1. The two suits against the decrees in which these two appeals are laid were disposed of in one judgment. Natesa Chetty, the appellant in both appeals, was the plaintiff in O.S. No. 20 of 1934. In O.S. No. 24 of 1934 he was defendant 7. His adversary Ramalingam Chetty was defendant 4 in O.S. No. 20 and the plaintiff in O.S. No. 24. He is the contesting respondent here. In a Court auction, held in pursuance of a mortgage decree, Natesa Chetty through a clerk purchased the mortgage property on 13th October 1924 and was put in possession by the Court on 16th October 1927. But Ramalingam Chetty was a puisne mortgagee of a major portion of the property and he had not been impleaded in the suit. His interest therefore remained unaffected by the decree. On 30th June 1932, Natesa Chetty filed what is now numbered as O.S. No. 20 of 1934 and on 10th August 1933 Ramalingam Chetty filed O.S. No. 24. Natesa Chetty's suit was that the property comprised in the first mortgage be sold again and out of the sale proceeds he should be paid the amount due on that mortgage at that date of the plaint. Ramalingam Chetty's suit proceeded on the assumption that the prior mortgage had been for the most part discharged and he prayed for a decree on foot of his mortgage. Implicit in these pleadings is the contention of the appellant that he is not liable to be debited with the profits of the land which accrued after 16th October 1927; and in his defence to the suit of the puisne mortgagee he alleged that on account of the threats of the mortgagors he had never got into possession. On the other hand, the case of the puisne mortgagee is that the profits so accruing have been nearly sufficient to wipe out the prior mortgage. The learned Subordinate Judge has found (1) that the appellant, Natesa Chetty, is entitled to priority in the amount of the prior mortgage calculated up to the date fixed for payment; (2) that this amount is to be arrived at by calculating interest at 12 per cent. and not at the penal rate stipulated in the bond since the latter was penal, usurious and excessive; (3) that the amount so found is to be reduced by the profits of the land from 16th October 1927 at the rate of Rs. 650 per annum. Natesa Chetty's appeal is (a) that he was not in possession of the land at all; (b) that even if he was, he is not liable to account for the profits; (c) that in any event, he is not liable to account for the profits in a sum more than the amount of interest that accrued due on the mortgage during the time he was in possession; (d) that the profits have been over-estimated by the lower Court; (e) that the amount due to him should be calculated according to the mortgage deed.
2. The puisne mortgagee filed cross-objections in regard to the profits that the lower Court should have estimated them at at least Rs. 1000 per annum. We shall first take up the two questions of fact: Was the lower Court wrong in holding that Natesa Chetty got possession of the lands sold under the decree in the prior mortgage and is Rs. 650 per annum as an estimate of the average annual net profits too high or too low? On the question of possession, it is not denied that Nanjunda Iyer, the clerk of Natesa Chetty, took delivery of the land through Court on 16th October 1927. The case set up at the trial was that when Natesa Chetty tried to lease the land, he was prevented from doing so by the threats of the mortgagor and the mortgagor's sons. The learned Subordinate Judge has stated that appellant failed to show in what manner the mortgagor and his sons were influential enough to defy the orders of the Court; that appellant has had the patta for the lands transferred to his name and has been paying the revenue due to Government regularly; and that, since the date of the alleged dispossession he has never moved any authority with a view to being put into possession nor complained to any public authority. Moreover, in respect of other lands in the same village purchased by him in Court auction, the appellant has admittedly found no difficulty in enjoying them and reaping the profits from them. Then as regards the oral evidence, the learned Judge found that it was false. Out of seven witnesses only one, as pointed out by the learned Subordinate Judge, is not interested in appellant and this man is an agriculturist who has no lands near the suit lands. We have heard learned counsel on both sides at some length on the question of the value of the evidence adduced by the appellant at the trial and we see no sufficient reason to differ from the opinion of the Judge who saw the witnesses. We observe that in his plaint, although he must have known that the puisne mortgagee would raise the question of profits, the appellant did not declare that he had been dispossessed. We observe also that when in 1928, in a suit for partition coupled with a declaration that the mortgage decree was not binding on them, the sons of the mortgagor declared that the properties continued to be entirely in their possession, this appellant being defendant 5 in that suit replied that this averment was false and that the plaintiffs in that suit were not in possession of the plaint properties. What did the appellant mean by that statement if he did not mean that he the purchaser had got effective possession of the lands?
