LAND ACQUISITION/LAND LAW AND TENANCY

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Rule of Appropriation of Payments Against Decretal Amount and its Applicability to the LA Act, 1894*
by K.C. Jain

Cite as : (2003) 5 SCC (Jour) 42

The general rule of appropriation of payments of decretal amount is that "in the absence of a specific condition or agreement to the contrary, the money paid by the judgment-debtor is first applied in the payment of interest and cost and then when that is satisfied, in payment of capital or the principal amount".1 (SCC p. 84, para 5)

Whether this general rule of appropriation2 applies to a decretal amount payable in terms of the Reference Court's award under Section 18 read with Section 26 of the Land Acquisition Act, 1894 (in short "the LA Act") and also to the appellate judgments (under Section 54) therefrom? In other words, whether the LA Act makes any departure from this general rule in view of its specific provisions? Hon'ble K. Ramaswamy, J. for a three-Judge Bench3 in Prem Nath Kapur4 ruled in favour of such departure thus:

"It is seen that by operation of Section 53 of the Act, Order 21 Rule 1 being inconsistent with the express provisions contained in Sections 34 and 28, stands excluded."5

While taking the above view, the Bench overruled an earlier two-Judge Bench decision of the Supreme Court in Mathai case6 by holding that: (SCC p. 80, para 16)

"The ratio therein, therefore, is applicable only to the debtor and creditor in an ordinary civil suit governed by the provisions of CPC. Order 21 Rule 1 being inconsistent with the express provisions contained in Sections 34 and 28 of the Act, it cannot stand extended to the cases covered by the Act. It is unfortunate that these provisions were not brought to the attention of this Court when it decided Mathunni Mathai case6, which make all the difference."

In legal circles, several doubts and difficulties are expressed as to the correctness of Prem Nath Kapur4 ratio, which unfortunately also leads to unjust results. Some of the issues for consideration being raised are: whether the LA Act in fact contains contrary and inconsistent provisions to make the general rule of appropriation inapplicable to a given decree under it? Whether in view of absence of any prescribed mode of payment/ appropriation in the LA Act, the provisions of Order 21 Rule 1 CPC would not apply particularly in view of Section 53 of the LA Act7 (which applies CPC except to the extent of inconsistency)8? Whether Prem Nath Kapur4 was not a case on its own facts and whether the Bench made the observations therein of a sweeping nature by laying down a proposition not required? Whether the construction that leads to unjust results, ought to have been avoided? Since the answers of these questions have large bearing upon the rights of the expropriated landowners, it would be useful to consider and analyse these issues in a bit detail.

Rationale of rule

To begin with, the rationale of this general rule needs to be focused. Lord Rigby, J., a century back, in Parr's Banking Co. Ltd. v. Yates9 succinctly described this rule as "the old-and-well-settled rule", that where both the 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 the 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 the contract, and would be most unreasonable as against him.

The rationale of this general rule was also spelled out by R.M. Sahai, J. (as he then was) in Mathunni Mathai6 thus: (SCC pp. 29-30, para 3)

"3. The right of the decree-holder to appropriate the amount deposited by the judgment-debtor, either in court or paid outside, towards interest and other expenses is founded both on fairness and necessity. The courts and the law have not looked upon favourably where the judgment-debtor does not pay or deposit the decretal amount within the time granted as one cannot be permitted to take advantage of his own default. Therefore, the normal rule that is followed is to allow the deposit or payment if it is in part to be adjusted towards the interest due etc."

The crux of the rationale of this general rule is: a judgment-debtor (JD) cannot be permitted to take advantage of his own default; treating part of the paid sum towards principal where interest is also due, would be unfair and unreasonable as against the decree-holder (DH), as in that case, interest would cease to run and the due interest being a simple one would not further carry any interest thereupon. From any standpoint, it can be justified that interest be paid by JD and part-payment should be treated towards principal.

