K. Appa Rao (Decd.) and others vs State Bank of Hyderabad

A suit filed on behalf of the plaintiff/respondent has been decreed for a sum of Rs. 1,33,474.30 together with interest at 16 1/2 per cent. per

annum on the sum of Rs. 91,350 from the date of the suit till the date of the realisation, for creating a charge for the decretal sum on the pledged

goods detailed in the pledge delivery letter executed by the defendant in favour of the plaintiff/respondent and for directing the stocks to be sold

and proceeds credited towards decree and for costs of suit.

The defendant/appellant was carrying on the business of export of granite, marble and other stones and minerals and different types of wood

and timber to various countries and was maintaining an account with the plaintiff/respondent. In the year 1973, he sought for loan facility from the

plaintiff-bank in relation to his export trade to enable him to purchase necessary materials for the purpose of export against existing or anticipated

orders. The plaintiff/respondent initially sanctioned in November, 1973, loan facilities to the defendant/appellant for a limit of Rs. 50,000. At the

request of the defendant/appellant, the loan limit was enhanced to Rs. 1,50,000 in June, 1974. Pursuant to the sanction of the enhanced limit, the

appellant availed of a loan of Rs. 91,350 by debit to his account with the plaintiff/respondent and withdrew the said amount and thus received

consideration. In relation to this loan, he executed in favour of the plaintiff/respondent a promissory note dated July 29, 1974, for Rs. 95,350.

Alleging, however, that the defendant appellant, after having availed of the loan, failed to arrange for the purchase of the sandalwood, etc., as well

as to export the same, as a result of which, the letter of credit expired and consequently the loan amount remained unadjusted and over due; the

plaintiff/respondent''s demands for return of the loan, however, also were not honoured by the defendant/appellant, but he created in favour of the

plaintiff/respondent a charge under the agreement of hypothecation dated September 17, 1976, and the hypothecation on inspection later was

discovered to be of inferior variety and not enough to cover even a portion of the loan outstanding, and ""in view of the continued failure on the part

of the defendant to adjust the outstanding, the plaintiff filed the suit.

In the written statement that was filed on behalf of the defendant/appellant, it was conceded that the initial loan limit was Rs. 50,000 which was

later enhanced to Rs. 1,50,000 and that the defendant/appellant availed of the loan facility as per promissory note for Rs. 91,350 dated July 29,

1974. The defendant/appellant, however, asserted that he had the requisite sandalwood pieces for export as arranged but due to unexpected

circumstances, they could not be exported in time. In response to the plaintiff/respondent''s letter, the defendant/appellant tried his best to obtain

extension of time provided in letters of credit deposited with the plaintiff and in response to the plaintiff''s demand for payment of the outstanding

liability, the defendant furnished securities first by execution of the hypothecation bond dated September 17, 1976, and confirmation letter of

pledge dated December 8, 1976, but the plaintiff insisted for security of an immovable property and so the defendant deposited with the plaintiff

the title deeds of his land in Kolur Village, Ponneri Taluk (an extent of 54 acres-estimated value of Rs. 1,62,000).

The trial court, as stated above, has decreed the suit. The appellant has not questioned his liability before us and thus the principal sum is not in

dispute. Learned counsel for the appellant has questioned, however, the correctness of the finding with respect to the rate of interest, which

admittedly was not the contracted rate. The defendant/appellant has contended that the only rate of interest that could be allowed in terms of the

provisions of law that regulate the rate of interest chargeable on the principal sum by any creditor cannot exceed the contractual rate of interest or

where there is no contractual rate, the rate at which moneys are lent or advanced by the nationalised banks in relation to commercial transactions.

He has submitted that, although the plaintiff/respondent is a nationalised bank, it is not shown that the rate of interest at 16 1/2 per cent. per annum.

was the rate at which monies were lent or advanced at the relevant time by nationalised banks in relation to the transactions like the one in

question. He has also submitted that the court has got ample power to reduce the rate of interest keeping in view the nature of transaction between

the parties and the reason of the failure of the defendant/appellant in honouring the commitments as to the repayment of loans. Learned counsel for

the respondent, on the other hand, has contended that on the facts as are available on the record, it is conceded that the defendant/appellant took

advantage of the concessional rate of interest for export oriented loans, but he did not utilise the loan advanced by the plaintiff/respondent for the

purpose of any goods that were exported or stacked for export. He has submitted that on the facts as found by the learned trial judge, which are

not in dispute before us, the proper rate of interest at which the defendant/appellant should pay to the plaintiff/respondent, is the lending rate at

which monies were lent or advanced by the nationalised banks at the relevant time and that the rate of 16 1/2 per cent. per annum has been

claimed in the suit.

