1. In this appeal the only question that arises for consideration is whether the interest claimed by the Punjab Financial Corporation, who is the respondent in this case, and awarded by the trial Court was penal and was hit by Section 74 of the Contract Act or not.
2. The appellants had taken a loan of Rs. 40,000/- from the respondent on 8th June, 1960 by the mortgage of the properties mentioned in the deed and under the terms of this mortgage the principal was payable in seven annual instalments. As the appellants failed to make the payment of the instalments as and when those became due, the respondent issued a notice in March 1963 that the loan had been recalled and demand for Rs. 37,678.54 together with interest with effect from 15th May, 1962 onwards was made. As no payment was made in response to this notice the respondent issued another notice and then filed a petition under Section 31 of the State Financial Corporation Act, 1951. In this petition the Corporation besides claiming the balance of the principal amount, also claimed future interest at the rate of 11 per cent per annum with effect from 30th April 1968. While contesting the application the appellants challenged the claim of the Corporation to enhanced interest on the ground that it was penal. This controversy led to the framing of the following issue amongst others--
'(2) Whether the interest claimed by the applicant is penal?'
The learned trial Court found this issue against the appellants and these findings have now been challenged in appeal.
3. In order to appreciate the rival contentions of the parties, reference will have to be made to Section 74 of the Indian Contract Act, the relevant provisions of which are as follows:--
'74. Compensation for breach of contract where penalty stipulated for.--When a contract has been broken if a sum is named in the contract as the amount to be paid in case of such breach or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be the penalty stipulated for.
Explanation.--A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
* * * * *'
In this case we are mainly concerned with the Explanation which only says that a stipulation for increased interest from the date of default may be a stipulation by way of penalty. There is, however, nothing in this Explanation to preclude the Court from coming to the conclusion that a stipulation for increased interest from the date of default ought not to be regarded as a stipulation by way of penalty. Read in the light of the illustrations, the Explanation shows that it is for the Court to conclude on the facts of a particular case whether the stipulation is by way of penalty or not. If the Court funds a stipulation to be a penalty it may award compensation not exceeding the penalty stipulated for. If there is something unconscionable or unreasonable about the agreement or if the enhanced interest be not moderate the Court may find the stipulation to be a penalty. Stipulations for enhanced rate of interest may be prospective or retrospective in their operation. In the leading case of Mackintosh v. Crow, (1883) ILR 9 Cal 689, it was held that where money is borrowed under a contract for repayment with interest on a certain day and the contract stipulated that if the money is not paid at the due date it shall thenceforth carry interest at an enhanced rate, such a stipulation is not a penalty and the enhanced rate agreed to be paid may be recovered in its entirety. This case was cited with approval in the Full Bench decision of the Calcutta High Court in Kalachand Kyal v. Shib Chunder Roy, (1892) ILR 19 Cal 392(FB), and it was held that
'a provision in a bond to the effect that the principal should be repaid with interest on the due date and that on failure thereof interest should be paid at an increased rate from the date of the bond up to the date of realisation, amounts to a provision for a penalty and Section 74 of the Contract Act applies to the money claimed at the increased rate of interest from the date of the bond until realisation.'
In Umarkhan Mahamadkhan Deshmukh v. Salekhan, (1893) ILR 17 Bom 106(FB), it was decided by the Full Bench that
'a proviso for retrospective enhancement of interest, in default of payment of the interest at a due date is generally a penalty which should be relieved against but a proviso for enhanced interest in the future cannot be considered as penalty unless the enhanced rate be such as to lead to the conclusion that it could not have been intended to be part of the primary contract between the parties.'
