Ramachandra Rao, J.
1. This appeal was preferred by the 2nd defendant originally against the judgment and decree in O. S. No. 50 of 1968 on the file of the Court of the District Judge, Guntur decreeing the suit of the plaintiff, State Bank of India for the recovery of a sum of Rupees 74,644-04 together with interest thereon and costs. The second defendant having died, his legal representatives were brought on record as appellants 2 and 3.
2. The relevant facts are as follows: For convenience sake, the parties are referred to according to their ranks in the trial court. The plaintiff, the State Bank of India, filed the suit for the recovery of a sum of Rupees 74,644-04 on the basis of two accounts opened by the defendants with the plaintiff. The 1st defendant was a partnership firm known as 'Padarti Ratnam and Company'. Defendants 2 to 7 were the partners of that firm. Padarthi Ratnam and Co., was carrying on business in tobacco at Guntur for a long time, Prior to 13-8-1964 the partners of the firm were late Padarthy Ratnam (who is the son of the 4th defendant and the husband of the 5th defendant) and defendants 2, 3, 6 and 7. During the lifetime of Padarthy Ratnam, the said Ratnam and the second defendant were managing the business and the firm. In the year 1961 the firm applied to the plaintiff-Bank for cash credit facilities and the Bank granted the firm cash credit facilities known as 'Factory type and Lock and Key Type' loans to the tune of Rupees 4,00,000/-. Subsequently the cash credit limit was raised and by the year 1963 it was enhanced to Rs. 6,00,000/- under the Factory Type loan and the Rs. 8.5 lakhs under the Lock and key type loan. Those facilities were given to the firm against pledge of tobacco stored in the firm's godowns and grading halls and against Agmarked tobacco stored in the licensed godowns and also against warehouse receipts covering stocks of tobacco issued by approved shipping agents. In view of the large cash credit facilities and on account of fluctuations in price and the possible deterioration in the quality of the pledged tobacco the plaintiff demanded and the firm furnished additional security on 29-4-1963 by depositing the title deeds relating to immovable properties described as items 1 and 2 in the II schedule appended to the plaint. Padarthy Ratnam died on 12-8-1964 and his legal representatives viz. his mother and his widow, defendants 4 and 5 along with the erstwhile partners constituted themselves into a partnership firm under the same old name and took over all the assets and liabilities of the previous firm and continued with the Bank the previous dealings of the original firm. As further collateral security the second defendant deposited with the plaintiff-Bank the title deed relating to item No. 3 of the II Schedule on 15-3-1965.
3. Subsequent to it the 1st defendant-firm failed to pay the amounts due to the plaintiff-Bank and a notice was issued on 16-8-1965 by the plaintiff to the firm demanding the payment of the amounts within a week of the receipt of the notice. The third defendant, the managing partner of the firm, sent a reply on 23-8-1965 requesting the plaintiff to grant two weeks time for payment, but the amount was not paid even after the lapse of several months. The plaintiff then issued a registered notice through their Advocates on 1-7-1966 to the defendants demanding the payment of the amount. Defendants 2, 4, 5 and 6 sent replies raising certain objections. Subsequently the defendants sought the permission of the Bank to sell the pledged tobacco, and the plaintiff Bank said that it would have no objection provided all the partners of the firm agreed in respect of the price of the tobacco. But the defendants could not come to any agreement. They could not also make any arrangement for the payment of the amount due to the plaintiff. The plaintiff Bank thereupon filed the suit for the recovery of Rs. 74,644-04 with further interest thereon at ten per cent per annum till the date of payment, for the sale of the pledged tobacco mentioned in Schedule I and crediting the amounts realised towards the suit claim and if the defendants failed to pay the suit amount with interest and costs by a date fixed by the Court to grant a decree directing the properties detailed in Schedule II which were under equitable mortgage to the plaintiff to be sold, and the proceeds to be credited towards suit claim, and the balance to be paid to the defendant.
4. The second defendant filed the main written statement contending as follows:--
5. The original rate of interest stipulated between the plaintiff and the firm was only 7 1/4 per cent. per annum. The account of the plaintiff as annexed to the plaint showed that the plaintiff claimed compound interest at 8 1/4 per cent. per annum with monthly rests. The defendant firm or any of its partners never agreed to pay compound interest. The plaintiff Bank wrote a letter to the defendant firm on 24-3-1965 stating that the rate of interest was revised and increased by 1 per cent. and asked the defendant-firm to agree for the revised rate of interest. But the defendant-firm did not agree. Even otherwise the rate of interest claimed by the plaintiff was usurious and liable to be reduced. The plaintiff had debited against the firm's accounts the salaries of watchman and some trunk call bills for which the defendant-firm never agreed. It was also alleged that the firm had sustained heavy loss on, account of the conduct of the plaintiff Bank. When the firm was anxious to dispose of the tobacco pledged with the plaintiff as early as possible and also to complete an order given to it from Egypt, the plaintiff did not co-operate with the firm. The Bank authorities did not make any further advance, even though the indebtedness of the Arm to the Bank was substantially reduced by that time. On account of that the defendant firm sustained heavy loss to the tune of Rs. 20,000/-It was contended that out of the suit claim the plaintiff was not entitled to a sum of Rs. 35,000/- representing the excess amount claimed towards compound interest on monthly rests, towards trunk call charges and salaries of watchmen employed by the Bank, and that the plaintiff was liable to make good a sum of Rs. 20,000/- towards loss caused to the firm.
