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Judgment
Govinda Menon, J.—By Ex. P-1 dated 20th March 1923 the first defendant executed a mortgage for a sum of Rs. 2351-9-6 in favour of
the undivided father of the plaintiffs. The consideration for that document was made up of sums due under a prior promissory note executed by the
first defendant and moneys due under an account. It also included a sum of Rs. 50 being the costs of an insolvency petition which the plaintiffs''
father and another had filed against the first defendant. The mortgage recited that compound interest would be paid at the rate of Rs. 1-0-6 per
cent per mensem with annual rests. The relevant portions of the document are as follows:
......This sum, from this date until it is paid up to you in full, shall carry compound interest at the rate of Rs. 1-0-6 (one rupee and six pies) per cent
per mensem with annual rests calculated according to the Telugu calendar months and for Adhikamasams-also, and the principal and interest so
aggregating shall be paid up to you by me in instalments as fixed hereunder.
In the lower Court, the first defendant raised various issues such as that the mortgage deed was invalid and unenforceable, that the suit was
barred by limitation, that he was an agriculturist entitled to the benefits of the Madras Agriculturists'' Relief Act, that the suit was barred u/s 67A of
the Transfer of Property Act, and that the rate of interest was exorbitant and usurious. The learned Judge found that the mortgage bond was fully
and duly supported by consideration, and was enforceable. He further held that as a result of a payment of Rs. 10 towards the principal and Rs.
10 towards the interest due under the mortgage bond on 17-3-1938 and the endorsement thereof by the first defendant on the mortgage bond,
limitation was saved as there was an acknowledgment of liability find hence the suit was in time. It was further found, by the learned Judge that
there is no evidence that the first defendant ever owned even a leasehold interest in agricultural lands and therefore he was not entitled to the
benefits of the Madras Agriculturists'' Relief Act.
On issue 4 as to whether the rate of interest was exorbitant, the learned Judge found that the principal amount of Rs. 23fil-9-6 had swelled, up as a
result of compound interest with annual rests at the rate of Rs. 1-0-6 per cent per mensem to Rs. 24951-15-6. He further held that on the
evidence the rate of interest was excessive and that the transaction was substantially unfair between the parties. Such being the case, it was
decided to give relief to the first defendant under the provisions of the Usurious Loans Act. The plaintiffs were therefore given a decree for a sum
of Rs. 6621-9-9 made up of the balance principal amount of Rs. 2341-9-6 with simple interest at 9 percent per annum. Further interest and
proportionate costs were also allowed.
There is no cross appeal by the first defendant against the decree passed for a sum of Rs. 6621-9-9 but he has filed an application for adducing
additional evidence in appeal under Order XLI, Rule 27, C.P.C. in order to prove that he was an agriculturist & therefore entitled to the benefits of
the Madras Agriculturists'' Relief Act. The affidavit in support of the application does not show any sufficient or justifiable material as to why we
should exercise our discretion in favour of the first defendant and allow the documents to be admitted as additional evidence. The conditions
prescribed by Order XLI, Rule 27, C.P.C. which have been recently explained in a judgment of the Supreme Court are conspicuous by their
absence in the present case. We therefore do not feel justified in admitting the documents as additional evidence.
The appellants'' argument is based mainly on the circumstance that there was no unfairness as between the parties at the time Ex. P-1 was
executed. Both were Vysya merchants lending money to others and both knew the nature of the transaction. The evidence of the plaintiffs'' clerk as
P.W. 1 is to the effect that Rs. 1-0-6 per cent per mensem compound interest with annual rests was then the usual prevailing rate of interest. On
this aspect of the case, it is urged by Mr. K. Venkatarama Raju for the appellants that there is no sufficient cross-examination of P.W. 1. The
evidence on the side of the defendant consists chiefly of himself examined as D. W. 1 and he deposes that the usual rate of interest under mortgage
bonds at that time was 12 annas 3 pies to 13 annas simple interest.
