1. Plaintiffs are the appellants. The only question that arises in this case is about interest awarded by the trial Court. The suit is based upon two mortgages, Exs. A-1 and A-3, dated 25-11-1964 and 4-4-1966 respectively. Under the first mortgage, a sum of Rupees 6,000/- was borrowed and, under the second mortgage a sum or Rupees 8,000/- was borrowed. The stipulations in both the mortgages are identical, except the rate of interest. The first mortgage provided that the entire loan amount shall be repaid within a period of one year with 12 per cent per annum interest simple. It, however, provided that if interest is not so paid, the mortgagor shall be liable to pay interest on interest, i.e., compound interest. Such compound interest was payable in case of default, every year. In the second mortgage, interest stipulated is Rs. 1-15 Ps. per cent per month, i. e., 13.18 per cent per annum simple interest (with identical stipulations). On the ground that the defendants have failed to repay the principal or the interest, except a small amount, the present suit was instituted for recovery of a sum of Rs. 32,462/-. The suit was instituted in the year 1974.
2. Among other contentions, the defendants raised the contention that the interest calimed is penal and usurious. Issue No. 3 in the suit related to this plea. It reads: 'whether the interest claimed in the suit is penal and usurious'. This issue was discussed by the trial Court in paragraph 11 of it's judgment. No specific evidence was led by the defendants in support of their plea in this behalf. Yet, the trial Court was of the opinion that the rate stipulated is substantially unfair and penal. The reasons given by it can best be set out in it's own words;--
'.........But the amount under the two mortgages accrued is Rs. 32,462/- though the defendants already paid nearly about Rs. 5,000/- as admitted by the plaintiff. In this case the calculation of interest over interest with yearly rests amounts to penal interest and calculation is substantially unfair. So, under Section 3 of the Usurious Loans Act, the penal interest has to be scaled down. On consideration of the facts and circumstances of the case I am oi the view that interest at 12% per annum simple is reasonable. So, I find on this issue that the interest claimed in the suit is penal and usurious, and interest at 12% p. a., simple has to be calculated........,'
3. In this appeal, the correctness of the above reasoning is attacked.
4. This being a suit based on mortgage, the award of interest is governed by Order XXXIV, Rule 11, C.P.C. and not by Section 34. As held by the Supreme Court in S.P. Majoo v. Gangadhar : 3SCR33 , interest up to the date of suit has to be awarded at the contractual rate, unless it is found to be usurious of penal within the meaning of the Usurious Loans Act. But, so far as interest from the date of suit till the date of redemption is concerned, the court, held that ft is a matter within the discretion of the Court, which has to be exercised in the light of all the facts and circumstances of the case.
5. I will first take up the question oi rate of interest prior to the date of suit. Mr. M. S.K. Sastry, the learned counsel for the respondents, seeks to support the judgment of the trial Court on two grounds. Firstly, he submits, on the basis of a decision of the Madras High Court in Venkata Rao v. Venkataratnam, : AIR1952Mad872 that stipulation of any interest over and above 12% per annum simple, is per se excessive and usurious and ought not to be awarded. Secondly, he submits, on the basis of the decision of the Supreme Court in S.R. Naidu v. Bank of Karaikudi, : 2SCR427 that, inasmuch as the contract herein provides for payment of compound interest in case at default in paying the simple interest orginally stipulated, the stipulation for compound interest is penal and should not be enforced.
6. On the other hand, Mr. C. Poornaiah, the learned Counsel for the appellants (plaintiffs), submits that the decision in Venkata Rao v. Venkataratnam (supra) has been subsequently explained by the Madras High Court itself as not intended to lay down any general rule of universal application and that, it cannot be enunciated as a rule of law that stipulation of interest at 12% compound with yearly rests, is per se excessive or usurious. So far as the decision of the Supreme Court in S.R. Naidu v. Bank of Karaikudi, : 2SCR427 is concerned, the learned counsel submitted that the principle of the said decision applies where the rate is varied, but not where compound interest is agreed to be paid at the same rate at which simple interest is stipulated. He relied upon the decision of the Privy Council in Bhushana Rao v. G. Subbayya, (AIR 1936 PC 283), and a decision of the Madras High Court in Ramalingam Chettiar v. Subramanya Chettiar, (AIR 1927 Mad 620). He also relied upon the decision of Chinnappa Reddy, J. dated 1-8-1972 in A. S. No. 334 of 1970, to say that the stipulation of interest at the rate of Rs. 1-05 ps. per cent per mensem, compounded yearly, is not excessive in the present day economy.
