Ananjaperumal Konar (dead) and Another vs Pichamuthu Nadar and Another

Devadoss, J.—The main point argued in this second appeal is whether a stipulation to pay compound interest on default of payment of

interest is penal.

2.The District Munsif decreed the plaintiff''s suit. On appeal by the 1st defendant the Subordinate Judge relying upon a decision of this Court

reported in Venkataramiah Pillai v. Subramania Pillai 37 IndCas 799. held that the stipulation to pay compound interest was penal and allowed the

plaintiff''s claim for interest at 24 per cent. per annum and the plaintiff has preferred this second appeal.

3.The question is whether a bare stipulation to pay compound interest on default of payment of interest is penal. The respondent''s vakil concedes

that if a low rate of interest is provided for in the bond the stipulation to pay compound interest on default of payment of interest would not be

penal.

A bare stipulation to pay compound interest is not penal within the meaning of Section 74 of the Contract Act. Compound interest is paid in

many business transactions and the borrower who undertakes to pay the interest on the loan on a due date is bound to pay it and if he does not

pay it any stipulation to pay interest on such interest, is not a penalty. The decisions of this Court have been uniform on this question that a bare

stipulation to pay compound interest at the rate provided for in the bond, on default of payment of interest is not a penalty. Vide Veera Reddi v.

Subbanna Reddi (1910) 8 MLT 387 and Venkatachallam Chettiar v. Veerannan Ambalagarar (1912) MWN 512. But a Bench of this Court

consisting of the Officiating Chief Justice, Sir Abdur Rahim and Seshagiri Aiyar, JJ. held in a case reported in Venkataramaiali Pillai v. Subramania

Pillai 37 IndCas 799 that a "" provision for payment of compound interest may be a penalty within the meaning of Section 74 of the Contract Act

and it makes no difference in principle whether the interest is payable on default at a higher rate or at the same rate. "" The learned 3.Judges rely

upon a decision of the Privy Council in Sundar Koer v. Rai Sham Krishen ILR (1906) C 150 and a decision of a Bench of the Calcutta High

Court reported in Khagaram v. Ramsankar Das Pramanick ILR (1914) C 652. In Sundar Koer v. Rai Sham Krishen ILR (1906) C 150 their

Lordships do not hold that stipulation to pay interest on interest on default of payment of interest is penal. They observe at page 158 "" 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."" The decision of the Privy Council is contrary to the

view taken by the learned Officiating Chief Justice in V enkataramaiah Pillai v. Subramania Pillai 37 IndCas 799 and the decision in Khagaram Das

v. Ramsankar Das Pramanick ILR (1914) C 652 does not support his view. Mr. Justice Mookerjee observed at page 658 :-"" Before we examine

this argument in the light of judicial decisions, it is desirable to point out, 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 interest at an advanced rate on default of payment of principal or interest on the due

date or other classes of cases in which, on default of payment of principal or interest stipulation is made for payment of compound interest at the

same rate as the simple interest originally agreed to be paid or at a higher rate."" With all respect to the Officiating Chief Justice we fail to see how

this Judgment of the Calcutta High Court supports the view he has taken. The other learned Judge Seshagiri Aiyar, J., was a party to the decision

in Ghantasala Setharamiah v. Tadepalli Pitchayya and Ors. 28 IndCas 859. There sitting with Sadasiva Aiyar, J., he held following Sundar Koer v.

Rai Sham Krishen ILR (1906) C 150 that a provision for payment of compound interest was not penal by itself but a provision for compound

interest at an appreciably higher rate than the rate mentioned as payable till default might be penal. The decision in Venkataramaiah Pillai v.

Subramania Pillai 37 IndCas 799 was dissented from a Bench of this Court in Malli Chettiar Vs. Veeranna Tevan and Others, and Mr. Justice

Ayling and Mr. Justice Odgers held that the stipulation to pay compound interest from the date of default at the same rate as simple interest was

not a penalty within Section 74 of the Contract Act. Where a borrower undertakes to pay interest on default of payment of interest at the same

rate at which he contracted to pay interest on the principal sum, it is not a penalty u/s 74 of the Contract Act. That being so, we think the decree of

the Subordinate Judge was wrong in disallowing compound interest as claimed by the plaintiff.

The Subordinate Judge has decreed that certain items, i.e., items 2, 4 and 5 should be proceeded against first by the mortgagee. The mortgagee

is entitled to proceed against all or any of the items. he chooses. We do not think it was open to the lower Court to direct him to proceed against

certain items in the first instance, in the absence of circumstances which would justify that order.

We do not think there is any evidence in the case to justify that order. The 2nd defendant has not chosen to put forward any defence.

In the result, the Second Appeal is allowed and the judgment of the Subordinate Judge set aside and that of the District Munsif restored.

As regards costs, the appellant will get his costs both here and in the Lower Appellate Court from the 1st defendant Time for redemption six

months.