V.S. Deshpande, C.J.
1. This the defendants' appeal against the preliminary decree dated 3rd May, 1980 passed by the learned Civil Judge (Senior Division), Alibag, in favour of the respondent-Bank. Defendant No. 1 is a partnership firm while defendants Nos. 2 to 5 are its partners. The defendants executed a registered simple mortgage deed in favour of the plaintiff on 23rd December, 1969 and obtained a loan of Rs. 2,00,000 against the same. The amount was liable to be returned within five years as specified in the mortgage deed. Interest was agreed initially to be paid at the rate of 9 1/2% per annum and was liable to be computed at quarter, rests. In the event of non-payment of interest in cash, the same was liable to be debited to the defendants' account and further interest was liable to be calculated on the amount due inclusive of unpaid interest. The Bank was also authorised to vary the rate of interest from time to time. By the time the suit came to be instituted, interest was raised to 16% per annum. The defendants also executed a promissory note on 22nd July, 1978 acknowledging the amount due on that date and agreeing to pay interest thereon at the rate of 16% p.a.
2. This suit was instituted on 26th April, 1979 claiming an amount of Rs. 3,79, 199-50 with future interest at 16% p.a.
3. The defendants resisted the suit on several grounds. On these pleadings issues were framed. It is unnecessary to refer to the same in detail as the factual aspects were not agitated before us in this appeal by Mr. Agarwal, the learned Advocate appearing for the appellants.
4. The learned trial Judge passed a preliminary decree declaring the defendants Nos. 1 to 5 liable to pay a sum of Rs. 3,79,199-50 with further interest at 16% per annum from the date of suit till payments and with costs. The defendants were directed to pay the amount on or before 1st December, 1980 failing which a decree for sale was to be passed on the application to that effect by the plaintiff. The defendants Nos. 1 to 5 were also made personally liable for the balance of the decretal amount, if any. The defendants have preferred the present appeal against the said decree.
5. Mr. Agrawal, the learned Advocate for the appellants, fairly enough did not challenge the fact of the appellants having obtained loan from the plaintiff-Bank and executing the mortgage deed dated 23rd December, 1961. He, however, raised four points in support of this appeal. His first contention is that the plaintiff did obtain a promissory note from the defendants on 22nd July, 1978 regarding the dues on the said date in respect of this very transaction. With the coming into existence of the pronote, says Mr. Agarwal, the earlier transaction of mortgage gets extinguished and the plaintiff can rely on the pro-note and not the original transaction of mortgage. The contention is obviously untenable. In the first instance, the liability under the mortgage deed can come to an end only when the mortgage money is paid and the deed is returned or the same is cancelled by another registered document. Mere execution of promissory note cannot have the effect of wiping out the mortgage transaction and the liability created thereunder. It is nobody case that the pro-note was accepted in discharge of the debt. Each promissory notes are invariably executed by way of additional security and evidence of acknowledgment of the dues on that on taking accounts.
6. Mr. Agrawal then contends that under Order 34, Rule 11(a)(i) of the Code of Civil Procedure, interest from the date of the suit is payable only on the principal amount due. It is obligatory on the Court to find out the actual amount due by way of principal and make the defendants to pay interest only thereon. The amount of Rs. 3,79, 199-50 on which the defendants are directed to pay interest includes interest also. Making the defendants liable to pay interest on the total amount inclusive of earlier interest, according to Mr. Agarwal is violative of the legislative mandate under Order 34, Rule 11(a)(i) of the Code. It is not in dispute that the amount of Rs. 3,79, 199-50 does include interest. Under Clause 5 of the mortgage deed, the plaintiff was entitled to calculate interest at contract rate at six monthly rests and debit the same to the defendant's account if the same is not paid in cash. Clause 5 authorises the Bank to calculate interest on the amount due, inclusive of interest added to the principal, on account of its not being paid. This, in effect, amounts to the defendants agreeing to treat the unpaid interest as part of the principal. Though the words to that effect are not expressly used in this clause, the express authority to the Bank to charge compound interest in that manner and debit interest in accordance with the Bank's practice does not leave any manner of doubt on this point. The amount of Rs. 3,79, 199-50 on which the trial Court directed to pay interest from the date of the suit includes only such unpaid interest which is merged in the principal which under the contract is to be treated as principal. The amount of Rs. 3,79, 199-50 found due till the date of the suit is in fact thus the amount of principal. This is held to be permissible by the Privy Council in Jagannath Prasad Singh Chowdhury v. Surajmal Jalal . Accounts of dues are liable to be worked out till the date of the suit in terms of the contract. Any contract to treat unpaid interest as principal and permit the creditor to charge interest thereon is not per se illegal. The legality of this practice of calculating interest at six monthly rests and merging the unpaid such interest in the principal is affirmed by the Supreme Court in S.P. Majoo v. Ganga Dhar : 3SCR33 . There is thus no substance in the contention of Mr. Agrawal.
