Article 1: (Article 85 of the Act of 1908):
The period of limitation for a suit for balance due on a mutual, open and current account, where there have been reciprocal demands between the parties is three years and the time from which period begins to run is the close of the year in which the last item admitted or proved is entered in the account; such year to be computed as in the account.
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ADVERTISEMENTS:
In order to attract Art. 1 of the Limitation Act, 1963 the following conditions are required:
(i) There must be mutual, open and current account between the parties; and
(ii) There also must be reciprocity of demands.
An open account is one which consists of series of transactions and which is unclosed by settlement. A current account is one which contains items between the parties from which the balance due to one of them is or can be ascertained.
ADVERTISEMENTS:
Mutual accounts are such as consist of reciprocity of dealings between the parties and do not embrace those having items on one side only, though made up of debits and credits. An account is mutual, open and current when it is an account between the two parties having mutual dealings, which is running or current, that is not closed, and open, that is not settled.
In Chobey Sushil Chandra v. Raj Bahadur, (AIR 1977 All. 259), it has been held that when A’s account is being credited with the commission amount due to him towards the services rendered by him in connection with the supply of raw materials supplied by him to the third party and the amounts received by A to meet the expenses for prosecuting a suit against the third party are debited in A’s account, the account is not open, mutual and current account because no independent obligations were created between the parties on such transaction.
In Madhab Motiram v. Jairam, (AIR 1921 Bom. 451), the plaintiff, the owner of ginning factory, lent money to the defendant to buy cotton. The cotton so purchased was ginned by the plaintiff and pressed. The plaintiff then sold the products on behalf of the defendant.
The ginning and pressing charges as well as the principal and the interest was debited to the account of the defendant and the sale proceeds of the cotton bales were credited to the accounts of the defendant as against the advances made by the plaintiff to the defendant. It is held that the transaction was mutual, open and current account.
ADVERTISEMENTS:
In Union Bank v. Raghaban, (AIR 1959 Ker. 204), it has been held that the distinguishing characters of the mutual account are: (i) that there should be independent transaction between the two parties in one of which a party should hold the position of a debtor and in the other that of creditor and in the other the reverse position; (ii) and that the dealings should disclose independent obligations of both sides and not merely the obligation on one side, the acts done by the other are merely discharge of such obligations and such party may be able to say to the other, “I have accounts against you.”
In cases where there are mutual dealings between the parties and the balance is struck from time to time, it cannot be held that it is not mutual, open and current account. This is because when balance is struck, there is a mere acknowledgement but no agreement to pay the balance.
Article 1 of the Limitation Act, 1963 applies where the parties having mutual obligations intend that such obligations are to be set off against each other.
In A run Kumar v. Bazpur Cooperative Sugar Factory, [AIR 1980 NOC 8 (All.)], it has been held that for the creation of an open, mutual and current account there must be an intention between the parties, either express or implied which may be deductible from the course of dealings, to have mutual dealings creating reciprocal obligations independent of each other with the intention that these transactions are to be continued and not to be closed until the parties decide to close the account.
In Kishore Chand v. Shillong Banking Corporation, (AIR 1965 SC 1711), is has been held that when a bank gives loan to a customer on overdraft and the customer makes deposits the loan granted by the bank creates obligation on the part of the customer to repay the loans and the bank is under an independent obligation to repay the amount of cash deposited by the customer and to account for the hundis, cheques and drafts deposited by the customer for collection. So the transaction between them creates independent obligations between the banker and the customer.
Thus, the account is mutual, open and current account and any suit filed on such account attracts Art. 1 of the Limitation Act, 1963. Thus, cash credit facility granted by the bank to the customer is a mutual, open and current account. Thus a suit thereon is governed by Article 1 of the Limitation Act and a suit brought within three years of the last payment made by the customer on such account is within time.
In Niamath Ali v. Commercial and Industrial Bank, (AIR 1959 A.P. 294), it has been held that an overdraft account with the bank creates two sets of independent transactions, that when a customer opens a current account with the bank he has a credit balance which he can enforce against the bank, but as soon as an overdraft is allowed taking a demand promissory 1 note, as a collateral security, an independent obligation is created, on the customer which the bank can enforce against the customer and that consequently the transaction is mutual, open and current account to which Art. 1 of the Limitation Act is attracted.
In Syed Jalaluddin v. Tara Pharmacy, (AIR 1966 A.P. 366), it has been held that when a customer opens a current account with the bank with overdraft facilities and deposits with the bank several shares securities giving blank transfer forms giving a right to the bank to sell the shares and apply the proceeds to the overdraft account, the transaction creates mutual, open and current account between the bank and the customer.
In the transaction between the bank and its customer, in order to attract applicability of Article 1, there have to be reciprocal demand between the parties and mutual transaction as co-terminus for computing the period of limitation. The entries concerning interest are not to be entries as mutual ‘ transaction creating obligations.
The year in which the last entry of payment is made would be excluded to compute the period of limitation and the limitation for three years shall commence from the month of January of the following year in which the last entry was made.
In K.K. Abraham v. N.K. Abraham, (AIR 1978 Mad. 56), it has been held that when the accounts of the plaintiff were closed on 31st December, 1966 and the last entry of payment was made on 23rd July, 1966, the suit filed on 23rd December, 1969 though beyond three years of the last payment is within time.
It is clear that the period of limitation starts from the close of the year in which the last entry of payment is admitted or proved. In Parashuraman v Purushothaman, (AIR 1977 Ker. 182), it has been held that when the mutual, open and current account is adjusted in the middle of a year and at least one item of payment is admitted or proved, then the limitation would run from the beginning of the following year and not from the date of actual adjustment.
A mutual, open and current account will not be statute barred if there is any item in that account within the period of limitation, even if all the earlier items of payment were made beyond the period of limitation.
In Shivaram Construction Co. v. Vijaya Bank, [AIR 1997 Guj. 24 (DB)], it has been held that when the fixed deposit of the debtor came to be liquidated and the proceeds appropriated term dues of the bank in current account of the debtor on 21st October, 1980 the suit filed on 17th February, 1984 is within time as the financial year of the bank at the relevant time was from April to March.