Before we advert to the relevant provisions of law in this behalf, we may extract a passage from the judgment of the trial court to know as to

how and why the contractual rate of 11 1/2 per cent. was enhanced to 16 1/2 per cent. by the trial court. The trial court has said :

Mr. Habibullah Badsha, learned counsel for the plaintiff, concedes the general proposition of law that unless there is any specific provision or

enactment regarding retrospective effect, then the effect of the provisions in the said enactment has to be given prospectively and not

retrospectively. Though it looks as if this is against the contention raised on behalf of the plaintiff, yet he submits that it is his duty to bring to the

notice of this Hon''ble court a proposition that is found in the fact note which may be considered against the contentions raised on behalf of the

plaintiff, but it is not so.

Mr. Habibullah Badsha further submits :

(a) There is a consensus between the plaintiff and the defendant in the instant case with regard to the aspect that the concessional rate of interest is

available for an export-oriented loan, i.e., at the rate of 11 1/2 per cent. It is also conceded by the defendant that this was an export-oriented

loans. So, the defendant must be deemed to be aware of the penalties attached to the non-fulfilment of the conditions of the export loan. Hence,

there is no question of retrospective operation for the acceptance of the penalty attached to the non-fulfilment. It is more in the nature of procedural

law.

(b) The more important fact is whether the issues involved are prospective or retrospective in effect of availing, because exhibits P-10 and P-11

and exhibit D-12 written by the plaintiff to the defendant made it clear that the rate of interest was 16 1/2 per cent. from the date on which the loan

was availed of and there was no reply to these letters written on behalf of the plaintiff to the defendant. Therefore, the defendant is liable to pay

interest at 16 1/2 per cent. per annum even though it is deemed to be retrospective.

(c) Even if it is deemed to be prospective and cannot apply retrospectively, exhibit P-23 is dated July 5, 1975, and so it will be applicable at least

from July 5, 1975. The deemed promissory note, exhibit P-1, is dated July 29, 1974. Though the plaintiff does not concede that the rate of interest

at 16 1/2 per cent. is not applicable from July 29, 1974, if it is held that due to the law of prospective operation of the notification then it will apply

only from the date of the issue of exhibit P-23. Then the plaintiff is entitled to claim interest at the rate of 16 1/2 per cent. from July 5, 1975.

Mr. Mustafa, learned counsel for the defendant, submits that the concessional rate of interest at 11 1/2 per cent. is the rate that should be

adopted even with respect to the transactions that had been conducted after exhibit P-15 was not fully complied with, because the defendant did

engage himself in activities contemplated by the letter of credit, exhibit P-15. The loan is on a credit of one and a half lakh of rupees which was

granted by the bank to the defendant. We are governed by the contract in this. One contemporaneous document which is exhibit P-2 and it came

into existence at the time of the coming into existence of exhibit P-1, that is, on July 29, 1974. In the instant case, though the defendant has not

been examined, it is his son who has been examined on behalf of him as DW-1. There is an evidence to show that DW-1 is associated with the

transaction. Therefore, he is competent to speak. On the other hand, so far as PW-1 is concerned he is the incompetent witness in the sense that

he lacks personal knowledge, relating to the documents relied upon by the plaintiff.

Mr. Mustafa, submits that in so far as exhibit P-1 is concerned, the interest charged should be on the basis of the contract imbedded in exhibit

P-1. There is also alternative interest specified in exhibit P-1. There are two types of interest that are contemplated by the contents of exhibit P-1.

The quarterly rests mentioned in exhibit P-1 will not be available to the plaintiff for charging the defendant with quarterly rests. Mr. Mustafa,

learned counsel for the defendant, points out exhibit P-1 which reads as follows :

On demand, I, K. Appa Rao, promise to pay the State Bank of Hyderabad, T. Nagar, or order the sum of rupees ninety-one thousand three

hundred and fifty-one for value received with interest from this date at 2 per cent. (above) below the State Bank advance rate subject to a

minimum of 9 per cent. per annum with quarterly rests.

By reading exhibit P-1, Mr. Mustafa submits that ""quarterly rests"", can be called as a proviso clause, i.e., the minimum of 9 per cent. per annum.

If quarterly rests subject to 9 per cent. per annum are taken as a parenthetical clause, then D.W.-1, has correctly stated in his evidence that

quarterly rests will apply only where only interest is charged at 9 per cent. They have charged the State Bank advance rate of interest. We must

necessarily have the knowledge of the State Bank advance rate of interest. Exhibit P-1 mentions the State Bank advance rate of interest and that

the defendant must pay 2 per cent. below the State Bank advance rate of interest. Therefore, there should be evidence on the State Bank advance

rate of interest in order to charge interest.