7. So far as the decision in Venkata Rao v. Venkataratnam, : AIR1952Mad872 is concerned, it would be appropriate to refer to the subsequent Bench decision of the Madras High Court, consisting of Rajamannar, C.J., and Panchapakesa Ayyar, J., in Balasaraswathi Ltd. v. A. Parameswara, : AIR1957Mad122 . After referring to several decisions of the Madras High Court, including Venkata Rao v. Venkataratnaga : AIR1952Mad872 , the Bench observed:--
'.........No absolute maximum rate of interest beyond which it will automatically become usurious or unconscionable, can be laid down, even, after the coming into operation of the Constitution of India. Courts will have to see the circumstances of each case, and judge whether the rates in those circumstances, will be penal, usurious and unconscionable. Of course, there may be some cases where rate is so excessive that there may be a conclusive presumptian that it is penal, usurious or unconscionable, as where the rate is 100 per cent per annum, or it is compound interest at even 10% per annum with daily rests.
It cannot be said that compound interest without more, by itself will be presumed to be penal, usurious or unconscionable, either regarding secured or unsecured debts, even after the coming into operation of the Constitution of India......
Where there is no security and the principal and interest are in danger, and the borrower cannot get in the money market any loan even at 12%, simple interest, a Court can allow something more than 12%, simple interest per annum.....'.
They also observed that the decision in Venkata Rao v. Venkataratnam, : AIR1952Mad872 should be understood in the particular facts of that case. In fact, the decision in Venkata Rao v. Venkataratnam, : AIR1952Mad872 was carried to the Supreme Court, and the decision of the Supreme Court is reported in Vardachariar v. Gopala Menon, : 1SCR721 . With respect to the rate of interest prior to the date of suit, the Supreme Court observed:
'.....It appears to us, therefore, that in the opinion of a number of Judges of the Madras High Court who were cognizant of the state of affairs prevailing in the State interest beyond the rate of 12% per annum simple would be considered excessive by Courts of law where the security was not inadequate and the risk run by the creditor was not abnormal. There can be no dispute that interest payable at the rate of 10 per cent compoundable annually over a number of years would be more in the interest of the creditor than 12% per annum simple for the same period. In our opinion, the learned Judges of the Division Bench of the Madras High Court were right in holding that 10% compound interest with yearly rests would meet the justice of the case .....'
What is relevant to notice is that, the Supreme Court did not say that as a rule of law, any interest over and above 12% simple is per se usurious and excessive. As pointed out by Chinnappa Reddy J. in A.S. No. 334 of 1970, dated 1-8-1972, the mortgage concerned in the decision in Venkata Rao v. Venkataratnam, : AIR1952Mad872 ; was of the year 1936 and that, since then there has been a sea change in the market conditions and the economy. This is what the learned Judge observed:
'The learned Subordinate Judge failed to notice that their Lordships of the Supreme Court were concerned with a transaction of the year 1936, whereas in the present case, we are concerned with a transaction of the year 1962. It cannot be pretended that there has been no change in the economy of our country in the meanwhile. It is well known that even the Bank rate has gone up during this period. In those circumstances, I do not see bow it can be said that 121/2% compound in the face of the evidence that there were several other transactions, where similar rate of interest was charged, can be considered to be excessive, leave alone unfair, I therefore think that the learned Subordinate Judge ought to have allowed the interest as claimed by the plaintiff.....'
In the case before me, the transactions are of the year 1964 and 1966.
8. In this connection, it would not be out of place to notice that in K. Raja Rao v. K. Beeraraju, (AIR 1927 Mad 1143) interest at 18% per annum compound was held not to be excessive. The Bench observed 'in our opinion, the amount of 18% compound interest is not a high percentage of interest considering the state of the money market. Higher rates have been allowed by the Privy Council......'.
In fact, in Ramalingam Chettiar v. Subramanya Chettiar, (AIR 1927 Mad 620), 24% compound interest at six-monthly rests was held not to be per se penal. I am only trying to emphasise that it cannot be laid down as a rule of law that interest above a particular rate is always penal and excessive. Whether interest ispenal and excessive is always a question of fact, to be decided in the facts and circumstances of a given case. In this case, Mr. C. Poornaiah is limiting his request only to 12% per annum compound interest in case of both the mortgages, which, I think, can be awarded.
