- Bookmark
- Share
- CaseIQ
Union Bank Of India v. Dalpat Gaurishankar Upadyay
Full-Bench Opinion Summary — Interpretation of "principal sum adjudged" in Section 34 CPC
Factual and Procedural Background
The suit was filed by Union Bank of India claiming recovery of Rs. 5,55,259.35 with further interest at 16.5% per annum with quarterly rests from the date of the suit until payment. The plaintiffs relied on documents and sought an ex parte decree with interest pendente lite and post-decretal interest. The amount claimed (Rs. 5,55,259.35) was admitted to be inclusive of interest accrued up to the date of the filing of the suit. A legal controversy arose over the interpretation of the phrase “principal sum adjudged” in section 34 of the Code of Civil Procedure, 1908 (CPC) — specifically, whether that phrase referred only to the original principal or to the aggregate amount due on the date of the suit inclusive of interest (including interest capitalised by periodic rests as per agreement or practice).
A learned Single Judge noted conflicting precedents and recommended reference of specific questions to a larger Bench. The matter was placed before the Full Bench. The Court heard counsel for the plaintiffs (Shri Tulzapurkar), allowed the Indian Banks' Association to intervene (represented by Shri Kapadia), and heard Shri R.A. Dada for the defendant (who was unrepresented initially). The Bench proceeded to examine section 34 and related rules (Order 34 Rules 2 & 11) and decided the referred questions.
Legal Issues Presented
- Whether the expression “the principal sum adjudged” used in section 34 of the Code of Civil Procedure means only the original amount lent (the principal without addition of any interest) so that interest pendente lite or post-decretal interest can be awarded only on such original amount?
- When does interest become part of the principal or get merged with the principal within the meaning of section 34 when the agreement provides for addition of interest to the principal at certain intervals with periodical rests?
- Whether the expression “principal sum adjudged” includes the aggregate amount found due and payable on the date of the suit inclusive of amount of interest added to the principal with or without periodical rests in accordance with the agreement between the parties, express or implied, or the practice followed?
- What is the meaning of the expression “principal” used in Order 34, Rule 2 and Order 34, Rule 11 of the Code?
Arguments of the Parties
Plaintiff-Bank (Appellant) — Principal submissions
- The plaintiff's counsel accepted that interest prior to suit does not always become part of principal, but submitted there are situations where interest merges into principal — notably where an agreement provides for periodic addition of interest to principal (quarterly rests), i.e., compound interest or capitalisation of interest.
- Counsel argued that where interest is capitalised by agreement or by banking practice (debited periodically to the borrower's account and carried forward), the accrued interest loses its identity as interest and becomes part of the principal; consequently the “principal sum adjudged” should include such capitalised interest and pendente lite or post-decretal interest under section 34 should be calculable on that enlarged principal.
- Authorities relied upon by the plaintiffs included Halsbury's Laws of England (noting banking practice of debiting accrued interest to current accounts) and the House of Lords decision in Panton's (Paton) Trustees v. I.R.C (1938), which observed that accrued interest added to principal with the customer's assent becomes merged into the principal.
- Counsel also drew support from a Calcutta High Court decision (The Bank of Rajasthan Ltd. v. S.K. Trading Co.) that, on facts where quarterly rests were provided, treated the larger amount (principal plus capitalised interest) as the principal for the purpose of section 34.
The opinion does not contain a detailed account of the defendant's legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kaluram v. Chimniram, AIR 1934 Bom. 86 | Held (pre-1956) that Courts could award compound interest under section 34 as then worded (i.e., court could give compound interest where obligation impliedly agreed). | The Bench distinguished this decision: it applied to the pre-1956 version of section 34 and the specific issue of compound interest before amendment. The Court held Kaluram has no application to section 34 as amended by the 1956 Amendment Act. |
| Jagannath Pigments & Chemicals v. Bank of Baroda (F.A. No. 364 of 1986), decided 19.11.1986 | Interpreted “principal sum adjudged” to mean principal only and not aggregate including interest; awarded pendente lite interest only on principal. | The Court regarded this Division Bench decision (interpreting the amended section) as correctly stating the law and accepted its approach as applicable to the amended section 34. |
| Central Bank of India v. Haribhau Kakade (F.A. No. 999 of 1987), decided 16.3.1988 | Held interest pendente lite should be allowed on promissory-note amount (principal) and not on aggregate including interest. | The Court treated this Division Bench decision as correctly interpreting the amended section 34 and therefore as supporting the view that interest under section 34 is payable only on principal. |
| Secretary, Irrigation Dept., Government of Orissa v. G. C. Roy, (1992) 1 SCC 508, 533 | States that interest for period prior to institution of suit is substantive law, governed by agreement or usage of trade — not by section 34. | Cited to support the proposition that section 34 governs only interest from date of suit to decree and from decree to payment, and not pre-suit interest (which remains a separate substantive matter). |
| Panton's (Paton) Trustees v. I.R.C., (1938) 1 All England Law Reports 786 (House of Lords) | Observed that accrued interest which a bank has with the customer's assent added to principal ceases to be interest and merges into principal. | Noted by the Court as authority relied upon by the plaintiffs and some High Courts; the Bench acknowledged the principle but held that, for purposes of section 34 as amended, legislative intent prevents interest (even if capitalised by agreement) being treated as principal for awards under section 34. |
