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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • S.N.Gupta
  • R.N.Bhardwaj
  • J.R.Midha
Judges
  • Vijender Jain, J.
Acts
  • provisions of Section 59 of the Indian Contract Act.7. Section 59 of the Indian Contract Act
  • provisions of Sections 59 and 60 of the Contract Act.
  • provisions of Section 59 of the Indian Contract Act.
  • Order 21 Rule 1 of the Code of Civil Procedure
  • Section 60 of the Indian Contract Act
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • S.N.Gupta
  • R.N.Bhardwaj
  • J.R.Midha
Judges
  • Vijender Jain, J.
Acts
  • provisions of Section 59 of the Indian Contract Act.7. Section 59 of the Indian Contract Act
  • provisions of Sections 59 and 60 of the Contract Act.
  • provisions of Section 59 of the Indian Contract Act.
  • Order 21 Rule 1 of the Code of Civil Procedure
  • Section 60 of the Indian Contract Act
See more information ...
Smart Summary

Structured Summary of the Opinion (Vijender Jain, J.)

Factual and Procedural Background

The underlying award (reference to an arbitration or similar award) directed payment of Rs. 15,77,200/- with interest of Rs. 2,71,000/- and costs of Rs. 56,000/-. The petitioner was liable for future interest until realisation. By an agreement dated 31 August 1987, respondent No.1 (a Cooperative Bank) accepted instalments of Rs. 30,000 per month (Rs. 20,000 credited to principal and Rs. 10,000 credited to interest). The petitioner states that from October 1987 to July 1992 forty such instalments were paid, amounting to Rs. 8,00,000/- credited to principal and Rs. 4,00,000/- towards interest (the opinion also elsewhere records other figures for interest payments; see the body of the opinion).

The petitioner filed a writ petition on 15 July 1992 seeking to quash letters dated 2 July 1992 and 9 July 1992 (which directed attachment and auction of the petitioner's property) and for consequential relief including staying issuance of warrants of arrest against the petitioner's officials. During pendency of the writ petition, the petitioner made several deposits in Court and otherwise: Rs. 8,12,520.47 (comprising Rs. 7.77 lakhs principal and Rs. 35,520 interest) and later Rs. 12,09,195.69 paid in Court. The petition record also shows a total payment figure of Rs. 32,46,480.49 mentioned by the petitioner.

Legal Issues Presented

  1. Whether the respondents' appropriation of amounts paid by the petitioner (which had been recorded by the bank as payments towards the principal) into the interest account was justified.
  2. Whether, in view of the post-1976 amendment to Order 21 Rule 1 of the Code of Civil Procedure and related authorities relied on by the petitioner, receipts must be appropriated first to principal (as argued by the petitioner) or whether the bank could apply receipts differently upon the petitioner's default.

Arguments of the Parties

Petitioner's Arguments (as advanced by Mr. J. R. Midha)

  • The bank's own records (a pass-book at page 96 of the paper book) show the petitioner's payments recorded in two heads — principal and interest — and once a debtor deposits money in a particular head the creditor cannot later appropriate it to a different head.
  • The respondent's appropriation of amounts credited as principal to the interest account after the petitioner's default is impermissible and violates Section 59 of the Indian Contract Act.
  • After the 1976 amendment to Order 21 Rule 1 CPC, even in execution of a decree, the amount received should be appropriated first towards principal (relied upon Punjab National Bank v. Prem Sagar Choudhary, AIR 1988 H.P. 33).
  • The petitioner had paid an aggregate sum (referred to in the petition) of Rs. 32,46,480.49, which exceeded the original awarded amount.
  • The petitioner cited several cases in support: Life Insurance Corporation v. Samarendra Nath Roy (AIR 1979 Calcutta 243), Central Warehousing Corporation v. Govinda Chaudhary (AIR 1989 Orissa 90), and Prabirendra v. Anil Chattopadhya (AIR 1956 Calcutta 570).

Respondent No.1-Bank's Arguments (as advanced by Mr. R. N. Bhardwaj)