He further deposed that he used to execute promissory notes at simple interest of 13 annas and 14 annas. According to him, at the time the
mortgage was executed he was indebted to the extent of nearly Rs. 6000 and therefore the plaintiffs'' father and M. Subbayya filed an insolvency
petition against him in the District Court because of a mortgage executed by him to one Jaldu Subbarao and that was considered to be an act of
insolvency. After the filing of the insolvency petition, plaintiffs'' father and Subbayya wanted the suit mortgage and another document to be
executed and if that was done, they promised not to press the insolvency petition. Thereupon the first defendant was afraid and executed the suit
mortgage. In cross-examination questions were put to him to show that the previous averments were incorrect and that he was fully aware of the
nature of the transaction and that at present the hypotheca is worth Rs. 1,15,000. What we have to decide is whether the transaction was fair
between the parties on the date of Ex. P-l.
The learned counsel for the appellants invited our attention to the fact that the previous promissory note, Ex. P-2, dated 24-3-1923, also
contained a provision for compound interest at the rate of Rs. 1-0-3 per cent per mensem. Further a mortgage bond, Ex. P-5, dated 21-7-1924,
contained stipulations in various places that compound interest at the rate of Re. 1-0-0 per cent per mensem would be paid. It was also brought to
our notice that Ex. P-3 of even date as Ex. P-l also contains the same stipulation, viz., Rs. 1-0-6 per cent per mensem compound interest. Such
being per rate of interest neither was the rate of interest excessive, nor was the transaction unfair between the parties. An earlier promissory note of
20th March l''J17 also contained stipulations regarding interest in exactly the same way. The statutory provision relating to relief to be given where
the transaction is considered to be an usurious loan of money is contained in the Usurious Loans Act of 1918 (Central Act X of 1918). Section 3,
Sub-sectoin (1) is as follows:
Notwithstanding anything in the Usury Laws Repeal Act, 1855, where in any suit to which this Act applies, whether heard ex parte or otherwise,
the court (has reason to believe, (a) that the interest is excessive; and (b) that the transaction was, as between the parties thereto, substantially
unfair, the court may exercise all or any of the following powers, namely......)
By Madras Act VIII of 1937, the portion within brackets has been amended by the insertion of the clause in the following terms:
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...
According to the Central Act as it stood prior to the amendment, unless the court has reason, to believe that the rate of interest is excessive and
that the transaction as between the parties was unfair, no jurisdiction is conferred on the court to give relief by exercising the remedies enumerated
therefor. It is not as if the two Sub-clauses (a) and (b) are disjunctive. They are connected together by the conjunction and therefore both the
criteria are necessary in order to attract the operation of the section. Not only should the interest be excessive but the transaction must be unfair
between the parties. One can contemplate cases where interest alone is excessive but there was no unfairness in the transaction. Vice versa, it can
be visualised that there was unfairness between the parties but the interest is not excessive. If, therefore, only one of the necessary ingredients is
present, the Act as it stood prior to the Madras amendment could not be applied. But after the amendment in 1937, if the court is reasonably
convinced that the transaction as between the parties was unfair, then the court shall exercise one or more of the powers.
The Madras amendment also introduced a new Explanation I to the following effect:
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.
The explanation incorporates Clause (a) of Sub-section (1) of Section 3 by providing for the excessive nature of the interest. According to the
explanation, if the interest is excessive, then the court is bound to presume that the transaction was substantially unfair. But it is open to the lender
to rebut such presumption by proof of special circumstances justifying the rate of interest: that is, when once the court is satisfied that the interest is
excessive, then it has necessarily to presume that the transaction was unfair and the presumption being rebuttable, it is open to the opposite party to
let in sufficient evidence to show that the rate of interest was not excessive in the circumstances of the transaction.
There is a further proviso to Clause (b) of Sub-section (2) of Section 3 which says that in the case of loans to agriculturists, if compound interest is
charged, the court shall presume that the interest is excessive. The question whether by merely charging compound interest, the rate of interest can
be considered to be excessive, would arise if the defendant was an agriculturist. We have already expressed our opinion that on the material
placed before the lower court there are no sufficient data to come to the conclusion that the defendant was an agriculturist. Therefore we have to
decide, on the footing of the defendant not being an agriculturist, whether, the rate of Rs. 1-0-6 per cent per mensem compound interest with
annual rests is excessive in the circumstances of the case.