| The Bank of Rajasthan Ltd. v. S.K. Trading Co., (1990 Bank J. 677) (Calcutta HC) | Held that where agreement provided for quarterly rests, interest was merged with principal and the larger figure (including interest) was to be treated as principal under section 34. | Referred to by plaintiffs and considered by the Court; the Bench nonetheless concluded that the legislative scheme of amended section 34 displaces such a contractual/banking-practice-based approach for the purposes of awarding interest under section 34. |
| Sigappiachi v. Palaniappa, AIR 1972 Mad. 463 (Madras HC) | Madras HC view that in an account suit the principal sum adjudged could be the amount payable on the date of the suit (including interest). | Noted by the Court but distinguished on its facts (account suit). The Bench rejected the broader principle that section 34 should allow interest on interest. |
| Indian Bank v. Kamalaya Cloth Store, AIR 1991 Ori. 44 (Orissa HC) | Held that “principal sum adjudged” could include such amount of interest which had become part of principal. | Mentioned as part of High Courts taking the inclusive view; the Full Bench disagreed with that approach as contrary to the scheme and intent of the 1956 amendment to section 34. |
| Jafar Husein v. Bishambhar Nath, AIR 1937 All. 442 (Allahabad HC) | Allahabad HC view supporting inclusion of interest in “principal sum adjudged.” | Listed among High Court authorities taking the inclusive approach; the Full Bench rejected that approach for purposes of the amended section 34. |
| Kalyanpur Cold Storage v. Sohanlal Bajpai, AIR 1990 All. 218 (Allahabad HC) | Held “final amount” determined by court after adjudication shall be deemed “principal sum adjudged”; interest accrues on such amount and not on original amount advanced. | Noted by the Full Bench; the Bench disagreed with this interpretation and held it contrary to the amended statutory scheme. |
| Syndicate Bank v. W.B. Cements, AIR 1989 Delhi 107 (Delhi HC) | Held “principal sum adjudged” includes such amount of interest which had become part of the principal; relied on banking practice and Panton's case. | Noted and cited; the Full Bench rejected the reasoning in favour of interpreting the amended section 34 as permitting interest only on principal. |
| Food Corporation of India v. Samena Co-operative Marketing Society Ltd., (1987) Cur. L.J. (Civ. & Cri.) 778 (Orissa HC) | Held that interest under section 34 could be awarded only on principal due and not on interest adjudged along with principal. | Referred to by the Court as an authority taking the opposite view to Indian Bank v. Kamalaya Cloth Store; noted in the survey of High Court decisions. |
| State of Punjab v. Scheduled Caste Co-operative L.O.S. Ltd., AIR 1988 Pun. & Hary. 192 (Punjab & Haryana HC) | Discussed section 34 after the 1956 amendment and held that interest awardable from date of plaint to date of decree is only on principal sum and not on the whole amount including interest. | Cited by the Full Bench as supportive of its interpretation of the amended section and the legislative intent to prohibit interest on interest. |
| M.V. Mahalinga Aiyar v. Union Bank Ltd., AIR 1943 Mad. 216 (Madras HC) | Held that interest from date of plaint to date of decree must be only upon principal sum due (observing that the sum in the decree erroneously included interest up to date of plaint and should have been reduced to principal only for pendente lite calculation). | Noted by the Court as an earlier authority supporting the view that pendente lite interest is to be computed on principal only. |
Court's Reasoning and Analysis
This Bench undertook a textual and contextual analysis of section 34 CPC and Order 34 Rules 2 & 11. The key points of the Court's stepwise reasoning as reflected in the opinion are:
- Scope of Section 34: The Court began with a plain reading of section 34, noting that it authorises award of interest (i) from the date of the suit to the date of the decree and (ii) from the date of the decree to the date of payment. The statute specifies that such interest is payable on the “principal sum adjudged.”
- Distinction between pre-suit interest and section 34 interest: The Court observed (citing Secretary, Irrigation Dept. v. G.C. Roy) that interest for periods prior to institution of suit is a matter of substantive law (usage or agreement) and is not governed by section 34, which expressly refers to interest adjudged for any period prior to institution of the suit “in addition to” interest under section 34. Thus the statute itself distinguishes “principal sum adjudged” from “any interest adjudged on such principal sum for any period prior to the institution of the suit.”
- Conflict of authorities: The Bench reviewed prior decisions — noting a Division Bench (Kaluram) which had permitted compound interest under section 34 as it stood before the 1956 amendment, and two later Division Bench decisions of this Court (Jagannath Pigments and Central Bank v. Haribhau Kakade) which had interpreted the amended section to allow interest only on principal. The Court held there was no real inconsistency between those decisions once the pre- and post-amendment contexts were distinguished.
- Legislative amendment and intent (1956 Amendment): The Court emphasised the 1956 amendment to section 34 and the Joint Committee's Report which explicitly stated that interest should not be awarded on interest but only on the principal sum. The Court treated the amendment as decisive — incorporation of “principal sum” into section 34 reflects legislative intent to prohibit interest on interest.
- Effect of banking practice or agreement (capitalisation): The Bench examined plaintiff's reliance on banking practice and authorities (Halsbury's and Panton's case) that interest, if added to principal with assent (e.g., by quarterly rests), becomes capital. The Court acknowledged those principles but concluded that the statutory scheme of the amended section 34 overrides any contractual or banking practice for the specific purpose of awarding pendente lite and post-decretal interest under section 34. Therefore, even where contractual provisions capitalise interest, for the purposes of section 34 the “principal sum adjudged” remains the original principal.
- Definitions and conceptual distinction: The Court surveyed standard legal dictionary definitions of “interest,” “simple interest,” and “compound interest” (West's, Black's, Corpus Juris) to underscore the conceptual distinction: “principal” and “interest” retain separate identities and the addition of accrued interest for calculation does not convert interest into principal for statutory purposes where the statute expressly separates them.