6. The 5th defendant filed a written statement raising similar plea contending that in so far as the 2nd defendant executed a promissory note dated 29-3-1965 in favour of the plaintiff there was no liability on the part of the other defendants as the execution of the promissory note amounted to novatio and that the liability of the firm and its members came to a close under the new contract. Defendants 1, 3, 4, 6 and 7 filed a memo adopting the written statement of the 5th defendant.
7. On the aforesaid pleadings the trial court framed the following issues:
1. Whether the account filed by the plaintiff is entitled to the amount claimed?
2. Whether the interest claimed by the plaintiff is contrary to the contract governing the parties?
3. Whether the interest claimed is usurious?
4. Whether the settlement of accounts dated 29-3-1965 amounts to novatio and, if so, whether the defendants, 3 to 7 are liable for the suit claim?
5. Whether the defendants are not liable to pay the watchman's salary and trunk call charges debited against them?
6. Whether the defendants are not liable for costs of the suit?
7. To what relief?
The Agent of the plaintiff Bank was examined as P. W. I and Exs. A-1 to A-29 were marked for the plaintiff. The second defendant and the 3rd defendant were examined as D. Ws. 1 and 2. Exs. B-1 to B-6 were marked for the defendants. Before the learned District Judge the learned counsel for the second defendant stated that his client's defence of the suit was confined only to the question of the interest and the question of the watchman's salary. The learned Counsel for the other defendants also represented that the main defence of the suit was confined only to the questions of interest and watchman's salary and to cessation of their liability on account of the agreements executed bv the second defendant on 29-3-1965. The learned District Judge on a consideration of the entire evidence on record held on issues Nos. 1, 2 and 3 that the account filed by the plaintiff Bank was correct, that the plaintiff was entitled to recover the said amount, that the interest claimed by the plaintiff was not contrary to the terms' of the contract and that the interest claimed was not usurious. On issue No. 4 the learned Judge held that the two agreements, Exs. A-8 and A-9 D/- 29-3-1965 were executed by the second defendant not in his individual capacity but as a managing partner of the firm and on behalf of the firm and that there was no substance in the contention of defendants 1 and 3 to 7 that on account of the execution of the agreement under Exs. A-8 and A-9 by the 2nd defendant their liability under the account with the plaintiff was wiped out. On issue No. 5 the learned Judge held that the defendants were liable to pay the watchman's salary and trunk call charges debited against them. It was also held that on account of the defendants deliberate default in payment of the amounts due to the plaintiff the suit had to be filed by the plaintiff for the recovery of the suit amount and therefore the defendants were liable to pay the costs of the suit. Accordingly the learned Judge decreed the suit as prayed for against all the defendants and a charge was created on the properties described in Schedule II in plaintiffs favour for the amount decreed. Six months time was granted to the defendants for redemption.
8. It is necessary to mention that there is no appeal preferred by the defendants 1 and 3 to 7 against the decree granted by the trial Court.
9. In this appeal, Sri P. L. Narasimha Sarma, the learned counsel for the appellants raised the following contentions:
(1) That the plaintiff is not entitled to debit the trunk call charges to the account of the firm;
(2) That the plaintiff is not entitled to claim the charges incurred by the bank towards watchman's salary;
(3) That the interest claimed by the plaintiff is contrary to the terms of the contract entered into by the parties;
(4) That the interest charged under the contract and claimed by the plaintiff in the suit, is usurious; and
(5) That the lower court erred in awarding interest at 10 per cent. per annum from the date of suit till date of decree.
10. The first point raised is with regard to the charges for trunk calls debited against the firm. But the defendants had given up their contest in the lower Court; with regard to the trunk call charges and therefore, it is not open to them to raise that question in the appeal.
11. Sri P. L. N. Sarma, sought to contend that the contest with regard to trunk call charges is similar to the contention raised with regard to watchman's salary and therefore the appellants could raise the contention in the appeal though given up in the lower Court. But we are unable to agree with this submission. Both the Counsel appearing for the defendants in the lower Court expressly confined their defence to the question of interest and watchman's salary. Therefore, the appellants cannot be permitted to raise that question now. In this view, the first point raised by the learned counsel for the appellants has to be rejected.