Mr. Mustafa submits that there is no evidence in this regarding State Bank advance rate of interest except exhibit P-21. Mr. Mustafa, learned

counsel for the defendant refers to clause 11 of exhibit P-21 which reads as follows :

Consequent upon the rise in Reserve Bank of India rate from 7 per cent. to 9 per cent. from July 23, 1974, as also the State Bank of India

advance rate now revised to 12 1/2 per cent. the rate of interest on all types of advances in our bank have been revised as per annexure-1. Please

note that the revised rates will come into force with retrospective effect from July 23, 1974.

In exhibit P-21, only there is a reference that there should be revision of rate of interest. Therefore, excepting this reference to 12 1/2 per cent.

in exhibit P-21, and reading the same with reference to the contents of exhibit P-1, the interest payable to the defendant under exhibit P-1 is 2 per

cent. below the State Bank advance rate of interest which comes to 10 1/2 per cent. That is more than 9 per cent. interest mentioned in exhibit P-

1.

On the question whether the loan has been granted for a particular purpose, we have necessarily to look into the contemporaneous document,

exhibit P-2, along with exhibit P-1 by reading exhibit P-2, we come to know that it is not for export activity which is referred to herein. Mr.

Mustafa, learned counsel for the defendant, submits that instead of going through the entire document exhibit P-2, one or two paragraphs may be

referred to and in fact he refers to the opening paragraph of the same which specifies the amount to be advanced, namely, Rs. 91,350. He also

refers to clause 4 of exhibit P-2 which reads as follows :

In the case of goods intended to be sold in India, they shall be as from the time they are delivered to me/us or the property therein passes to me/us

be and remain hypothecated and/or pledged with you until they are redeemed by me/us.

In clause 4 of exhibit P-2, it has been agreed that even with respect to goods that are to be sold in India, it shall remain hypothecated or

pledged. It is an internal arrangement of trade, but the schedule to exhibit P-2 does not contain anything. That is the schedule which was expected

to contain the rules to be read by the defendant. There is the blank schedule. If we look into the oral evidence of PW-1, it is the sandalwood and

granite that are expected to be exported. That is the evidence of PW-1. Therefore, the plaintiff is not clear in his submission whether sandalwood

and sandalwood alone has to be exported. Therefore, there is no document to show that export of sandalwood is not the only activity and the

export is not the only activity for which the loan has been granted. It is also pointed out that the Reserve Bank of India''s directions as such are not

before this court as exhibits. Exhibits P-21 and P-22 are only giving out some directions in general and which are in pursuance of directions of the

Reserve Bank of India. What these Reserve Bank of India''s directions are and what were the actual definitions that are contemplated have not

been made clear by the plaintiff and the evidence emanating from PW-1 is also not sufficient in that aspect so as to throw light u/s 21(2) of the

Banking Regulation Act, 1949.

Mr. Mustafa, learned counsel for the defendant, further submits that there is no specific stipulation in any one of the written instruments to the

effect that the defendant is bound to pay at the enhanced rate of 16 1/2 per cent., though the Reserve Bank had given instructions to its

subordinate banks for following that course of conduct for collecting interest. According to Mr. Mustafa, exhibit P-15, the letter of credit has been

entrusted with the plaintiff-bank only with the understanding that the export of the commodities dealt with by the defendant will be ensured and that

does not mean that within the stipulated period mentioned in the letter of credit, exhibit P-15, had to be complied with in the strict sense of the

terms. He further submits that the money borrowed is only for the purpose of export under exhibit P-15 and that the granite stones and

sandalwood were the items to be exported.

After stating as above, learned trial judge has taken notice of the evidence of P.W.-1 and some documents filed on behalf of the

plaintiff/respondent to state that the loan granted was not for export of sandalwood alone but also for further items such as granite, rosewood,

ebony wood, etc., and that there was no evidence either oral or documentary to show that the State Bank advance rate of interest had been

revised, which rate was shown in exhibit P-21 to read as follows :

Consequent upon the rise in the Reserve Bank of India rate from 7 per cent. to 9 per cent. from July 25, 1974, as also the State Bank of India

advance rate now revision to 12 1/2 per cent., the rate of interest on all types of advance in our bank have been revised as per annexure-I. Please

note that the revised rates will come into force with retrospective effect from July 23, 1974.

