UNION OF INDIA v. ASSOCIATION OF UNIFIED TELECOM SERVICE PROVIDERS OF INDIA ETC.ETC.

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A 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 35-A of the Banking Regulation Act, 1949 is coupled with duty to act. The Reserve Bank of India is the 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 the public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. The 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 the 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 net 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. G (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 H borrowers belong.

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SERVICE PROVIDERS OF INDIA [ARUN MISHRA, J.]

(7) Any interest charged and/or capitalised in violation of A RBI directives, as to rate of interest, or as to periods at which rests can be arrived at, shall be disallowed 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 CPC dehors 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 exercised fairly, judiciously and for reasons and not in an arbitrary or fanciful manner.” D

188Copy pinpoint188. Before considering the applicability of the decisions above, the factual gamut of the case has to be considered. The demand was raised for the first time in the year 2003 despite the fact that the definition of gross revenue was clear, and as is apparent from the E correspondence and the agreement reached between the parties, there was no doubt what constitutes gross revenue. Licensees were aware that these items concerning which they have raised the dispute were included in the definition of gross revenue, as such, they had initially questioned inclusion on the basis of the validity of the definition of gross revenue. The challenge was found to be sans any basis by this Court. F The objections raised concerning the validity of the gross revenue, were wholly unsustainable and on the face of it, were liable to be rejected, and came to be rejected finally and conclusively by this Court in the year 2011. After that, again the objections have been repeated to exclude those very revenue items which were held to be included once G over an effort has been made to get rid of the definition of gross revenue. The objections which have been raised pertained to the definition of gross revenue for which the court held they are part of revenue. Now, relying upon AS-9 standards, an attempt has been made by an indirect method for excluding items, which are expressly included in the definition of gross revenue. Objections are too tenuous, and, as H

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A a matter of fact, there was no scope to raise such objections in 2003 itself. Because of the various correspondence which has been referred, it becomes apparent that all these heads are included in the definition of gross revenue, and there is no justification for the licensees to raise the objections and to keep them pending for over two decades.

189Copy pinpoint189. Further, the conduct of the licensees has also to be considered in the backdrop of the fact that the regime of revenue sharing was extremely beneficial than the previous regime of the fixed licence fee, and they have tremendously benefited by it as is apparent from the statistics of the revenue earned by the licensees under the revenue sharing regime. When Government has parted with the privilege as to revenue on sharing basis under the license, and an agreement entered into, it ought to have been precisely followed. The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment. It passes comprehension how they have contended that the demand has to be worked out after this Court renders the decision. Demand had been raised way-back in the year 2003, which is ultimately the subject-matter of the lis. As the objections are baseless and wholly untenable, it cannot be said that there was a bona fide dispute concerning various items. The disputes raised could not be termed to be bona fide at all. They were justified in order to delay the liability and the payment in accordance with the agreement. In this backdrop and what has been held by us, we have to consider whether the interest, penalty, and interest on penalty can be levied or not. Particularly since it is the revenue sharing regime and the Government has been deprived of the benefit of revenue which it would have earned but for granting the privilege which it has parted with in favour of the licensees.

190Copy pinpoint190. In M/s. Everest Industrial Corporation & Ors. v. Gujarat State Financial Corporation, (1987) 3 SCC 597, this Court held that the rate of interest payable on the principal amount due under the court’s G order passed under section 32 of the State Financial Corporations Act, 1951 would be as stipulated in the contract as the provisions of section 34 CPC are not attracted, order under section 32 being not a decree, liability to pay contractual rate of interest cannot be disowned, merely because of absence of direction for payment of interest in order under H section 32. This Court has held:

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“6. If as held by this Court the proceeding instituted under Section A 31(1) of the Act is something akin to an application for attachment of property in execution of a decree at a stage posterior to the passing of the decree no question of passing any order under Section 34 of the Code would arise since Section 34 of the Code would be applicable only at the stage of the B passing of the decree and not to any stage posterior to the decree. It may also be mentioned here that even under the Code the question of interest payable in mortgage suits filed in civil courts is governed by Order 34 Rule 11 of the Code and not by Section 34 of the Code which may be applicable only to cases of personal decrees passed under Order 34 Rule 6 of the Code. C The High Court was right in holding that interest would be payable on the principal amount due in accordance with the terms of the agreement between the parties till the entire amount due was paid as per the order passed under Section 32 of the Act. We hold that the decision of the Karnataka High Court, referred to above, which has applied Section 34 of the Code to a proceeding instituted under Section 31(1) of the Act is not correctly decided.” (emphasis supplied)