12. The fifth point raised by the learned Counsel, that the lower Court should not have awarded interest at the rate of 10 per cent. per annum from the date of suit till date of decree, is devoid of any merit. Under Order 34, Rule 11, Civil P. C. interest can be awarded at the contract rate till the period of redemption expires. The provisions of Section 34, Civil P. C. are not applicable to cases of mortgages, and the award of interest is governed by the provision of Order 34, Rule 11, Civil P. C. This position is well settled and Sri P. L. N. Sarma, has frankly submitted that this legal position cannot be controverted.
13. In Jagannath Prasad Singh Chowdary v. Surajmul Jalal, (1927) 52 Mad LJ 373 = (AIR 1927 PC I). Their Lord-slips of the Privy Council held that--
'Order 34 of the Code of Civil Procedure determines' the question of the rate of interest, and whether it be simple or compound and may for this particular case of mortgages differ from the general provision of Section 34 of the Code, but if so, the particular avoids the general. Until the period for redemption fixed by the Court has expired interest has to be paid at the rate and with the rests specified in the contract or mortgage.'
Actually the plaintiff has claimed in the plaint subsequent interest at a rate lower than the contract rate. Therefore the appellants can have no grievance against the decree of the lower Court awarding subsequent interest at 10 per cent. per annum.
14. With regard to the debiting of watchhmans salary, it is contended by the learned counsel for the appellants that this claim is not covered by the terms of contract and therefore the plaintiff is not entitled to debit watchman's salary to the account of the defendants' firm. The lower Court upheld this claim of the plaintiff on the ground that from 1962, the beginning of the transactions between the plaintiff and firm, till the end of closing of accounts by the plaintiff-bank, watchman's charges were being debited every month, and an account was being sent by the bank to the firm and no objection was raised by the defendants-firm to the same. On the other hand the statement of account sent every month including the debiting of watchman's charges was, confirmed by both the second and third defendants as managing partners.
15. Sri P. L, N. Sarma, sought to contend that the claim not being covered by the terms of the contract, the lower Court should not have upheld the claim relating to watchman's charges, but we are unable to agree with this submission. The money was advanced by the bank under the Lock and Key type of loan to the defendants-firm. Watchmen were appointed by the bank but they were appointed mainly to keep a watch over the godown and the goods with a view to allow some flexibility of trade to the defendants.
16. P. W. 1 the Agent of the plaintiff-bank at Guntur stated as follows:
'The loan sanctioned to the 1st defendant is Factory Type i. e. amounts should be advanced on the pledge of tobacco to which the borrower will have access and the Bank appoints its own watchman to watch the tobacco. The salary of the watchman will have to be borne by the borrower.'
In cross-examination he stated :
'A watchman was appointed since 1st February, 1961. He was continued till 5-12-1966. The various amounts paid to the watchman are shown in the accounts filed by me. The duties of the watchman are fixed by the Bank. The duties assigned to all the godown watchers are common. The written agreements Exs. A-6 to A-9 do not provide for the appointment of Godown watchman. The first defendant was consulted by the Bank before a watchman was appointed. 1 cannot say if there was any writing to show the consultation. The bank has the right to appoint a watchman of its own choice. The watchman is appointed to safeguard the interests of the Bank. The Agent supervises the work of the godown watchmen. The salary of the Agent is not debited in the 1st defendant's account as supervision of the godown watchman's work is a part of the many duties of the Agent.'
Again he stated that:
'The factory type account is an open account where no restrictions are imposed on the party's access to the goods except that the goods are under the watch of the godown watchman appointed by the Bank at the cost of the party. The party is at liberty to sell the goods to whomsoever he likes and at whatever price he chooses.'
17. The evidence of P. W. 1 shows that watchman was appointed ever since the transactions began between the firm and the bank to keep a watch over the goods pledged, and the charges were being debited to the account of the firm. [After considering the defendants' evidence his- Lordship proceeded].
22. The oral evidence of the plaintiff and the defendants clearly establishes that ever since the transactions began between the plaintiff-bank and the defendants-firm, monthly statements were being sent by the bank to the firm and in the said statements it was shown that watchman's charges were being debited to the account of the firm and that no protest was made at any time by the firm or its managing partners to the debiting of watchman's charges. The defendant acquiesced in and accepted the debiting of watchman's charges to the account of the firm.
23. Admittedly the firm was sanctioned two types of loans, (1) Factory type of loan and (2) The Lock and key type of loan which was completely discharged by the firm. The suit claim is for the recovery of the loans outstanding under the Factory type of loan. What the Factory type of loan means is explained by the agent of the Bank (P. W. 1) as follows:--
'The loan sanctioned to the 1st defendant is Factory type, i. e. amounts could be advanced on the pledge of tobacco to which the borrower will have access and the bank appoints its own watchman to watch the tobacco. The salary of the watchman will have to be borne by the borrower.'