We are not intending to quote any further from the judgment of the learned trial judge or to go to any other discussion as to the rate of interest,

for we shall presently notice that there is no evidence on record to show as to what is the rate of interest for which moneys were lent or advanced

by nationalised banks in relation to commercial transactions at the relevant time except that a concessional rate of interest was stipulated for export

oriented loans at the rate of 11 1/2 per cent. and that there was nothing to claim any higher rate of interest on any date prior to July 5, 1975, for as

noticed in the various passages of the judgment of the learned trial judge extracted above, exhibit P-23 dated July 5, 1975, could be applied only

prospectively and not retrospectively. In fact, the plaintiff/respondent almost conceded this position but in the words of the learned trial judge :

Though the plaintiff does not concede that the rate of interest at 16 per cent. is not applicable from July 29, 1974, if it is held that due to the law of

prospective operation of the notification, then it will apply only from the date of the issue of exhibit P-23. Then the plaintiff is entitled to claim

interest at the rate of 16 1/2 per cent. at least from July 5, 1975.

In the above there is one mistake noticed by us that the rate higher than 11 1/2 per cent. could be claimed until exhibit P-23 became

operational, but on exhibit P-23 becoming operational, how the rate of interest at 16 1/2 per cent. was worked out would entirely depend upon

the evidence on such rate of interest, the rate that was applicable to moneys lent or advance by the nationalised banks in relation to the commercial

transactions.

Learned counsel for the appellant has urged that it is a case of excessive rate of interest claimed by a nationalised bank and this court should

call in aid the provisions of the Usurious Loans Act, 1918, to mitigate the rigour of the loan transaction. Our difficulty, however, in taking any aid

from the said Act is created on account of a Bench decision of this court in the case of Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania

Gurukal, in which case a Bench of this court has said :

The avowed object of the Banking Regulation Act, 1949, is to consolidate and amend the law relating to banking and thereunder provision is

made for the regulation and control by the Reserve Bank of India of the carrying on of the business of banking by banking companies including the

rates of interest on advances by banks. Any contravention on the part of the banks to charge interest at the rates specified u/s 21(2)(e) is made

punishable u/s 46(4) of the Banking Regulation Act, 1949. The primary object of the Usurious Loans Act, is to confer a power on the court to

afford relief to a debtor, if the court has reason to believe that a particular transaction between the parties is substantially unfair. No particular rate

of interest, as reasonable interest or excessive interest, has been prescribed in the Usurious Loans Act and the reasonableness or otherwise of the

rate of interest in any given case has to be decided and determined in the light of the statutory provisions contained therein. In other words, the

provisions of the Usurious Loans Act do not in any manner control or regulate the charging of rates of interest, but are intended merely to afford

relief from a claim for excessive interest in cases where the transaction is considered to be substantially unfair. It is obvious that the spheres of

operation of these two enactments are very different, in that one is concerned with the control and regulation of the business of banking including

the rate of interest on advances to be made by the banking companies, while the other is intended to secure relief from excessive claims for interest

sought to be enforced through courts. On a consideration of the diverse scope of the operation of the provisions of these enactments, we are of the

view that the provisions of the Banking Regulation Act, 1949, alone regulate the rate of interest on advances by nationalised banks and that there is

no inconsistency between its provisions and the provisions of the Usurious Loans Act. The contention of learned counsel for the petitioner in this

regard has, therefore, to be negatived. Equally, the contention of learned counsel for the respondents that the provisions of the Usurious Loans Act

will prevail over the provisions of the Banking Regulation Act, 1949, has also to be rejected.

A Bench of the Karnataka High Court, however, in Vellaya Gouder Vs. N. Ramanathan and Others, , has expressed its inability to follow the

decision of this court in the case of Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, saying that the relevant circulars and directives

of the Reserve Bank of India have been brought to the notice of the Bench of this court in the case of Indian Bank, Tiruvannamalai Vs. V.A.

Balasubramania Gurukal, . In a later judgment of this court in Sri Venkataramanan and Co., by Partner T.M. Thambusamy and Others Vs. Indian

Overseas Bank, a Bench of this court has taken notice of the judgment of this court in Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania

Gurukal, as well as the judgment of the Karnataka High Court in the case of Vellaya Gouder Vs. N. Ramanathan and Others, and observed (at

page 86) :

Learned counsel appearing for the appellants drew our attention to a decision of Vellaya Gouder Vs. N. Ramanathan and Others, , where the

identical question was considered by a Bench of the said court. The learned judges, who decided the said case, referred to a decision of this court

in Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, . After elaborately considering the entire matter, the Karnataka High Court

expressed their inability to follow the decision of this court for the various reasons. According to them, all the relevant circulars and directives of the

Reserve Bank of India were not brought to the notice of the said court. Their attention was drawn to the circulars issued by the Reserve Bank of