3. Next on the point of the quantum of profits. The learned Subordinate Judge has held that neither side adduced reliable evidence on this point; and for his estimate of Rs. 650 he employs several independent data. Fifteen times the land revenue he takes as the gross income and half of this he takes to be the net income. Again he makes an estimate of the net income as a percentage (in this case 6%) of the value of the lands and he estimates the value as Rs. 12,000, relying on the figures adopted by Ramalingam Chettiar, the respondent in his plaint in O.S. No. 24. We think the data used by the learned Subordinate Judge are reliable and further, in spite of arguments of learned counsel on both sides, we agree with him in his opinion of the evidence adduced at the trial. Appellant has himself stated that the profits are one-third of Rs. 2,000, the estimate made by the respondent as plaintiff in O.S. No. 24. Respondent on the other hand as defendant in O.S. No. 20 first entered Rs. 1,000 as the profits but later amended the figure to Rs. 2,000. The mortgagee's sons in their partition suit valued the profits of all family property including those compromised in the first mortgage at Rupees 1,000. We think that the learned Subordinate Judge's estimate of Rs. 650 is correct. This disposes of the main point in respondent's cross-objections. We now come to the main point of contest in the appeal, namely the accountability for profits accruing during the period that the appellant has been in possession, namely from 16th October 1927 up to date. Appellant as we have said takes up two positions: first that he is not accountable at all; secondly that at the most he is accountable only up to the extent that the profits are equal to the interest on the mortgage. We think that the question of accountability in oases like the present is settled beyond all doubt and that the decision taken by the learned Subordinate Judge is the correct decision. A very recent case decided by a Bench of the Allahabad High Court (Niamatullah and Rachhpal Singh, JJ.) states the matter very clearly and we think it appropriate to cite the relevant passages from that judgment:
The first question we have to decide is whether the plaintiff-appellants (the puisne mortgagee) are in law untitled to have the profits of the property purchased by the defendant-respondents in execution of their mortgage decree set off against the interest and, so far as it was in excess of the interest, against the principal. Where a prior mortgagee obtains a decree on foot of his mortgage and purchases the mortgaged property in execution of his own decree to which the puisne mortgagee was not a party, the sale cannot be considered to be of no effect at all. It effectively transfers the mortgagor's right to the prior mortgagee auotion-purchaser . . . . though the sale is not binding on the subsequent mortgagee, who can in spite of it exercise his right of redemption . . . Applying that rule to the facts of the present case, we have to accept the position that the mortgagor's rights were transferred to the defendant-respondents in 1886; but the plaintiff-appellants who were no party are entitled to redeem. In the exercise of their right of redemption, they are entitled to treat the prior mortgages as still subsisting. Not being bound by the decree, they can ignore it. The necessary corollary to this is that account of the mortgage money is to be made up on the basis of the stipulation contained in the mortgage deed. In redeeming the mortgages, they must pay the principal and interest calculated up-to-date. At the same time the prior mortgagees who have been in possession of the mortgaged property by virtue of the auction-sale held in execution of their own mortgage decree should account for the usufruct received by them. They have to do this not because their possession can be traced to anything in the mortgages in their favour, which were simple, but to the fact that the usufruct received by them should be considered to be tantamount to payments made by the mortgagors. In this connexion it should not be overlooked that as between the prior mortgagees and the mortgagors, the latter's rights were assigned to the prior mortgagees under the auction-sale in lieu of the mortgage money. The prior mortgagees have been in receipt of the usufruct as against the mortgagors in consideration of the whole or part of the mortgage money, which as against the mortgagors should be considered to have been wiped out. Any payments which the mortgagor makes to the prior mortgagee enures for the benefit of the puisne mortgagee also. If the prior mortgagees be considered to bo in possession of the mortgaged property under an arrangement made by the Court in the auction-sale on behalf of the mortgagor to the effect that the prior mortgagees may take possession of the mortgaged property and retain it an the owners thereof in full or part satisfaction of the mortgage money subject to the right of the puisne mortgagee's right to redeem, there can be no doubt that the usufruct received by the prior mortgagees under such arrangement should, in relation to the puisne mortgagee, be considered to be payments made by the mortgagor. Otherwise the prior mortgagees would have it both ways. On the one hand they insist on payment of the mortgage money consisting in the principal and interest calculated up to date; and on the other hand they are allowed to appropriate the usufruct which but for this auction sale in their own suit would have been taken by the mortgagor (Ramji Lal v. Roshan Singh : AIR1935All692 ).