Again he explained in cross-examination, that--
'the factory-type of account is an open account where no restrictions are imposed on the party's access to the goods except that the goods are under the watch of the Godown watchman appointed by the bank at the cost of the party. The party is at liberty to sell the goods to whomsoever he likes and at whatever price he chooses.'
24. It appears to us that in the Factory-type loan sanctioned by the bank, it is only with a view to facilitate the dealing with the goods pledged by the defendants-firm that a watchman was being appointed. It is stated by Sri K. Ramgopal the learned Counsel for the bank that in the case of lock and key type of loan, the key of the godown will be in the custody of the bank and whenever the customer wants to deal with the goods, he has to obtain the permission of the bank and the goods will be released by the bank authorities before the customer can sell or deal with the goods; and to avoid such inconvenience to the customer, the Factory-type of loans are sanctioned by the bank to secure certain amount of freedom to the customer to deal with the goods.
25. In Nadar Bank Ltd. v. Canara Bank Ltd., : AIR1961Mad326 the learned Judges bad occasion to explain the 'Key Loan' system and the 'Open Credit' system of loan. The learned Judges stated:--
'We might here conveniently state that, under the 'key loan' system to the contrary the advance is secured by the pledge of goods in the godowns through the simple and effective expedient of putting a lock or seal of the creditor bank on the godowns, the key or kees thereof being retained, by that bank. But, naturally, this latter system has the profound disadvantages that it immobilises trade or credit. It is no longer possible for the borrower to deal with the goods, even for a restricted purpose, unless he takes possession of the key from the creditor bank and thus operates upon his stock.'
Again the learned Judges observed:
'We would here emphasise that, in such a matter the form of the Judicial relationship is very important, and that it cannot be divorced from the substance, merely because in mercantile practice, there is a certain flexibility and freedom for the borrower under the 'open credit' system. On the contrary, the system seems to have been devised for this very reason, in effect, it secures for the borrowers a certain freedom to deal with the goods, provided a stipulated margin above the value of the advance is maintained though the formal character of the 'pledge' is throughout preserved.
Under the 'key loan' system, the goods are equally secured by pledge, and in the possession of the creditor bank but there is far less freedom for the borrower to deal with the goods in any manner, even with the express permission of the creditor bank, and under its authority as the keys of the godowns are in the physical possession of the bank.'
26. These observations of the learned Judges clearly bring out the distinction between the 'key loan' system and the 'Open credit' system. The same distinction applies to the 'Lock and Key' type of loan and the 'Factory type' of loan in the instant case. The appointment of the watchman is to confer certain amount of freedom on the defendant-firm to deal with the goods, subject of course to the condition that the margin stipulated by the agreement should not be exceeded. The continuous course of the conduct on the part of the defendant-firm and its partners shows that the appointment of watchman by the bank and the debiting of watchman's charges to the account of the defendant-firm, were accepted by the firm and it actually operated upon the loans sanctioned by the bank. It is only to give effect to the terms of the agreement (Ex. A-9) dated 29-3-1965 under which 4he 'factory-type' of loan was sanctioned and to confer a facility on the 1st defendant-firm to deal with the goods, that a watchman was appointed and his salary was being debited to the account of the firm. The defendant-firm and its managing partners acquiesced in the same and availed the loan facility sanctioned under Ex. A-9 and therefore it is not open to them to raise any objection to the debiting of watchman's charges. We therefore hold in agreement with the lower court that the defendants are liable to pay watchman's charges which were debited to the account of the defendant-firm.
27. The next contention of the learn ed counsel for the appellants is that the interest debited to the account of the firm at the rate of 8 1/4 per cent. per annum with monthly rests, is not covered by the terms of the agreement entered into between the plaintiff-bank and the defendant-firm. But this contention is untenable in view of the clear language of the relevant terms of the contract, Exs. A-7, A-8 and A-9 are the agreements and Clause (7) of these agreements reads as follows:--
'That interest at the rate of 1 per cent. over S. B. I. Advance Rate minimum 7 1/4 per cent per annum on drawings' upto 4 lakhs and at I per cent. over S. B. I. advance Rate Minimum 7 1/2 per cent. per annum on drawings over Rs. 4 lakhs shall be calculated respectively on the daily balance of such account or accounts as aforesaid and shall be charged to such account or accounts as the case may be on the last working day of each month.'
