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TMI Blog2003 (4) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts. It has resolved to issue shares mainly to the farmers for its capital requirement for expansion of the sugar factory. As most of the prospective share buyers are the agriculturists, who are to produce the sugarcane and supply the same to the factory and since they are not having sufficient money to pay the share amount in cash, an arrangement has been carved out, under which the Defendant-bank has agreed to lend the amount to the extent of share amount to be purchased by each agriculturists. Thus, the share amount is treated as a loan on the part of the agriculturists/shareholders, who have to execute separate documents for the amount taken. However, it has been further agreed that the amount so sanctioned as loans shall be kept in the Defendant-bank in a separate saving account and with a condition that the sum shall not be operated until the block capital release Orders are issued by the I.D.B.I. and other financial institutions. Accordingly, two S.B. Accounts were opened by the Plaintiff. They are 7/C-89, which was opened on 23-4-1977 and 8/1103, which was opened on 7-10-1977. Since the share amount had run into several lakhs, the same was kept in S.B. Accounts. The ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot statutory force and it was issued in the public interest. It binds the bank as well as the Society. In view of the circular, the very opening of the account is against the circular and therefore, payment of interest is illegal and contrary to law. Under those circumstances, the bank is entitled to recover the interest amount paid. Inasmuch as, when this was noticed the account had a credit balance of Rs. 1,94,237-79 and the same was appropriated. Thus, it is stated that the action of the bank is quite legal and valid. It is also stated that the plea of estoppel is not sustainable as the Plaintiff cannot plead the principle of estoppel against law, inasmuch as the circular issued by the Reserve Bank of India has force of law and no estoppels can be pleaded against the circular issued by the Reserve Bank of India. 4. Plaintiff has also filed rejoinder taking alternative pleas under sections 65 and 70 of the Contract Act on the ground that the Plaintiff-Bank has enjoyed the amount and it is liable to pay the interest, the bank cannot be allowed to have unjust enrichment. In view of the respective pleadings, the trial Court framed the following issues: 1.Whether the Plaintiff is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposal has been approved by our Local Head Office and the bank is prepared to extend such finance upto an extent of Rs. 20/25 lakhs: 1.The details of the scheme and the terms and conditions on which we are agreeable to entertain the individual applications are as under: (i )Only non-members of primary Cooperative Society will be financed. (ii)The scheme of individual farmers should be viable. (iii)The sugarcane growers should register themselves with the sugar factory before availing of the loan. (iv)The farmers proposed to be financed by us should deal exclusively with us for all their agricultural credit requirements and to this effect they should give us an undertaking. (v)Loans upto Rs. 4,500 (i.e. after retaining a margin of 10 per cent will be sanctioned to farmers owning lands upto 5 acres at the rate of Rs. 1,000 per acre). (vi)Two years start up period would be allowed for repayment of the proposed loans. (vii)Interest on the advances will be charged as follows: With holdings up to 5 acres wet land or 10 acres dry land With holdings exceeding 5 acres wet land or 10 acres dry land Upto Rs. 2,000 11% 13% Over Rs. 2,000 12% 13% Upto Rs. 4,500 (viii)Mortgage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery are completed. 4.We are also prepared to extend to you any other assistance you would need in your efforts to take up the construction of the factory and installation of the machinery as also your future working capital requirements. 5.Assuring you of our best at all times." 9. Another letter was issued by the Defendant-Bank on 8-9-1976, which reads thus: "Please refer to our letter F.No. 4, dated 1-9-1976. (2) As indicated in paragraph 2 of the letter of Central Office have agreed to relax the stipulations made against Item No. 1(1), (viii) and (xiii) subject to the following conditions: (i )The Bank will finance the members of the Cooperative societies also for purchase of shares in the cooperative sugar mill subject to their objection and production of no dues/no-objection certificates from the Cooperative societies of their area. Such applicant farmer should, however, also furnish suitable letters of understanding whereby they should undertake not to borrow from cooperative societies in future. As a corollary thereof all their credit needs will be met by this Bank. (ii)Our financing of individual farmers will not await the receipt of the formal sanction of block capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t does not turn up, over such amounts credited by them to our account until the sanction for block capital is produced. We, however, bring to your notice in this connection that the Director of Sugar, Hyderabad and the Government of Andhra Pradesh have addressed letters to Development Manager (Agrl.), State Bank of India, Hyderabad for release of funds and we have addressed a letter on 6-4-1977 and again on 17-8-1977 to your Regional Manager, Hyderabad (copy enclosed) to relax this condition. Our general letter of undertaking as detailed above issued today is subject to our above request." 11. It is also not in dispute that the amount was deposited in the Special account called share deposit account. The interest was allowed to be credited to the 'said account as per the rates applicable' to S.B. Account. The interest was being credited to the said account from time to time and the total interest upto October, 1987 was more than Rs. 7.77 lakhs. 