Very important point
The meaning to be assigned to the phrase ‘‘the principal sum adjudged’’ in Section 34 CPC (after 1956 amendment) is the principal sum actually advanced coupled with the interest on periodical rests and also capitalised on remaining unpaid. The principal sum so adjudged is ‘such principal sum’ within the meaning of Section 34 CPC on which interest pendente lite and future interest i.e. post decree interest, at such rate and for such period which the Court may deem fit, may be awarded by the Court.

Headnote:(i) Civil Procedure Code, 1908—Section 34 (after 1956 amendment)—Capitalisation of interest debited on periodical rests—Does it convert interest into ‘the principal sum’?—(Yes)—Survery of Judicial opinion.
       Held : Bank of Baroda vs. Jagannath Pigment & Chemicals & Ors. (Civil Appeal No.2785/1987) decided on September 21, 1994 (see - 1996 5 SCC, at p. 280) is a short judgment delivered by three-Judges Bench of this Court approving the two-Judges Bench decision of this Court in Corporation Bank (supra). Therein the sum borrowed by the debtor was Rs.1,20,675.59p to which compound interest was added and a suit to recover a sum of Rs.1,66,759.29p with interest was filed claiming that the interest charged and added to the sum borrowed would be the principal sum adjudged on which future interest could be granted under section 34 of the Civil Procedure Code. This plea found favour with the Trial Judge. On appeal the High Court modified the decree by directing that future interest should be calculated on the sum borrowed viz. Rs.1,20,675.59 and not the principal sum adjudged i.e. Rs.1,66,759.29. This Court set aside the appellate judgment of the High Court and restored the decree passed by the Trial Judge. (Para 32)
       Held finally : The English decisions and the decisions of this Court and almost all the High Courts of the country have noticed and approved long established banking practice of charging interest at reasonable rates on periodical rests and capitalising the same on remaining unpaid. Such a practice is prevalent and also recognised in non-banking money lending transactions. Legislature has stepped in from time to time to relieve the debtors from hardship whenever it has found the practice of charging compound interest and its capitalisation to be oppressive and hence needing to be curbed. The practice is permissible, legal and judicially upheld excepting when superseded by legislation. There is nothing wrong in the parties voluntarily entering into transactions, evidenced by deeds incorporating covenant or stipulation for payment of compound interest at reasonable rates, and authorising the creditor to capitalise the interest on remaining unpaid so as to enable interest being charged at the agreed rate on the interest component of the capitalised sum for the succeeding period. Interest once capitalised, sheds its colour of being interest and becomes a part of principal so as to bind the debtor/borrower. (Para 36)
       (ii) Civil Procedure Code, 1908—Section 34 (after 1956 amendment)—Interest and its classes.
       Held : The amendment cannot be read as intending, expressly or by necessary implication, to deprive the court of its power to award future interest on the amount of the principal sum adjudged, the sense in which the expression was understood, also judicially expounded even before 1955; the expression having been left untouched by the 1956 amendment. (Para 45)
       It was also submitted that Section 34 of the CPC is general in its application to all money suits and if banking practice or banking contracts providing for capitalisation of interest charged on periodical rests were to be recognised it will mean that application of Section 34 would be different in suits filed by banks and in suits filed by creditors other than bankers. In our opinion it is bound to be so. Section 34 is a general procedural provision and whether it would apply or not and if apply then to what extent would obviously depend on the fact situation of each case. (Para 48)
       Held consequently : We are, therefore, of the opinion that two-Judge Bench decision of this Court in Corporation Bank vs. D.S. Gowda & Anr. and three-Judge Bench decision in Bank of Baroda vs. Jagannath Pigment & Chemicals & Ors. are correctly decided and are, therefore, affirmed. A creditor can charge interest from his debtor on periodical rests and also capitalise the same so as to make it a part of the principal. Such a course can be justified by stipulation in a contract voluntarily entered into between the parties or by a practice or usage well established in the world to which the parties belong. Such practice is to be found already in vogue in the field of banking business. Such contract or usage or practice can stand abrogated by legislation such as Usury Laws or Debt Relief Laws and so on. (Para 49)
       (iii) Civil Procedure Code, 1908—Section 34 (after 1956 amendment)—Meaning of phrases "the principal sum adjudged" and ‘‘such principal sum’’—Same meaning—A few notes of caution.
       Held : We propose to place on record a few incidental observations, without which, we feel, our answer will not be complete and that we do as under:
       (1) Though interest can be capitalised on the analogy that the interest falling due on the accrued date and remaining unpaid, partakes the character of amount advanced on that date, yet penal interest, which is charged by way of penalty for non-payment cannot be capitalised. Further interest, i.e. interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy.
       (2) Novation, that is, a debtor entering into a fresh agreement with creditor undertaking payment of previously borrowed principal amount coupled with interest by treating the sum total as principal, any contract express or implied and an express acknowledgement of accounts, are best evidence of capitalisation. Acquiescence in the method of accounting adopted by the creditor and brought to the knowledge of the debtor may also enable interest being converted into principal. A mere failure to protest is not acquisescence.