7. Mr. Agarwal then contends that even if liability to the quantum of interest before the suit remains within the domain of the contract, the Court has a discretion to reduce the same from the date of the contract and inspite of any contract, to the contrary, Order 34, Rule 11(a)(i) of the Code authorises the Court to vary the terms of the contract to that effect. Though the language of Rule 11(a)(i) of the Code is somewhat vague, the same has been interpreted by the Federal Court and this Court to mean that discretionary powers of the Court come into play in this context from the date of the suit. See Dawoodbhai v. Shaikhali : AIR1953Bom445 and Jaigobind Singh v. Lachmi Narain Ram .
8. On the facts and circumstances of this case, however, we do not see any reason to alter the contractual rate of interest. The plaintiff in this case is a Bank. It is bound to pay interest to its customers and depositors at the rates fixed by the Reserve Bank of India. Its practice and procedure is based on sound reasons affecting national finance. The defendants are merchants. The loan is obviously intended for commercial Purposes. We do not see why this rate should be reduced. The authority to the Bank to vary interest from time to time under Clause (5) is aimed at ensuring the Bank's compliance with the rate of interest fixed by the Reserve Bank. We, however, think, that the Bank should not be permitted to charge compound interest from the date of the suit. It would not be proper to permit compound interest when the matter is left to the Court's discretion. The learned trial Judge has also not given any compound interest from the date of the suit. The order as to interest, therefore, subsequent to the date of the suit in this case does not call for any interference.
9. Mr. Agrawal then contends that, at any rate, the defendants may be allowed to pay the decretal dues by instalments. From the affidavit filed before us, the defendants do not appear to be in a position to pay the decretal dues in lump sum. The sale of the mortgaged property for this purpose may or may not be sufficient to satisfy the decretal dues. We have asked Mr. Patwardhan, the learned Advocate for the Bank-respondent, to get instructions if the Bank is agreeable to enable the defendants to pay the decretal dues in instalments. Mr. Patwardhan, on instructions, informs us that the Bank would be agreeable to instalments only if immediately a sum of Rs. 1,50,000/- is paid by the defendants and the balance is paid in instalments of Rs. 20,000/- each with the usual default clause. After hearing both the learned advocates and considering the facts and circumstances of the case, we think that the defendants should be permitted to pay the decretal amount in instalments of Rs. 15,000/- per month payable on 5th November, 1981 provided he pay a sum of Rs. 1,00,000/- on or before the 1st October, 1981 and continues to pay instalments of Rs. 15,000/- each on the 5th of every subsequent month beginning from 5th November, 1981. In the event of default in the payment of a sum of Rs. 1,00,000/- on or before 1st October, 1981 or in the payment of subsequent any two instalments as indicated above the Bank would be entitled to recover the entire dues by sale of the mortgaged property and recover the balance, if any, from the other property of the defendants or their person. The appeal is dismissed with costs with the above modifications. The defendants will bear their costs of this appeal.