Citation Codes

Equivalent Citations

citation codes

Case Number

Appeal from Order No. 121 of 1916

Judges

Richardson
Walmsley, JJ.

Acts

Indian Contract Act, 2nd Edition,
sec. 60 of the Contract Act

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Smart Summary

Structured Summary of the Opinion (Richardson, J.; Walmsley, J.)

Factual and Procedural Background

The matter concerns an instalment decree dated 21 December 1908 founded on a judgment permitting the defendant to pay by instalments. The judgment and decree provided for yearly instalments of Rs. 600 payable on 15 July each year, with interest at 12% per annum, and contained a default clause that in default of any instalment the whole amount would become payable.

The decree as printed ordered payment of Rs. 2,888 and annas 2 with interest at 12% per annum and costs; the opinion also records that the amount decreed excluding costs was Rs. 2,888 and annas 8 with interest at 12% per annum. The decree was read together with the judgment to determine meaning and the court took the year for interest purposes to end on 14 July (so interest became payable on 15 July).

The defendant (judgment-debtor) regularly paid Rs. 600 instalments. A dispute arose about the accounting of those payments: whether the creditor (plaintiff, decree-holder) could appropriate each Rs. 600 first to interest and then to principal (the creditor's position), or whether each Rs. 600 had to be applied entirely to principal so long as any principal remained due (the debtor's position).

The decree-holder filed an application on 28 July 1909 "that the decree may be amended in conformity with the judgment". The subordinate court declined to amend, and the courts below decided in favour of the defendant. The matter proceeded on appeal.

Legal Issues Presented

Whether, in the absence of any express appropriation by the debtor, payments made under the instalment decree (Rs. 600 yearly) could be appropriated by the creditor first to interest due and then to principal, or whether the creditor was obliged to apply each instalment entirely to principal so long as any principal remained unpaid.
Whether the decree-holder's later application for amendment and the parties' petitions indicated an intention by the creditor to appropriate instalments entirely to principal (i.e., whether such filings evidenced an appropriation contrary to the creditor's practice).
Whether the general rule (payments applied first to interest where interest is expressly payable) applies to instalment decrees as well as to bonds and ordinary decrees.

Arguments of the Parties

Plaintiff / Decree-holder (Appellant)

The decree expressly made interest payable at 12% per annum and therefore, in the absence of any appropriation by the debtor, the creditor was at liberty to appropriate each Rs. 600 payment first to satisfy the interest due at the date of payment and to apply the balance to principal.
The decree-holder filed a petition seeking amendment "in conformity with the judgment"; the decree-holder's request to have payments reflect both the Rs. 600 instalment and interest due was relied on by the appellant as consistent with an entitlement to appropriate payments to interest first (though the court examined this point closely).

Defendant / Judgment-debtor (Respondent)

The judgment-debtor contended that the plaintiff was obliged to allocate the whole of each Rs. 600 instalment to principal and to take nothing for interest so long as any principal remained due.
In the debtor's counter petition (paragraph 4) he stated that if the Court ordered payment of interest on the whole sum along with the Rs. 600 instalment he would not be able to pay and that, if he failed to pay the instalment, the plaintiff would enforce payment — this was presented in the subordinate court as part of the debtor's position in opposing amendment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Goverdhan Das v. Warn Ali (Sadar Dewani Adalat, 1827)	Expressed the rule that sums received should be carried to the account of interest until the whole amount of interest is paid (i.e., payments go to interest first).	Quoted as an early articulation of the general rule that payments are normally applied to interest first where interest is due; used to support the proposition that the creditor may appropriate payments to interest before principal.
Bamundoss v. Omesh Chander (Privy Council)	Held that payments should be applied to interest in the first instance unless there was an appropriation to principal; Privy Council expressed no doubt about this as the ordinary course.	Cited by the court as authoritative Privy Council support for the rule that payments are to be applied first to interest absent debtor appropriation.
Luchmeswar Singh v. Syed Lutf Ali Khan (Privy Council)	When payment on a bond was less than the interest due, the payment ought to reduce interest and creditor was entitled to a decree for principal and balance of interest up to the date of decree; Privy Council indicated creditor's right to treat payments as for interest unless debtor had appropriated otherwise.	Relied upon to demonstrate that the Privy Council consistently applied the rule to bonds and similar instruments; used to counter the argument that applying the rule effectively permits compound interest.
Guroo Dass Dutt v. Ooma Charan Roy	Applied the rule (payments to interest first) to payments on account of a decretal debt (not only bonds).	Employed to show the rule's applicability to decretal debts and to support applying the same approach to an instalment decree.
Maharaja of Benares v. Har Narain Singh (Allahabad High Court)	Referenced as another authority applying or recognising the rule concerning appropriation to interest.	Referred to as additional authority illustrating the established nature of the rule; used to reinforce the conclusion that the creditor could apply payments to interest first.

