1. The short point for decision is whether a stipulation to pay compound interest from date of default at the same rate as the simple interest is a penalty within Section 74, Indian Contract Act.
2. There is authority for saying that a stipulation for payment of compound interest at the same rate is not a penalty but that a stipulation for payment of compound interest at a higher rate is (See the cases collected in Pollock and Mulla's Contract Act 4th Edition page 435).
3. As the Privy Council said in Sunder Koer v. Rai Sham Krishan (1906) I.L.R. 34 Cal. 150 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 outside the ordinary and usual stipulation, may well be regarded as in the nature of a penalty. And again at page 157 referring to the amended explanation to Section 74, Indian Contract Act their Lordships say ' The Indian Courts have invariably held that where the stipulation is retrospective and the increased interest runs from the date of the bond and not merely from the date of default, it is always to be considered a penalty, because an additional money payment in that case becomes immediately payable by the mortgagor.' This latter observation has strictly no application to the present case as it is clear that the interest was only to be compounded from the date of default.
4. The law has been similarly Laid down as to the first point noticed by their Lordships in Jwala Ram v. Buchi Ram (1916) 38 I.C. 583 and by a Bench of this Court in Chantasula Seetharamiah v. Vadepalli Pitchayya (1915) 28 I.C. 860 wherein the learned Judges followed the Privy Council case. Compare also Lakhi Chand v. Pear Chand (1917) 39 I.C. 106.
5. Had this been all, one would have said with confidence that a stipulation; to pay compound interest was not a penalty and that this is fairly deducible from the judgment of the Privy Council as first quoted above.
6. However a case of this Court has been brought to our notice. It is reported in Venkataramiah Pillai v. Subramaniya Pillai (1916) 37 I.C. 799 and is to the effect that there is no difference in principle whether the interest is compounded on default at the same or a higher rate. There the claim was for Rs. 146,000 for Rs. 50,000 originally advanced.
Abdur Rahim, J.
7. (p. 800) that the Judgment of the Privy Council referred to. above does not mean that in no case can the stipulation to pay compound interest, even at the same rate be regarded as a penalty. The learned Judge says 'The exact point has bean exhaustively dealt with by Mr, Justice Mookerjee in Khagaram Das v. Ramsankar Das Pramanik I.L.R(1914) . Cal. 652 and I agree with him.' Now that learned Judge in Khagaram Das v. Ramsankar Das Parmanik I.L.R. (1914) Cal. 652 says:
The first contention of the respondents is that the stipulation forthe payment of interest at an exhibitant rate upon the entire amount secured by the mortgage in the event of default of payment of one or two instalments was in the nature of a penalty. Before we examine this argument in the light of judicial decisions, it is desirable to point put that in the solution of this question, no real assistance can be derived from the class of cases in which there is a stipulation for payment of at an advanced note on default of payment of principal or interest on the due date or the other class of cases in which on default of payment of principal or interest, stipulation is made fa1 payment Of compound interest at the same rate as the simple interest originally agreed to be paid or at a higher rate.
8. The case before hint was for 75 per cent, interest in default of payment of the instalments of a mortgage instrument.
9. As far as I have been able to see, there is no question of compound interest at a.11 in that case but the learned Judge treats the stipulation as to the payment of interest at 75 per cent as penal, and therefore unenforceable. He further adds that each case must be treated on its own circumstances.
10. It would thus seem that the learned Judges in 37 I.C. 799 were wrong in construing the decision in 42 Cal. 652 as they did as applicable to a question of compound-interest, and that if that were the basis of their judgment the latter cannot be sus-taind. They were undoubtedly impressed by the very large claim for interest and Abdur Rahim, J., observes (page 801) 'But I fail to see why the stipulation for the payment of interest on interest in default of payment of regular payments of interest, as contemplated by the parties in this case, cannot be considered by way of penalty within the meaning of Section 74 if the parties so intended it.'
11. It was held that having regard to the original rate of interest (18 per centj the stipulation for compound-interest was by way of penalty. It is not urged that the original rate of interest as such should be relieved against. I am with deference unable to follow this decision which appears to me to be at variance with the decision of the Privy Council and with the course of decisions some of them by this Court.
12. In my opinion, a stipulation to charge compound interest from date of default is legal provided it is at the original rate.
13. There will be the usual mortgage decree in plaintiff's favour with compound-interest at the contract rate up to date of suit, from that date interest (simple) at & per cent only. Time for payment will be extended to three months from ihis date. PLalntiff will have his costs throughout.
14. I agree in the conclusion of my learned brother. It seems to be clear vide Sundar Koer v. Rai Sham Krishen I.L.R(1906) . Cal. 150 , that a stipulation providing for the payment of compound interest on default is not penal by reason of the conversion of interest from simple to compound. The contention is that such a stipulation may neverthless be treated as penal and releived against if the court considers the contract rate of interest which continues? after default, to be excessive. This seems to be the basis of the decision in Venkataratniah Pillai v. Subramania Pillai (1916) 37 I.C. 799. With all respect, it seems to me to to be wrong. A penal clause must be one which imposes some penalty for the default, that is to say, which puts the defaulter in a worse position than he would occupy, if there were no penal clause. How can that be said to be ihe case here? In the absence of the stipulation defendant would be liable to pay the principal with simple-interest at the contract rate up to date of suit. The only change effected by the stipulation is the change on the system of computation from simple to compound ; and this, as already stated does not render it penal. The contract rate of interest here is doubt' less very high, but it is not contended that the court was competent to reduce it as regards the period up to date of default at any rate under the law in force at the time of suit. Neither, so far as I can see, can it be reduced for the subsequent period.