Facts of Prem Nath Kapur4

It is essential to first examine the facts of Prem Nath Kapur4. It cannot be gainsaid that a decision is good only with regard to the facts found in that particular case and the principle emerging on a consideration of those facts.10 Different facts may lead to a different decision.11 The detailed facts of Prem Nath Kapur4 find mention in the High Court's judgment12 These facts can be summarised thus:

Certain land was acquired, and the Collector gave his award on 9-10-1975, pursuant to which the determined amount of compensation was paid on the same date. A reference under Section 18 was made to the District Judge but was dismissed on 2-1-1979. The landowners filed no appeal. However, they filed revision petition in the High Court on the ground that since other co-sharers had been given enhanced compensation, the same be allowed to them also. The revision petition was allowed on 23-5-1983 and compensation was enhanced, which was deposited on 14-1-1984. The claimants again filed another civil revision for awarding severance charges, which was allowed on 6-1-1984, and such awarded sum was deposited on 5-5-1984. The claimants again moved the High Court for grant of interest and solatium on the severance charges which was allowed on 18-9-1984, and this amount was paid on 1-10-1985. For getting the solatium and interest as admissible by the Land Acquisition (Amendment) Act, 1984, the claimants again applied, and it was allowed on 25-11-1985 and subsequently paid. The claimants in execution proceedings contended that the payments made by the judgment-debtor from time to time should be appropriated first against the cost, then against the interest and finally towards the principal. The executing court accepted the claimants' contention, but the High Court in revision upset the order. J.V. Gupta, J., for the High Court, said:

"... Here as and when the amount was determined either by the Collector or by this Court, the same was paid immediately against the particular demand. That being the situation, it could not be successfully argued that they were justified in appropriating the payments made by judgment-debtor first against the costs then against the interest and finally against the principal. On the facts and the circumstances of this case, that proposition is not available to the decree-holders."13

The Supreme Court on appeal in Prem Nath Kapur4, inter alia, gave the following reason for affirming the view of the High Court:

"The right to make appropriation is indicated by necessary implication, by the award itself as the award or decree clearly mentions each of the items. When the deposit is made towards the specified amounts, the claimant/owner is not entitled to deduct from the amount of compensation towards costs, interest, additional amount under Section 23(1-A) with interest and then to claim the total balance amount with further interest."14

Thus, the most pertinent fact that appears to have heavily weighed with the Bench in Prem Nath Kapur4 is that the payments were made from time to time against specified amounts, and therefore they could not be treated otherwise (i.e. towards interest or costs). This most significant factual premise needs to be kept in mind while construing the ratio of Prem Nath Kapur4.

Sections 28 and 34 of the LA Act

Both Sections 28 and 34 postulate award of statutory interest. While Section 3415 covers a situation where the Collector has delayed payment of the compensation amount awarded by him (i.e. under Section 11 of the LA Act), Section 2816 envisages a situation where the court awards an additional amount of compensation. Neither of these provisions specifies any rule relating to the appropriation in case of a part-payment. They merely lay down that interest is payable up to the date of "payment" and do not contemplate that where only a part of judgment-debt in terms of the Reference Court decree or appellate decree is paid, such payment is to be appropriated against which head? Sections 28 and 34 are silent on this point and do not also make the provisions of CPC inapplicable. For that, one has to go to the general rule of appropriation. The view taken in Prem Nath Kapur4 that expresses provisions of Sections 28 and 34 excludes applicability of this rule also does seem sound, faced with a plain reading of the said provisions and also in view of the pertinent fact that there is also nothing in any other provision of the LA Act to make the rule of appropriation inapplicable either expressly or by necessary intendment. Further, in view of Section 53 of the LA Act, CPC becomes per se applicable including its Order 21 Rule 1, which deals with payments inside and outside court.

Payments—pre-and-post-decretal

In Prem Nath Kapur4, Section 60 of the Contract Act17 was referred to and on its basis, it was opined that the debtor "may specify his appropriation expressly or his intention may be implied as shown by other circumstances, indicating that his intention at the time of payment was to appropriate the amount deposited by him to a specific debt or account towards the debt".18 In Mathunni Mathai6 also, Sahai, J. also referred to and relied upon Section 60 of the Contract Act to support his view.