Court's Reasoning and Analysis

The court analysed the decree and the judgment together to determine their plain meaning. The decree, when read with the judgment, made the following points clear from the text itself:

The decree ordered payment of a specified sum (recorded as Rs. 2,888 and annas 2 in the printed decree, while the opinion records the amount excluding costs as Rs. 2,888 and annas 8) with interest at 12% per annum and costs; interest was expressly made payable yearly and the year for the present purpose was treated as ending on 14 July, so interest became payable on 15 July each year.
The judgment-debtor regularly paid Rs. 600 instalments but did not expressly or impliedly appropriate these payments to principal.
On general principles, and in the absence of any appropriation by the debtor, the creditor (plaintiff) was entitled to appropriate each payment first to satisfy the interest accrued due at the date of payment and to credit the balance to principal. The court characterised this as the established general rule, citing early and later authorities.

The court addressed the defendant's contention that the creditor was obliged to allocate the full instalment to principal while any principal remained due, finding nothing in the decree that entitled the defendant to such treatment. Because interest was expressly made payable by the decree, interest was a debt accessory to the principal debt and thus payable out of sums received unless the debtor had appropriated them otherwise.

The court considered the objection that applying the rule might amount to allowing compound interest. It noted that where instalments regularly satisfy interest due so that interest is never in arrears, the total paid may coincide with what compound interest would produce; however, that result does not transform the rule into an authorization of compound interest. The court gave examples (taken from the opinion) showing situations in which interest would not be added to principal (e.g., no payments for two years and simple interest) and where payments less than interest would not add the unpaid interest to principal. The guiding point was that, on payment, interest due belongs to the creditor and may be taken by him unless contract or decree provides otherwise or the debtor appropriates the payment at the time.

The court further invoked sec. 60 of the Indian Contract Act (as discussed in Pollock and Mulla) to explain that where interest is payable under an express stipulation, interest becomes accessory to the principal debt, thereby supporting the creditor's right to appropriate payments to interest first.

Regarding the decree-holder's amendment petition of 28 July 1909, the court examined the pleadings and filings. The amendment application did not specify how the decree differed from the judgment. The debtor's counter petition indicated concern about payment of interest with instalments but the court held that the petitions and the subordinate judge's order did not provide proof that the plaintiff intended, when receiving Rs. 600 instalments only, to appropriate those instalments entirely to principal. The subordinate judge had refused amendment because "too much time had elapsed." The appellate court found that the lower courts had erred in deciding for the defendant.

Both Richardson, J. and Walmsley, J. concluded that the appeal should be allowed. Richardson, J. ordered that the orders of the courts below be discharged, the certificate of full satisfaction granted by the first court be set aside, and an order drawn up stating the amount still due on the basis of applying payments first to interest and then to principal. On costs, Richardson noted he saw no reason to depart from the usual rule but deferred to his learned brother's view and therefore the appeal was allowed without costs. Walmsley, J. expressed reservations about endorsing a general rule of calculation that effectively allows compound interest but agreed that, on the material before the court, the arrangement between the parties justified allowing the appeal without costs.

Holding and Implications

Holding: The appeal was allowed. The court held that, in the absence of any appropriation by the debtor and given that interest was expressly made payable by the decree, the creditor was entitled to appropriate each Rs. 600 payment first to interest due and to apply any remainder to principal. The orders of the courts below in favour of the defendant were discharged, the certificate of full satisfaction granted by the first court was set aside, and an order was to be drawn up stating the amount still due on that basis. The appeal was allowed without costs.

Implications:

Direct effect on the parties: The creditor may retain sums applied to interest in accordance with the decree and account accordingly; the certificate of full satisfaction in the first court is vacated and a fresh calculation is to be made showing the balance due after applying instalments first to interest.
Scope and precedent: The court applied an established rule (supported by authorities cited) that payments are ordinarily applied to interest first when interest is expressly payable. The opinion treats this rule as long recognised and applied to instalment decrees as well as bonds and decretal debts. The court did not purport to lay down an expansive new principle beyond applying the established rule to the facts of this instalment decree; the majority considered the rule well established and applicable here.

