1. Plaintiff is the appellant. He filed a suit for recovery of a sum of Rs. 31,686, being the balance of the principle and interest due on a registered mortgage bond dt. 29-8-1960, executed by the 1st defendant and his wife, in favour of the plaintiff and his father. The Principle amount under the mortgage bond is Rs. 11,000. According to the terms of the mortgage, interest is payable at the rate of 0.94 paise per cent per mensem, once in six months, and the principle amount has to be discharged in five equal instalments, by 29-8-1965. It was further provided that, in default of payment of any instalment, the amount will carry compound interest at the same rate, with half yearly rests. Suit was filed alleging that the mortgagors-defendants have failed to pay the amount as stipulated.
2. The legal representative of the 1st defendant (the 1st defendant died pending the suit) filed a written statement, contending that he is not aware of the suit mortgage bond, and putting the plaintiff to strict proof thereof. He stated that he is not aware of the execution of the suit mortgage bond, and the receipt of consideration thereunder. He submitted further that the compound rate of interest claimed in the mortgage bond, in case of default, is penal and, therefore, unenforceable. He submitted that if simple interest is calculated on the principal amount, the amount due would be far lesser than the amount claimed in the suit.
3. On the above pleadings, the learned Principal Subordinate Judge framed three issues, viz.,
(1) Whether the plaintiff is entitled to claim at the pencil rate of interest.
(2) Whether the mortgage is true and binding on the 4th defendant; and
(3) To what relief?'
On issue No. 2 he held that the mortgage is true and binding on the 4th defendant (legal representative of the 1st defendant). On the first issue, the learned Sub-ordinate Judge, held that the charging of compound interest in case of default in paying the instalment on prescribed date, is penal within the meaning of Section 74 of the Contract Act and is, therefore unenforceable. Accordingly, the granted a decree for the principal amount of Rs. 11,000 with simple interest at the rate of 0.94 paise per cent per mensem, less the part payments already made. This interest was granted from the date of mortgage till the expiry of the period of redemption, and thereafter at the rate of 6% per annum, till the date of payment. The plaintiff has filed this appeal aggrieved by the refusal of the court to award compound interest as stipulated in the mortgage bond. This question has to be decided with reference to S. 74, Contract Act.
4. The mortgage bond (Ex. A-1) provides, inter alia, that to be paid once in six months at the rate of 15 annas per cent mensem and, in case of default, the amount of interest accrued shall be included in the principal amount and it shall become the principal amount, and from the date till the date of payment, compound interest at the rate of 15 annas per cent per mensem, with half-yearly rests, on that principal amount has to be paid, relying upon a decision rendered by me in Messrs. P. Sambamurthy v. M. Krishna Rao, : AIR1981AP77 , Mr. M. S. R. Subrahmanyam, the learned counsel for the appellant, contends that charging of compound interest in case of default, at the same rate, cannot beheld to be penal per se and that, therefore the court below was not right in refusing to award interest as claimed.
5. On the other hand, the learned counsel for the respondents beings to my notice two decisions of this Court viz., Ramanna v. Butchamma, (1958) 1 Andh WR 255 at page 261: (AIR 1958 Andh Pra 598 at pp. 603-4) and D. Radhakrishnayya v. T. Satyanandam, : AIR1963AP117 ; where it has been held that the charging of compound interest, in case of default, even at the same rate, is penal and must be relieved against under Section 74 of the Contract Act. Mr. C. Poornaiah the learned counsel for the respondents has fairly brought to my notice the two lines of decisions where apparently contradictory views have been taken. I will first refer to the decision of the Privy Council in Bhushana Rao v. Subbayya, AIR 1936 PC 283 which is one of the decision relied upon by me in my decision aforesaid. In that case, the mortgage amount of Rs. 5,000 was repayable in five years in instalments, with interest at 11 annas, per cent per mensem, and it was provided that, in case of default, interest shall be enhanced to Rs. 1-4-0 per cent per mensem. In other words, for the arrears of instalments, a higher rate of compound interest was stipulated. It was argued that the charging of the compound interest at a higher rate is penal. This was answered by the Privy Council in the following words:-
'As regards the stipulation for the payment of compound interest, in the event of default, at a rate of higher than that was justified in holding it to be a penal provision. As observed in (1906) 34 1nd App 9:
'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 an outside 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 . . . .. '
This decision clearly shows that the charging of compound interest in case of default, at the same rate, is not per se penal.
