(1) This is an appeal from the judgment and decree by Ramaswami J. in a suit instituted on the original side of this Court, C. S. No. 72 of 1950. The suit was for the recovery of the amount due under four mortgages which were executed by one Dhanakoti Ammal in favour of the plaintiff, Sreenivasa Varadachariar, on 20-3-1936, 14-9-1936, 27-7-1937 and 2-1-1938, for sums of Rs. 25,000, Rs. 9,000, Rs. 7,000 and Rs. 7,000 respectively. The terms relating to the interest were the same in respect of each of these four mortgages, viz., Rs. 15 p.c. per annum compound with quarterly rests. A favourable rate of interest at 12 p.c. per annum was however provided in case of payment of interest due for each month by the 20th day of succeeding month.
Dhanakoti Ammal was adjudged insolvent and her estate vested in the Official Assignee, Madras. The Official Assignee sold the four items mentioned in the plaint schedule comprised in the four mortgages to Dr. Gopala Menon on 6-7-1944. The sale was subject to the aforesaid four mortgages. Though there were several defendants in the suit, the main contesting defendant was Dr. Gopala Menon, the second defendant. The only plea in defence was that the interest provided in respect of the mortgages is excessive and that he would be entitled to relief under the Usurious Loans Act. Ramaswami J. who tried the suit reduced the interest to 15 p.c. per annum compound interest with yearly rests. The second defendant Dr. Gopala Menon is the appellant before us and in the appeal the arguments were confined to the same plea of excessive interest.
(2) Mr. K. V. Venkatasubramania Aiyar, learned counsel for the appellant, contended that the interest provided under the mortgage deeds was usurious and therefore he was entitled to relief under the Usurious Loans Act and submitted that the interest should be reduced to 12 p.c. simple till date of plaint. The only question in this appeal therefore is what if any is the relief which the appellant can be granted under the provisions of the Usurious Loans Act (X of 1918). The relevant section of the Usurious Loans Act as amended by the Usurious Loans (Madras Amendment) Act, VIII of 1937 is S. 3 which runs thus:
"3(1). Notwithstanding anything in the Usury Laws Repeal Act, 1865, where in any suit to which this Act applies, whether heard 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 account 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. (The provisos are not material.)
Explanation 1: 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: In the case of a suit brought on a series of transactions the expression 'the transaction' means, for the purpose of proviso (i), the first of such transactions.
(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, inquiries, 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 agriculturists 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."
(3) It was not suggested by learned counsel for the appellant, Mr. Venkatasubramania Aiyar, that the transactions of mortgages in respect of which the suit has been brought were substantially unfair because of circumstances materially affecting the relations of the parties at the time of the loan. Nor did he contend that there were other circumstances arising from the position in which the debtor was placed at the time of the transactions which rendered the transactions unfair. His contention was confined to this, namely, that the transaction was substantially unfair because the interest was excessive.
Now to decide whether the interest which has been provided in respect of these suit mortgages is excessive, we are governed entirely by the considerations expressly mentioned in S. 3(2)(a), (b) and (c). In our opinion it is not open to the court to hold that interest is excessive either because the rate is high in the view of the court, completely divorced from the circumstances of the case such as are referred to in sub-s. (2)(a), (b) and (c), or to hold that the interest is excessive because of any other condition regarding interest, unless such condition has relation to the circumstances mentioned in the said provisions.
Mr. Venkatasubramania Aiyar contended that 'excessive' in so far the rate is concerned implies an objective arithmetical standard rate irrespective of the facts relating to each transaction of loan, and he made it a part of his argument that anything in excess of 12 per cent simple interest must be deemed to be excessive. In support of his contention he placed much reliance on a decision of a Division Bench of this court in Venkatarao v. Venkatratnam, . There are undoubtedly observations in his decision which lend prima facie support to the contention of Mr.Venkatasubramania Ayyar, Govinda Menon, J. who delivered the judgment of the Division Bench said,
"We are also of opinion that in the Madras State is has been long understood that 12 per cent simple interest is a fair, proper and reasonable rate................... We have already expressed the opinion that anything above 12 per cent per annum simple interest is excessive, considering the nature of transactions in this State."
We do not, however, understand the effect of this decision to be to lay down an inflexible rule that anything above 12 per cent per annum simple interest is excessive, whatever be the particular circumstances relating to a particular transaction of loan. So far as we are aware, this decision has not been understood to have that effect. In Balasaraswathi Ltd. v. Parameswara, , decided by
another Division Bench of this court to which one of us was a party, thought this decision of Govinda Menon and Ramaswami Gounder, JJ. was referred to, it was held that there could be no absolute maximum rate of interest beyond which it would become automatically usurious and unconscionable, and that the circumstances of each case must be examined to judge whether the rate is penal, usurious or unconscionable.
Subba Rao J. in C. S. No. 163 of 1949 which related to a mortgage executed by Dhanakoti Ammal herself prior to the suit mortgage, made it clear that the observation in , that in the Madras State anything above 12 per cent simple interest is excessive, cannot be taken as a principle of law applicable to all cases irrespective of the circumstances obtaining at the time of the transactions. On the evidence before him, Subba Rao J. reduced the rate of interest from 15 per cent compound interest to 12 per cent per annum simple. We are clearly of opinion that to lay down an absolute maximum rate of interest beyond which interest would be excessive within the meaning of the Usurious Loans Act would be in direct contravention of what is laid down in the Act itself. Section 3(2)(a), (b) and (c) of the Usurious Loans Act which continues to be applicable notwithstanding the Madras amendment makes it abundantly clear that in deciding whether the interest charged is excessive several factors have to be taken into consideration.