A vital question that also arises for consideration is whether Section 60 of the Contract Act applies to payments made pursuant to a judgment-debt? A two-Judge Bench19 in Smithaben H. Patel1 focused this aspect, and opined that Section 60 has no application to the post-decretal payments and even any indication of the choice of the JD as to the manner and mode of the appropriation would not bind the DH.

It would be relevant in this context to recapitulate the brief facts of Smithaben1: a decree was passed on the basis of the mortgage deed, holding the JDs liable to pay the plaintiff a sum of Rs 5,25,451.07 together with the principal, costs and current interest and future interest, and the decretal amount was to be paid in monthly instalment of Rs 20,000. However, in case of default of payment of two instalments the plaintiff was held entitled to bring the suit property for sale and to realize the entire balance due. The JDs did not pay the full amount, leading to DH's execution petition. The JDs raised a plea in the execution proceedings that payments were made by them in liquidation of the principal amount inasmuch as the JDs sent letters to DH specifically mentioning that the amount of instalments be appropriated towards the head of principal and the DH did not reply to such letters. The plea of the JD did not find favour with the execution court but was accepted by the High Court. The High Court took the view that if the DH desired to disregard the instruction of the JD to appropriate the paid amount towards the principal the DH ought to have communicated their refusal. On appeal, several pertinent questions arose before the Supreme Court. Hon'ble R.P. Sethi, J., speaking for the Bench, ruled:

"Sections 59 and 60 Contract Act, would be applicable only in pre-decretal stage and not thereafter. Post-decretal payments have to be made either in terms of the decree or in accordance with the agreement arrived at between the parties...."20

Sethi, J. further stated:

"There does not appear to be any obligation on the decree-holder to intimate the judgment-debtor that the amount paid to him had not been accepted in the manner specified by him in the letter accompanying the payment. Insisting upon such a course would result in unnecessary burden upon the financial institutions and conferment of unwanted unilateral discretion in favour of the defaulters."21

The Bench also declined to accept the view that if the debtor has indicated the manner in which the appropriation is to be made, then the creditor has no choice to apply it differently and also if the DH does not agree to the mode of payment the DH should refund the amount to the debtor/JD. The Bench also approved the Full Bench view of the Lahore High Court in Jia Ram v. Sulakhan Mal22 arguing thus:

"Sections 59 to 61 Contract Act 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. They 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."23

Thus, Smithaben1, though decided by a two-Judge Bench, has highlighted many pertinent areas. The reliance upon Section 60 in Prem Nath Kapur4 does not seem sound, as Section 60 cannot be said to have any role qua post-decretal payments. The concept of a "single debt" comprising of principal, interest and cost has also not been unfortunately noticed in Prem Nath Kapur4. In fact, Smithaben1 is a step further for laying an authority that even an instruction of a JD to appropriate the paid amount in the specified mode (e.g. towards principal) does not also bind the DH.

Rules of construction

The rules of construction also require that the courts should presume that law should be just and fair and the legislators intended to observe this principle; therefore, the courts should strive to avoid adopting a construction of Sections 28 and 34 of the LA Act that leads to injustice or unfairness. Since non-application of the general rule of appropriation to LA decrees leads to unjust results, such construction of the provisions of the LA Act merits to be avoided.24

Sum up

It can be summed up that Sections 28 and 34 or the other provisions of the LA Act are not in any way inconsistent with the general rule of appropriation or with the provisions of CPC; Section 60 of the Contract Act has also got no application to a post-decretal payment; and a decree comprising of principal, interest and cost constitutes a "single debt" which is in contrast to "several debts" owed by a single debtor. The general rule of appropriation should apply with full force to a decree under the LA Act. However, if it is considered that Prem Nath Kapur4 lays down that the general rule of appropriation does not apply to the LA Act, then for the reasons elaborated above, such view needs correction by a larger Bench of the Supreme Court.

