Judgment:
S.N. Kapoor, J.
(1) In all the above writs, the petitioner-Society has challenged the similar awards and common orders in appeals rejecting claim of the petitioner- Society to charge interest at the penal rate of 24% per annum from the members defaulting in making payment of installments towards cost of construction in time, in addition to penalty of Rs. 10.00 per day and adjusting all payments first towards interest and remaining amount towards cost of construction.
(2) The respondents in these writs moved the Registrar of Co-operative Societies under Section 60 of Delhi Co-operative Societies Act. These matters were referred to Arbitrator. The Arbitrator decided that the interest can be charged only at the rate of 18% per annum on the delayed payments due against the defaulters and that the interest already charged at a rate of more than 18% per annum on delayed payment in the past, has to be adjusted and credited to the account of the claimants in principal loan account.
(3) In appeal under Section 78 of the said Act, the Delhi Co-operative Tribunal took the view that decision of the general body could neither be unreasonable nor arbitrary. The respondents could not be punished twice by charging penal interest and day to day penalty of Rs. 10.00 and also interest upon interest by adjusting the payments received at the first instance and adjusting remaining amount towards cost of construction. Thus the Tribunal upheld the view taken by the learned Arbitrator.
(4) The learned Counsel for the petitioner-Society submitted that nearly all the members, excepting respondents had paid the installments in time. On account of the delay on the part of the defaulting members, the construction had been delayed; escalation in the cost of construction had taken place and other members who had paid in time had been deprived of the benefit of occupying or letting out those premises and all this is due to the defaulting members. In such circumstances, the General Body passed the relevant resolution to charge penal interest at the rate of 24% per annum; Rs. 10.00 per day on the amount due and to adjust the amount received first towards interest and thereafter towards installments in respect of the cost of construction. It was also contended that rule 78 (5) relied upon by the Arbitrator was confined to loans and subsidies by the Government and would not govern the payment of installments by the members towards cost of construction etc. All member's excepting the respondents have paid the interest etc. accordingly. He submitted that in such circumstances, it would be unreasonable to allow these members to take undue advantage of the situation. Learned Counsel also submitted that the lending rate of interest charged by Lic, State Bank of India and by other financial institutions ranged between 18% to 24%. In such circumstances if the Society charged interest from the defaulting Members interest at the rate of 24%, it was not unreasonable.
(5) Mr. Rakesh Munjal, learned Counsel for the respondent supported the impugned order of the learned Tribunal by submitting that it would be harsh and unreasonable to charge the penalty of Rs. 10.00 per day charging interest at the rate of 24% and adjusting amount received first towards interest and thereafter towards cost of construction.
(6) Having heard the learned Counsel for the parties, and perusing the record, as regards the plea that Rule 78(5) covered the entire gamut of rate of interest chargeable from members, we feel that there is certainly some misconception about the scope of Rule 78(5). It reads as under: '78. Loans and Subsidies by the Government (5) In case of default in repayment of loans by the members of any class of Societies, the penal rate of interest shall be charged not exceeding 3 percent per annum, by the Co-operative Society over and above the normal rate of interest from the date of default.'
(7) The Rule 78 itself starts with a heading 'Loans and Subsidies by the Government'.
(8) The payment of installments cannot be called repayment of loans by members. Consequently, neither it covers the payment of Installment towards cost of construction of the flat nor payments' made towards cost of building, common areas and external services and the demands made in connection with electric and water connection, be antifriction etc. for making the Society habitable.
(9) Learned Counsel for the petitioner referred to a letter issued by Delhi Co-operative Housing Finance Society Ltd. (hereinafter referred to as 'DCHFS' for short) dated 22nd October, 1990 Annexure 'B' (at p.49 of paper-book) and submitted that the Society was asked to pay interest on a graded scale depending upon the delay in making payment. Accordingly, the petitioner-Society was supposed to pay interest at the rates ranging from 15.50% to 26%. In such circumstances, it was unreasonable to direct the Society to charge interest at the rate of 18% only. On the other hand, Mr. Rakesh Munjal contended that even Dchfs could not charge interest in the fashion it proposed to charge vide Annexure 'B' for, it was also bound by Rule 78(5) of Delhi Co-operative Societies Rules, 1973. Before proceeding further, the first thing to be considered is whether the loan taken by Dchfs itself is covered by Sub-rule (5) of Rule 78 or not. Rule 78(1) refers to loans and subsidies granted by Government by a general or special order from time to time. Sub-rule (2) relates to loan or subsidy both from a Government department or a Government sponsored agency. Under Sub-rule (4), in case of default in repayment of loans, the financing bank is supposed to charge a penal rate of interest not exceeding I % per annum over and above the normal rate of interest from the defaulting societies. According to the definition of financing bank given in Section 2(i), it means 'a Co-operative Society, the object of which includes the creation of funds to be lent to other Co-operative Societies'. However, under Rule 2(ix) of the Delhi Co-operative Societies Rules, 1973 it has been defined differently and means only 'The Delhi State Co-operative Bank Ltd.'. Sub-rule (5) appears to be the second stage concerning the same area of loans and subsidies and this governs the relation between the Co-operative Society and the members in respect of any loan taken by the Society for the benefit of their members from any financing bank. In view of the definition given in the Act, we feel that former definition should prevail over the definition given in the Rules. Besides Delhi State Co-Operative Bank Ltd. and the Dchfs both are performing the same kind of functions. Consequently, there appears no reason or rationale to treat them differently. Moreover, if the petitioner Society under Rule 78(5) cannot charge any interest on loans and subsidies more than 3% above normal rate of interest and conjoint reading of Sub-rules (4) and (5) makes it clear that every Society at the ground level shall charge only 2% penal interest, and no middle tier is contemplated in between primary societies and the apex financial bank referred in Sub-rule (4), Dchfs has per force to be equated with Financial Bank.