4. See also the case Jnanendra Nath v. Shorashi Charam Mitter AIR 1922 Cal 23 :
In our opinion we must deal with the matter as if there had been no suit at all (on the first mortgage) . . . . The mortgagees are entitled to receive the whole of the principal sum with interest from the date of the bond . . . . As regards the actual profits realized since . . . . when the mortgagees obtained possession of the mortgaged property, the learned Judge has without taking any account, simply directed that such realisations be set off against interest payable. This is a rough and ready method which may be adopted with the consent of the parties. But here the respondents object to this course in their cross-objections which must be allowed. The amount of profits should not be taken as an equivalent of the interest due. We therefore direct that an account be taken of what is due to defendant 1 for the principal and interest on the mortgage . . . . allowing credit for all the sums paid to the mortgagees and the actual profits realised by them during the period they have been in possession of the mortgaged property.
5. To the same effect is the decision in Muthammal v. Razu Pillai AIR 1918 Mad 103, although we shall have occasion presently to refer to some of the observations in that judgment which seem to be inconsistent with the general principle. What then is the foundation for the appellant's contentions? Take his first position that he is not accountable for the profits at all. It is first argued that as purchaser of the mortgagor's right in the land, he steps into the shoes of the mortgagor and the latter of course is not accountable to any one for the profits of the land. This argument is fallacious. It ignores the fact that the purchase was made behind the back of the puisne mortgagee, in pursuance of a decree to which the puisne mortgagee was no party though he ought to have been made a party, in which case the lands would have been sold for their full value and the puisne mortgagee would have been satisfied wholly or in part. In this connexion we observe that though the appellant declared in his plaint in O.S. No. 20 that when he bought the land at Court auction he knew nothing of the respondent's mortgage, as a matter of fact the existence of that mortgage was proclaimed at the time of the auction. The law as settled is that in relation to the puisne mortgagee, the decree on the first mortgage is to be treated as a nullity. The sale which took place in pursuance of that decree is thus a nullity and the purchaser at that sale could not acquire the rights of a mortgagor owner as against the puisne mortgagee. The only right he did acquire against the puisne mortgagee arose from the fact that the purchase money either wholly or in part went to discharge the prior mortgage; so that he is able to revive the prior mortgage and hold it as a shield against the puisne mortgagee when the latter sues to bring the property to sale. As for his possession and enjoyment of the land, that is not to be regarded as transferring ownership at all. The profits he makes out of the land are deemed to be the money of the mortgagor in his hands, and liable to be credited in reduction of the prior mortgage. We do not think it is possible to assail this position by merely designating the Court sale a transfer both of the rights of the prior mortgagee and of the rights of the mortgagor. And that is the opinion of the Judges in the case of this Court last cited. In p. 518 of 41 Mad:
That to our minds is conclusive to show that the mortgage which is revived against the puisne mortgagee though extinguished against the mortgagor is kept alive to the fullest extent as if no action had ever teen brought on it . . . . . It is on this principle that the purchaser in the prior mortgagee's execution sale is required to account for the profits.
6. The second argument in support of the appellant's plea that he is not accountable at all is based on the fact that the price he paid for the mortgaged property was more than the amount due on the mortgage. He paid Rs. 7,000 and the amount due on the mortgage including costs of the suit and poundage was Rs. 6,660. It is contended on the strength of certain observations of the learned Judges in Muthammal v. Razu Pillai AIR 1918 Mad 103, that when this is the case the purchaser is not accountable for the profits accruing during the time he is in possession. These observations are at p. 517 of 41 Mad. The exact words are:
If the purchaser obtains possession on sale from the owner, he must account for the profits at least in cases where the price he pays is not more than sufficient to pay the mortgage sued on; for in such a case the purchaser pays nothing for the equity of redemption and the profits of the land are to be regarded as the money of the mortgagor placed in the hand of the purchaser to discharge the mortgage pro tanto. If beyond the value of the mortgages a price is paid for the equity of redemption and the purchaser gets possession from the owner of the equity of redemption . . . . . it may be the purchaser would not be bound to account for the profits [Jones on Mortgages, Vol. 2, Section 1118(a)], but we think that justice requires that there should be an apportionment of the profits between the value of the mortgage and of the equity of redemption.
7. With all respect, we must confess ourselves unable to follow the argument in this passage from the judgment in Muthammal v. Razu Pillai AIR 1918 Mad 103. We do not think it necessary to discuss it as the opinions expressed there were not necessary for a decision of the case. Coming to the next position contended for by the appellant that in any case he is not liable to account for profits to an extent greater than the interest which accrued on the prior mortgage during the time the profits were earned, we do not think we need add anything to the decision in Muthammal v. Razu Pillai AIR 1918 Mad 103 and following pages. It is clear from that decision that the point is concluded by the highest authority. See also the later and very recent decision of the Allahabad High Court, the relevant portions of which we have set out above. Though we must record an appreciation of the skill and learning with which Mr. Krishnaswami Iyer has pressed the appellant's case, we must hold that the appellant is accountable for the profits to the full extent.