- Order 34 Rules 2 & 11: The Bench read the text of these rules and observed Rule 2 requires the court to take account separately of “principal” and “interest on the mortgage,” and Rule 11 permits interest to be awarded on “the principal amount found or declared due.” The Court noted that prior to the 1956 amendment Rule 11(b) expressly allowed subsequent interest on aggregate principal and interest; the words “and of the interest” were omitted by the 1956 amendment. The legislative redrafting indicates the same policy choice to preclude interest on interest. Consequently, “principal” in Rules 2 and 11 means principal only and excludes interest.
- Conclusion of analysis: Synthesising the textual language, legislative history (1956 Amendment and Joint Committee Report), dictionary definitions, and precedential landscape, the Bench concluded that (a) under section 34 as amended interest under that section can be awarded only on the principal sum adjudged, and (b) “principal sum adjudged” does not include interest however computed or capitalised by agreement or banking practice. The first three referred questions were answered accordingly. The fourth question was answered by construing “principal” in Order 34 Rules 2 and 11 as excluding interest.
Holding and Implications
Holding (core rulings):
- First three questions: The Bench held that the expression “principal sum adjudged” in section 34 of the C.P.C. means the original amount lent (the principal) without addition of any interest whatsoever. Interest accrued up to the date of the suit (whether computed as simple or compound, or capitalised by agreement or banking practice) retains its character as interest and does not merge into the principal for the purpose of awarding interest under section 34. Accordingly, pendente lite and post-decretal interest under section 34 can be granted only on the principal sum adjudged and not on principal plus interest accrued thereon.
- Fourth question: The Bench held that the expressions “principal” and “aggregate of the principal sums” used in Order 34 Rules 2 and 11 mean only the principal amounts and not principal plus interest. Interest under Rule 11 can be awarded only on the principal amounts found or declared due; Rule 2 requires separate ascertainment of principal and interest.
Immediate consequences for the parties
- Where a decree is for payment of money, pendente lite interest (from date of suit to decree) and post-decretal interest (from decree to payment) under section 34 can be awarded only on the principal sum adjudged; the court cannot award those statutory interests on amounts that merely represent interest accrued up to the date of the suit.
- This conclusion applies irrespective of any contractual clause or prevailing banking practice that purports to capitalise interest; such contractual capitalisation does not transform pre-suit interest into “principal” for the statutory purpose of section 34.
- Order 34 Rules 2 and 11 must be read consistently with the 1956 amendments — interest under those rules attaches to principal sums, not to interest components of the adjudged total.
The opinion does not discuss broader policy implications beyond the statutory interpretation and its application to the questions referred; the Court confined itself to construing the statutory language, its amendment history and relevant authorities and answered the four referred questions accordingly.
Disposition
The Full Bench answered the referred questions in the manner set out above. The Court ordered that a certified copy be furnished expeditiously and concluded with the direction "Order accordingly."
Order accordingly.
Dr. B.P Saraf, J.:— This case has been referred to the Full Bench at the instance of brother Dhanuka, J. The controversy that arose for determination relates to interpretation of the expression ‘principal sum adjudged’ as used in section 34 of the Code of Civil Procedure, 1908 (hereinafter “C.P.C”).
2. The suit in relation to which this controversy arose was filed by the Union Bank of India for recovery of a sum of Rs. 5,55,259-35 with further interest thereon at the rate of 16.5% per annum with quarterly rests from the date of the suit till payment. The plaintiffs relied on various documents in support of its contention that the defendant had agreed to pay the amount of interest to it with quarterly rests. An ex parte decree against the defendant was prayed for with interest pendente lite and post-decretal. The controversy arose as to the amount on which pendente lite or post-decretal interest can be granted. The amount of Rs. 5,55,259-35 for which the suit had been filed was admittedly inclusive of interest due till the filing of the suit. section 34 of Civil Procedure Code empowers the Court to award pendente lite and post-decretal interest at such rate as it may deem reasonable on the ‘principal sum adjudged’. The question for determination was whether ‘the principal sum adjudged’ would mean the amount of original sum lent or the aggregate amount found due and payable on the date of the suit inclusive of the amount of interest added to the principal amount with or without periodical rests in accordance with the agreement between the parties. Similar expression has also been used in Order 34, Rule 2 and Order 34, Rule 11. The learned Single Judge trying the suit, noticed that there was a clear conflict of opinion between the Division Bench Judgments of this Court in Kaluram v. Chimniram, AIR 1934 Bom. 86 and two later unreported judgments in F.A No. 364 of 1986, Jagannath Pigments and Chemicals v. Bank of Baroda decided on 19th November, 1986 and F.A No. 999 of 1987, Central Bank of India v. Haribhau Kakade decided on 16th March, 1988. The learned Judge also noticed conflict of opinion between the view expressed by this Court in the later unreported judgments and the views of different High Courts. It is in this background, more particularly in view of the fact that similar question often arises for consideration in number of cases especially in Bank suits, the learned Single Judge recommended reference of the following questions to a larger bench:—
a) Whether the expression “the principal sum adjudged” used in section 34 of the Code of Civil Procedure means only the original amount lent or the amount of original principal without addition of any interest whatsoever thereto and interest pendente lite or post decretal interest can be awarded by the Court only on such original amount?
b) When interest becomes part of the principal or gets merged with the principal within the meaning of section 34 of the Code when the agreement provides for addition of interest to the principal at certain intervals with periodical rests?
c) Whether the expression “principal sum adjudged” includes the aggregate amount found due and payable oh the date of the suit inclusive of amount of interest added to the principal with or without periodical rests in accordance with the agreement between the parties, express or implied, or the practice followed?
d) What is the meaning of the expression “principal” used in Order 34, Rule 2 and Order 34, Rule 11 of the Code?
