S.B. Accounts by the trading concerns and since this is not within the knowledge of the bank and it has come to know when a complaint has made in 1987 by the Indian Banks Association, they have realised that the bank has committed a mistake in allowing the plaintiff-Society to open S.B. Accounts with interest of 5% on the amount kept in deposit of the said account.

15. The learned Counsel for the appellant-plaintiff submits that the circulars issued by the bank are only executive instructions and they have no force of law. Even otherwise, the circulars cannot be interpreted to totally over-ride the contract entered in between the bank and the customer. He further submits that even assuming that the trading concern is precluded from opening S.B. Accounts and what was opened was not S.B. Accounts and it was only share deposit account of the agriculturists to whom the loan was sanctioned by the bank and the loan was sanctioned on a specific condition that the amount should be deposited in a separate account and therefore, what was opened was in fact a share deposit account and it was disguised as S.B. Accounts, so as to enable such deposit to earn interest as applicable to S.B. Accounts. Therefore, in effect he submits that what was opened was not S.B. Accounts, but share deposit account. He also submits that the account was not permitted to be operated for a considerable length of time until block capital loan was released by the IDBI and other financial institutions. Therefore, the deposit was being used indirectly as a security for the other financial facilities which were made available to the Co-operative Society and the amount was not operatable account inasmuch as neither cheques are credited to the account nor the amounts were withdrawn, except the amount which was withdrawn was only the amount of interest. Thus, he submits that even assuming that such a directive is binding, it has no application to the facts of the present case. He further submits that the directions issued by the Reserve Bank of India are only binding on the Bank and it does not bind the Plaintiff-Co-operative Society. The violations of the directives issued under Section 35-A have penal consequences and the bank is only liable to the penal consequences and not the account holders or the customers. Therefore, alternatively also he submits that even assuming that it has binding force, it cannot bind the customers and the bank has to face the consequences and it is bound to honour agreement in between the bank and the customers.

16. The learned Counsel relies on the decision of the Bombay High Court reported in Bank of Maharashtra v. United Construction Company, , wherein it was held that the Circular issued by the Reserve Bank of India govern the relations in between the Reserve Bank of India and the bank and could not bind, it observed in para 9 as follows:

"As far as the question of interest is concerned, we may point out that we agree with the learned Judge that there does not seem to have any express agreement as such to grant any overdraft facility nor any agreement that the interest would be paid at a particular rate in respect of the amounts overdrawn in the said account. In our view, looking to all facts and circumstances, the only reasonable rate of interest which can be granted in the case like this is at 12%. Mr. Tulzapurkar drew our attention to the Reserve Bank circular stating that the banks must charge interest 17% per acre or any other rate as prescribed by the Reserve Bank in respect of amounts which are due in an overdraft account. We are unable to see how this circular is of any assistance in the case before us. The circular governs the relations between the Reserve Bank and the Banks subject to its control. We fail to see how that circular could bind Defendant No. 1 or its partners. If Mr. Sathe was conscious of that Circular and wanted to see that it was complied with, it was for him to have made it clear to Defendant No. 3 that interest would be charged at 17% per acre or such other rate as might be prescribed by the Reserve Bank of India on the amounts overdrawn."

17. The Division Bench of Gujarat High Court in Reserve Bank of India, Bombay v. Harisidh Co-operative Bank Limited, Ahmedabad, , as follows:

"The contention of Mr. Vakharia with respect to the power of the Executive Director, prima facie does not appear to have any substance. It is also the duty and, therefore, the business of the Reserve Bank of India to supervise the affairs of the insured Co-operative Banks. Section 35-A of the Banking Regulation Act authorises the Reserve Bank to give necessary directions to secure the proper management of any banking Company. It is not in dispute that this provision applies to an insured Cooperative Bank also. If Section 115-A is read with Sections 7 and 35-A of the Banking Regulation Act, it becomes difficult to accept at this stage the contention of Mr. Vakharia, So also there does not appear to be any substance, prima facie, in the contention that the power to supersede the Board of Directors and appoint an Administrator has been exercised in this case mala fide. The directions which the Reserve Bank had given on 19-6-1987 were for achieving a different object. As the purpose of giving those directions was served, the said directions came to be withdrawn on 27-6-1987. At this stage what appears from the record is that considering the consequences of the alleged mal practices of the Bank and other irregularities, the Reserve Bank was satisfied about the necessity of giving the impugned directions dated 23-7-1987. It is not possible to say that the said satisfaction of the Reserve Bank is based on no material or that the said directions were given on extraneous considerations. With respect to the contention that both the impugned orders are void as violating the principles of natural justice, it must be stated that the final decision in this behalf can be taken only when the Special Civil Application is finally heard. When an emergent action is required to be taken, orders passed without giving a prior opportunity or hearing the persons adversely affected by such orders are upheld by the Courts. Legislations, excluding application of certain principles of natural justice like prior hearing, have been held to be valid, if such a legislation is not regarded as unreasonable for that reason in view of the object of the legislation or for similar reasons."

18. In Indian Bank, Tiruvannamalai v. A. Balasubramania Gurukal, , the Division Bench while dealing with the Usurious Loans Act observed that the provisions of Banking Regulation Act alone with regulate rate of interest of a nationalized bank. There was no inconsistency in between the provisions. The Division Bench observed in para 14 as follows:

"We may briefly pause to consider the contention of the learned Counsel for the petitioner that there is an irreconcilable inconsistency between the provisions of the Banking Regulation Act, 1949 and those of the Usurious Loans Act. The avowed object of the Banking Regulation Act, 1949 is to consolidate and amend the law relating to banking and thereunder provision is made for the regulation and control by the Reserve Bank of India of the carrying on of the business of banking by banking companies including the rates of interest on advances by banks. Any contravention on the part of the banks to charge interest at the rates specified under Section 21(2)(e) is made punishable under Section 46(4) of the Banking Regulation Act, 1949. The primary object of the Usurious Loans Act is to confer a power on Court to afford relief to a debtor, if the Court has reason to believe that a particular transaction between the parties is substantially unfair. No particular rate of interest, as reasonable interest or excessive interest, has been prescribed in the Usurious Loans Act and the reasonableness or otherwise of the rate of interest in any given case has to be decided and determined in the light of the statutory provisions contained therein. In other words, the provisions of the Usurious Loans Act do not in any manner control or regulate the charging of rates of interest, but are intended merely to afford relief from a claim for excessive interest in cases where the transaction is considered to be substantially unfair. It is obvious, that the spheres of operation of these two enactments are very different, in that one is concerned with the control and regulation of the business of banking including the rate of interest on advance to be made by the banking companies, while the other is intended to secure relief from excessive claims for interest sought to be enforced through Courts. On a consideration of the diverse scope of the operation of the provisions of these enactments, we are of the view that the provisions of the Banking Regulation Act, 1949 alone regulate the rate of interest on advances by nationalized banks and that there is no inconsistency between its provisions and the provisions of the Usurious Loans Act. The contention of the learned Counsel for the petitioner in this regard, has therefore, to be negatived. Equally, the contention of the learned Counsel for the respondents that the provisions of the Usurious Loans Act will prevail over the provisions of the Banking Regulation Act, 1949 has also to be rejected."

19. As against the same, the learned Counsel for the bank submits that under Section 35-A, the directive issued by the bank are binding and therefore, their question of plea of estoppel is not available. He relies on the recent judgment of the Supreme Court reported in Central Bank of India v. Ravindra and Ors., . While dealing with the power of the Reserve Bank of India under Sections 21 and 35-A, the Supreme Court observed as follows:

"The power conferred by Sections 21 and 35A of the Banking Regulation Act, 1935 is coupled with duty to act. Reserve Bank of India is prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authorities 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 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 capitalized. 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 excessive, usurious or opposed to public policy."