Final notation in the opinion: "Appeal Allowed."

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Biswanath Bhattacharjee Decree-Holder, v. Someswar Sarma Judgment-Debtor, .

Richardson, J.:— The case as it seems to me is really a simple one. It relates to an instalment decree, dated the 21st December, 1908. The decree is founded on a judgment in these terms:—

“Defendant admits the claim but prays for an order to pay by instalments. Plaintiff will get a decree with costs for the amount claimed to be paid in yearly instalments of Rs. 600 (six hundred) payable on July 15th each year with interest at 12 per cent. In default of any instalment the whole amount will be payable.”

The decree itself runs as follows:—

“It is ordered that the Defendant do pay to the Plaintiff the sum of Rs. 2,888, annas 2, with interest thereon at the rate of twelve per cent, per annum with the costs of the suit.

The amount decreed with costs to be paid in yearly instalment of Rs. 600 (Six hundred) payable in July 15th each year: In default of any instalment the whole amount will be payable.”

In the decree the words underlined are printed and it may be that the printed form of which use was made is not as suitable for an instalment decree or for a decree of the ordinary kind. But reading the judgment and the decree together the meaning seems clear. The amount decreed excluding the costs is Rs. 2,888, annas 8 with interest at 12 per cent, per annum. The decree makes it clear that the interest is payable yearly and for the present purpose the year must be taken to end on the 14th July. No doubt the payment of interest on interest is not directed but on every 15th July the decree-holder became entitled to the interest accrued due on the amount of his claim or the balance of that amount.

The judgment-debtor regularly paid Rs. 600 and the question is now one of accounting. The judgment-debtor did not expressly or impliedly appropriate these payments to principal. The Plaintiff therefore contends that he was at liberty to appropriate out of each payment as it was made sufficient to satisfy the interest due at the date of the payment, and to credit the balance only to principal. The judgment-debtor on the other hand contends that the Plaintiff was obliged to allocate the whole of each periodical payment to principal and to take nothing for interest so long as there was any principal due. So far as I can see there is nothing in the decree which entitles the Defendant to have the account taken on that footing. Interest was expressly made payable by the decree. The amount decreed comprised the principal debt and the debt annually due on account of interest. On general principles, in the absence at any rate of any appropriation by the debtor, it was open to the creditor to divide each sum of Rs. 600 between principal and interest, as he did, and to make up his account accordingly.

In other words the case falls within the general rule which the Courts have long recognised. “It is usual said the Sadar Dewani Adalat in 1827 [Goverdhan Das v. Warn Ali(1)] till the whole amount of interest is paid to carry any sums received to the account of interest and not of principal”. The case was cited before the Privy Council in Bamundoss v. Omesh Chander. Judgment was delivered by Sir William Maule who said this:—“Their Lordships during the argument in this case intimated their opinion on the main question, namely, whether the payments made should be ascribed exclusively to principal, and no part of them to interest: expressing their opinion that the course adopted was the ordinary one, and that the construct on of this instrument is one which does not point out any other, namely, that the payments should be applied in the first instance to interest, and to principal only so far as those payments exceed the interest due. That is the main point in question, and their Lordships entertained no doubt at all about it”. The rule was again applied by the Privy Council Luchmeswar Singh v. Syed Lutf Ali Khan. The head-note is as follows:—“When payment was made upon a bond, the amount paid being less than the interest due, held the payment ought to go to reduce the amount of interest due, and the creditor in a suit upon the bond was entitled to a decree for the principal and balance of interest up to date of decree”. The report states that when the appeal was opened, their Lordships intimated that unless the learned. Counsel could satisfy them that there had been an appropriation at the time of payment to the payment off of the principal, the creditor had a right to 4 consider it as a payment on account of the interest. It seems to have been argued (as it has been argued before us in the present case) that the result of adopting the rule was virtually to allow the creditor compound instead of simple interest. Their Lordships delivered a short judgment but took occasion expressly to observe that “there has been no calculation so as to give compound interest”. Reference may also be made to the decision of Sir William Markby and Romesh Chandra Mitter, JJ., in Guroo Dass Dutt v. Ooma Charan Roy and to the decision of the Allahabad High Court in Maharaja of Benares v. Har Narain Singh. The rule is so well established that but for the respect due to the Courts below and to my learned brother, I should hardly have thought it necessary to cite authority at all.