  • The grant of instalments followed an agreement dated 31 August 1987; instalments were accepted pursuant to that agreement.
  • The petitioner defaulted; under Clause 4 of the agreement the original award became operative, and from the date of default the respondent was entitled to treat the entire amount due as principal and appropriate payments accordingly.
  • The petitioner was repeatedly informed of non-compliance with the instalment schedule and therefore could not avoid liability under the award.
  • In the respondent's counter-affidavit specific year-wise sums paid by the petitioner after the agreement are pleaded (1988: Rs. 2,50,000; 1989: Rs. 3,60,000; 1990: Rs. 3,20,000; 1991: Rs. 1,21,000; 1992 before filing writ: Rs. 60,000; and thereafter Rs. 1 lakh per month from 21.7.1992 as ordered by the Court).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Life Insurance Corporation v. Samarendra Nath Roy, AIR 1979 Calcutta 243 Cited by petitioner in support of the contention regarding appropriation/application of payments. The opinion records that the case was cited by the petitioner; the court did not elaborate further application of this case in its reasoning.
Central Warehousing Corporation v. Govinda Chaudhary, AIR 1989 Orissa 90 Cited by petitioner as authority in support of his contentions on appropriation/application of payments. The opinion records the citation; the court does not expressly discuss its specific application in the body of the reasoning.
Prabirendra v. Anil Chattopadhya, AIR 1956 Calcutta 570 Cited by petitioner to support his contentions about appropriation of payments. The opinion notes the citation but does not set out or apply any specific holding from the case in the court's written reasoning.
Punjab National Bank v. Prem Sagar Choudhary, AIR 1988 H.P. 33 Cited by petitioner in support of the submission concerning the effect of the amendment to Order 21 Rule 1 CPC (post-1976) and appropriation towards principal. The opinion records that the petitioner relied on this authority; the court's reasoning focuses on statutory provisions (Sections 59 and 60) and the facts recorded in the bank's passbook rather than an extended exposition of this precedent.

Court's Reasoning and Analysis

The court heard counsel for both parties at length and identified the short question as whether the respondents' appropriation of amounts paid by the petitioner (which the bank's records had credited to principal) to the interest account was justified.

The judge accepted the petitioner's factual position that the bank's pass-book (at page 96 of the paper book) recorded the payments as having been made towards principal and interest in the two heads agreed between the parties. The court emphasised that when the creditor itself has shown the payment as being made to a particular head (here, principal), the creditor cannot subsequently alter that appropriation and apply it to interest after the debtor defaults.

The court considered the statutory framework it regarded as relevant. It set out Section 59 of the Indian Contract Act (which requires a payment, made with express intimation or under circumstances implying it is to be applied to a particular debt, to be applied accordingly if accepted). The court also described the general rule and Section 60: normally payments on a debt with interest are first applied to interest and then to principal; Section 60 allows the creditor to appropriate payments at his discretion where the debtor has omitted to intimate the appropriation and there are no circumstances indicating to which debt the payment is to be applied.

The court analysed the applicable principles in light of the facts: because the debtor had in fact stipulated (and the bank's own records showed) that the payments were credited to principal, the creditor could not accept the money and then apply it differently. If the creditor did not wish to accept a payment on the principal head (for example, because the agreement had become inoperative), the proper course was to return the payment. The court held that when the agreement terminated on account of default, the respondents ought to have returned amounts recorded as principal rather than keep them and treat them as interest; keeping and appropriating them to interest violated Section 59 (and, as discussed, the principles of Section 60).

The court further addressed respondent's conduct and pleaded facts: the respondents' own behaviour (accepting less in some years, accepting later payments, and not invoking Clause 4 of the agreement immediately) operated to extend the agreement by conduct and estopped the respondents from asserting that the agreement had been terminated at an earlier date. On that basis, the court concluded the respondents were not justified in appropriating Rs. 8 lakhs credited to principal towards payment of interest.

On remedies and practical adjustments, the court took into account the payments already deposited with the Court and the aggregate amount the petitioner claimed to have paid (Rs. 32,46,480.49). The court directed the respondents to treat payments made before 2 July 1992 as having been deposited under the head of principal (as recorded by the bank) and to compute any remaining outstanding amount after adjusting those payments. Further, payments received pursuant to the order of the Court were to be applied first to liquidate principal and thereafter to interest.

Holding and Implications

Holding: The writ petition was allowed in part and the court issued the following directions:

  • QUASHED the letters dated 2 July 1992 and 9 July 1992 issued by respondent No.2 (which had directed attachment and auction of the petitioner's property).
  • The respondents were directed to adjust payments made by the petitioner prior to 2 July 1992 under the head principal as those payments had been recorded by the respondent and accepted as such.
  • Respondents were to calculate any amount outstanding after taking into account the total payments made by the petitioner as on 2 July 1992; payments received pursuant to the Court's order were to be applied first to principal and then to interest.
  • The respondent shall communicate the outstanding amount, if any, to the petitioner within one month from the date of the order and the petitioner shall pay any such amount within one month thereafter.

Implications: The direct effect is that the respondents cannot appropriate amounts recorded and accepted as payments of principal to interest; the two contested letters were quashed; specific directions were given to re-compute outstanding liability and to apply future payments in the sequence principal then interest. The opinion does not purport to lay down a novel legal precedent beyond applying existing statutory provisions (Sections 59 and 60 of the Indian Contract Act) and established principles to the facts before the court.

