SHRINIWAS RAGHVENDRA JAVALGEKAR Vs. BANK OF MAHARASHTRA

JUDGEMENT

(1.) THESE appeals are taken up together as they raise common question relating to the propriety of the observations of the Full Bench of this Court in the case of (Union Bank v. Dalpat Gaurishankar Upadyay) reported in 1992 Mah. L. J. pg. 686. Whereas the main grievance of the appellant original loanee of the Bank is that the respondent/bank is not entitled to interest on interest in terms of the ratio laid down in the above case, the grievance of the Bank is that this view needs reconsideration as that would deprive the Bank of the sizeble income by way of interest on the interest, which stands merged in the main principal and that this would seriously erode the financial strength of the Banking operations in this country. Large chunk of the amounts of interest merged in the original advances given by the Bank would stand frozen with reference to the interest income available from those amounts, which at least constitute 1/3rd to 1/2 of the total claims. It is also urged that the banks are put to further losses when claims are filed in courts because they cannot avail of terms relating to quarterly or half yearly rests and add to their final claim amounts. It is, therefore, urged on behalf of the respondent/bank that the view taken in the above case of Union Bank of India v. Dalpat, cited supra, should be reconsidered and that it should be observed that under section 34 of the C. P. C. the principal sum adjudged should include not only the principal amount of advance but the interest accruing thereon and merged therein under the scheme of either quarterly rests of six monthly rests.

(2.) OUR attention is also drawn to the latest view of the Supreme Court, reported in the case of (Renusagar Power Company Limited v. General Electric Company) reported in A. I. R. 1994 S. C. 860, wherein, according to the Respondent/bank even the Supreme Court has approved by way of obiter observations if not in the ratio that the Banks are entitled to file the suits both for recovery of the principal amount of advance and the interest merged with the main advance and future interest thereon. Briefly speaking the interest on interest is permissible as not being opposed to public policy. To put it differently the scheme of compound interest is not against the public policy in India and that the Banks and financial institutions are quite competent and eligible to enforce the recovery of loans comprising of principal amount and interest accruing thereon prior to the filing of the suit with interest on the total sum of principal advance and the interest merged therein. The compound interest is certainly recoverable and this view is quite contrary to the view cited in the above judgment of this Court. In this light, according to the respondent/bank, the ratio needs to be reconsidered and reviewed.

(3.) IN order to appreciate the real question behind these arguments, few facts will have to be noted from these three appeals. In First Appeal No. 56/87, which arises from Special Suit No. 34/79, the Bank and State Industrial and Investment Corporation had advanced the loan of Rs. 80,000/- to the defendant. Rs. 50,000/- were advanced by the Bank of Maharashtra, whereas Rs. 30,000/- by the Corporation, under the capital participation scheme. The terms of the loan were, the loan so far as it was advanced by the Bank was to carry 4? per cent interest over the Bank rate and that the defendant executed pro-note and has also hypothecated the machinery, tools, etc. lying with the Factory of the defendant. The Corporation was to charge uniform interest of 14? per cent. The loan was to be repaid by certain instalments prescribed in the hypothecation scheme. On the date of the suit, the amount of outstanding loan in favour of Bank was Rs. 38,837. 50 ps. inclusive of interest of Rs. 177. 40 ps. and the loan outstanding in favour of the Corporation was Rs. 85,584. 74 ps. comprising principal amount of Rs. 30,000/- and interest of Rs. 55, 584. 70 ps. It was stated that the present appellant/defendant had confirmed the balance of outstanding principal amount comprising original loan and interest amount from time to time. Since the amount was to be computed with quarterly rests, the defendant had accepted that the interest had become the part of the principal from time to time. However, as there was default on the part of the appellant/defendant, the suit was filed for total amount of Rs. 1,16,000/- and odd amount. The defendant had contended that he had paid some amount and that the same was liable to be adjusted and further that the interest was to be computed correctly. The appellant/defendant did not question the merging of the accrued interest in the principal at any stage and accordingly the decree was passed. This appeal was filed only to dispute the amount of repayment and the computation of interest.