On the recommendation of the learned Single Judge this case has been placed before us for hearing under the orders of the Hon'ble the Chief Justice.
3. We have heard at length Shri Tulzapurkar, learned counsel for-the plaintiffs-bank. In view of the importance of the controversy we also allowed the Indian Banks' Association to intervene and heard its learned counsel Shri Kapadia. At our request learned counsel Shri R.A Dada argued the case on behalf of the defendant who was unrepresented before us. We have carefully considered the various submissions.
4. The first question relates to the interpretation of the expression “principal sum adjudged” used in section 34 of the Civil Procedure Code. The other two are in effect the different shades of facets thereof. We shall therefore, first deal with the expression “principal sum adjudged” used in section 34 of the Civil Procedure Code. Section 34 reads:
“34. Interest. — (1) Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six per cent per annum as the Court deems reasonable on such principal sum from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit..
(2) Where such a decree is silent with respect to the payment of further interest on such principal sum from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefor shall not lie:
Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent 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 banks in relation to commercial transactions.
Explanation I: In this sub-section “nationalised bank” means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970).
Explanation II: For the purposes of this section, a transaction is a commericial transaction, if it is connected with the industry, trade or business of the party incurring the liability.”
5. It is clear from the plain reading of section 34 that it deals with powers of the Court to award interest (i) from the date of the suit to the date of the decree and (ii) from the date of the decree to the date of payment.
6. The award of interest for the two periods mentioned above can only be on the principal sum adjudged. There is no dispute in that regard. The only controversy is in regard to the true meaning of this expression viz., ‘principal sum adjudged’. The question that falls for determination is whether this expression means simply the principal amount lent or advanced by the plaintiffs to the defendant which remains unpaid on the date of the suit or it includes also any interest adjudged on such unpaid principal for any period prior to the institution of the suit. The controversy, in other words, is whether the interest accrued till the date of the filing of the suit will partake the character of principal and lose its identity as interest depending on the agreement between the parties, express or implied or prevailing Banking or Trade practice.
7. Before we proceed to examine the controversy, it may be expedient to observe that interest for period prior to the institution of the suit is not governed by the provisions of section 34, that being the matter of substantive law, usage of trade or agreement. (See Secretary, Irrigation Department, Government of Orissa v. G C. Roy, (1992) 1 SCC 508, 533). Section 34 only governs award of interest from the date of the suit till the date of the decree and from the date of decree to the date of payment which is payable only on the “principal sum adjudged”. While providing for such interest, this section also takes note of the fact that in addition to the principal sum interest might also be due or adjudged due to the plaintiff on such principal for period prior to the filing of the suit and makes it clear that interest pendente lite and post decretal governed by this section is in addition to such interest adjudged for period prior to the filing of the suit. In other words, this section is clearly recognises interest for the period prior to the institution of the suit as “interest” in contradistinction to “principal” and provides for award of additional interest for the period from the date of the suit to the date of the decree and further interest from the date of the decree to the date of payment only on the “principal sum” not on the aggregate amount due on the date of the filing of the suit including interest due if any upto that date.
8. The learned Counsel for the plaintiffs fairly stated that it is not his case that in all cases interest for period prior to the institution of the suit would form part of the ‘principal sum adjudged’. There are cases where such interest would retain its identity as such. He however submits that there are cases where interest will merge in principal and form part thereof. One such case being where an agreement provides for addition of interest in the principal at certain intervals with periodical rests. In such case, interest will become part of the principal and get merged in it and in that event ‘principal sum adjudged’ as used in section 34 shall include such interest also. The learned counsel tried to draw a distinction between the ‘simple interest’ and ‘compound interest’. According to him, different consequences will flow in case of compound interest charged by the bank on the basis of an agreement or prevailing banking practice. Interest in such a case gets added to the principal at certain intervals. It sheds its character as interest and gets capitalised.
9. A reference was made in this connection to the Halsbury's Laws of England, Volume 3, paragraph 160, where such banking practice has been acknowledged in the following terms:—
“It is the practice of Bankers to debit the accrued interest to the borrower's current account at regular periods (usually half-yearly), where the current account is overdrawn or becomes overdrawn as a result of the debit the effect is to add the interest to the principal, in which case it loses its quality of interest and becomes capital.”
10. Reliance was also placed on the decision of the House of Lords in Paton (Panton's Trustees) v. I.R.C, (1938) 1 All England Law Reports 786, where it was observed that the accrued interest which the Bank has, with the customer's assent, added to the principal loan ceases to be due or recoverable as interest but becomes merged in the principal. Learned Counsel referred to a decision of the Calcutta High Court in The Bank of Rajasthan Ltd. v. S.K Trading Co., reported in 1990 Bank J. 677, particularly the following passages, in paragraphs 15, 16 and 17:
“The contention of Mr. Sarkar with regard to section 34 of Civil Procedure Code is that in view of the agreement between the parties the interest with quarterly rests becomes part of the principal and therefore, this 11,88,000/- and odd which includes interest will be the principal amount within the meaning of section 34 of the Civil Procedure Code”………. On behalf of the respondents-defendants Mr. Das has contended that in view of the amendment made in section 34 at present such interest under section 34 can be granted only on the principal sum which in the present case is Rs. 9,00,000/- and not on the sum of Rs. 11,88,000/- and odd which includes interest……. There cannot be any doubt that the interest under section 34 after amendment can be granted on the principal sum only, but what is the principal sum depends on the facts and circumstances of each case …. While granting interest under section 34 no further interest on such interest can be granted. This is generally the law after the amendment of section 34. There cannot be any dispute……. It means that the interest calculated upto the end of a particular quarter is thereafter added to the principal amount and since then it becomes part of the principal amount. This practice is well known and it has been so recognized…”.