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*    Advocate, Supreme Court of India, New Delhi. Return to Text

1. Industrial Credit & Development Syndicate v. Smithaben H. Patel, (1999) 3 SCC 80 Return to Text
2. This rule was described as early as in the year 1702 in Chase v. Box, (1702) 2 Freeman 261 : 22 ER 1197 thus: "If a man is indebted to another for principal and interest and payeth the money generally, it shall be applied in the first place to sink the interest before any part of the principal should be sunk." The other case on this point is: Meka Venkatadri Appa Rao Bahadur Zamindar Garu v. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu, AIR 1922 PC 233. Return to Text
3. The Bench consisted of Hon'ble K. Ramaswamy, B.L. Hansaria and Ms Sujata V. Manohar, JJ. Return to Text
4. Prem Nath Kapur v. National Fertilizers Corpn. of India Ltd., (1996) 2 SCC 71. Return to Text
5. Ibid., p. 80, para 16 Return to Text
6. Mathunni Mathai v. Hindustan Organic Chemicals Ltd., (1995) 4 SCC 26, given by the Bench of Hon'ble R.M. Sahai and N.P. Singh, JJ. Return to Text
7. "53. Code of Civil Procedure to apply to proceedings before court.-Save insofar as they may be inconsistent with anything contained in this Act, the provisions of the Code of Civil Procedure, 1908, shall apply to all proceedings before the court under this Act." Return to Text
8. Obviously, such inconsistency is to be found in the draftsman language, either in express or implied terms. Return to Text
9. (1898) 2 QB 460 Return to Text
10. About a century back, in Quinn v. Leathem, 1901 AC 495, the House of Lords said: "... every judgment must be read as applicable to the particular facts proved, or assumed to be proved since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found". Return to Text
11. See also: Ambica Quarry Works v. State of Gujarat, (1987) 1 SCC 213, wherein Their Lordships of the Supreme Court reaffirmed that the ratio of any decision must be understood in the background of the facts of that case. In Punjab Coop. Bank Ltd. v. CIT, AIR 1940 PC 230 also, it was opined that every judgment must be read as applicable to "the particular facts proved, or assumed to be proved" since, the generality of the expressions which may be found there are not intended to be expositions of the whole law but governed or qualified by the particular facts of the case in which such expressions are to be found. Return to Text
12. National Fertilizer Corpn. of India v. Prem Nath Kapur, 1987 Punjab Law Journal 297. Return to Text
13. Id. Return to Text
14. Supra n-4 at p. 79, para 14. Return to Text
15. "34. Payment of interest.-When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of nine per centum per annum from the time of so taking possession until it shall have been so paid or deposited: Provided that if such compensation or any part thereof is not paid or deposited within a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of compensation or part thereof which has not been paid or deposited before the date of such expiry." Return to Text
16. "28. Collector may be directed to pay interest on excess compensation.-If the sum which, in the opinion of the court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into court: Provided that the award of the court may also direct that where such excess or any part thereof is paid into court after the date of expiry of a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of such excess or part thereof which has not been paid into court before the date of such expiry." Return to Text
17. "60. Application of payment where debt to be discharged is not indicated.-Where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits." Return to Text
18. SCC p. 78, para 11 Return to Text
19. Consisting of Hon'ble V.N. Khare and R.P. Sethi, JJ. Return to Text
20. SCC p. 87, para 9 Return to Text
21. SCC p. 87, para 9 Return to Text
22. AIR 1941 Lahore 386 Return to Text
23. Ibid., p. 388 Return to Text
24. Halsbury's Laws of England, 4th Edn., Reissue, Vol. 44(1), para 1442, at p. 880 reads thus: "It is a principle of legal principle that law should be just and fair, and the court decisions should further the ends of justice. The court, when considering, in relation to the facts of the instant case, which of the opposing constructions of the enactment would give effect to the legislative intention, should presume that the legislature intended to observe this principle. The court should therefore strive to avoid adopting a construction that leads to injustice or unfairness." Return to Text