Vishal Agencies, Through Its ... vs Osmanabad Janata Sahakari Bank ...
2002 Latest Caselaw 461 Bom

JUDGMENT

D.G. Karnik, J.

1. Heard Shri A.M. Kanade, learned Counsel for the petitioners and Shri S.S. Choudhary, learned Counsel i/b Shri A.N. Irapalgire, advocate for the respondent No. 1. The learned Counsel for the petitioners craves leave to delete the respondent No. 2. Leave granted.

2. Rule, made returnable forthwith by consent of the parties.

3. The respondent is a Co-operative Bank having, amongst others, a branch at Latur. At the request of the petitioners, a cash credit facility with the drawing limit of Rs. Fifteen lacs was granted by the respondent No. 1 to the petitioners on 3rd June, 1997 and the actual cash credit account was opened on 18th June, 1997. Enjoying the said cash credit facility, the petitioners transacted business and borrowed money from the respondent Bank. It is not disputed that till October/November, 1997, the petitioners were regularly transacting business with the respondent No. 1 Bank. In November, 1997 the petitioners stopped operations in the cash credit account.

4. As the operations in the account were stopped and a sum of Rs. 14.75 lacs was due, the respondent Bank issued demand notices and ultimately filed a dispute in the Co-operative Court at Nanded for recovery of Rs. 17,50,693,04 inclusive of interest upto to the date of the dispute. The original respondent No. 2 in this petition, who was the guarantor, was also joined as party to the dispute.

5. Before the Co-operative Court, several defences were raised by the petitioners. It was contended that respondent Bank had charged interest with monthly rests and capitalised unpaid interest every month contrary to the law and directions/circulars issued by the Reserve Bank of India (for short "the R.B.I.") from time to time. The entries made in the books of account were also disputed; especially the debit entries relating to the interest and certain entries which were made under the heading "Voucher Withdrawal", in the statement of accounts were challenged. It was further claimed that no cause of action had arisen to the respondent Bank for filing of the dispute.

6. The Co-operative Court, Nanded dismissed the dispute in its entirety. The appeal filed by the respondent Bank was allowed by the Maharashtra State Co-operative Appellate Court. The Co-operative Appellate Court allowed the dispute in toto and directed the petitioners to pay the entire amount of claim i.e. Rs. 17,50,693,04 together with interest at the rate of 21%p.a. from the date of the dispute till payment.

7. Another dispute filed by the respondent No. 1 Bank against the very petitioners in respect of another loan, which was also decreed by the Maharashtra State Co-operative Appellate Court and against which a Writ Petition bearing No. 736/2001 was filed in this Court. In all a sum of Rs. Ten lacs was deposited by the petitioners in this Court against the claims covered in the Writ Petition No. 736/2001 and this writ petition. As agreed between the parties, a sum of Rs. Five lacs is to be treated as deposit in Writ Petition No. 736/2001 and remaining sum of Rs. Five lacs is to be treated as deposit in respect of this petition. While deciding the Writ Petition No. 736/2002, 1 have directed that the sum of Rs. Five lacs may be transferred to the respondent Bank as a deposit in respect of the claim covered by Writ Petition No. 736/2002. The respondent No. 1 Bank is in the process of withdrawal of the said sum of Rs. Five lacs and the balance sum of Rs. Five Lacs is still remaining in this Court on account of the dispute covered by this Writ Petition.

8. Relying on the judgment of the Constitution Bench of the Hon'ble Supreme Court in the case of Central Bank of India v. Ravindra and Ors. Shri Kanade, the learned Counsel for the petitioners made the following submissions :

(i) The interest was not charged at the agreed rate of interest i.e. 21% p.a., but was charged higher than 21% p.a., under the guise that the Bank was entitled to charge penal interest over and above 21% p.a. At the end of the statement of accounts, an entry/endorsement is made by hand debiting the amount of Rs. 52,427.00 is charged by way of penal interest but there is no actual entry made in the computerised statement of accounts which was handed In the Court.

(ii) Interest has been debited monthly to the account and thus capitalised contrary to the circulars of the R.B.I. There was no contract to pay interest monthly and assuming that there was a contract, it was against the public policy as held by the Supreme Court in the case of Central Bank of India u. Rauindra and Ors. (supra).

(iii) The respondent Bank has not properly pleaded the cause of action and, therefore, the entire dispute needs to be dismissed.

9. The last of the contentions is considered first. The cause of action is the bundle of facts which give rise to the claim made in the plaint/dispute. All facts that are necessary to be pleaded for the purpose of establishing the claim form the cause of action. In the present case, the bundle of facts which the respondent Bank was required to prove to get the award in its favour consisted of, (i) grant of cash credit facility, (ii) actual withdrawal of the loan by enjoying the said cash credit facility by the petitioners, (iii) the failure to repay the loan on demand, and (iv) agreement to pay interest and rate of interest. All these facts are pleaded. In the circumstances, the contention of the petitioners that the respondent Bank had not properly pleaded the cause of action has to be" rejected.