(Emphasis supplied)
The conclusion at paragraph 27 was also referred to, which is in the following terms:
“Accordingly, we are of the opinion that in view of such clauses in the agreement between the parties which provides for quarterly rests, the interest calculated by the Bank was merged with the principal and for the purpose of section 34 of the said Act principal sum would be Rs. 11,88,706-91 for which decree was claimed and for which the decree was passed.”
11. Counsel also referred to the decision of the Division Bench of this Court in Kaluram v. Chimniram, AIR 1934 Bom. 86, where repelling the contention that under section 34 of the Civil Procedure Code which allowed the Court to give interest on the principal sum adjudged at the date of the suit the Court cannot give compound interest, Beaumont, C.J, observed:
“… I think we clearly have jurisdiction to give compound interest……“
It was also observed in the same judgment by Blackwol, J., at pages 90 and 91 of the report that section 34 of the Civil Procedure Code did not prevent the Court from allowing compound interest since the obligation to pay such compound interest was impliedly agreed upon between the parties. These observations were made in the context of award of interest pendente lite and post-decretal interest.
12. At this stage it may be pertinent to observe that this decision was rendered on the interpretation of section 34 of the Civil Procedure Code as it stood at the relevant time. Subsequent to the aforesaid judgment this section was amended by Code of Civil Procedure (Amendment) Act, 1956 (Act LXVI of 1956) and the words “with further interest at such rate not exceeding six per cent per annum as the Court deems reasonable on such principal sum” were substituted for the words “with further interest at such rate as the Court deems reasonable on the aggregate sum so adjudged”, and the words “on such principal sum” were substituted for the then existing words “such aggregate sum”. The object of the aforesaid amendment to section 34 is evident from the Report of the Joint Committee on the Bill as published in the Gazette of India, Extraordinary Part II, section 2, dated December 13, 1955. The relevant part of the Report reads as under:—
“section 34 of the Code empowers a Court to award further interest from the date of the decree upto the date of payment on the ‘aggregate sum’ which comprises principal sum with interest accrued thereon. The Committee are of the opinion that interest should not be awarded on interest but only on the principal sum. Suitable amendment has accordingly been incorporated in this clause”.
The aforesaid observations of the Joint Committee make it abundantly clear that the intention of the legislature was not to allow the award of compound interest by the Courts and to give effect to that intention the expression “principal sum” was introduced which fundamentally means the ‘principal sum’ only without addition of amount of interest, if any, accrued thereon till the date of filing of the suit. We shall revert to this aspect a little later. Before that we may refer to some other decisions of this Court where a view contrary to the one taken by the Division Bench in Kaluram v. Chimniram (supra) had been taken. We may refer in this connection to the decision of the Division Bench in F.A No. 364 of 1986, Jagannath Pigments and Chemicals v. Bank of Baroda decided on 19th November, 1986 (S.K Desai and A.D Tated, JJ.). This appeal arose out of a suit filed by the Bank wherein the interest was claimed on the sum of Rs. 1,66,759-29 which was inclusive of the amount of interest upto the date of the suit added to the principal amount of Rs. 1,20,675-59. The trial Court had awarded interest pendente lite on the aforesaid sum of Rs. 1,66,759-29. On appeal, the Division Bench of this Court modified the decree and awarded interest pendente lite only on the principal amount of Rs. 1,20,675-29. Evidently, that was done on the interpretation of expression ‘principal sum adjudged’ to mean principal sum only and not the aggregate amount including interest due and payable on the date of the suit.
13. Same view was taken by the another Division Bench comprising of S.C Pratap, as he then was, and A.D Tated., JJ., in F.A No. 999 of 1987, Central Bank of India v. Haribhau Kakade decided on 16th March, 1988. This appeal arose out of the decree in a suit based on promissory note for a sum of Rs. 1,49,318/-. The amount claimed by the Bank due from the date of the filing of the suit including the interest upto that date was Rs. 2,45,162-74. The interest pendente lite etc., was claimed on the aggregate amount including interest. This Court allowed interest only on the amount of promissory note and not on the aggregate amount which was found due and payable on the date of the suit.
14. It is this inconsistency between the decision of this Court in Kaluram v. Chimniram (supra) and the later two decisions of the two Division Benches of this Court dated November 19, 1986 and March 16, 1988 which persuaded the learned Single Judge to recommend reference of the controversy to the Full Bench.
15. Before dealing with this conflict, it may be appropriate also to refer to some of the decisions of the other High Courts on this point. The Division Bench of Madras High Court in Sigappiachi v. Palaniappa, AIR 1972 Mad. 463; Orissa High Court in Indian Bank v. Kamalaya Cloth Store, AIR 1991 Ori. 44; Allahabad High Court in Jafar Husein v. Bishambhar Nath, AIR 1937 All. 442 and Kalyanpur Cold Storage v. Sohanlal Bajpai, AIR 1990 All. 218, have taken the view that the expression “principal sum adjudged” in section 34 of the Civil Procedure Code would mean the amount found due on the date of the suit including interest accrued upto that date. The Allahabad High Court in the last decision in Kalyanpur Cold Storage v. Sohanlal Bajpai (supra) observed that the expression “principal sum adjudged” was to be distinguished from “principal sum advanced” and held that “final amount” which has been determined by the Court after adjudicating upon the rights of the parties to the suit shall be deemed to be the “principal sum adjudged” and interest shall accrue on such amount and not on the original amount advanced. The Court in other words, held that the “principal amount” shall include the amount of interest till the date of filing of the suit. No distinction was drawn in this case between simple interest and compound interest. The Court in effect, equated “aggregate sum” with “principal sum found due”.