Most of the cases relate to bonds containing an express stipulation for the payment of interest but in Guroo Dass Dutt's case the rule was applied to payments on account of a decretal debt. Nor is there any reason why the rule should not apply when there is an express provision for the payment of interest in a decree, whether the decree be an instalment decree or a decree of the ordinary kind. Take for instance a decree for Rs. 1,000 with interest at five per cent, per annum. If at the end of a year a sum of Rs. 100 is realised the judgment-debtor would be entitled to appropriate Rs. 50 for the interest due.

As to the argument that the rule virtually allows compound interest, it may be that when the amounts paid on account are regularly paid and are always sufficient to satisfy the interest due, so that the interest is never in arrears, the result as regards the total amount paid is the same as allowing compound interest, or as though the instalments paid were credited to principal and the interest due were added to principal. But this would not always be so. For instance, if nothing be paid on a debt carrying simple interest for two years, the interest due for the first year would not be added to principal; so, too, if the amount paid on account be less than the interest due, the balance of the interest would not be added to principal. The point is that when the money is paid there is interest due to the creditor and unless the contract or decree provides to the contrary or the money is otherwise specially appropriated by the debtor the creditor has a right to pay himself his interest.

The principle underlying the rule appears to be this that when interest is payable under an express stipulation or provision, the interest becomes a debt accessory to the principal debt and sec. 60 of the Contract Act is applicable (Pollock and Mulla's Indian Contract Act, 2nd Edition, p. 260).

One point remains. On the 28th July, 1909, the decree-holder filed an application praying “that the decree may be amended in conformity with the judgment”. The application does not state in what respect the decree was not in conformity with the judgment. The judgment-debtor presented a counter petition in paragraph 4 of which he stated “that if the Court passes orders for payment of interest on the whole sum decreed along with the instalment of Rs. 600 the Defendant will not be in a position to pay the same, and if the Defendant in that case fails to pay the kist, the Plaintiff no doubt will not let him off easily”. The learned Subordinate Judge before whom the matter came contented himself with saying that he was not inclined to amend the decree as too much time had elapsed. It is suggested that what the decree-holder asked for by way of amendment was a direction that the judgment-debtor should pay on each 15th July not only the sum of Rs. 600 but also the interest due to date and that this request showed that he meant to allocate each payment of Rs. 600, in its entirety, to principal. In my opinion no such declaration of intention can be extracted from the petitions and the order of the Subordinate Judge. The fact, if it be a fact, that Plaintiff wanted the instalments increased from Rs. 600 to Rs. 600 and interest due is no proof of any intention on his part, if he received instalments of Rs. 600 only to allocate the whole to principal.

The Courts below decided in favour of the Defendant. It may be that their sympathy was with him but for the reasons indicated their orders should in my opinion be discharged. The certificate of full satisfaction of the decretal debt granted by the first Court must be set aside and an order drawn up stating the amount still due on the basis above indicated.

As regards costs, I do not myself see any reason for departing from the usual rule, but as my learned brother thinks differently, I do not press the point. The appeal will therefore be allowed without costs.

Walmsley, J.:— This appeal has caused me much difficulty and if it were necessary to state a general rule as to the manner of calculating interest on an ordinary decree for money, I fear I could not agree with my learned brother. The case of Guroo Dass Dutt v. Ooma Charan Roy deals with the question, but with all deference to the learned Judges, I doubt whether their statement “of the rule usually adopted in this country” is correct at the present day. Moveover, I think that a method of calculation which has the practical effect of allowing compound interest cannot be distinguished from compound interest, and should be acknowledged as such.

In the present case, however, the plaint and the written statement with the judgment passed thereon, supplemented by the decree-holder's petition for amendment with the debtor's petition in reply, make it plain that the arrangement between the parties was that the amount due under the decree should continue to bear interest at the rate stipulated in the hand-not in the same manner as if the debt were still due under the hand-note and not under the decree, and that the only relief granted to the debtor was that he should pay off the debt in regular instalments, instead of becoming liable immediately to execution proceedings for the entire amount due under the decree. There is no uncertainty about the manner in which, by custom and authority, interest would be calculated under the hand-note. I therefore agree that the appeal should be allowed, but without any order as to costs.

Appeal Allowed.

Biswanath Bhattacharjee Decree-Holder, v. Someswar Sarma Judgment-Debtor, .

Structured Summary of the Opinion (Richardson, J.; Walmsley, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Plaintiff / Decree-holder (Appellant)

Defendant / Judgment-debtor (Respondent)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Biswanath Bhattacharjee Decree-Holder, v. Someswar Sarma Judgment-Debtor, .

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