The rule applies not only to unsecured loans, but also to loans secured by a pledge of movable property or by a mortgage of immovable property. Although the Madras High Court has held that the rule of damdupat does not apply to mortgages executed after the Transfer of Property Act, 1882, came into force, a contrary view has been expressed by the High Courts of Bombay, Calcutta and Nagpur.
The reason behind this rule is that the ancient Hindu Law did not recognise any rule of limitation for the recovery of debts. Every debt which was lawful was binding on the debtors, irrespective of the time which passed after the liability was incurred. It was, therefore, thought fit to impose a restriction on the amount of interest which could be recovered by the creditor, and it is precisely such a restriction that is imposed by the rule of damdupat.
It may be noted that the rule of damdupat does not affect the Limitation Act, 1963. According to that Act, the period of limitation for a suit to recover money lent is three years. A creditor may, therefore, sue for the loan amount and for the arrears of interest, but in cases to which the rule of damdupat applies, he cannot, at any one time, recover interest which exceeds the principal amount.
The rule of damdupat also does not forbid the capitalisation of interest, i.e., conversion of interest into arrears of capital, if there is a subsequent agreement between the debtor and the creditor to do so. Therefore, if the debtor signs a fresh bond for the aggregate amount of the principal and the accrued interest under the old bond, for the purposes of the rule of damdupat, the principal will be the amount of the fresh bond.
Part-Payment of Principal Amount:
If part of the loan is re-paid, whether under an agreement to pay by installments or otherwise, the principal amount, for the purpose of the rule of damdupat, is the balance of the principal amount due when the interest is sought to be recovered.
Thus, if the original loan is Rs. 2,000 to be paid in four equal installments , and the debtor pays the first three installments and all interest due thereon, and defaults in the payment of the last installments , the creditor cannot recover any amount more than Rs. 500 as the interest on the last installments of Rs. 500. At the most, he can recover Rs. 500 as interest, along with the balance principal amount of Rs. 500. The fact that the original loan was of Rs. 2,000 is immaterial for the purpose of the application of the rule of damdupat.
Places Where the Rule Applies:
The rule applies in the former State of Bombay, (i.e., States of Maharashtra and Gujarat now). It also applies in the city of Calcutta, but not elsewhere in West Bengal. In the States of Rajasthan, Uttar Pradesh and Tamil Nadu, the rule has not been given effect to.
In other States of India, the rule of damdupat is not applicable as such, but in many States, the rule has been adopted to cover certain cases by local Acts, as for instance the U.P. Encumbered Estates Act, 1934.
Persons Who Claim the Benefit of the Rule:
According to the Calcutta High Court, (Nobin Chunder v. Ramesh Chunder, 14 Cal. 781), the rule applies only if both the original contracting parties, viz., the debtor and the creditor, are Hindus. However, according to the Bombay High Court (Harilal v. Nagar, 21 Bom.), it is only necessary that the original debtor should be a Hindu, and the rule does not apply if the original debtor is a Mahomedan, though the debt is subsequently transferred to a Hindu.
In cases where there are two debtors, one of whom is a Hindu, the rule will apply only to the Hindu debtor. However, this will not prevent the non-Hindu debtor from claiming contribution from the Hindu debtor on the basis of direct payment made by him to the creditor.
In cases where the original debtor is a Hindu, and the debt is later transferred to a Mahomedan, the rule applies as long as the debtor is a Hindu, and ceases to operate from the date when the debt is transferred to the Mahomedan.
In one case, A, a Hindu, borrowed Rs. 150 at 12% per annum from a Mahomedan X, on the mortgage of his immovable property. A then sold his equity of redemption to a Mahomedan, Ì. X sued M to recover Rs. 750 comprising of Rs. 150 as the principal amount and Rs. 600 as interest.
The Court held that X was entitled to Rs. 150 as the principal amount and a further sum of Rs. 150 as interest. It was also held that he would also be entitled to the interest on this amount of Rs. 300 at 12% from the date of the sale to M. If A had not sold his equity of redemption to M, and the suit had been filed against A himself, X would not have been entitled to anything more than Rs. 300. (All Saheb v. Shabji, 21 Bom. 85).