Kerala Financial Corporation v A.S. Madhava Menon and State of Kerala and The Deputy Tahsildar

Case Details & Bench

Court: High Court of Kerala
Hon'ble Judges: THOTTATHIL B.RADHAKRISHNAN
Judgment Date: 2007-01-01
Court Decision / Holding: Second appeal partly allowed; the decree of the lower appellate court is modified so that the Kerala Financial Corporation is entitled to charge interest only at 5.5% per annum from the plaintiff; the direction to give credit to the subsidy amount provided by the Government is vacated. The judgment clarifies that the decision concerns the rate of interest and not the form (simple vs. compound), which remains a matter dependent on the contract between the parties. No costs.
Final Disposition: Partly allowed

Parties to the Case

Appellants / Petitioners

Kerala Financial Corporation

Respondents

A.S. Madhava Menon
State of Kerala
The Deputy Tahsildar, Revenue Recovery

Legal Representation & Advocates

Counsels for Petitioners

• V. B. Unniraj

Counsels for Respondents

• C. Chandrasekharan
• Smt. Lakshmi Rani

Case Synopsis & Summary

This Second Appeal arises from a loan transaction between the plaintiff, A.S. Madhava Menon, and the Kerala Financial Corporation (KFC), which had the benefit of a subsidy arrangement with the State of Kerala. When the subsidy agreement collapsed, KFC demanded a higher rate of interest, and the plaintiff’s account fell under Revenue Recovery proceedings. The trial court dismissed the suit on the ground of bar under the Kerala Revenue Recovery Act and on merits that the defendant was entitled to the claimed rate. The first appellate court found that, by the time, the rate of interest that could be charged would be 5.5% because the loan was supported by the subsidy, and directed a re-accounting that credited any excess interest back to the plaintiff, while also requiring credit for any subsidy provided by the Government. The Kerala Financial Corporation challenged that directive, arguing it should not be obliged to give credit for the subsidy beyond the 5.5% rate. The High Court, in Part, relied on Mathew v. Kerala Financial Corporation, holding that once the corporation enters into a subsidy-supported contract, it is bound to the contracted rate, and cannot enhance the rate while resiling from obligations. Consequently, the court modified the lower appellate decree: the defendant is entitled to charge interest only at 5.5% and the directive to credit subsidies is vacated. The decision clarifies that the issue concerns rate of interest, not the form (simple/compound).

Provisions of Law Cited

Kerala Revenue Recovery Act

Submissions & Arguments

Contentions of Appellants / Petitioners

The Kerala Financial Corporation submits that the loan was made at 5.5% with subsidy support; it contends that, because the subsidy agreement was in force, the interest rate charged to the plaintiff must be limited to 5.5% and the Corporation is not obliged to credit subsidy amounts beyond maintaining the 5.5% rate; it relies on Mathew v. Kerala Financial Corporation to bind the parties to the contracted rate of interest and seeks modification of the decree to reflect only the 5.5% rate and no subsidy credit.

Contentions of Respondents

The plaintiff and other respondents contend that subsidy should be credited in calculating the interest, so that the effective rate reflects the subsidy; they argued that the lower appellate court’s directive to grant subsidy credit should be upheld, as it aligns the rate with the government subsidy and prevents windfall gains.

Cited Precedents (1)

Case Name	Citation	Treatment	Explanation
Mathew v. Kerala Financial Corporation	1989 (1) KLT 904	Positive	Cited to support the proposition that a public undertaking bound by a subsidy contract must adhere to the contracted rate, thus limiting the rate at which interest may be charged.

Extracted Judgment Text

Exact text extracted from official judgment records.