(10) Besides, Sub-rule (5) and Sub-rule (4) both relate to normal rate of interest. The term 'normal rate of interest' has not been defined. This rate could be bank rate of interest, this rate could be market rate of interest or this could be lending rate of interest charged by Delhi State Co-operative Banks normally. Taking into consideration that generally the rate of interest of Delhi State Co-operative Bank is slightly different from lending rate of scheduled banks, the normal rate of interest should be taken to mean lending rate of interest charged by the Delhi State Co-operative Bank Ltd. generally at the relevant time. Probably on account of the lack of timely communication, these rates vary. It is desirable that the Delhi State Co-operative Bank Ltd. should prescribe these rates from time to time and communicate the same to all the societies to maintain uniformity and to avoid arbitrariness. Consequently, under the rules Dchfs is supposed to charge interest only at the rate of 1% above the normal rate and the Society is supposed to charge interest at the rate of3% above the normal rate of interest. But if for any reason the Society is made to pay interest or has paid interest under some mistaken belief, at higher rate, then the Society should be entitled to charge interest at the rate of 2% over and above the rate charged by the aforesaid Co-operative Society, subject to adjustment at a later stage after recovery from the aforesaid credit Society. This appears to be essential to meet the financial requirements for the benefit of all the members of the Society including the respondents.
(11) The Rule 78(5) does not at all cover the payment of installments towards cost of construction etc. and various amounts for other incidental matters.
(12) Certain guidelines issued by the Registrar of Co-operative Societies on 28th May, 1996 have been shown to us. So far as the period after 28th May, 1996 is concerned, the directives under Rule 77 of the said Rules issued by the Registrar of Co-operative Societies should uniformly be followed.
(13) In respect of earlier period, we certainly feel that it is unreasonable to charge daily penalty of Rs. 10.00 per day on the one hand and then also to charge interest at the rate of 24%. This is likely to defeat the very basic spirit and soul of cooperation and Co-operatives and we certainly do not approve the same.
(14) However, if the ordinary market rate' of interest is 18% per annum and all other members have paid interest at the rate of 24%, then it would be unreasonable to spare the defaulters who are responsible for the delay in construction, escalation in the cost of construction and for depriving other members of the benefit of occupying the constructed flats etc. in time. The suggestion of the learned Tribunal that they should be ousted and new members should be brought in to complete the construction in time, would prove much more harsh to these respondents, apart from unnecessarily causing procedural delays in expulsions of members by adopting just procedure and involving the Society in fruitless litigation. The purpose is to ensure timely payment and not to punish any person and if for that purpose the Society in its general body meeting decided to charge penal interest at the rate of 24%, the decision could not be said to be unjust, even in the light of the directive issued by Registrar Co-operative Societies referred to above, which prescribes equalisation charges at the rate of 24% per annum.
(15) Accordingly, defaulting members cannot claim that they would not pay interest at the rate of 2% above the rate charged by DCHFS. The Registrar, Co-operative Societies on 28th May, 1996 issued a direction under Rule 77 of Delhi Co-operative Society Rules, 1973 in respect of rate of interest to be charged by the Group Housing Societies from the defaulting members. This provided a graded scale of interest- 12% for default of payments up to six months, 15% up to one year and 18% for more than one year. However, these rates of interest would be operative w.e.f. 28th May, 1996 and all the Co-operative Societies including the petitioner-Society have to adhere to it.