10. There is, however, considerable force in the submission of Shri Kanade regarding the computation of the interest and Its capitalisation/compounding. Capitalisation of interest is founded on the principle that when the borrower fails to make the payment on the due date and thereby renders himself defaulter, the interest which ought to have been paid on the due date partakes the character of the amount advanced on that date. There is a prevalent practice of compounding the interest at certain rests. Charging of interest at the rests at which the interest falls due and compounding thereof at the end of those rests is a general banking custom. Often, the rests at which interest is to be charged are agreed contractually between the parties. Such contracts, unless opposed to the public policy, are binding on the contracting parties. A stipulation to charge and compound interest at yearly or half yearly rests on the basis of contract or banking practice are not considered as usurious, illegal or opposed to the public policy. In many cases, there is even a practice of charging interest quarterly and such practice is even recognised by the R.B.I. The R.B.I, has from time to time issued Circulars containing the instructions to the Banks relating to the interest on advances. Under a letter dated August 9, 2001, the R.B.I, sent a Master Circular containing compendium of instructions issued to the Banks from time to time relating to the interest. The said letter dated August 9, 2001 along with the Circular is published on the Internet and a copy thereof is annexed to the additional affidavit dated 17th April, 2002 filed by the petitioner. Issuance of this letter and Circular is not challenged by the respondent Bank. In paragraph 1.2 of the said Circular, it is stated :

1.2. The interest at specified rates shall be charged with quarterly or longer rests and shall be rounded off to the nearest rupee.

(underline supplied)

Thus, the R.B.I, has recognised and permitted the capitalisation of the interest only at quarterly or longer rests. The instructions issued by the R.B.I. under Sections 21 and 35-A of the Banking Regulation Act, 1935 have a statutory force. The R.B.I, is the prime Banking Institution of the Country entrusted with supevisory role over the banking and conferred with the authority of issuing binding directions, which have a statutory force. The Circulars issued by R.B.I. are binding on the Banks. The learned Counsel for the respondent Bank submitted that the R.B.I, has permitted charging of the interest with monthly rests for certain loans specified in the latest Circular w.e.f. 1st April, 2002. The controversy in the present case relates to the rate of interest for the period prior to 1st April, 2002 and as get the Circular of the R.B.I. interest at shorter than quarterly rests was "Here italicized: not permissible at the relevant time. The statement of accounts handed in by the respondent Bank shows that the interest is debited monthly and is capitalised monthly. This is clearly contrary to the directions of the R.B.I.

11. Even assuming that there were no instructions/directions from the R.B.I, prohibiting charging of the interest with monthly rests, monthly capitalisation was not permissible. In this connection, reference may be made to the observations made in paragraph 55 by the Hon'ble Supreme Court in the case of Central Bank of India v. Ravlndra and Ors. (supra), which are to the following effect :

Borrowers other than those belonging to corporate sector, find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous. At times the interest charged and capitalised is manifold than the amount actually advanced. Rule of damdupat does not apply. Penal interest, service charges and other over-heads are debited in the account of the borrower and capitalised of which debits the borrower may not even be aware. If the practice of charging interest on quarterly rests is upheld and given a judicial recognition, unscrupulous banks may resort to charging interest even on monthly rests and capitalising the same.

Thus the Supreme Court disapproved the charging of interest at monthly rests and called the banks charging it as unscrupulous banks. The present case is squarely covered by these observations.

12. The learned Counsel for the respondent No. 1 Bank also showed, during the course of arguments, the deed of hypotehcation dated 18th June, 1997, executed by the petitioners and invited my attention to clause No. 7 thereof, relevant portion of which reads as under :

...the rate of interest at the rate of 21% over the Bank rate with minimum per cent per annum, with half yearly/quarterly/monthly rests be calculated and charged on the daily balance in bank's favour due upon such cash credit....

(underlining supplied)

It may be noted that out of the three words "half yearly/quarterly/monthly", two words were to be deleted and only one of them was to be retained. However, no word is deleted and all the three words appearing in the printed form are kept intact. This only shows that it was not agreed by the petitioner that he would pay interest at monthly rests. Therefore, in the present case, there is even no contract to pay interest with monthly rests, Assuming that there was such contract, it was contrary to the directions of the R.B.I. and to the judgment of the Apex Court in the case of Central Bank of India v. Ravindra and Ors. (supra). Thus, in any event, the respondent Bank was not entitled to charge and capitalise the interest with monthly rests.