20. While deliberating on the item of interest, the Supreme Court observed the basic characteristics of interest and various clauses on interest, thus:

"Black's Law Dictionary (7th Edition) defines 'interest' inter alia as the compensation fixed by agreement or allowed by law for the use or detention 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, Government of Orissa and Ors. v. G.C. Roy, , 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. Shamlal Narula v. CIT., Punjab, , 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. Westminster Bank Limited, [(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 might have made if he has 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 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.I.T., Punjab v. Dr. Sham Lal Narula 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 use or retention by one person of a sum of money belonging to or owed 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 whatever 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 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. Shamlal 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 wrongdoer 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 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.

Mulla, on the Code of Civil Procedure (1995 Edition) sets out three divisions of interest as dealt in Section 34 of Civil Procedure Code. The division is according to the period for which interest is allowed by the Court, namely (1) interest 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 to the date of the decree, at such rate as the Court deems reasonable; (3) further 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; interest pendente lite is not a matter of substantive law (See, Secretary, Irrigation Department, Government of Orissa and Ors. v. G.C. Roy, . Pre-suit interest is referable to substantive law and can be sub-divided into two sub-heads: (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 a stipulation for the rate of interest, 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 Court must award at such rate as it deems reasonable; (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 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 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 bind the parties as also the Court excepting in any case out of the three exceptions set out hereinbefore.

21. Therefore, in view of the aforesaid contentions and decisions, it has to be considered, whether the bank can successfully stake a claim refusing the interest on the accounts opened by the Plaintiff-Society. In this regard, it is also to be observed that till October, 1987, the entire interest accrued on these share deposit account was around 7.7 lakhs, but though the bank has issued a demand for the return of the balance, no action was taken to recover the balance amount.

22. Admittedly, the account which was opened with the bank was only a share deposit account and as per the terms and conditions of the financial institutions, as can be seen from Ex.A-1 and A2, the amount which was lend to the agriculturists-loanees was to be kept in deposit till such time, the block capital was released by the other financial institutions and that till such time, this amount should carry interest @ 5% per acre as applicable to S.B. Account. We go by the contention of the learned Counsel for the bank that the circulars issued by the Reserve Bank of India are binding on the bank, but how far they are binding on the subject are yet debatable point, which we are not inclined to deal in this appeal. We find it unnecessary as per the terms and conditions referred to above. It is to be only construed that it is a deposit made by the Plaintiff-Society to obtain various other financial benefits including the capital assistance for a sum of Rs. 20 to Rs. 25 lakhs. Therefore, it was only a deposit made and not account to be operated. The mere naming the account as S.B. Account would not change the characteristic of a transaction. In order to see that the amount of loan issued to the agriculturists-loanees and also the loan facility granted to the plaintiff, the amount was kept in deposit so as not to be operated till the complementary loan was granted by the other financial institutions. It is also admitted that the account was not being operated till the loan was granted by the other financial institutions and even after the loan was sanctioned, the operation was only to the extent of drawing the interest which accrued on the deposit. Therefore, a clear picture which emerges from the transaction is that the amount which has been deposited is only a share deposit account and it is not an S.B. Account to be operated. Co-operative Societies shall not be construed as commercial concerns in the larger interest of State policy of Co-operative movement. Though the name assigned by the parties as S.B. Account, in effect, it is only a share deposit account which will be governed by the terms and conditions of the agreement as understood in between the parties under Ex.A1 and A2. Under those circumstances, we have to necessarily hold that the denial of interest on the premise that it is contrary to the directives of the Reserve Bank of India is wholly illegal and misconceived, since it is only share deposit account. The Trial Court has not properly considered this issue and swayed away by the contentions of the Bank that the circular issued by the Reserve Bank of India are binding and opening of S.B. Account and crediting the interest is prohibited and thus dismissed the suit. Such an approach is illegal and contrary to law. The Bank is solely responsible for suppression of the fact and enter into a contract. It is liable to refund the suit amount with interest by way of equity, by virtue of Sections 65 and 70 Contract Act. It is not barred by limitation. Thus, we allow the appeal and decree the suit filed by the Appellant-plaintiff with costs. But, however, they are entitled for interest @ 9% from the date of suit till the date of payment.