Creditor has the discretion to apply payments towards interest first and then principal unless instructed otherwise by the debtor.

JUDGMENT :

C. PRATHEEP KUMAR, J.

1. This Second Appeal has been preferred under Section 100 r/w Order XLII rule 1 of CPC by the appellant in A.S.198/2008 on the file of the 1^st Additional District Judge, Thrissur, who is the plaintiff in O.S.461/2004 on the file of the Principal Sub Court, Thrissur, against the judgment dated 13.11.2017 dismissing the appeal. For the purpose of convenience, the parties are hereafter referred to as per their rank before the trial Court.

2. The brief facts necessary for the disposal of this Appeal are as follows :-

The second defendant is the son of the first defendant. According to the plaintiff, the defendants jointly borrowed a sum of Rs.75,0000/- from him on 18.2.1999 after executing a demand promissory note, promising to repay the amount on demand. On 16.2.2002 the defendants paid a sum of Rs.500/- towards interest. However, the principal amount and remaining interest was not repaid, in spite of repeated demands and a registered lawyer notice. According to the defendants, the 1^st defendant borrowed a sum of Rs.50,000/- from the plaintiff on 18.2.1999 and executed an agreement for sale in respect of his property as security for the repayment of the loan amount. Subsequently when the second defendant was in need of a further sum of Rs.25,000/-, the plaintiff insisted for executing a demand promissory note for Rs.75,000/-. He had also obtained signed blank stamp papers and signed blank papers from them. They regularly paid interest to the borrowed amount. On 24.12.2001 they repaid Rs.25,000/- and the remaining Rs.50,000/- was repaid on 6.5.2003, through the account of the plaintiff. The plaintiff informed the defendants that he had destroyed the signed blank stamp papers and blank papers given as security and that they are not liable to repay any amount to the defendants.

3. As per the judgment dated 28.2.2008, the trial court directed the defendants to pay an amount of Rs.25,000/- along with interest at the rate of 12% per annum, till the date of suit and thereafter, at the rate of 6% per annum, after crediting Rs.50,000/- paid through the plaintiff's bank account. Since the trial court has not awarded interest for the entire principal amount of Rs.75,000/- from the date of the loan, the plaintiff preferred the first appeal. The defendants also filed a cross-objection. As per judgment dated 13.11.2017 the 1^st Appellate Court dismissed the appeal as well as the cross-objection. Dissatisfied with the above judgment of the 1^st Appellate Court, the plaintiff preferred the Second Appeal raising various contentions.

4. At the time of admission, after hearing both side, this Court formulated the following substantial question of law for consideration :

“When a payment is made towards a debt, is not the creditor entitled to adjust that payment towards the interest liability firstly and thereafter towards the principal ?

5. Heard both sides.

6. The trial court as well as the 1^st Appellate Court found that the defendants borrowed a sum of Rs.75,000/- from the plaintiff on 18.2.1999 after executing Ext.A1 promissory note. Though the defendants pleaded complete discharge, they could prove the repayment of only a sum of Rs.50,000/- on 6.5.2003, in addition another Rs.500/- paid towards interest on 16.2.2002. The plaintiff claimed interest for the loan amount at the rate of 12% per annum from the date of the loan, for Rs.75,000/-. The trial court awarded interest at the rate of 12% per annum only for a sum of Rs.25,000/-, till the date of the suit and thereafter, at the rate of 6% per annum till realization. The prayer for granting interest from the date of the loan on 18.2.1999 till 6.5.2003 ( the date of repayment