16. Reference may be made also to a decision of Delhi High Court in Syndicate Bank v. W.B Cements, AIR 1989 Delhi 107. The Delhi High Court has taken a view that expression “principal sum adjudged” would include such amount of interest which had become part of the principal. In this decision also reliance was placed on the banking practice as well as the observations of Lord Macmillan, J. in Panton's case (supra), particularly the observations to the effect that accrued interest which is added to the principal with the assent of the customer gets merged in the principal itself. This decision was followed by the Orissa High Court in Indian Bank (supra). It may be pertinent to note that there is also an earlier decision of the Orissa High Court in Food Corporation of India v. Samena Co-operative Marketing Society Ltd., (1987) Cur.L.J (Ci. and Cri.) 778 wherein it was held that interest under section 34 of the Civil Procedure Code could be awarded only on the principal due and not on the amount of interest which sum was also adjudged along with the principal. This decision does not appear to have been placed before the Court in the latter case in Indian Bank (supra) wherein a contrary view was taken.
17. A Division Bench of Punjab and Haryana High Court in State of Punjab v. Scheduled Caste Co-operative L.O.S Ltd., AIR 1988 Pun. & Hary. 192, discussed the provisions of section 34 of the Civil Procedure Code in the context of amendment made therein by 1956 Amendment Act and held as follows:
“Thus the interest awardable from the date of the plaint to the date of the decree under section 34 as it stands now will be only on the principal sum and not on the whole amount including the interest as claimed…”
(Emphasis supplied)
It was further observed:
“… before the abovementioned amendment of section 34 by Amendment Act, 1956, further interest was awardable on the aggregated principal and interest as on the date of the decree…..“
(Emphasis supplied)
18. There is also an earlier decision of Division Bench of Madras High Court in M.V Mahalinga Aiyar v. Union Bank Ltd., AIR 1943 Mad. 216, where it was held that any interest awardable from the date of the plaint to the date of the decree can be only upon the principal sum due. It was observed:
“…. There is however, one small error in the decree which has been brought to our notice. The learned Subordinate Judge has decreed to the plaintiff a sum of Rs. 9981-1-9 with interest thereon at the rate of eight per cent per annum from 17th August, 1938 to the date of the decree. In doing so he has overlooked the fact that the sum of Rs. 9981-1-9 includes interest calculated upto the date of the plaint and therefore, that any interest awardable from the date of the plaint to the date of the decree must be only upon the principal sum due. The decree will accordingly be modified by saying “do pay to the plaintiffs the sum of Rupees 9981-1-9 with interest on Rs. 8500/- at the rate of eight per cent per annum from 17th August, 1938 to this date.”
This decision also does not seem to have been placed before the Court while considering similar controversy later in Sigappicchi v. Palaniappa (supra) which has been referred in support of the contrary view. Besides, the later decision is clearly distinguishable. It was an account suit and it was in that context that it was held that the principal sum adjudged would be the amount payable by the defendant on the date of the suit.
19. We have carefully gone through various decisions referred to above, more particularly the decisions of this Court in Kaluram v. Chimniram (supra) and in F.A No. 364 of 1986 and F.A No. 999 of 1987 (supra). So far as the decisions of this Court are concerned, we do not find that there is any real inconsistency in the two sets of the decisions. The decision in Kaluram ‘s case (supra) is clearly distinguishable on two grounds. Firstly, it is a decision under section 34 of the Civil Procedure Code as it stood prior to 1956 Amendment, when the expressions used therein were different. Secondly, the controversy in that case was whether under section 34 the Court could award compound interest, if obligation to pay such compound interest was impliedly agreed upon between the parties. It was held that the Court could do so in exercise of the powers under section 34. That position has since been completely change by 1956 Amendment whereby section 34 was amended and expression ‘principal sum’ was incorporated in the context of award of interest under that section. The object of the amendment, as is evident from the report of the Joint Committee was to prohibit award of interest on interest and was to restrict it only on the principal sum. Under section 34, as amended, the interest can be awarded only on the principal sum and not on the aggregate sum comprising of principal and interest accrued thereon. The decision in Kaluram (supra), therefore, has no application to section 34 as amended by 1956 Amendment. The two later decisions of this Court were delivered on the interpretation of the amended section. We are, therefore, of the opinion that correct law has been laid down in these two decisions.
20. We have also gone through the decisions of the various High Courts, which have taken the view that the principal sum adjudged in section 34 would mean the amount found due on the date of the suit including the interest upto that date. In our opinion this view is not correct. While rendering these decisions, emphasis was laid on the banking practice than on the clear language of section 34 and the scheme thereof in the light of the amendment made in 1956 and the object thereof. To say that the “principal sum adjudged” would include the amount of interest also which had accrued upto the date of filing of the suit clearly goes counter to the very scheme and object of section 34 which intends to prohibit award of compound interest, i.e interest on interest.
21. At this stage, it may be expedient to refer to the meaning of the three expressions, “interest”, “simple interest” and “compound interest” as given in different authoritative law dictionaries.
West's Legal Thesaurus or Dictionary defines these three expressions as under:
“Interest”. — A charge that is paid to borrow for use money.