8A. The next limb of Mr. Sastry's argument is based upon the decision in S. R. Naidu v. Bank of Karaikudi, : 2SCR427 . In that case, the mortgage stipulated simple interest at the rate of 101/2 per cent per annum, and provided further that if the mortgagor failed to pay the interest periodically and regularly, he would be liable to pay interest at the rate of 12% per annum from the date of such default. The Supreme Court observed 'on the question of interest we are of the view in the light of the provisions of the mortgage deed and all the circumstances that the rate of 12% is unfair and penal We are inclined, therefore, to give this relief that the interest should be calculated at the rate of 101/2 per cent (which was the original contractual rate) from the date of the mortgage to the date of the preliminary decree.....'. On the basis of the above observations, it is argued that the stipulation in the contracts concerned herein, viz., payment of compound interest in the place of simple interest, in case of default, should also be held to be penal and unenforceable. Mr. Poornaiah, however, brings to my notice certain decisions of the Privy Council and the Madras High Court, which make it appear that the cases where the compound interest is agreed to be paid at the same rate as the simple interest in case of default, stand on a separate footing from the cases where the rate of interest itself is varied. I will first refer to the decision in K. Raja Bao v. K. Veeraraju, (AIR 1927 Mad 1143). In that case, the mortgage deed provided for 18% simple interest, and then provided that if payments are not made for 1-2 instalments according to the prescribed time, and if any default is made, compound interest shall be payable at the same rate on the whole amount of principal and interest due, from the date of default. It was argued that the said provision is penal and is unenforceable under Section 74 of the Indian Contract Act. This argument was repelled by the Bench in the following words :--
'.....On behalf of the plaintiffs-appellants it is argued that the opinion of the learned Judge is wrong and that the stipulation in the documents only amounts to a provision to pay compound interest from the date of default at the same rate as the simple interest and it does not amount to a penalty within the meaning of Section 74, Indian Contract Act. We must accept this argument. The provisions in the documents, re: interest are for the payment of compound interest at the same rate as the simple interest and take effect only from the dates of default and not from the dates of the bonds. It has been held in a series of cases in this Court and also in the Privy Council that such stipulations are not penal and can be enforced, see Malli Chettiar v. Veeranna Tevan, (AIR 1921 Mad 378); Ananjaperunal Konar v. Pichamuthu Nadar, (AIR 1925 Mad 332); Ramalinga Chettiar v. Subramanya Chettiar (AIR 1927 Mad 620) and Sundar Koer v. Rai Sham Krishen (1907) ILR 34 Cal 150: ((1907) 4 All LJ 109). The fact that in the event of the nonpayment of the first instalment the remaining instalments of the principal amount also fall due at once, and this is the only feature which distinguishes these cases from the ordinary cases of payment of compound interest at the same rate as the simple interest from the date of default, does not in our opinion, make any difference as regards the application of the principles we have referred to. Section 74, Indian Contract Act, makes it clear that where money is payable in instalments with a stipulation that 'in default of payment of any instalment, the whole shall become due the stipulation is not by way of penalty and the contract may be enforced according to its terms (see illustration T). We think therefore that the provisions in these documents regarding payment of principal and interest only amount to payment of compound interest at the same rate as the simple interest on the total amount due under the documents in the event of default of payment of any instalment, the payments of such compound interest starting only from the dates of such default and not from the dates of the bonds. In this view the stipulations are not penal.....'
9. The following observations of the Privy Council in Bhushana Rao v. Subbayya, (AIR 1936 PC 283 at p. 285); are significant in this context:
'As regards the stipulation for the payment of compound interest, in the event of default, at a rate higher than that of the simple interest, the High Court was justified in holding it to be a penal provision. As observed in (1907) 34 Ind App 9: (1907-4 All LJ 109):
'Compound interest is in itself perfectly legal, but compound interest at a rate exceeding the rate of interest on the principal moneys, being in excess of and out- . side the ordinary and usual stipulation, may well be regarded as in the nature of a penalty.
The plaintiff has therefore been rightly allowed compound interest at the same rate as simple interest....'
10. I am, therefore, of the view that where the contract stipulates a particular rate of interest but provides that interest at a higher rate is payable in case of default, it can be held to be penal and not enforceable; but, where the contract provides for simple interest at a particular rate and also provided that, in case of default in paying the interest, compound interest is payable at the same rate from the date of default, it cannot be held to be per se penal. Accordingly, it must be held that the clause in question in the mortgages before me is not penal. As I have observed herein before, the defendants have led no evidence whatsoever in support of their plea that the rate of interest agreed is usurious, excessive or unfair.
11. So far as interest up to the date of suit is concerned, I am of the opinion that interest at the rate of 12 per cent compound can be awarded and, is accordingly, awarded herewith. The judgment of the trial Court is modified accordingly.
12. So far as interest from the date of suit is concerned, it is a matter within the discretion of the Court. In this case the debt was a secured one. The defendants have also repaid a part of the loan amount. It is not shown that the property mortgaged was not sufficient. In the circumstances, I am of the opinion that 12 per cent per annum simple interest will be the proper interest to be awarded from the date of suit till the date of redemption. That is what the trial Court has also awarded, and the same is confirmed herewith. From the date of redemption till realisation, the plaintiffs shall be entitled to interest at the rate of 6 per cent per annum, simple, on the principal amount.
13. The appeal is, accordingly, allowed in part, to the extent indicated above, viz., to the extent of interest up to the date of suit. In other respects, the appeal is dismissed. In the circumstances of the case, there will be no order as to costs in this appeal. Time for redemption; three months from today.