The language of Clause (7) in the agreements Exs. A-8 and A-9 is the same. This clause provides that interest should be calculated on the daily balance of the account and should be charged to such account on the last working day of each month. Exs. A-15 and A-16 are cash credit Account of Factory-type of the 1st defendant-Company. These accounts show that the defendant-firm was availing the cash credit facility from time to time and making certain repayments of the loans and that the daily balance was varying. Clause (7) of the agreements provides for calculating interest on the daily balance of the account and charging the same to the account on the last working day of each month. The expression, 'shall be charged to such account or accounts' implies that interest will be added to the balance of the account at the end of each month and that it contemplates charging of compound interest. The language employed in Clause (7), of the agreements does provide for charging of compound rate of interest. It is not possible to infer from the language of Clause (7) that the agreements contemplate charging of simple interest. Further, that the defendants, understood that only compound rate of interest was to be charged, is clear from their subsequent conduct. Ex. A-17 notice was issued by the plaintiff on 16-8-1965 calling upon the defendants-firm to pay the amount due under the loans as per the accounts maintained by the bank. The firm sent a reply (Ex. A-18) on 23-8-1965 requesting two weeks' time for payment of the loan amount, but no objection was raised in this letter to the interest charged with monthly rests. Prior to the filing of the suit, the plaintiff-bank issued the notice Ex. A-20 on 18-7-1966 calling upon the defendants to pay a sum of Rs. 72,779-62 ps. as due to the bank exclusive of unapplied interest from 1-5-1966. The 2nd defendant sent a reply Ex. A-21 on 18-8-1966 setting up a plea that there was an agreement entered into by the partners, that only the other defendants would be liable to pay the dues to the State Bank of India and other creditors and that therefore the amounts should be realised from the other partners. In this reply also, no objection was raised to the amount claimed or to the rate of interest charged by the Bank.
28. The defendants 4, 5 and 7 sent a reply Ex. A-22 on 28-7-1966. In this letter, no objection was raised to the rate of interest claimed by the bank. Prior to the said notice, the third defendant on behalf of the 1st defendant-firm sent a letter Ex. A-11 on 7-2-1966 confirming the balance of the current account as on 31-12-1965. The 3rd defendant examined as D. W. 2 sought to get over the admissions contained in Ex. A-11 by stating that the said letter was taken from him by coercion by the Agent of the Bank. But it is difficult to accept this version. He was aged 43 years at the time of signing Ex. A-11 and he was managing the affairs of the firm. He admitted in cross-examination that the Agent did not threaten or force him to sign Ex. A-11. In the written statement filed by him, he did not mention anything about the letter Ex A-11. Therefore Ex. A-11 establishes that the defendants themselves accepted the accounts sent by the plaintiff-bank in which interest was being charged at monthly rests.
29. The 2nd defendant examined as D. W. 1 admitted that the bank was sending a copy of the account every month. Ex. A-15 contains copies of the accounts sent by the bank to the defendants-firm for the period 18-2-1961 to 31-12-1963. Ex. A-16 is a true copy of the account for the period 13-8-1964 to 5-12-1966. D. W. 1 further admitted that whenever they receive such accounts, they varify the entries with reference to their accounts and that the statement sent by the bank showed that interest was calculated at compound rate of interest and that it was being so charged from the year 1963. Admittedly the firm or its managing partners (defendants 2 and 3) did not at any time object in writing to the charging of interest at compound rate. D. W. 2 no doubt stated that he orally protested before the bank agent, but it is not possible to accept this statement. There is no other evidence to support this version. This conduct of the 1st defendant-firm and its partners shows that they not only accepted the rate of interest charged but also the method of accounting adopted by the bank from the inception in fact it is on the understanding that interest could be charged at compound rate, that the bank advanced further loans to the defendants and they availed the said loan facilities from time to time.
39. In Haridas v. Mercantile Bank India, (AIR 1920 PC 61) it was found that
'for several years the Bank had allowed the defendants' firm to overdraw their account and the practice was that annually on the 1st December the defendants, in the name of their firm and individually, signed a letter in printed form addressed to and given to the bank, and in accordance with those letters the bank allowed the defendants' firm to overdraw their account.'
31. Clause 2 of the agreement entered into with the bank provided as follows:
'Interest shall be charged at 7 per cent. per annum and shall be calculated on the daily balance due to you in respect of the said overdraft, till 30th June, 1914, and thereafter till 1st December, 1914, at 5 per cent. per annum.'
32. The Trial Court found that the defendants knew that the bank was charging Compound interest and agreed to that interest being charged in that way with monthly rests and accordingly granted a decree and this decree was upheld by the High Court of Bombay. On further appeal, then Lordships of the Privy Council held as follows:--
'Whatever may be the strict construction of Clause 2 of that letter the Bank invariably struck a balance of its customers' accounts on the last day of each month and charged interest on the amount of that balance. The interest so charged was added to the monthly balance and the resultant balance which included the interest, was carried forward to the debit of the customer as the balance due on the 1st of the following month. The pass book of the defendants with the Bank shows clearly that that was the way in which interest was computed and charged in their account with the Bank. The defendants never, until after the 1st August, 1914, raised any objection to that principle of charging them compound interest or to compound interest being charged by the Bank on their overdrafts. It was the course of business to which it must be taken that the defendants agreed.'