“Simple Interest”. — Interest paid on the initial amount invested and not on any earnings or interest thereon.
“Compound Interest”. — Interest on interest; the interest that is earned generates further interest on these earnings.”
Black's Law Dictionary (Fifth Edition) defines these expressions as follows:
“Interest” — Interest is the compensation allowed by law or fixed by the parties for the use or forbearance or detention of money…. Payments a borrower pays a lender for the use of the money.”
“Simple Interest” — That which is paid for the principal or sum lent, at a certain rate or allowance made by law or agreement of parties. Interest calculated on principal where interest earned during periods before maturity of loan is neither added to the principal nor paid to the lender. That paid on the principal lent as distinguished compound interest which is interest paid on unpaid interest. “
“Compound Interest”. — Interest upon interest i.e interest paid on principal plus accrued interest. Exists where accrued interest is added to the principal sum, and the whole treated as new principal for the calculation of the interest for the next period. Interest added to principal as interest becomes due and thereafter made to bear interest.”
(Emphasis supplied)
In Corpus Juris Secondum (Volume 47) “interest” has been defined to mean—
“compensation allowed by law, or fixed by the parties for the use or forbearance of money, or for detention.”
“Simple interest” has been defined as:
“interest computed solely on the principal.”
“Compound interest” has been defined as:
“compound interest is interest on interest… accrued interest added to the principal sum and the whole treated as new principal for the calculation of interest for the next period.”
(Emphasis supplied)
From the aforesaid definitions it is clear that the only difference between simple interest and compound interest is that in case of simple interest, the interest is computed only on the principal sum, whereas for computation of compound interest, the accrued interest is also added to the principal sum. The resultant amount arrived at by the addition of accrued interest in the principal sum is treated as new principal only for the limited purpose of calculation of the interest for the next period. This is also what has been observed in Halsbury's Laws of England (Vol. 3), para 160, which has been relied upon not only by the counsel for the plaintiffs but by many of the Courts in support of the view taken by them, that the principal sum would include the interest accrued thereon upto the date of the suit. Halsbury's Laws of England also refers to the practice of the bankers to debit accrued interest to the borrowers' regular account for next period and says that the effect of such debit is to add the interest to the principal in which case it loses its quality as interest and becomes the capital.
22. “Principal” had been distinguished from “interest” in Corpus Juris Secondum, Volume 47, page 11 in the following words:
“Principal distinguished. —‘Principal’ is used in its commercial sense in distinction from ‘interest’. The terms are correlative; each implies and excludes the other, and that which is principal cannot be interest.”
These definitions make it abundantly clear that “principal” and “interest” always retain their separate identities no matter by what method the interest is calculated — whether by way of simple interest or compound interest.
23. Reverting back to section 34, we may observe that the fact that the “principal sum adjudged” used in section 34 of the Civil Procedure Code does not include any interest, is also clear from the use of the expression “in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit” in contradistinction to the expression “principal sum adjudged”. Thus, in addition to “interest from the date of the suit to the date of the decree” and “from the date of the decree to the date of the payment”, this section also refers to “interest adjudged on such principal sum for any period prior to institution of the suit”. All these sums are interest as distinguished from “principal”.
24. A clear picture which emerges from reading of this section is that the Court while decreeing the suit will adjudge, (i) the principal sum and (ii) any interest on such principal sum prior to the date of institution of the suit. Both amounts adjudged by the Court by way of “principal sum” as well as “interest” thereon for the period prior to the institution of the suit together may be termed as “aggregate amount adjudged” as payable on the date of the suit. But interest under section 34 is not payable on such aggregate amount. It is made payable only on the principal sum adjudged. No interest is payable on the amount of interest adjudged on such principal sum. Interest, whether simple or compound will remain ‘interest’ for the purpose of section 34 and shall never merge in the principal. The Legislature while using the expression “in addition to any interest adjudged on such principal for any period prior to the institution of the suit” in section 34 in contradistinction to the expression “principal sum” has not made any distinction between the interest computed by way of simple interest or compound interest. The legislative scheme and intent being so clear, there is no scope for doubt that the expression “principal sum adjudged” would mean only the “principal sum”. It will never include the interest whatever be the agreement between the parties. Interest under section 34, therefore, can be allowed only on the principal sum and not on the principal sum plus interest accrued thereon till the filing of the suit. In view of foregoing discussion, we hold that the “principal sum adjudged” used in section 34 of the C.P.C means the original amount lent without the addition thereto of any interest whatsoever. This will be the position notwithstanding any agreement between the parties or any prevailing banking or trade practice to the contrary. The first three questions are answered accordingly.