Disposition: Writ Petition disposed of in terms of the above directions.

Writ Petition disposed of.
Show full summary ...

    Dsco Cooperative Industrial Society Ltd. v. Delhi State Coop. Bank Ltd. & Ors.

    Vijender Jain, J.— I have heard the arguments advanced by the learned Counsel for the both the parties at length. The short question involved in this petition is as to whether the action of the respondents in appropriating the amount, which was paid by the petitioner towards repayment of debt in the interest amount, is justified or not.

    2. The award was for a sum of Rs. 15,77,200/- along with interest amounting to Rs. 2,71,000/- in addition to the cost amounting to Rs. 56,000/-. The petitioner was also liable to pay future interest till realisation as per the award. It seems that thereafter there was some agreement between the parties and in terms of that agreement the respondent No. 1-Cooperative Bank agreed on 31st August, 1987 to have the amount paid by the petitioner in instalments of Rs. 30,000/- per month, i.e Rs. 20,000/- towards repayment of principal amount and Rs. 10,000/- towards the payment of interest. It is the case of the petitioner that from October, 1987 to July, 1992 forty instalments were paid, thereby paying a total sum of Rs. 8,00,000/- towards the repayment of principal amount and Rs. 4,00,000/- towards the payment of interest amount.

    3. Mr. J.R Midha, learned Counsel appearing for the petitioner, has contended that as per the records of the respondent No. 1-Bank, which is filed at page-96 of the paper book, the respondent No. 1 has recorded the receipt of the payment aforesaid in these two heads. Mr. Midha has also contended that once a debtor has deposited the amount in a particular head, the creditor subsequently cannot appropriate it in a different head. According to the learned Counsel for the petitioner, the amount paid by the petitioner towards repayment of principal amount, in the event of petitioner's committing default, cannot be appropriated by the respondent-Bank in the interest amount, which has been done in this case. Mr. Midha has further contended that the same will be against the provisions of Section 59 of the Indian Contract Act. In support of his contentions, he has cited Life Insurance Corporation v. Samarendra Nath Roy, AIR 1979 Calcutta 243, Central Warehousing Corporation v. Govinda Chaudhary, AIR 1989 Orissa 90 and Prabirendra v. Anil Chattopadhya, AIR 1956 Calcutta 570.

    4. Yet another contention raised by the learned Counsel for the petitioner is that after the amendment of Order 21 Rule 1 of the Code of Civil Procedure in the year 1976, even if a decree is to be executed, the amount so received has to be appropriated first towards the payment of principal amount. In support of this contention, Mr. Midha has cited the case of Punjab National Bank v. Prem Sagar Choudhary., AIR 1988 H.P 33. Mr. Midha has also contended that out of the aforesaid amount, which was awarded under the award, the petitioner has made the payment of a sum of Rs. 32,46,480.49 paise, which was much more than the original awarded amount.

    5. On the other hand, Mr. R.N Bhardwaj, learned Counsel appearing for the respondent No. 1-Bank, has vehemently argued that the grant of instalments was pursuant to the petitioner's fulfilling its obligation under the agreement, which was entered into between the petitioner and the respondent resulting in the letter dated 31st August, 1987. Mr. Bhardwaj has also contended that the petitioner was a defaulter and, therefore, in terms of Clause-4 of the agreement dated 31st August, 1987, the originial award became operative and the respondent was entitled to take the whole amount, which was due from the date of default as principal amount from the petitioner. Mr. Bhardwaj has further contended that, time and again, the petitioner was informed that he was not making the instalments as per the agreement and, therefore, the petitioner cannot be allowed to escape the liability to make the payment under the award.

    6. After hearing the learned Counsel appearing for both the parties, I am inclined to agree with the submissions made by the learned Counsel for the petitioner. Admittedly, it is evident from the copy of pass-book filed by the petitioner, which has been written by the respondent, which is at page-96 of the paper book, that when the respondent itself has shown the amount, which was paid by the petitioner to the respondent as payments towards principal amount, the respondent cannot be permitted to alter and appropriate the same towards interest, after petitioner failed to make the instalments in the stipulated period. If the payment was not made pursuant to the agreement dated 31st August, 1987, as per the said agreement, award became operative. But when that award became operative, the amount, which was received by the respondent in the account of principal amount, cannot be appropriated towards payment of interest. That will be in clear violation of the provisions of Section 59 of the Indian Contract Act.

    7. Section 59 of the Indian Contract Act is as follows:—

    “Application of payment where debt to be discharged is indicated.— Where a debtor, owning several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances, implying, that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly.”