       (3) The prevalence of banking practice legitimatises stipulations as to interest on periodical rests and their capitalisation being incorporated in contracts. Such stipulations incorporated in contracts voluntarily entered into and binding on the parties shall govern the substantive rights and obligations of the parties as to recovery and payment of interest.
       (4) Capitalisation method is founded on the principle that the borrower failed to make payment though he could have made and thereby rendered himself a defaulter. To hold an amount debited to the account of the borrower capitalised it should appear that the borrower had an opportunity of making the payment on the date of entry or within a reasonable time or period of grace from the date of debit entry or the amount falling due and thereby avoiding capitalisation. Any debit entry in the account of the borrower and claimed to have been capitalised so as to form an amalgam of the principal sum may be excluded on being shown to the satisfaction of the Court that such debit entry was not brought to the notice of the borrower and/or he did not have the opportunity of making payment before capitalisation and thereby excluding its capitalisation.
       (5) The power conferred by Sections 21 and 35A of the Banking Regulation Act, 1935 is coupled with duty to act. Reserve Bank of India is prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. Reserve Bank of India is one of the watchdogs of finance and economy of the nation. It is, and it ought to be, aware of all relevant factors, including credit conditions as prevailing, which would invite its policy decisions. RBI has been issuing directions/circulars from time to time which, inter alia, deal with rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the not of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy.
       (6) Agricultural borrowings are to be treated on a pedestal different from others. Charging and capitalisation of interest on agricultural loans cannot be permitted in India except on annual or six monthly rests depending on the rotation of crops in the area to which the agriculturist borrowers belong.
       (7) Any interest charged and/or capitalised in violation of RBI directives, as to rate of interest, or as to periods at which rests can be arrived at, shall be dis-allowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly.
       (8) Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC de hors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercise fairly, judiciously and for reasons and not in an arbitrary or fanciful manner.
       In view of the law having been settled with this judgment, it is expected henceforth from the banks, bound by the directives of the Reserve Bank of India, to make an averment in the plaint that interest/compound interest has been charged at such rates, and capitalised at such periodical rests, as are permitted by, and do not run counter to, the directives of the Reserve Bank of India. A statement of account shall be field in Court showing details and giving particulars of debit entries, and if debit entry relates to interest then setting out also the rate of, and the period for which, the interest has been charged. On the Court being prima facie satisfied, if a dispute is raised in that regard, of the permissibility of debits, the onus would be on the borrower to show why the amount of debit balance appearing at the foot of the account and claimed as principal sum cannot be so accepted and adjudged. This practice would narrow down the scope of controversy in suits filed by banking institutions and enable an expeditious disposal of the suits, the issues wherein are by and large capable of being determined by documentary evidence. RBI directives have not only statutory flavour, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of Section 46 of Banking Regulation Act, 1949. The Court can act on assumption that transactions or dealings have taken place and accounts maintained by banks in conformity with RBI directives. We have dealt with the law governing the debtor and creditor relationship. We have not dealt with any provision or principle of taxation law whereunder deemed payment of interest consequent upon capitalisation and actual payment whenever made may be treated as capital or revenue which question shall have to be determined under the scheme of relevant statutory enactment. (Paras 55, 56 & 57)
       (iv) Civil Procedure Code, 1908—Section 34 (after 1956 amendment)—What is the meaning to be assigned to the phrases ‘‘the principal sum adjudged’’ and ‘‘such principal sum’’ as occurring in Section 34—Interpretation of the liability of the borrower to pay interest on the principal sum—Whether to include interest that became merged with the principal sum adjudged? (Yes) or principal sum as lent? (No).
       Held : Subject to the above we answer the reference in following terms:
       (1) Subject to a binding stipulation contained in a voluntary contract between the parties and/or an established practice or usage interest on loans and advances may be charged on periodical rests and also capitalised on remaining unpaid. The principal sum actually advanced coupled with the interest on periodical rests so capitalised is capable of being adjudged as principal sum on the date of the suit.
       (2) The principal sum so adjudged is ‘such principal sum’ within the meaning of Section 34 of the Code of Civil Procedure, 1908 on which interest pendente lite and future interest i.e. post-decree interest, at such rate and for such period which the Court may deem fit, may be awarded by the Court.
       (3) Corporation Bank vs. H.S. Gowda and Anr. 1994 (5) SCC 213 and Bank of Baroda vs. Jagannath Pigment & Chetti have been correctly decided.’’ (Para 58)
       Held finally : Let all these appeals and SLPs be now placed before appropriate Bench for decision. (Para 60)