33. In that view, their Lordships affirmed the decree of the High Court.
34. In Balakrishna v. Bhawanipur Banking Corporation Ltd., (AIR 1932 Cal 521), the learned Judges observed as follows:
'Where the defendant is a man of business and appears upon the evidence to be well conversant with dealings of banks and bank rates of interest, and there is clear evidence that the defendant used to intelligently examine the entries in his pass book and to dispute or call for explanations as regards entries which to him seemed open to exception, x x x x 'It is quite true that the rates of interest charged were not stated in the entries but the entries would at once show that compound interest at monthlyrests was being charged and debited--a fact which goes a long way to 'support the plaintiffs' case as to the agreement and completely demolishes the case of the defendant on that point. From circumstances such as these it would not be unreasonable to contend that means of knowledge was equivalent to knowledge or reasonable grounds of belief so as to fix the defendant with adoption or ratification of the rate of interest that was being charged.' And from continued and persistent acquiescence of this character, the existence of an agreement may be presumed.'
35. In Hulas Kunwar v. Allahabad Bank, : AIR1958Cal644
'a notice communicating the decision of the Bank to raise the rate of 'interest from a certain date may not amount to an express proposal within the meaning of Section 2(a) of the Contract Act but it nevertheless contains an implied proposal to the effect that if the constituent wanted to keep alive his overdraft account with the Bank or desired to take further advances from the Bank it could be done only on, the terms contained in the notice. In other words, this implied proposal invites from him in the words of Section 8 a 'reciprocal promise' to pay interest at the higher rate and as a consideration for that reciprocal promise the Bank offers to desist from making a demand for the immediate payment of the amount advanced and also to make further advances. If the constituent accepts either of these considerations with notice of the fact that the Bank had raised the rate of interest from the date of the notice there would be an implied promise on the part of the plaintiff to pay interest at that rate.'
36. On the facts of that case, the learned Judges held,
'that the constituted had kept alive his overdraft account for more than three years from the date of the notice and also had taken a further advance thereafter, with the notice of the fact that the bank had raised the rate of interest and hence there was an implied, 'promise on his part to pay the higher rate of interest'.'
37. In the instant case also, for several years, the defendants availed the overdraft facilities afforded by the bank and periodical statements of accounts were being sent to the defendant-firm showing that interest was being charged and debited at compound rate and no objection was raised at any time and therefore there is no doubt that they agreed to the compound rate of interest being charged and debited to their account. Hence we hold that the agreements provide for charging compound rate of interest, that the defendants had agreed to pay the same and that interest was rightly awarded at the compound rate,
38. The only question that now remains for consideration is whether the interest charged is usurious. The contention of the learned counsel for the appellants is that the rate of interest charged works out to over 27 per cent. and odd, but this is not substantiated by any material on record nor do the accounts produced in court disclose that the interest charged works out to 27 per cent. and odd.
39. On the other hand it is the contention of Sri K. Ramgopal, the learned Counsel for the plaintiff bank that the interest charged came to about 8.84 per cent per annum with monthly rests at 8 1/2 per annum.
40. The question whether interest is usurious or not has to be determined with reference to the provisions of Usurious Loan* Act. Section 3 of the said Act as amended by the Madras Amending Act VIII of 1937 which it is admitted is in force in the State of Andhra Pradesh, reads as follows:--
'3 (1) Notwithstanding anything in the Usury Laws Repeal Act, 1855 where in any suit to which this Act applies, wheher beard ex parte or otherwise, the court has reason to believe that the transaction was as between the parties thereto substantially unfair, the Court shall exercise one or more of the following powers, namely
(i) reopen the transaction, take an account between the parties, and relieve the debtor of all liability in respect of any excessive interest;
(ii) notwithstanding any agreement, purporting to close previous dealings and to create a new obligation, reopen any accounts already taken between them and relieve the debtor of all liability in respect of any excessive interest, and if anything had been paid or allowed in account in respect of such liability, order the creditor to repay any sum which it considers to be repayable in respect thereof
(iii) set aside either wholly or in part or revise or alter any security given or agreement made in respect of any loan, and if the creditor has parted with the security order him to indemnify the debtor in such manner and to such extent as it may deem just.
Explanation I. If the interest is excessive the Court shall presume that the transaction was substantially unfair; but such presumption may be rebutted by proof of special circumstances justifying the rate of interest;
Explanation II- (Omitted as it is unnecessary for this case).
2 (a) In this section 'Excessive' means in excess of that which the court deems to be reasonable having regard to the risk incurred as it appeared, or must be taken to have appeared, to the creditor at the date of the loan.
(b) In considering whether interest is excessive under this section the court shall take into account any amounts charged or paid whether in money or in kind, for expenses, injuries, fines, bonuses; premia, renewals or any other charges, and if compound interest is charged, the periods at which it is calculated and the total advantage which may reasonably be taken to have been expected from the transaction.
Provided that in the case of loans to agriculurists if compound interest is charged, the court shall presume that the interest is excessive.