(16) As regards the appropriation of the amounts received from the members, the matter could be said to be governed by Sections 59 to 61 of the Contract Act. Sections 59 to 61 embody the general rules as to appropriation of payments in cases where a debtor owes several distinct debts to one person and voluntarily makes payment to him. In Jia Ram v. Sulakhan Mal (28) Air 1941 Lah 386, the Full Bench observed that these general rules do not deal with cases in which principal and interest are due on a single debt or where a decree has been passed on such a debt, carrying interest on the sum adjudged to be due on the decree. The Full Bench observed as under: In such cases, the rule of English Law, laid down as far back as 1702 in 2 Freeman 261 :22 Er 1197 is that: if a man is indebted to another for principal and interest and pay the money generally, it shall be applied in the first place to sink the interest before any part of the principal should be sunk. In (1898) 2 Qb 460, Lord Rigby, J. described it as 'the old and well-settled rule' that where both principal and interest are due the sums paid on account must be applied first to interest. That rule, where it is applicable is only common justice. To apply the sums paid to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the benefit to which he is entitled under his contract, and would be most unreasonable as against him. Fisher in his standard work on the Law of Mortgages (Edn.7), p. 620, while dealing with the question of appropriation of payments towards a mortgage debt, states the law as follows: Where the debtor claims to be discharged by reason or payments which were not specially made in respect either of the principal or the interest of the mortgage, the rule is that a general payment shall be applied in the first place to sink the interest, before any part of the principal is discharged. This rule is not limited to voluntary payments only, but applies also to cases where the mortgaged property is sold by the mortgagee under authority given to him in the deed or is sold by the Court in execution of a decree passed in an action brought on foot of the mortgage. In (1870) 10 Eq 497, Lord Romilly M.R. laid down that where a mortgagee in possession sells part of the mortgaged property under a power of sale in the mortgage, he must apply the proceeds of the sale, first in payment of interest and costs, and then either pay the balance to the mortgagor or apply it in reduction of the principal due on the mortgage. Similarly, it is stated in Seton's Judgments and Orders (Edn.7) p.1848 that 'upon sale of the property the proceeds are applicable in payment of interest and costs and then in reduction of the principal.' In British India these rules have been applied, as between creditor and debtor, from the earliest times. So far as voluntary payments made out of Court towards an interest-bearing debt, are concerned, the rule received the imprinter of the Privy Council as far back as 1856 in 6 Mia 289. In that case upon the adjustment of an account of the principal and interest due on a pre-existing bond, a deed of agreement was entered into by the parties in which, besides the original sum, a further sum for interest accrued thereon was declared due and agreed to be paid off by installments before a given time. Payments were made at regular intervals, which payments the bond-holder claimed to appropriate to keeping down the interest upon the whole sum composed of both the original principal sum as well as the sum mentioned in the agreement as accrued thereon for interest. On a dispute arising between the parties as to the interpretation of the agreement and the correct mode of appropriation of the payments, their Lordships held upon the construction of the agreement that the principal alone carried interest, and as to appropriation they expressed the opinion that all payments made were to be applied in the first instance to satisfy such interest, the excess of the payments only being appropriated towards the liquidation of the principal sum due They observed that 'the ordinary course in such cases' was that the payment should be applied in the fist instance to interest and to the principal only so far as those payments exceed the interest due. (p.306) Fifteen years later, the matter again came up before the same High Tribunal, on appeal from Bengal, in 8 Beng Lr 110, and their Lordships re-affirmed the proposition that where payment was made upon a bond, the amount paid being less than the interest due, the payment ought to go to reduce the amount of interest due, and the creditor in a suit upon the bond was entitled to a decree for the principal and balance of the interest up to the date of the decree. The rule laid down in these cases has been followed uniformly by the High Courts in India in numerous cases relating to appropriation of voluntary payments, made out of Court, towards a debt, and it is not necessary to refer to them in detail here. It will be sufficient to mention 28 All 25, where Stanley, C.J. and Knox, J. applied the well settled practice of the Courts to appropriate payments made upon a bond first to the interest due thereon, and thereafter, if any balance remains to the principal.
(17) After considering the above English Law, the Full Bench took the following view:
'...INthe absence of a direction to the contrary in the decree, the sale proceeds of the property sold in the execution of mortgage decree must be applied first in the payment of subsequent interest and cost and thereafter the balance to deposit the principal sum declared as payable in the decree'.