One important fact will be the risk incurred as it appeared, or must be taken to have appeared, to the creditor at the date of the loan. In considering the question of risk S. 3(2)(c) enacts that it will be material to take into account the presence or absence of security and the value thereof, and the financial condition of the debtor and the result of any previous loan transactions known to the creditor. If compound interest is charged, the periods at which it is calculated and the total advantage which may be reasonably expected to have accrued from the transaction are important factors. Having regard to these factors it is now necessary to deal with the facts of the case before us.
The following facts are either admitted or beyond dispute, or, in any event, they appear to be clearly established on the evidence. Before the execution of these four mortgages by Dhanakoti Ammal to the plaintiff, there was a prior mortgage of 1933 for Rs. 4000 and the interest provided was 15 per cent compound with quarterly rests. Even by the date of the first of the four suit mortgages a sum of Rs. 8000 was due in respect of this prior mortgage and the amount must have been larger by the date of the succeeding three suit mortgages. There was of course security for the loan. Item 1 is a vacant site of about 8 cawnies. Items 2 and 3 are houses and item 4 is a market situated on about 27 grounds.
Item 5 is a vacant site of nearly 3 acres. But the properties were situated in Kodambakkam on the outskirts of the city, and at the time of the loan the area was undeveloped though there was a prospect of development. The son of the plaintiff who gave evidence as P.W. 1 deposed that at the time when the first loan was advanced in 1936 the value of a ground was about Rs. 200 and that it was an undeveloped area and the market was in a dilapidated condition fetching about Rs. 100 per mensem.
It may be that today the properties are worth nearly three lakhs but that is a circumstance which is irrelevant. The amount advanced under the four mortgages comes to nearly Rs. 48,000. There was already a prior mortgage in respect of which nearly Rs. 8000 was due by the date of the first of the mortgages. It appears to us to be reasonably clear that though there was certainly security, the value of the security was certainly not very ample, though at the same time it cannot be said that it was markedly inadequate. It might well have appeared to the creditor that if a long time were to elapse before the money due under the mortgages can be recovered, the value of the security might not be sufficient to cover the entire amount which would become payable.
(4) There is also another fact which also must have contributed to the idea that the creditor was undergoing a risk in granting the loan. Admittedly there was litigation in respect of the properties. A brother of the mortgagor had filed a suit claiming that the entire property was ancestral property and the will under which Dhanakoti Ammal derived title to the property was invalid. That suit no doubt was decided against him in the trial court as well as in the appeal. But there was at or about the time of the first loan a certain apprehension that a suit would be filed by the bother after he attained majority to set aside the decree in the prior suit on the ground that his next friend was negligent in the conduct of the suit.
Eventually such a suit was filed on the Original Side of this court, C. S. No. 7 of 1937. The plaint appears to have been prepared even in December 1936. The third and the fourth of the suit mortgages were certainly executed after the institution of the suit. It may be that the suit was without much substance, but it is idle to completely disregard it. The suit, and before it, the apprehension that the suit would be instituted, must have cast a shadow on the title of the mortgagor.
(5) At the same time there is another feature of the mortgages to which S. 3(2)(b) would apply, that is, in so far as it declares that if compound interest is charged, the periods at which it is calculated should be taken into account in considering whether the interest is excessive. We have no hesitation in holding that compound interest calculated with quarterly rests is certainly excessive.
(6) On a consideration of the entire evidence bearing on the point revealing the circumstances in which the loan transactions came into existence we hold that 15 per cent compound interest calculated at quarterly rests is certainly excessive. When arriving at this conclusion we have taken into account the following factors:
(1) the presence of security,
(2) the value of the security which cannot be said to be prima facie inadequate and
(3) the quarterly rests for the calculation of compound interest.
Once we hold that the interest is excessive it follows that from Explanation 1 to S. 3(1) inserted by the Madras Act VIII of 1937, that the Court must presume that the transaction was substantially unfair. Though this presumption can be rebutted by proof of special circumstances justifying the rate of interest, our attention was not drawn to any such special circumstances.
(7) The next question which arises is, what is the relief to which the appellant Dr. Gopala Menon is entitled? We have already observed that 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. So far as we are aware, it has never been held that compound interest per se is usurious. The very fact that S. 3(2)(b) mentions only the periods at which compound interest is charged clearly indicates that there could be compound interest calculated at reasonable intervals which would not be "excessive" within the meaning of the enactment. The plaintiff is a money lender and presumably he would be able to invest the interest if paid on the due dates and earn profits therefrom. For the deprivation of his profits it would not be inequitable to hold that on default of payment of interest for a period of one year the amount due for interest should be treated as further principal.
(8) Ultimately the rate and terms of interest to be fixed by the court when granting relief must of necessity be arbitrary. Taking all the circumstance into consideration we hold that 10 per cent compound interest with yearly rests would not be excessive. The appeal is allowed to this extent and there will be a decree calculating interest at the rate which we have now fixed, from the date of the plaint the interest would be six per cent.
(9) We may mention that though we have been taken through the evidence bearing on the subject we have purposely refrained from making any reference to an alleged agreement between Dr. Gopala Menon and the plaintiff relating to the discharge of the four mortgages because that agreement was not acted upon, nor was it pressed on us by either side. Such an agreement cannot assist us in any manner to decide whether the rate of interest provided in the mortgages was excessive at the time when the mortgages were executed.
(10) Though the point appears to have been raised before Ramaswami J. that the provisions of the Usurious Loans Act cannot be availed of by a transferee of the equity of redemption, before us this point, was not pressed and rightly by the learned counsel for the plaintiff-respondent. In the appeal there will be no order as to costs. Time for redemption six months.
(11) Order accordingly.