(c) In considering the question of risk, the court shall take into account the presence or absence of security and the value thereof the financial condition of the debtor and the result of any previous transactions of the debtor, by way of loan so far as the same were known, or must be taken to have been known, to the creditor.
(d) In considering whether a transaction was substantially unfair, the court shall take into account all circumstances materially affecting the relations of the parties at the time of the loan or tending to show that the transaction was unfair, including the necessities or supposed necessities of the debtor at the time of the loan so far as the same were known, or must be taken to have been known to the creditor.'
41. It is unnecessary to refer to the entire case law on the point as the section has been recently construed in a recent judgment dated 5-8-1970 of this court in Godugula Lakshmi Narasimha Murty v. Muthuku-malli Venkata Subba Rao, (L. P. A. No. 69/ 1968 (Andh Pra)). After considering the relevant case law on the point, the position was summarised as follows :--
'(1) The Court can reopen the transaction and give appropriate relief in the matter of interest when the transaction is substantially unfair;
(2) If the interest is excessive, the court shall presume that the transaction is substantially unfair, but this is a rebuttable presumption;
(3) No hard and fast rule can be laid down as to what is a reasonable or excessive rate without reference to the several circumstances enumerated in Clauses (a), (b) and (c) of Sub-section (2) of Section 3 of the Act.
(4) In determining whether the rate is reasonable or not, the court has to take into consideration the following circumstances.
(a) The value of the security offered;
(b) The financial condition of the debtor including the result of any prior transaction;
(c) The known or probable risks in getting repayment;
(d) If compound interest was provided for the frequency of the period of calculation of the interest; and
(e) The advantage which the debtor reasonably expected to derive from the transaction.'
42. Bearing these principles in mind, we have to consider whether the interest charged is usurious or excessive. It has to be remembered that in the instant case, the loan was not given at one time by way of cash but it was advanced as overdrafts which the defendants were entitled to avail up to the limits provided for in the agreements. On the date of transaction, the loan was taken for carrying on tobacco business. Ex. A-2 dated 6-2-1961 shows that the loan was initially applied for by the defendants for a period of six months for financing their tobacco business is the first instance, the loan was sanctioned up to a limit of Rs. 4 lakhs in 1961 but under the subsequent agreement it was gradually enhanced by the year 1965 to Rs. 14 1/2 lakhs. In the first instance, amounts were advanced on the pledge of tobacco. In the year 1963 when the loan was enhanced, the bank took additional collateral security of immovable property by way of deposit of the title deeds Exs. A-12 and A-13. Again when the loan was enhanced in the year 1965 additional collateral security was taken by the way of deposit of the title deed Ex. A-14. But no evidence has been brought on record to establish that the security was sufficient and ample and that the bank ran no risk in advancing the huge loans under the aforesaid agreements.
43. It is contended by Sri P. L. N. Sarma, the learned Counsel for the appellants that Ex facie the rate of interest charged is excessive and under explanation (1) to Section 3(1) of the Usurious Loans Act a presumption arises that the transaction was substantially unfair and the court is bound to reopen the transaction and relieve the debtor of the liability to pay the excessive interest. But we are unable to agree with this contention. It has not been established by the defendants that the interest charged under the agreements at 8 1/2 per cent with monthly rests is per se excessive. The presumption under Explanation 1 to Section 3(1) arises if it is first established that the interest is excessive. There can be no presumption in law that the interest charged is excessive. Before the court comes to the conclusion that the interest is excessive, it should be established that ex facie the rate of interest is excessive or that in the particular circumstances and facts of the case, the interest charged is excessive and unconscionable. The burden of establishing that the interest is excessive is on the debtor who sets up such a plea. Further, the mere fact that the interest claimed had accumulated to a considerable amount over a long period of years due to the default is payment of the loans by the debtor, could not be a ground for holding the transaction to be substantially unfair or unconscionable or that the interest charged is excessive and these propositions are well-settled.
44. In Lala Balla Mal v. Ahad Shah, (AIR 1918 PC 249=35 Mad LJ 614). Their Lordships of the Privy Council held:
'In money-lending transactions the mere fact that the sum claimed exceeds enormously the amount originally advanced is no ground for holding the transaction unconscionable. It must also appear that there is something unconscionable, either in the original dealings, or in the subsequent stages of the transaction.
By taking short terms loans and insisting on capitalising the interest immediately It falls due a money-tender may pile up compound interest at an oppressive and unconscionable rate. But there is nothing inherently wrong or oppressive in his securing interest upon interest after the interest has been due and unpaid for a considerable time.'
45. In Girwar Prasad v. Ganeshlal Saraogi, (AIR 194? FC 57), Patanjali Sastri, J. (as he then was) held that
'In order to be entitled to the benefit of the Usurious Loans Act 1918, the appellant must establish.
(1) That the interest payable on the loans is excessive; and
(2) That the transaction was, as between the parties thereto, substantially unfair. It was frankly admitted before us that the appellant adduced no evidence as to the circumstances under which he borrowed moneys from the respondent, the availability of credit facilities and possibility of borrowing on easier terms in that part of the country where the transaction took place.'