Our attention was invited by learned counsel for the appellants to the observations of their Lordships of the Judicial Committee contained in --
''Lala Balla Mal v. Ahad Shah'', 35 M.L.J. 614 , to substantiate his argument that in money lending transactions the mere fact that the sum
ultimately claimed exceeds enormously the amount originally advanced is no ground for holding that the transaction was unconscionable. It must
also appear that there is something unconscionable either in the original dealings or in the subsequent stages of the transaction. The mere fact that a
sum of Rs. 2351 has swelled up to more than ten times that amount during the course of nearly twenty years should not influence us in holding that,
at the initial stage of the transaction, there was any unconscionable bargain between the parties or that the transaction was unfair between the
parties, so argues the learned counsel for the appellants.
The facts of that case were somewhat exceptionable and have no resemblance to the circumstances which we have to consider and moreover their
Lordships were not considering the Usurious Loans Act or its amendment in Madras. There can be no difficulty whatever in agreeing with the
learned counsel that what we have to decide is whether there was something unconscionable or unfair in the original transaction or at any
subsequent stage of the transaction. We propose to consider this case nly in that aspect. We guard ourselves from being understood as in any way
being influenced by the fact that the original principal has now become augmented to the extent of ten times the sum at the time of filing the suit.
That ertainly is not a consideration which would weigh with us if we are convinced that at the time of the initial bargain there was nothing
unconscionable or unfair between the parties.
In the Usurious Loans Statute which was in force in the Federated Malaya States, there was a similar provision like Section 3(1) of Act X of
1918. It was enacted there that where, in ''any proceeding to which the enactment applies, whether ex parte or otherwise the court had reason to
believe that the interest is excessive and that the transaction was between the parties thereto substantially unfair, the court may exercise all or any of
the powers enumerated therefor. On a construction of that section, the Judicial Committee in -- ''Chetambaram Chettiar v. Loo Than Poo'', 1940
1 M.L.J. 68 held that where a loan has bean incurred for interest and this interest is added to the amount agreed to be due when a new transaction
is agreed between the parties which includes the payment of interest as an acknowledged debt, this is not in principle open to any sound objection.
Their Lordships further held that the charge of 24 per cent interest per annum should be presumed to be unfair and should be reduced to 15 per
cent compound interest. In discussing the legal aspect of the case Lord Fairfield referred to the English decisions, chiefly to -- ''Cauringtons Ltd. v.
Smith'', (1906) 1 K.B. 79 as well as the decision of the Court of Appeal in -- ''Reading Trust v. Spero'', (1930) I K.B. 492 to which the learned
Law Lord himself as Lord Justice Greer was a party.
Our attention was further invited to -- Nageswara Ayyar Vs. M.L.M. Ramanathan Chettiar and Another, , a judgment of Varadachariar and Bum
JJ. where the learned Judges held that for a transaction to be regarded as unfair within the meaning of Sub-section (d) of Clause (2) of Section 3 of
the Usurious Loans Act, it is not necessary that the court should be able to ascribe some moral blame worthiness to the creditor in the sense that
he has tricked the debtor into entering into that bargain, though the terms of Sub-clause (d) show that taking undue advantage of the position of the
debtor is one category of issues falling under that clause. The learned counsel stressed chiefly one aspect of similar transactions referred to in the
judgment, viz., that a debtor ought not to invoke the aid of the court in his favour merely because, by his own default in repaying the loan, the
amount has swelled considerably. For that purpose, the learned Judges relied upon the observations of the Judicial Committee in -- ''Lala Balla
Mal v. Ahad Shah'', 35 M.L.J. 614 which we have already referred to.
