1. This appeal arises from a suit brought by the plaintiffs-respondents against the defendant-appellants on the basis of a bond, dated 23rd January 1917.
2. On one and the same day the defendant, Najaf Ali Khan, signed what purports to be a zarpeshgi lease in his favour executed by Narain Das, defendant second party, in respect of the zamindari rights in certain land. The lease I construe to be a lease of the property in consideration of the execution by the lessee of the bond now sued upon. The bond has not been printed, but both the lease and the bond show that the transaction effected by both the deeds was that the lessee was regarded as having discharged before occupation the total rent due for the whole period of occupation by means of his execution of the bond now sued upon. That bond has not been printed, but was consistent with this interpretation.
3. The lower Court was asked to hold that the two documents, in effect, resulted merely in a lease, and not a zarpeshgi or advance lease but one requiring lease money in the instalments and on the date fixed by the bond. In other words it was asked to hold that the effect of the bond was merely to supply the instalments and dates on which the lease money was to be paid, which details have been omitted from the lease. It was asked to hold this, because the defendant's contention was that he could not be required to pay the lease money since he had lost possession of the leased property by the action or at any rate with the connivance of the plaintiffs. Alternatively it was asked to hold that the rate of interest imposed on failure by the defendant Najaf Ali khan to pay up any instalment was penal, being 3 1/2 per cent. per month compound interest.
4. The Subordinate Judge repelled both these contentions. He held that the execution of the bond by the defendant was intended to discharge his liability to pay lease money in advance as recorded in the lease. He held that the rate of interest was not exceptional in the district, and gave no cause for interference by the Court. He did not specifically consider whether the rate could be regarded as a penalty or not.
5. In this appeal both decisions of the lower Court are impugned. As regards the first point, I hold that the lower Court was right. Where a lease is executed and simultaneously, or as part of the same transaction, the lessee purports to pay in advance the lease money by executing a bond making himself liable to pay the lease money (calculated in advance) in certain instalments, the question to be decided is what was the intention of the parties as indicated by the two documents. That intention may be that the bond should only be security for the payment of the lease money. The intention may be that on discharge of the bond the lessee should cease to be liable for lease money, that is to say, that discharge of liability under the lease is conditional on discharge of the terms of the bond. Lastly it may be that the bond entirely puts an end to any liability of the lessee under the lease. In the present case the last-named intention appears to me to be abundantly clear from the terms of the documents. It is sufficient to quote the words in the lease printed on p. 22 of the printed book:
I have received Rs. 2,250, the amount of the zarpeshgi lease aforesaid, under a bond of today's date executed by Najaf Ali Khan in my favour.
6. We may also invoke for interpreting this document the attending circumstances, that is to say, the existing facts, including the state of the law. If the liability of the lessee were to remain one merely of a lessee and not of a debtor under a bond, the rate of interest that could have been obtained by suit would have been limited to 12 per cent, per annum; see Section 161, Agra Tenancy Act, 1901, read with the definition of 'tenant' which includes a thekadar. At least this may well have been the idea of the lessor Narain Das. That being so, we can well understand why he should wish to substitute liability in his favour of a debtor under a bond for the liability of a lessee under a lease. Nor would such an arrangement, if assented to by the lessee, amount to an evasion of the Tenancy Act which should not be allowed as contrary to public policy. It is only in the case of a lessee or tenant that the rate is restricted by the Tenancy Act. If that tenant likes to substitute a liability under a bond, the Tenancy Act cannot be held to protect him.
7. The meaning of these documents, as interpreted by surrounding circumstances,, being clear, I hold that we are not entitled to resort to the subsequent conduct of the parties for the elucidation of the meaning of these documents. The appellant's counsel cannot, therefore, invoke, as he would like to do, a subsequent suit brought by the lesser Narain Das in respect of the first instalment under the bond wherein he described the bonds, as merely by way of security for the payment of the lease money. I accordingly hold that the lower Court was right on this point.
8. As to the second question whether the Court could and should have reduced the interest: the first question to decide is whether the provision for payment of interest was penal. It seems unnecessary to me to refer to the numerous decisions in favour of its being penal. It is sufficient to refer to one of them, namely,. Sundar Koer v. Radhe Shiam  34 Cal. 150 and say that a similar view has been taken by the Bombay and Madras High Courts. There is no recent decision of our Court on the point of which I am aware. It was held in the Calcutta case that the imposition of interest on default of the payment of an instalment, even though that interest is only to be reckoned from the date of the failure, nevertheless must be regarded as penal, because it does provide for a further obligation on the part of the debtor, by reason of his failure to fulfil his contract to pay the instalment on the prescribed date. With this reasoning I concur. A penalty is something imposed on a person by reason of his failure to do something, and it can make no difference whether that something is the payment of interest or any other obligation, giving rise to pecuniary loss. I am not aware that the Privy Council has anywhere expressed a contrary view. Doubtless it has expressed the view that the imposition of an excessive rate of interest by itself cannot justify a finding of undue influence under Sections 16 and 19(a), Contract Act. But it has never held, so far as it has been brought to our notice, that the imposition of such interest cannot be regarded as a penalty.
9. The next question is whether this interest should be reduced under Section 74, contract Act. Having regard to the fact that 37 per cent, is a very high rate in our opinion and that the object of the person requiring it was to evade restriction of interest by the Tenancy Act to 12 per cent, I consider that this is a case where the Court may interfere and would reduce the interest to interest at 12 per cent per annum. I see no reason for refusing compound interest.
10. For the above reasons, I would allow this appeal in part and give a decree on the bond sued upon for the principal with 12 per cent, compound interest in lieu of the contract rate. I would allow costs of this appeal and of the lower Court according to success and failure.
11. I concur in the order proposed. Having regard to the stipulations contained in the lease and in the bond, it is clear that the intention was to make the defendant-appellant liable under the bond for the payment of the installments and to give to Narain Das respondent the right to recover the amount through civil Court.
12. I agree that where a high rate of interest is stipulated to become payable only on default of payment of an instalment, the stipulation is in the nature of a penalty within the meaning of Section 74, Contract Act. There is no liability to pay' interest until default is made, and, therefore, the liability is a punishment for the breach. The explanation to the section indicates that where there is an increase of rate of interest on default of payment, the stipulation may be penal. On the same principle, when no interest is payable originally and some interest becomes payable only on default, the agreement would be penal.
13 There is plenty of authority in support of this view, vide Muthu Krishna Iyer v. Sankara Lingam Pillai  36 Mad. 229 and Khagaram Das v. Ramsankar Das  42 Cal. 652.
14. I also agree that the rate of interest fixed was exhorbitantly high.
15. The appeal is allowed in part and the claim decreed for the principal with interest at 12 per cent, per annum compounded annually up to the date of the suit, and thereafter at 6 per cent, per annum simple till realization. The parties are to receive and pay costs in both Courts according to success and failure.