On the facts of the case, the learned Judges confirmed the judgment of the High Court allowing 12 per cent. compound rate of interest as it was not established that the rate of interest charged was in excess of the commercial rate prevailing at that time.
46. In Varadachariar v. Gopala Menon, : 1SCR721 the learned Judges observed, that
'it is difficult to predicate of any rate of interest as being excessive divorced from the circumstances of the case unless the rate fixed is so high as to be suggestive of an unfair transaction on the face of things.' On the facts of that case, Their Lordships upheld the decision of the Madras High Court holding that 10 per cent. compound interest with yearly rests, would meet the justice of the case.
47. In General and Credit Corporation (India) Ltd. v. Venkata Rama Rao, : AIR1959AP433 Chandra Reddy, C. J. and Jaganmohan Reddy, J. (as he then was) observed at page 434 as follows:
'A Court has to determine whether a particular rate of Interest is excessive or not, having regard to the rates of interest at the time when the impugned transaction was entered into and the surrounding circumstances. What amounts to excessive interest has to be determined with reference to various factors, such as the security which the creditor obtained for the amount advanced by him, the pecuniary position of the debtor, the rate of interest prevailing at that time and the advantages which the debtor would derive from the loan.
A debtor would get relief under the Usurious Loans Act only if it is established that the transaction is substantially an unfair one. It is true that the explanation introduced by the Madras Amendment has laid down that if the interest is excessive, the Court shall presume that the transaction may be rebutted by proof of special circumstances justifying the late of interest. Thus, before the explanation could be invoked it should be established that the interest is excessive. It is only then that it may be presumed that the transaction was an unfair one.'
48. In Gopala Menon v. Sreenivasa, : AIR1960Mad359 , Rajamannar, C. J. and Ganapatia Pillai, J. observed:
'It cannot be laid down that any interest in excess of 12 per cent. per annum simple is excessive and that therefore the court cannot grant a decree for more than at that rate. It has also never been held that compound interest per se is usurious.'
49. This decision was upheld by the Supreme Court in : 1SCR721 . referred to earlier.
50. In Ramkrishna v. Heramba Chandra, (AIR 1930 Cal 207), the learned Judges observed:
'that interest at 12 per cent. per annum with yearly rests could not be considered as excessive when the rate of interest prevailing at the time was not lower than that provided in the mortgage bond or there were no circumstances on which it could be held that the transaction as between the parties to it was substantially unfair.'
51. In Manladina v. Sukhdeo, (AIR 1933 Nag 224) Bose, Additional Judicial Commissioner (as he then was) held, that
'excessive is a relative term and what is excessive in one case will not necessarily be so in another. It depends upon surrounding circumstances. Courts however cannot assume their existence; they must be found on proper evidence.'
52. Again His Lordship observed: 'a bargain which is fair in its inception cannot become unfair by the happening of subsequent events nor can interest which was reasonable in the beginning become excessive at a later date. The Court is limited to a consideration of circumstances which existed 'at the date of loan'.' Further the learned Judge stated,
'there is nothing inherently wrong in a creditor securing compensation for himself for interest which is not paid and for money which is not returned when due and where the parties are couple of money lenders who are perfectly well able to look after their own interests court should not interfere with the contract they themselves have made.'
53. In Nanun v. Lachhman, (AIR 1935 Lah 38) the learned Judges observed at page 39 as follows:--
'It can hardly be urged that the rate charged at any time was excessive under the circumstances of the case. If a debtor does not choose to pay he cannot complain if the amount of interest reaches an enormous figure in course of time.'
54. In Gajadhar Marwari v. Baidyanath Mandal, : AIR1950Pat379 the learned Judges held that
'Mere excess of interest, by itself, cannot give right to reopen a transaction It must be such that a court may consider the transaction substantially unfair or so monstrous as to show that the transaction was harsh and unconscionable by itself.'
55. The aforesaid rulings clearly (establish that there can be no presumption that the charging of compound rate of interest is per se excessive, that the burden of establishing that the interest is excessive lies on the debtor setting up a plea that the interest charged is usurious and that it is only when that is established the presumption under Explanation (1) to Section 3(1) of the Usurious Loans Act, as amended by the Madras Amendment Act, arises. In the instant case, the defendants have not established that the interest charged is excessive. There is neither pleading nor evidence on record to support such a plea and the defendants have failed to discharge the burden which clearly lay on them. The mere fact that interest was charged at 8 1/2 per cent per annum with monthly rests by the plaintiff-bank, ft cannot be presumed that the interest is excessive and that the transaction was substantially unfair on the date on which the loan was advanced by the bank to the defendants firm.
56. In the result all the contentions raised by the learned counsel for the appellants fail and this appeal is dismissed with costs.