12. It is the case of the Defendant-Bank that as per the guidelines issued by the Reserve Bank of India by virtue of the provisions contained under section 35A of the Banking Regulation Act, trading concerns are prohibited from opening S.B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied that-- (a)in the public interest; or (aa)in the interest of baking policy; or (b)to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c)to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect." 14. It is the case of the bank that since the Reserve Bank of India has issued circular as early as in 1974 not to permit the opening of S.B. Accounts by the trading concerns and since this is not within the knowledge of the bank and it has come to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement in between the bank and the customers. 16. The learned counsel relies on the decision of the Bombay High Court in Bank of Maharashtra v. United Construction Co. AIR 1985 Bom. 432, wherein it was held that the Circular issued by the Reserve Bank of India govern the relations in between the Reserve Bank of India and the bank and could not bind, it observed in para 9 as follows: "9. As far as the question of interest is concerned, we may point out that we agree with the learned Judge that there does not seem to have any express agreement as such to grant any overdraft facility nor any agreement that the interest would be paid at a particular rate in respect of the amounts overdrawn in the said account. In our view, looking to all facts and circumstances, the only reasonable rate of interest which can be granted in the case like this is at 12 per cent. Mr. Tulzapurkar drew our attention to the Reserve Bank circular stating that the banks must charge interest 17 per cent per annum or any other rate as prescribed by the Reserve Bank in respect of amounts which are due in an overdraft account. We are unable to see how this circular is of any assistance in the case before us. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required to be taken, Orders passed without giving a prior opportunity of hearing the persons adversely affected by such Orders are upheld by the Courts. Legislations, excluding application of certain principles of natural justice like prior hearing, have been held to be valid, if such a legislation is not regarded as unreasonable for that reason in view of the object of the Legislation or for similar reasons. . . ." (p. 109) 18. In Indian Bank v. V.A. Balasubramania Gurukal AIR 1982 Mad. 296, the Division Bench while dealing with the Usurious Loans Act observed that the provisions of Banking Regulation Act alone will regulate rate of interest of a nationalised bank. There was no inconsistency in between the provisions. The Division Bench observed in para 14 as follows: "14. We may briefly pause to consider the contention of the learned counsel for the petitioner that there is an irreconcilable inconsistency between the provisions of the Banking Regulation Act, 1949 and those of the Usurious Loans Act. The avowed object of the Banking Regulation Act, 1949 is to consolidate and amend the law relating to banking and there under provision is made for the regulation and control by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court in Central Bank of India v. Ravindra JT 2001 (9) SC 1011. While dealing with the power of the Reserve Bank of India under sections 21 and 35A, the Supreme Court observed as follows : "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 direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s articulated 66th concept of interest - "the words "interest" and "compensation" are sometimes used interchangeably and on other occasions they have distinct connotation. "Interest" in general terms in the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. In its narrow sense, "interest" is understood to mean the amount which one has contracted to pay for use of borrowed money. . . In whatever category "interest" in a particular case may be put, it is a consideration paid either for the use of money or for forbearance in demanding it, after it has fallen due, and thus, it is a charge for the use or forbearance of money. In this sense, it is a compensation allowed by law or fixed by parties, or permitted by custom or usage, for use of money, belonging to another, or for the delay in paying money after it has become payable." It is the appeal against this decision of Punjab High Court which was dismissed by Supreme Court in Dr. Shamlal Narula's case (supra). However, 'penal interest' has to be distinguished from 'interest'. Penal interest is an extraordinary liability incurred by a debtor on account of his being a wrong- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of interest the plaintiff is not entitled to interest except on proof of mercantile usage, statutory right to interest, or an implied agreement. Interest from the date of suit to date of decree is in the discretion of the court. Interest from the date of the decree to the date of payment or any other earlier date appointed by the court is again in the discretion of the court to award or not to award as also the rate at which to award. These principles are well established and are not disputed by learned counsel for the parties. We have stated the same only by way of introduction to the main controversy before us which has a colour little different and somewhat complex. The learned counsel appearing before us are agreed that pre-suit interest is a matter of substantive law and a voluntary stipulation entered into between the parties for payment of interest would bind the parties as also the court excepting in any case out of the three exceptions set out hereinbefore." 21. Therefore, in view of the aforesaid contentions and decisions, it has to be considered, whether the bank can successfully stake a claim refusing the interest on the accounts opened by the Plaintiff-Society. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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