25. We may now turn to the fourth and the last question which relates to the interpretation of the expression “principal” used in Rules 2 and 11 of Order 34 of the Civil Procedure Code. Order 34 deals with suits relating to mortgages of immovable property. Rule 2 specifies the powers of the Court to pass a preliminary decree in such suits. Rule 11 deals with the powers of the Court to award interest from the date of the suit upto the date fixed by the Court for payment of the mortgage debt and from the date fixed for payment to the date of realisation or actual payment. Rules 2 and 11 of Order 34, so far as relevant, read as follows:—
“2. Preliminary decree in foreclosure suit.—(1) In a suit forforeclosure, if the plaintiff succeeds, the Court shall pass a preliminary decree—
(a) ordering that an account be taken of what was due to the plaintiff at the date of such decree for—
(i) principal and interest on the mortgage,
(ii) the costs of the suit, if, any awarded to him, and
(iii) other costs, charges and expenses properly incurred by him up to the date in respect of his mortgage-security, together with the interest thereon; or
(b) declaring the amount so due at that date; and
(c) directing—
(i) that, if the defendant pays into Court the amount so found or declared due on or before such date as the Court may fix within six months from the date on which the Court confirms and countersigns the account taken under clause (a) or from the date on which such amount is declared in Court under clause (b), as the case may be, and thereafter pays such amount as may be adjudged due in respect of subsequent costs, charges, expenses as provided in rule 10, together with subsequent interest on such sums respectively as provided in rule 11, the plaintiff shall deliver up to the defendant, or to such person as the defendant appoints, all documents in his possession or power relating to the mortgaged property…….“
“11. Payment of interest. — In any decree passed in a suit for foreclosure, sale or redemption, where interest is legally recoverable the Court may order payment of interest to the mortgagee as follows, namely—
(a) interest up to the date or before which payment of the amount found or declared due is under the preliminary decree to be made by the mortgagor or other person redeeming the mortgage—
(i) on the principal amount found or declared due on the mortgage — at the rate payable on the principal, or where no such rate is fixed, at such rate as the Court deems reasonable,
(ii) xxx
(iii) on the amount adjudged due to the mortgagee for costs, charges and expenses properly incurred by the mortgagee in respect of the mortgage security up to the date of the preliminary decree and added to the mortgage money — at the rate agreed between the parties, or, failing such rate, at such rate not exceeding 6 per cent per annum as the Court deems reasonable and
(b) subsequent interest up to the date of realisation or actual payment on the aggregate of the principal sums specified in clause (a) as calculated in accordance with the clause at such rate as the Court deems reasonable.”
26. From a reading of Rule 2 set out above, it is clear that it casts a duty on the Court to order, inter aha, taking of account of what is due to the plaintiff at the date of the preliminary decree for “principal” and “interest on the mortgage”. Under clause (b) the Court has to declare the amount so due at that date. A conjoint reading of clauses (a) and (b) of sub-rule (1) of Rule 2 makes it abundantly clear that the “principal” and “interest” have to be ascertained separately and declared to be due as such. Rule 2 does not contemplate merger of interest in the principal and determination of the aggregate amount due on account of both. Rule 11 provides for award of interest from the date of the decree up to the date fixed for payment, and in the event of the same being not paid by such date, for further interest upto the date of realisation or actual payment. Interest under rule 11(a)(i) is payable on the “principal amount found or declared due on the mortgage”. Under sub-clause (iii) such interest is also payable on the amount adjudged due to the mortgagee for costs, charges and expenses up to the date of the preliminary decree and added to the mortgage money. The Court thus has been empowered to award interest under Rule 11(a) on all the components of the amount found or adjudged due to the plaintiff except on the “interest”. Similarly, subsequent interest upto the date of realisation or actual payment can also be awarded under Rule 11(b) only on the “aggregate of the principal sums specified in clause (a)” thereof. Clause (a), as indicated above, specifcically excludes interest due on mortgage from its purview. The principal amount referred to in clause (b) therefore, means only the principal amount found or declared due on the mortgage and the principal amounts adjudged due to the mortgagee for costs, charges and expenses. Interest on any of these amounts, therefore, will not fall within the expression “aggregate of the principal sums” used in clause (b) of rule 11. It is thus evident that interest under either of the two clauses of Rule 11 can be awarded only on the principal. Interest accrued due before the suit is not treated as principal. It is also evident from the fact that the amount of interest due to the plaintiff has to be determined separately, (Rule 2(1)(a)(i) of Order 34).
27. This view also gets support from the use of two different expressions in Rule 11 viz., “amount found or declared due” and “principal amount found or declared due on the mortgage”. For the purpose of determining the date up to which the interest would be payable under clause (a) of that rule, it refers to the amount found or declared due. In relation to the amount on which interest may be ordered to be paid, the expression used is:
“on the principal amount found or declared due on themortgage……”
The use of these two distinct expressions makes it further clear that interest would be payable only on “the principal” and not on the amount found or declared due which might include both the “principal” and “interest” on mortgage. We are, therefore, of the clear opinion that the expressions “principal” and “aggregate of the principal sums” specified in clause (a) used in Rules 2 and 11 of Order 34 mean only “principal” and not “principal and interest”.
28. This view of ours also gets support from the fact that prior to 1956, under clause (b) of rule 11, interest from the date fixed for payment till the date of payment could be awarded also on interest in addition to the principal. At that time, clause (b) read as under:
“(b) subsequent interest up to the date of realisation or actual payment at such rate as the Court deems reasonable—
(i) on the aggregate of the principal sums specified in clause (a) and of the interest thereon as calculated in accordance with that clause; and
(ii) on the amount adjudged due to the mortgagee in respect of such further costs, charges and expenses as may be payable under rule 10.”
This clause, in express terms, empowered the Courts to grant subsequent interest on the aggregate of the principal sums specified in clause (a) and on the “interest”. It was substituted by Act 66 of 1956 by the existing clause (b) and in the substituted clause the words “and of interest” etc. were omitted. It now refers only to “the aggregate of the principal sums”. The object of this amendment evidently was not to allow interest on interest. It is clear from the report of the Joint Committee on the Amendment Bill published in the Gazette of India dated 13th December, 1955 (supra), where it is observed—
“Committee also feels that interest on interest should not be allowed and, therefore clause (b) of rule 11 was re-drafted.…”
Thus after 1956 subsequent interest can be awarded on the principal only. No interest is payable under rule 11 on the amount of interest.
29. The fourth question referred to us is answered accordingly.
30. Certified copy to be furnished expeditiously.
Order accordingly.
Alert