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE THOTTATHIL B.RADHAKRISHNAN MONDAY, THE 1ST JANUARY 2007 / 11TH POUSHA 1928 SA.No. 622 of 2001() -------------------AS.190/1992 of ADDL.DISTRICT COURT, THRISSUR OS.864/1987 of II ADDL.M.C.,THRISSUR .................... APPELLANT/3RD RESPONDENT/3RD DEFENDANT: ------------------------------------------------------ KERALA FINANCIAL CORPORATION, TRIVANDRUM REPRESENTED BY ITS MANAGER (LEGAL). BY ADV. SRI.V.B.UNNIRAJ RESPONDENTS/APPELLANT & RESPONDENTS 1 & 2/PLAINTIFF & DEFENDANTS 1 & 2: ---------------------------------------------------------------------- 1. A.S.MADHAVA MENON. S/O.ARIYAMPARAMBATH SREEDHARA MENON, PARIYARAM VILLAGE, MUNDAPURAM TALUK BY HIS MUKTHIAR HOLDER SRI.P.DIVAKARA MENON, S/O.PADINJAROOT PARVATHY AMMA,”CARBIDE HOUSE”, KANJANI ROAD, AYYANTHOLE, THRISSUR -3. 2. STATE OF KERALA, REPRESENTED BY THE DISTRICT COLLECTOR, THRISSUR -3. 3. THE DEPUTY TAHSILDAR, REVENUE RECOVERY, KERALA FINANCIAL CORPORATION LTD., PALAGHAT. - R1 BY ADV. SRI.C.CHANDRASEKHARAN - R2, R3 BY GOVT. PLEADER SMT.LAKSHMI RANI THIS SECOND APPEAL HAVING BEEN FINALLY HEARD ON 01/01/2007, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ## **THOTTATHIL B.RADHAKRISHNAN, J** ------------------------------------------- ## S.A.No.622 OF 2001 ------------------------------------------Dated this the 1[st ] day of January, 2007 ## **JUDGMENT** 1. This second appeal is by the third defendant Kerala Financial Corporation. The plaintiff availed a loan from it. That loan was supported by the subsidy offered by the first defendant State of Kerala. The subsidy agreement between the State of Kerala and the Kerala Financial Corporation failed and accordingly, the Kerala Financial Corporation demanded higher rate of interest from the plaintiff. The account led to revenue recovery proceedings. The suit was filed seeking a decree of perpetual prohibitory injunction against revenue recovery proceedings. The court of first instance dismissed the suit holding that there is a bar to suit under the Kerala Revenue Recovery Act and also that the third defendant is entitled to rate of interest as claimed. 2. The lower appellate court, in deciding the first appeal of the plaintiff, noticed that there was consensus between the parties SA.622/01 ## Page numbers by that time that the rate of interest that could be charged by the third defendant Kerala Financial Corporation was only 5.5% as far as the account is concerned because the transaction was supported by a subsidy agreement between the Kerala Financial Corporation and the State of Kerala. It was also noticed that in view of the said proposition, there has to be a re-accounting by the third defendant Kerala Financial Corporation by giving credit to the excess interest, if any, paid. However, the lower appellate court also directed that credit shall be given to subsidy amount provided by the Government. It is this direction of the first appellate court, regarding adjustment of the subsidy amount, that has led the Kerala Financial Corporation to file this second appeal. 3. After having heard counsel for parties, it is found necessary to determine this second appeal on the following substantial questions of law: - (i) Is the third defendant appellant entitled to any interest from the plaintiff at any rate over and above SA.622/01 ## Page numbers 5.5% ? (ii) Is the third defendant bound to give credit to any subsidy amount that it receives from the Government ? 4.As already noticed, the plaintiff obtained a loan from the third defendant. The rate of interest at 5.5% was agreed to between the parties following the subsidy agreement between the State of Kerala and the Kerala Financial Corporation. By virtue of such an agreement, subsidy regarding the interest component will have to be paid by the State of Kerala to the Kerala Financial Corporation. This means that the interest at the rate of 5.5% agreed to between the Kerala Financial Corporation and the plaintiff is the rate that the Kerala Financial Corporation would charge with the support of the subsidy facility by the State of Kerala. Hence the rate of interest that could be charged by the Kerala Financial Corporation is only 5.5% so long as the plaintiff is entitled to the benefit of the subsidy agreement between the State of Kerala and the Kerala Financial Corporation. It is not in dispute that the loan was ## SA.622/01 ## Page numbers availed of by the plaintiff while the subsidy agreement between the State of Kerala and the Kerala Financial Corporation was in force. This means that the Kerala Financial Corporation is entitled to contribution by the State of Kerala to the extent of the interest that it has slashed in the case of the plaintiff. As a corollary, it also means that the Kerala Financial Corporation is not obliged to give credit to any subsidy it receives, except to the extent it is required to sustain recovery of interest from the plaintiff to be only at 5.5%. 5.As has been held by this Court in **Mathew** v. **Kerala Financial Corporation** {1989 (1) KLT 904}, once the Kerala Financial Corporation, a public undertaking has entered into a contract with the plaintiff, the Kerala Financial Corporation has to be tied down to the rate of interest to which it has agreed to and it cannot be permitted to enhance the said rate depending upon the State of Kerala resiling out of its obligations under the subsidy agreement. The loan that the ## SA.622/01 ## Page numbers plaintiff had availed is essentially that it took acting on the promise of the State of Kerala to provide interest contribution to Kerala Financial Corporation in excess of 5.5% and the Kerala Financial Corporation's offer to collect from the plaintiff interest only at the rate of 5.5%. This means that the Kerala Financial Corporation will be entitled to charge interest only at 5.5% from the plaintiff while it will not be liable to give credit to any subsidy amount it receives from the Government. The impugned judgment of the lower appellate court requires to be modified in the aforesaid extent. - 6.In the result, the second appeal is partly allowed and the direction in the decree of the lower appellate court holding that the third defendant Kerala Financial Corporation is entitled to interest only at 5.5% per annum on the loan availed by the plaintiff is confirmed and the direction to give credit to the subsidy amount, if any, provided by the Government is vacated. Following this second appeal decree, the Kerala Financial Corporation will forthwith give effect to the SA.622/01 ## Page numbers directions in the decree of the lower appellate court as modified hereby. It is also clarified that the judgment and decree of the lower appellate court and this judgment and decree touch only the rate of interest and not as to whether it is simple or compound, such question being dependent on the contract between the parties. No costs. **THOTTATHIL B.RADHAKRISHNAN Judge** kkb. SA.622/01 Page numbers ======================= THOTTATHIL B. RADHAKRISHNAN, J S.A.NO.622 OF 2001 JUDGMENT 1[st] JANUARY, 2007. =======================