    8. It is now well-settled that the normal rule in the case of a debt due with interest is that any payment made by the debtor is in the first instance to be applied towards the satisfaction of interest and thereafter to the principal. Section 60 of the Indian Contract Act provides that where debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor. But if a debtor in making payment stipulates that it is to be credited towards a particular debt, namely, the principal amount, the creditor is not bound to appropriate the same towards the principal. In that case, he must not accept the money, but return it to the debtor. Where a debtor makes payment without making any indication as to how the payment is to be adjusted, it is the option of the creditor to make adjustment first of the interest and then of the principal, but if the debtor has indicated the manner in which the appropriation is to be made, then the creditor has no choice to apply the payment in a different manner, therefore, at the relevant time, when on account of default of the petitioner the agreement in question came to an end, the respondent ought to have returned the amount received as principal amount. But the respondents chose to keep that amount, which was received as principal amount then they could not have appropriated said amount deposited in the principal account, to interest account.

    9. In this case when the writ petition was filed on 15.7.1992, the prayer was to quash the orders dated 2.7.1992 and 9.7.1992 passed by respondent No. 2 directing the attachment of the property of the petitioner and auctioning of the same with the further direction for staying the issuance of warrants of arrest against the officials of the petitioner. During the pendency of this writ petition, the petitioner has deposited a sum of Rs. 8.12,520.47 paise i.e Rs. 7.77 lakhs due as principal and Rs. 35,520/- towards the payment of interest. However, on 9.5.1995 the petitioner had paid in the Court another sum of Rs. 12,09,195.69 paise. The awarded amount was for a sum of Rs. 15,77,200/- along with interest and cost.

    10. As I have discussed above that the petitioner deposited forty instalments, thereby paying a total sum of Rs. 8 lakhs towards the repayment of the principal amount and Rs. 14 lakhs towards the payment of interest amount, the respondents Were not justified in appropriating the said deposit of Rs. 8 lakhs towards the payment of interest, that will be against the provisions of Sections 59 and 60 of the Contract Act. If the respondents were not to accept the amount in principal amount on account of the default of the petitioner then they could have returned the said amount of Rs. 8 lakhs, which was deposited by the petitioner in the account of principal amount and would have shown the whole amount under the award along with interest outstanding against the petitioner. Having not done so, the respondents cannot be permitted to appropriate the amount, which was paid towards repayment of principal account.

    11. There is yet another aspect of the controversy. According to the counter-affidavit filed by respondent No. 1, after the agreement entered into between the parties on 31.8.1987, the petitioner failed to make the payment of monthly instalments as agreed. It is the case of respondents that in the year 1988 the petitioner-society paid only Rs. 2,50,000/-, in the year 1989 Rs. 3,60,000/-, in the year 1990 Rs. 3,20,000/- and in 1991 Rs. 1,21,000/- before filing this writ petition in 1992 Rs. 60,000/- and further amount of Rs. 1 lakh per month from 21.7.1992 were paid by the petitioner-society as per the order of this Court. As a matter of fact, the agreement dated 31.8.1987 Was extended by the conduct of the parties as more time was given to make the payment to the petitioner by the respondent, otherwise in the year 1988 when instead of making payment of Rs. 3,60,000/- per year, the Society only paid Rs. 2,50,000/-, the respondents ought to have invoked Clause-4 of the agreement and could have claimed the whole amount due under the award, which was not done. The petitioner-society only made the full payment of Rs. 3,60,000/- in the year 1989 and even in 1990 it paid Rs. 3,20,000/-, therefore, the respondents by their conduct was estopped from canvassing before me that the agreement dated 31.8.1987 stood terminated. Therefore, in view of the discussions above, I quash the letters dated 2.7.1992 and 9.7.1992 passed by respondent No. 2. In view of the fact that petitioner has deposited a total amount of Rs. 32,46,480.49 paise, I direct the respondents to adjust the payment, which was made by the petitioner before issuance of the letter dated 2.7.1992 under the head principal amount as deposited by the petitioner. The respondents will calculate as to any other amount is still outstanding and due after taking into consideration the total payment made by the petitioner as on 2.7.1992 The payment received pursuant to the order of this Court will be taken to liquidate the principal amount and then towards adjustment of interest amount. The respondent shall communicate the said outstanding amount, if any, to the petitioner within one month from the date of this order and if any amount is due, the petitioner shall make the payment of the said amount within a period of one month thereafter from the said communication.

    12. The writ petition is disposed of in terms of the above order.

    Writ Petition disposed of.
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    Dsco Cooperative Industrial Society Ltd. v. Delhi State Coop. Bank Ltd. & Ors.
    (Dec 7, 1995)