6. A Bench of the Madras High Court held in Malli Chettiar v. Veeranna Tevan, (1921) 41 Mad LJ 470: (AIR 1921 Mad 378), 'a stipulation to pay compound interest from the date of default at the same rate as the simple interest, is not a penalty within the meaning of S. 74 of the Contract Act'. The learned Judges relied upon the decision in Sunder Koer v. Rai Sham Kei Shan, (1906) ILR 34 Cal 150 and refused to follow the decision in Venkataramaiah Pillai v. Subramanya Pillai, (1917) 37 Ind Cas 799: (AIR 1917 Mad 5).
7. Similarly, in Anan Japerumal Konar v. Pichamuthu Nadar, AIR 1925 Mad 332, a Bench of the Madras High Court has held that a bare stipulation to pay compound interest in default of paying the interest on due date, is not penal.
8. On the other hand, there are decisions which take a contrary view. They are Maddur Veera Reddi v. Madm Subbanna Setti, (1910) 8 Ind Cas 330 (Mad), Ramamurti v. Subba Rao, (1939) 1 Mad LJ 491: (AIR 1939 Mad 481), Ramanna v. Butchamma, (1958) 1 Andh WR 255 (at p. 261): (AIR 1958 Andh Pra 598 at pp. 603-4) and D. Radhakrishnayya v. T. Satyanandam, : AIR1963AP117 . It would be sufficient if I refer to the last two decisions.
9. In Ramanna v. Butchamma (AIR 1958 Andh Pra 598 at p. 604), the learned Judges held that the stipulation to pay compound interest, in case of default, at the same rate as stipulated in the deed, is penal. The learned Judges formulated the test to be applied in these cases, in the following words:-
'The test in our opinion to see whether the debtor has to make an additional money payment and whether it throws an additional burden on him by way of punishment for committing default. . . . . . . ' Applying this test, they held that the charging if compound interest even at the same rate, is penal. Similarly, in D. Radhakrishnayya v. T. Satyanandam, : AIR1963AP117 another Bench came to the same conclusion, relying upon the decision in Ramana v. Butchamma, (1958) 1 Andh WR 255 (at page 261): (AIR 1958 Andh Pra 598 at pp. 603-4). But, I find that neither of these two decisions refers to the decision refers to the decision if the Privy Council in Bhushana Rao v. Subbayya, AIR 1936 PC 283 or to the decision in Sunder Koer v. Sham Krishna (1906) ILR 34 Cal 150: 34 Ind App 9 referred to in the Privy Council decision nor to the earlier Madras decisions aforesaid taking a contrary view. In the face of these two mutually conflicting lines of thought, I prefer to follow the view which I have already taken in the aforesaid decision, particularly because it appears to be consistent with the view taken by the Privy Council. No decision of the Supreme Court taking a contrary view has been brought to my notice.
10. It should be remembered as pointed out by Chinnappa Reddy, J. in A.S. No. 334/70, dt. 1-8-1972 that over the recent years there has been a substantial change in the economy and market conditions in our country and that, even the Banks are now charging more than 12% compound interest, This decision in P. Sambamurthy v. M. Krishna Rao, : AIR1981AP77 .
11. It should also be noticed that, under S. 74 of the Contract Act, when a contract has been broken, and if sum named in the contract as the amount to be paid in the case of such breach, is avoided on the ground that it is penalty, the party who has broken the contract should made to pay reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. It is, therefore, clear that even if it is found that the charging of compound interest is penal per se, even then the mortgagee has to be compensated for the deprivation of compound interest; and such compensation can extend up the amount which would be payable if compound interest is charged. Having regard to the present money market conditions, I am of the opinion, that even if it is held that the charging of compound interest, in case of default, at the same rate, is penal, even then the mortgagee has to be compensated as contemplated by S. 74, and such compensation in the circumstances, should extend up to the full amount payable in the case compound interest charged as stipulated.
12. In the circumstances, the appeal is allowed. The plaintiff shall be entitled to compound interest with half-yearly rests, and at the rate stipulated in the mortgage bond, till the date of redemption, and thereafter at the rate of 6% per annum, till the date of realisation. There shall be no order as to costs in this appeal.
13. Time for redemption: six months.
14. Appeal allowed.