The same view was taken in a recent decision of this Court in Nand Lal Nirula v. State of Punjab, ILR 1966(2) Punj 714, where the following observations were made:-
'Coming to the question of stipulation to pay increased interest in the case of breach, it appears to me that if such increased interest is payable from the date of agreement or from a date prior to the default, then there may be little difficulty in holding the stipulation to be by way of penalty, by reason of its oppressive character, for it apparently operates in terrarium over the promisor. If, however, the increased interest is payable from the date of the breach, then the stipulation may or may not be by way of penalty, depending on all the facts and circumstances of the case. This indeed is also clear from the Explanation to Section 74. This Explanation not only does not preclude the Court from holding such a stipulation not to amount to a penalty but its language seems to me to suggest that such a stipulation may be by way of penalty only if there be some special circumstances for instance something unconscionable or unreasonable about the agreement or about the increased rate of interest. If the provision for increased rate of interest might well have been intended to be a part of the primary contract between the parties then it may not be easily considered to be by way of penalty. In the case in hand it may be remembered that the State Government is advancing loans under the Statute in order to encourage the development of industries in the Punjab and the rate of interest charged is fairly low. The considerations of public policy demand that such loans be repaid strictly as agreed, so that other deserving claimants may get similar timely aid to effectuate the statutory purpose. Keeping in view all the circumstances the rate of 10 per cent by way of interest does not seem to me to be unreasonable.'
The above observations are fully attracted to the facts of the present case. Considering the facts of the present case there is nothing to show that the increased rate of interest was not intended to be a part of the primary contract between the parties. The enhanced rate of interest is also not unconscionable or unreasonable in the circumstances of the case. The industrialists are allowed the facility of getting loan at very moderate rates from the Punjab Financial Corporation and this facility is allowed so that the industries in the State may get a fillip. In order that The Punjab Financial Corporation should be able to run efficiently and be able to help the industries it is necessary that the loans are repaid according to the contract. In case of default the provision for enhanced rate of interest cannot be considered unreasonable provided the enhanced rate of interest is charged from the date of default.
4. On behalf of the appellants, reliance is mainly placed on the view taken by the Supreme Court in Cheruvu Nageswaraswami v. Vedrevu Viswasundara Rao, AIR 1953 SC 370. In this case, the trial and the High Court had held the stipulation as to payment of compound interest in case of default to be penal, yet the High Court allowed interest at the rate of 7 1/2 per cent compound with yearly rests. It was found by the Supreme Court that the High Court had been misled by the statement occurring in the judgment of the trial Judge that the original rate of interest was 7 1/2 per cent compound with yearly rests which was not true and as a matter of fact the original agreement was to pay interest at 7 1/2 per cent simple. In these circumstances the Supreme Court came to the conclusion that the mortgage money payable to the plaintiff should carry interest at the rate of 7 1/2 per cent. Simple up to the expiry of the period of redemption. The above view was taken by the Supreme Court having regard to the peculiar circumstances of the case and the ratio of the decision in this case does not help the case of the appellants.
5. Reference was also made to Dara Radhakrishnayya Lingam v. Talluri Satyanandan, AIR 1963 Andh Pra 117. In this case it was found that double penalty had been imposed upon the mortgagor and that he should be relieved against the penalty of the payment of compound interest. It was further held that the plaintiff was entitled to reasonable compensation under Section 74 of the Indian Contract Act and this was fixed at 12 1/2 per cent per annum. On behalf of the mortgagor it was contended that having found that there was double penalty in the case, the learned Judge had no jurisdiction to invoke Section 74 of the Contract Act. This contention was rejected with the observations that there was no warrant in the language of Section 74 of the Contract Act to confine its operation to ordinary payment of compound interest at the same rate as a simple interest from the date of default. It was further held that the case of Nageswaraswami, AIR 1953 SC 370 was of no assistance to the mortgagee in that case, as the Supreme Court had proceeded on the assumption that jurisdiction to invoke Section 74 of the Contract Act existed in such cases. No help is available to the case of the appellant from the case of Radhakrishnayya Lingam, AIR 1953 Andh Pra 117(supra).
6. For the reasons stated above, I find no merit in this appeal and dismiss the same but leave the parties to bear their own costs.
7. Appeal dismissed