191Copy pinpoint191. In Punjab Financial Corporation v. Surya Auto Industries, (2010) 1 SCC 297, the Court held that when the terms of the agreement have not been questioned, contractual rate of interest cannot be altered. The Court has observed thus: “25. The High Court also committed serious error in declaring that the appellant Corporation will be entitled to charge simple interest at the rate of 10% w.e.f. 1-4-2003 i.e. after the expiry of six months from the date of taking over of the unit. Undisputedly, the respondent had not challenged the terms of loan agreement. Therefore, the High Court could not have suo motu altered the terms of agreement and directed the appellant to make fresh calculation of the outstanding dues and allowed the respondent to pay the amount as per fresh demand by selling the mortgaged property. This approach of the High Court is ex facie contrary to the law laid down in U.P. Financial Corpn. v. Gem Cap (India) (P) Ltd., (1993) 2 SCC 299 and Haryana Financial Corpn. v. Jagdamba Oil Mills (2002) 3 SCC 496.” (emphasis supplied) H

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192Copy pinpoint192. In Hindustan Steel Ltd. v. State of Orissa (supra), relied on by licensees the matter was of imposition of penalty in a quasi- criminal proceeding that penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct – contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty to be imposed is exercised by judicial discretion. The ratio of the case, it is not attracted for the reason that in the instant matter, it is the contractual rate of interest and penalty agreed to which cannot be said to be arduous in any manner. The rate of interest has been agreed to and particularly since it is a revenue- sharing regime, and the licensees have acted in conscious disregard of their obligation. Thus, on the anvil of the decision above also, they are liable to pay the dues with interest and penalty. There is no discretion to vary the penalty. It is 50% of the amount which is in short-fall which cannot be said to be unreasonable and that too, two grace periods have been given in clause 20.8 to make payment of the same. As it is the agreed term and cannot be said to be arbitrary, the ratio of the decision is not attracted. Reliance has also been placed on Akbar Badrudin Giwani v. Collector of Customs (supra), wherein the dispute was bona fide. It was a case of exercise of power by the tribunal while imposing a penalty and fine instead of confiscation. There is no such discretion available when the parties have agreed in default what amount is to be paid. It automatically follows that it is not to be determined by licensor once over again. Parties (licensor and licensees) are bound by the terms and conditions of the contract. There is no enabling clause to vary either the rate of interest or the penalty provided therein and even if permissible it is not called for to vary interest or penalty fixed under the agreement in the facts and circumstances of the case. The decision mentioned above was concerning discretion to impose the penalty. Here, there is no such discretion, and considering the conduct of conscious disregard, the decision rather negates the submission than espousing the same.

193Copy pinpoint193. Reliance has been placed on J.K. Industries Ltd. & Anr. v. Union of India & Ors., (supra) and Tecumseh Products India Ltd. G (supra). In both the cases, duty was not paid under the provisions of section 11-A. There were divergent views of the High Courts. It was not found to be a case of fraud, collusion, wilful misstatement, or suppression of facts. Thus, the action of the imposing penal interest under section 11A and other penalties were set aside as there was a H bona fide dispute. In the present case, there is no bona fide dispute,

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SERVICE PROVIDERS OF INDIA [ARUN MISHRA, J.]

and it is not appropriate to vary the interest or the penalty. That has to be worked out from 2003 and not after the decision to be passed by this Court. Facts in J K Synthetics Ltd. (supra) were different. In that case, the assessee had paid the tax based on information supplied by him in the return. Thus, it was held that it would not be proper to levy interest under clause (a) of section 11B. In the instant case, the demand had been raised by the licensor, and after that, untenable objections have been raised which had no foundational basis, and the licensees have taken inconsistent stands. Earlier they had questioned on the ground that these items were wrongly included in the definition, now they are contending that the same are not part of the definition in agreement. C

194Copy pinpoint194. Reference has also been made to the decision in Kailash Nath Associates (supra). In that case, there was forfeiture of earnest money. The factual matrix of the instant case is different. The case was dealing with the court’s power to grant reasonable compensation when the amount fixed in the contract is like a penalty; only reasonable compensation can be awarded. Whether or not actual damage or loss is proved, has to be considered. It is only in cases where it is possible to prove actual damage or loss, such proof is not to be dispensed. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract can be awarded. In the instant case, it is quite reasonable amount of the penalty in case of default in payment of the amount. The term cannot be said to be unconscionable. As the Government has been deprived of the revenue and the licensees have been benefited by revenue sharing regime, in spite of that, they have not shared the revenue. They are bound by the stipulation, which is found to be quite reasonable in the facts and circumstances of the case. F