13. The learned Counsel for the respondent Bank contended that the petitioner had previously filed a Dispute bearing No. 218/99 in the Cooperative Court for settlement of the accounts and that dispute was unconditionally withdrawn. (Copy of the dispute was not filed in this Court by the respondent Bank). It was, therefore, contended that on account of this unconditional withdrawal of the dispute, the petitioner was not entitled to challenge the accounts or any entries in the accounts. On the principle of constructive resjudicata under Section 11 of the Code of Civil Procedure. Withdrawal of dispute cannot be regarded as resjudicata under Section 11 of the Code of Civil Procedure. Order XXIII Rule 1 of the Code of Civil Procedure specifically deals with the withdrawal of the suits and consequences thereof. One must look to the provisions of Order XXIII Rule 1 and not to the provisions of Section 11 for the purposes of considering the effect of withdrawal of the dispute. Sub-rule (4) of Order XXIII says that where the plaintiff withdraws from a suit or part of a claim, withovit the permission referred to in Sub-rule (3), he shall be precluded from instituting any fresh suit in respect of such subject matter or such part of the claim. Sub-rule (4) prohibits the plaintiff in the suit to file the second suit. It does not prohibit the plaintiff to take up the grounds which he had taken in the first suit as the grounds of defence in the subsequent suit filed by the defendant. The petitioner is, therefore, not precluded from taking up the ground that the accounts are not proper and the entries made therein were incorrect, merely because he had withdrawn his dispute for settlement of accounts. In any event, the contention that the respondent Bank was not entitled to capitalise interest monthly is an independent contention supported by the judgment of the Apex Court in Central Bank of India v. Ravindra (supra) and is different from the contention/claim for settlement of accounts.

14. In the present case, the State Co-operative Appellate Court has over looked the aspect that the interest was compounded monthly and added to the principal. On the assumption that such compounding was correct, the State Co-operative Appellate Court has decreed and passed the award as prayed and, therefore, the award deserves to be set aside.

15. The settlement of accounts handed in showed several debit entries under the heading "voucher withdrawal". The details of those "voucher withdrawals were not shown in the statement of accounts. These debit entries were disputed by the petitioners. Other debit entries are in respect of the "cheque withdrawal". The burden of proving that the debit entries for cheque withdrawal are incorrect was on the borrower/petitioners. They had not shown any of the debit entries of the cheque withdrawal to be incorrect. However, the same thing cannot be said in respect of "voucher withdrawal". The petitioners say that they had not signed any voucher regarding those withdrawals. The vouchers ought to be in possession of the respondent Bank. However, the respondent Bank had not produced the same in the Court. When these entries were disputed, the respondent Bank ought to have produced original vouchers or atleast their true copies and offered inspection of the originals to the petitioners. The Apex Court, in the case of Central Bank of India v. Ravindra and Ors. (supra), has observed :

Statements of accounts supplied by banks to borrowers many a times do not contain particulars or details of debit entries and when written in hand are worse than medical prescriptions putting to test the eyes and its of the borrowers. Instances, of unscrupulous, unfair and unhealthy dealings can be multiplied though they cannot be generalised.

16. To charge interest of such debit entries of "voucher withdrawals" for alleged expenses incurred by the Bank would also be contrary to law unless there is a specific agreement made by the borrower that these expenses, when incurred by the Bank were to be debited to the account and were recorded as the principal. It would, therefore be necessary to permit the parties to adduce evidence in respect of the entries of expenses and "voucher withdrawals". If any of the entries are not correct, those amounts would have to be omitted. Admittedly, the interest has also been charged on these debits. If interest was not payable on these entries as per the contract, the interest would have to be recalculated. I am conscious that the task of recalculation would be onerous, and if necessary the State Cooperative Appellate Court is permitted to appoint a Chartered Accountant or any expert Accountant for the purpose of recomputation of interest after laying down the guidelines in respect of, when the debits can be capitalised, when the debits cannot be capitalised and the frequency, (quarterly/half yearly, etc), of compounding of the Interest, etc. The liability for penal interest would also have to be considered because the issue regarding penal interest has not been specifically addressed to by the Co-operative Appellate Court.

17. In view of this, the matter is remanded back to the State Cooperative Appellate Court with a direction to recompute the amount due in the light of the observations made above and strictly complying the directions given by the Hon'ble Supreme Court in the case of Central Bank of India v. Ravindra and Ors. (supra).

18. Both the learned Counsel agree that an amount of Rs. Five lacs which stand deposited on account of this petition, in this Court, be paid to the respondent Bank and the said amount shall be adjusted towards the principal amount due. The adjustment shall be made as on today.

19. Rule is made absolute to the above extent. In the facts and circumstances of the case, the parties are directed to bear their own costs throughout.