India in 1972, 1974 and 1976 and commanding all commercial banks including nationalised banks not to charge compound interest on agricultural

loans. A particular reference was made to the circular issued in Ref. DBOD No. B.P.B.C. 94/C; 453(A) 76, dated August 17, 1976. Even

otherwise, the learned judges of the Karnataka High Court were not inclined to accept the soundness and tenability of the reasoning found in the

said judgment of this court. They did not agree with the principle declared therein to the effect that the directives of the Reserve Bank would

constitute a special circumstance within the scope of Explanation I to section 3(1) of the Usurious Loans Act. In this background, an earnest

appeal was made by learned counsel for the appellants that though this Bench is bound by the earlier decision of this court, we may consider the

question of referring the matter to a larger Bench. Even though the matter may require a second look, we feel that it is not necessary at this stage to

make such a reference, since on facts were find that a decision by a larger Bench on this point may not be relevant to dispose of the present

appeal.

The instant case is one, however, in which the court may take notice of the provisions in the Banking Regulation Act, 1949, and the various

circulars and orders issued by the Reserve Bank of India and need not advert to the provisions of the Usurious Loans Act to hold that while there

may be a reasonable basis to hold that the defendants/appellant was/is obliged to pay interest at 11 1/2 per cent., the contracted rate of interest, by

his conduct that has been found by the learned trial judge and which has not been seriously disputed before us, made himself liable to such rate of

interest which was chargeable upon the loan advanced to him by a nationalised bank as if it was not an export-oriented loan. The

plaintiff/respondent, however, cannot claim interest at a rate higher than the rate noticed by us above which nationalised banks charged on

commercial transactions. The plaintiff-respondent had to establish such rate of interest, but it failed to do so. All that it had been able to establish is

the rate of 11 1/2 per cent. chargeable on export-oriented loan (concessional rate) and that there was an upward revision to 12 1/2 per cent.

effective from July 23, 1974, with respect to commercial transactions otherwise than export-oriented loans.

Since we have taken the view that in the instant case there is no requirement to decide as to whether there is any conflict between the

provisions of the Usurious Loans Act and the Banking Regulation Act, we are not inclined to make any attempt to resolve the conflicting views of

this court in the case of Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, and that of the Karnataka High Court in the case of

Vellaya Gouder Vs. N. Ramanathan and Others, and/or to refer the case to a larger Bench. We, however, feel that the judgment of this court in

the case of Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, may require a second look but we do not say anything beyond that.

Section 34 of the CPC provides that 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 not exceeding six per cent.

per annum as the court deems reasonable on such principal sum, from the date of the decree to the date of payment, or to such earlier date as the

court thinks fit : Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such

further interest may exceed six per cent. per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the

rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions.

It is not in dispute that the instant transaction is a commercial transaction. It is also not disputed that there has been a contractual rate on

condition that the loan granted was for export of sandalwood and other items such as granite, rosewood, ebony, wood, etc. The

defendant/appellant, however, disentitled himself as found by the learned trial judge to any concessional rate of interest. He thus became liable as

noticed by us above not to the contractual rate of interest but to the rate at which moneys were lent or advanced by nationalised banks in relation

to commercial transactions at the relevant time. The concessional rate was 11 1/2 per cent. The rate applied to the commercial transaction effective

from July 23, 1974, was 12 1/2 per cent. That rate, however, could not be applied to the transaction of the defendant/appellant on any date prior

to exhibit P-23, that is to say, July 5, 1975. Thus, in our opinion, it is a fit case in which the rate of interest that may be allowed should be 11 1/2

per cent. from July 29, 1974, up to July 5, 1975, and thereafter at the rate of 12 1/2 per cent., the rate which the plaintiff/respondent was able to

prove, applied to commercial transaction as per the circular of the Reserve Bank of India.

Thus, we are satisfied that the plaintiff/respondent is entitled to treat the transaction as any other commercial transaction and not export-

oriented loan and charge the rate of interest which the nationalised banks were entitled to realise in relation to commercial transactions on and from

July 5, 1975, but not prior to that date. The plaintiff/respondent has been able to prove that the rate of interest of 12 1/2 per cent. effective from

July 29, 1974, applied to the case of the appellant from July 5, 1975, and not the rate of 16 1/2 per cent. for which there has been no evidence.

In the result, the appeal is allowed in part. The suit is decreed for a sum of Rs. 91,350 with interest at the rate of 11 1/2 per cent. per annum

on and from July 29, 1974, up to July 5, 1975, and thereafter at the rate of 12 1/2 per cent. per annum till the date of payment with proportionate

costs. There shall, however, be no decree as to costs in the appeal and the parties shall bear their respective costs in the appeal.