Judgement Key Points

The provided legal document does not contain any specific mention or reference to a bank manager. It primarily discusses legal principles related to the interpretation of interest, capitalisation practices, and the meaning of the term "principal sum" in the context of banking and financial transactions. There is no direct reference or discussion regarding the role, duties, or position of a bank manager.

JUDGMENT

R.C. Lahoti. J.—What is the meaning to be assigned to the phrases "the principal sum adjudged" and "such principal sum" as occurring in Section 34 of the Code of Civil Procedure, 1908 [as amended by the Code of Civil Procedure (Amendent) Act (66 of 1956) w.e.f. 1.1.1957], a question of frequent recurrence and having far reaching implications in suits for recovery of money, specially those filed by banking institutions against their borrowers, has been referred by a three-Judges Bench of this court to the Constitution Bench.

2. It will be useful to reproduce the order of reference dated 7th May, 1996 [since reported as (1996) 5 SCC 279] so as to highlight the nature and scope of controversy arising for decision before the Constitution Bench:

‘‘Order

After hearing learned Attorney General and amicus curiae S/Shri A. Subba Rao Ranjit Kumar and K.M.K. Nair on (the interpretation of the provisions of Section 34 CPC on "the principal sum adjudged" the matter is required to be considered by a Constitution Bench. The learned Attorney General has drawn our attention to the judgments of this Court in Corpn. Bank v. D.S. Gowda and Bank of Baroda v. Jagannath Pigment & Chem. wherein he sought to draw the deduction that the principal sum adjudged and the principal sum mentioned later would be the same. He seeks to take support from the word ‘such’ in support of his contention. Preceding Amendment Act 66 of 1956, the words were "aggregate sum so adjudged" and after amendment, were substituted with the words "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 on such date as the court deems reasonable on the ‘‘principal sum’’)*. The distinction, therefore, was not drawn to the attention of this Court in the aforesaid two judgments in particular the later one. As a fact no argument in this behalf appears to have been canvassed. Interpretation of the liability of the borrower to pay interest on the principal sum to include interest that became merged with the principal sum adjudged or principal sum as lent, is required to be authoritatively laid down by a Bench of five Judges.

The Registry is directed to place the matter before the Hon’ble the Chief Justice for constituting the Constitution Bench.

*[Sic., should have been – with further interest at such rate not exceeding six per cent. per annum, as the Court deems reasonable on such ‘principal sum’, in our opinion].

Section 34(1) of C.P.C. and 1956 Amendment

3. Sub-section (1) of Section 34 abovesaid, as it stood prior to the 1956 amendment, and as it stands amended, are reproduced in juxta position hereunder :

Prior to amendment

34. (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 as the Court deems reasonable on the aggregate sum so adjudged,] 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 aggregate sum as aforesaid 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.

As amended by Act No.66 of 1956

(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

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2001 Supreme(SC) 1473

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