8. The decision in Ramachandra Naidu v. Pavalayammal AIR 1935 Mad 360 has been much relied on by Mr. Krishnaswami Iyer and much canvassed in the arguments. But we do not think it is useful in the present connexion, since the facts it deals with are quite different. There, in execution of a money decree property was purchased which was subject to three mortgages. The purchaser subsequently discharged some part of the two first mortgages. The suit was by the third mortgagee and the question debated was whether the purchaser was entitled to be reimbursed in what he had paid towards the prior mortgagee with interest and if so whether he was liable to account for the profits. The fact which distinguishes the case from the present is that the purchaser came into possession of the mortgaged property by virtue of a sale which the mortgagees were not entitled to ignore, while here the possession of the purchaser derived from a sale which the puisne mortgagee is entitled to treat as a nullity. The appellant's case on this point depends on the assumption that if the purchaser is accountable for the profits at all, he is accountable because the profits of the mortgaged land which he purchased at Court auction are substituted for the interest on the mortgage money; so that, if the purchaser receives the interest from a puisne mortgagee or other person untitled to discharge the mortgagor, he is hound to restore the profits that he has earnad but only so much of them as is equivalent to the interest. This method of reasoning ignores the puisne mortgagee's right to be put in the same position as he would have occupied if the sale had never taken place. In order that that may be done, the purchaser must restore the benefit he got by sale. He can stand on the mortgage which was discharged by the sale and can get all that is due on that but he is not entitled to anything else as against the puisne mortgagee. The authorities have all been referred to and explained in Muthammal v. Razu Pillai AIR 1918 Mad 103, and it is unnecessary for us to cite them again. We say again that we respectfully agree with the conclusion arrived at in that ease.
9. We have come to the last main point in these appeals, namely whether the lower Court was wrong in departing from the stipulations in the prior mortgage bond in calculating the amount of the mortgage payable to the appellant. The bond provides an initial rate of interest at 10 per cent. per annum. But it is stipulated that if there is failure to pay the interest or principal on the due dates, the interest shall be at 18 per cent. The appellant's claim included interest at 10 per cent. for the first year and 18 per cent. for the subsequent period. The learned Subordinate Judge held that this contract was unconscionable for reasons which he has set out at length and re. opened the contract, purporting to act under the Usurious Loans Act 1918, and awarded interest at a uniform rate of 12 per cent. It is objected that the Usurious Loans Act applies only to suits on loans contracted subsequent to the Act and this mortgage was in 1914. We think that this objection must prevail. But the learned Subordinate Judge's procedure may be supported on other grounds. The stipulation for increased interest from the date of default may be considered to be a stipulation by way of penalty. It is so enacted in the Explanation of Section 74, Contract Act. If we regard it as such, then the enhanced interest cannot be levied directly under the contract. The lender is only entitled to receive reasonable compensation. It is urged that in the suit upon the mortgage the mortgagors did not seek to be relieved from the penal stipulation and that the puisne mortgagee should not be allowed to seek that indulgence now. But we think that the puisne mortgagee who was no party to the suit may be allowed to put forward such defences now as would have been available to him if he had been a party to the suit. In other words, he can claim that the prior mortgagee to whose rights the appellant is subrogated is only entitled to reasonable compensation and not to the full amount of interest at the enhanced rate. Such being the case, are we justified in holding that the stipulation for increased interest was a stipulation by way of penalty? And if so, is the appellant reasonably compensated by the rate of 12 per cent. awarded by the learned Subordinate Judge? We think both questions should be answered in the affirmative. The learned Subordinate Judge held that the security for the loan--which was only Rs. 3,000--was excellent and that the borrowers were induced to consent to the high rate of interest because they were hard pressed by creditors. In his opinion the stipulation of interest at 18 per cent. on a mortgage of this kind was itself sufficient evidence that the transaction was substantially unfair; and the learned Subordinate Judge must be held to speak with knowledge of local conditions. In this view we think that the stipulation for increased interest from the date of default was a stipulation by way of penalty and that the rate of 12 per cent. awarded by the learned Subordinate Judge is fair compensation. The appeal and cross objections are dismissed with costs.
C.M.A. No. 215 of 1935.
10. C.M.A. No. 215 of 1935 is against the order of the lower Court passed after decree refusing to appoint a receiver of the property at the instance of the appellant. Following our decision that the appellant is in possession of the property, that appeal is dismissed with costs. No orders are necessary in C.M.P. 2243 of 1935.