(18) A Division Bench of Allahabad High Court in Mt. Munno Bibi v. Commissioner of Income Tax, UP& Ajmer-Merwara Lucknow, : [1952]22ITR101(All) , took a slightly different view by appropriating the payment towards cost first and interest thereafter in following words :
'THE general principle of law as is now well-settled, is that when any payment is made in part it should first go towards the payment of costs due, then interest and the balance, if any, towards the payment of principal. In the absence of any appropriation by either party, there is no reason why this principle should not be applied. Their Lordships of the Judicial Committee in Meka Venkatadri Appa Rao v. Raja Parthasarthy Appa Rao Air 1922 P.C. 233, said : 'The question then remains as to how, apart from any specific appropriation, these sums ought to be dealt with. There is a debt due that carries interest. There are moneys that are received with out a definite appropriation on the one side or on the other, and the rule which is well-established in ordinary cases is that in those circumstances the money is first applied in payment of interest and then when that is satisfied in payment of the capital. The rule is referred to by Lord Justice Rig by in the case of Parr's Banking Co. v. Yates (1898)2 Q.B. 460 which is reported in these words : 'the defendant's Counsel relied on the old rule that does, no doubt apply to many cases, namely, that where both principal and interest are due, the sums paid on account must be applied first to interest. That rule, where it is applicable, is only common justice. To apply the sums paid to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the benefit to which he is entitled under his contract'.'
On the facts stated, thereforee, that only Rs. 13,000.00 was paid towards the liquidation of the amount due and for the balance a substituted security was furnished, this amount should first be applied to the payment of costs which amounted to Rs. 1,582.00 and the balance Rs. ll,418.00 towards the payment of interest. This is our answer to the reference. A person giving up a part of his claim must be deemed in the absence of anything to the contrary to have given up interest due of the loan rather than the principal amount due to him. It is the fruit which a man may normally be deemed to have given up rather than the tree itself. As we have indicated above, in our view the sum of Rs. 11418 should be deemed to have been received towards interest.'
(19) In 1954, Madhya Bharat High Court in Chaganlal Shrilal v. Gopilal Choturam & Ors. Air 1954 Mb 151 (Vol.41 Cn 74) took the following view: (5) ...The debtor has at the time of making payment a right to intimate that the payment is to be applied towards the liquidation of a particular debt. Whenever the debtor omits to do so and there are no circumstances indicating to which debt the payment is to be applied the creditor is entitled to appropriate it towards any lawful debt. The amount due in the present case for costs, interest and principal as awarded by the decree however constitute only one debt and technically the provisions of Secs. 59 to 61 do not apply. But the principle underlying has been applied to a claim like this and thee is a 'general rule' well established by the decision of the Privy Council and the various High Courts according to which 'the payments should be applied in the first instance to interest and to the principal the balance only so far as those payments exceed the interest due.'
(20) In the light of the aforesaid consistent view, we hold that the various payments received by the Society have to be applied in the first instance towards interest and the balance, only so far as those payments exceed the interest due to the principal.
(21) It maybe mentioned that all the amount of interest is supposed to go to the common pool i.e. in the account of the Society, each member having share in the same. If huge sum is accumulated, then it may be desirable that leaving a sum of Rs. 5,000.00 to 7,500.00 per member, the remaining amount should be shared amongst all the members of the Society firstly to protect the interest of financially weak members of the Society and secondly, to avoid litigation to control the huge funds available in this head. The members should not be allowed to feel that they are having a balance of say Rs. 20,000.00 to Rs. 25,000.00 of their share under this head and they are still being made to take loan at the rate of 18% to 24% from different financial institutions.
(22) Accordingly, we quash the impugned common orders passed by Delhi Co-operative Tribunal in these matters on 7th January, 1994 Along with the orders passed initial awards on 1st December, 1993 by Shri J.C. Gupta, Arbitrator, and issue following directions to be complied with by the Registrar of Co-operative Societies and petitioner Society - acting as an agent of financial bank for the purpose of disbursing and collecting loans, as follows :
(I)The Society shall charge simple interest on the installments towards cost of construction etc. from the defaulting members at the rate of 24% per annum till 28th May, 1996and thereafter it shall abide by the directives of the Registrar of Co-operative Societies dated 28th May, 1996. (ii) The Society shall be entitled to charge interest 2% over and above the interest charged by Dchfs from the defaulting members in respect of installments of loans taken by the members from the financial institutions like Dchfs or Delhi State Co-operative Bank. (iii) The Society may appropriate the amount of the payments received first towards payment of interest, then towards unpaid amount of installments and thereafter the balance amount may be adjusted towards future installments etc. (iv) If the financial bank and Society like Dchfs have charged more than one per cent per annum above the normal rate of interest, then the Society shall make reference under Sections 60 & 61 for adjustment/refund of interest charged beyond the rate prescribed under Rule 78(4) of the Delhi Co-operative Societies Rules. (v) The Registrar of Co-operative Societies is directed to ensure the compliance of these instructions and may issue direction on similar lines to all the Co-operative Group Housing Societies so as to save them from unnecessary financial hardships and litigation.
(23) All these Cwp Nos. 2019,2020,2021,2022 and 2025 of 1994 are disposed of accordingly.
(24) A copy of this judgment shall be placed on the files of Cwp Nos. 2020, 2021, 2022 and 2025 of 1994.
(25) Parties are left to bear their own costs. Writ petitions disposed of accordingly.