195Copy pinpoint195. In Central Bank of India v. Ravindra, (supra), this Court considered the question of award of payment of interest and has held that there is nothing wrong with the party voluntarily entering into the transaction as to stipulation, for payment of compound interest ,at reasonable rates and authorising the creditors to capitalise the amount G on the amount remaining unpaid so as to enable interest to be charged on the accrued rate on the interest component of the capitalised sum for the succeeding period. Interest, once capitalised, sheds its colour of interest and becomes a part of the principal to become a debt as has been observed thus: H

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A “36. 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 moneylending transactions. The B 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. C 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 the principal to bind the debtor/borrower.

44. We are of the opinion that the meaning assigned to the expression “the principal sum adjudged” should continue to be assigned to “principal sum” at such other places in Section 34(1) where the expression has been used qualified by the adjective “such”, that is to say, as “such principal sum”. Recognition of the method of capitalisation of interest to make it a part of the principal consistently with the contract between the parties or established banking practice does not offend the sense of reason, justice and equity. As we have noticed, such a system has a long- established practice and a series of judicial precedents upholding the same. Secondly, the underlying principle as noticed in several decided cases is that when interest is debited to the account of the borrower on periodical rests, it is debited because of it having fallen due on that day. Nothing prevents the borrower from paying the amount of interest on the date it falls due. If the amount of interest is paid there will be no occasion for capitalising the amount of interest and converting it into principal. If the interest is not paid on the date due, from that date the creditor is deprived of the use of the money, and which it would have made if the

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SERVICE PROVIDERS OF INDIA [ARUN MISHRA, J.]

debtor had paid the amount of interest on the date due, the creditor needs to be compensated for deprivation. As held in Pazhaniappa Mudaliar v. Narayana Ayyar, AIR 143 Mad 157, the fact situation is analogous to one as if the creditor has advanced money to the borrower equivalent to the amount of interest debited. We are, therefore, of the opinion that the expression “the principal sum adjudged” may include the amount of interest, charged on periodical rests, and capitalised with the principal sum actually advanced, so as to become an amalgam of principal in such cases where it is permissible or obligatory for the court to hold so. Where the principal sum (on the date of suit) has been so adjudged, the same shall be treated as “principal sum” for the purpose of “such principal sum” — the expression employed later in Section 34 CPC. The expression “principal sum” cannot be given different meanings at different places in the language of same section, i.e. Section 34 CPC. (emphasis supplied)” D

196Copy pinpoint196. Concerning penal interest, this Court in Central Bank of India v. Ravindra (supra) has observed that the penalty is founded on the doctrine of penal action. Penal interest can be charged only once for one period of default, and therefore cannot be permitted to be capitalised. E “55. (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.”

197Copy pinpoint197. It is not levy of penal interest, which is involved in the instant case. Thus, based on the decision mentioned above, we find that when there is contractual stipulation, the interest can be levied and compounded.

198Copy pinpoint198. Resultantly, we are of the considered opinion that interest and penalty have rightly been levied. Once an amount of shortfall has not been paid, it has to carry 50% of the penalty on defaulted amount, H

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A as agreed. Thus, we find no substance in the submission that interest, penalty, and interest on penalty cannot be realised. It is as per the agreement. In the facts and circumstances, we find no ground to reduce the same, considering the nature of untenable objections raised on behalf of the licensees, which were in fact either barred by res judicata or constructive res judicata but as this Court had remitted the matter to B TDSAT to find that demand was based on proper interpretation of licence. Matter was remitted after giving finding on inclusion of the various heads in the definition of gross revenue. Even as per the case of licensees they were not validly included in definition, now reprobating that, stand has been taken that they did not form part of revenue which C is not permissible. No litigant can be permitted to reap fruits on such inconsistent and untenable stands and litigate for decades in several rounds which is not so uncommon but is disturbing scenario projected in very many cases. We have examined the matter upon merits and then aforesaid conclusion indicates frivolous nature of objections.

199Copy pinpoint199. In the result, the appeals of licensees are dismissed and filed by DOT, are accordingly allowed in view of the findings recorded.

200Copy pinpoint200. No order as to costs.

Divya Pandey Appeals disposed of. E