It has been strenuously argued before us that in this case both the parties knew what the rate of interest was, that there was no kind of undue
influence being exercised upon the defendant by the plaintiffs'' father, and that simply because, after haying borrowed the money, the first defendant
did not act according to the terms of the mortgage and pay the amount within the time fixed or for nearly twenty years, he could not, now come
forward and plead that he should be relieved from the contractual obligation of paying the interest that is imposed upon him by invoking the
provisions of the Usurious Loans Act. In matters like this, the learned counsel contends, sympathy ought not to play any part whatever and that
where people with open eyes do not pay their legitimate debts, the courts should not help them unless, at the initial stage of the transaction there
had been some kind of undue influence or unfairness or unconscionable bargain between the parties.
In this connection we may also refer to a very recent decision in -- ''Venkataraju v. Venkataramana'', 1951 2 M.L.J. 34, where Panchapagesa
Sastry J. had to consider a case in which the defendant purchased a property from its prior owner undertaking to discharge a mortgage for Rs.
2000 of the year 1922. After making some payments, ultimately the suit mortgage was executed in 1935 for Rs. 3344 with interest at 9 per cent
compound. The question was whether the rate of interest was usurious, excessive and unconscionable. The learned Judge held that when the
property had been purchased with a direction to pay off the mortgage and the defendant, instead of doing so, found it convenient to renew the
mortgage and he could not make any payments till 1947 for want of money, the fact that the property had appreciated in value to a considerable
extent mainly by unearned increment is not a ground to justify the defendant keeping the benefit of the increment to himself in respect of the
mortgaged property as agreed to by him voluntarily and willingly in the deed of mortgage. It was held that there was therefore no case of any
unconscionable nature of the transaction.
We have to remark that in none of these cases the statute as it now obtains in Madras has been considered. We have already explained the
effective nature of the amendment introduced by the Madras Act and the explanation which says that where the court is satisfied that the interest is
excessive, then it has necessarily to hold that the transaction was unfair between the parties. There is a similar amendment to the Central Usurious
Loans Act introduced in the United Provinces; and in -- ''Ram Narain v. Chandrika Prasad'', 14 Luck. 49 and -- ''Sarsuit Prasad v. Baijnath
Singh'', 14 Luck. 464 the learned Judges of the Oudh Chief Court had to consider the effect of that amendment. They held that cases coming
before courts after the passing of the local amending Act must be decided according to the principles laid by the Act and therefore the court can
relieve the debtor of liability in respect of excessive interest not only when the interest is excessive and the transaction was substantially unfair, hut
also where either the interest is excessive or the transaction is substantially unfair. They discussed various cases of that court as well as of the Privy
Council.
In the case reported in -- ''Sasruit Prasad v. Baijnath Singh'', 14 Luck. 464 the learned Judges we''re of opinion that if the stipulated rate of interest
varies between 9 per cent and 24 per cent, the court has discretion, regard being had to all the circumstances, to hold that it is excessive.
What we have therefore to decide is whether Rs. 1-0-6 per cent per mensem compound interest with annual rests is excessive. In a case where
the mortgagor gave ample security for the loan and there were no encumbrances on or other claimants to the mortgaged property, it was held that
prima facie and in the absence of special circumstances to the contrary, the rate of 12 per cent per annum simple interest may be taken as a fair
and proper rate and that the condition for compounding it would make it an excessive rate and transform the transaction into substantially unfair
one. See. -- ''Gajraj Singh v. Muhammad Mushtaq All'', 56 All 263.
Lord Buckmaster in delivering the judgment of their Lordships of the Judicial Committee in -- Narain Das v. Abinash Chandar'', 36 M. L. W. 780
observes at pages 783 and 784 as follows:
The final question with regard to the amount of interest that has been allowed against the appellant can be disposed of in a few sentences. The rate
is 12 per cent. It appears, according to our notions in this country, a high rate of interest, but that has nothing whatever to do with the matter which
their Lordships have to consider. It may very well be that having regard to the local conditions in India, it is a very proper and reasonable rate to
impose, and their Lordships sec no reason whatever why any alteration should be made as to the amount.
So their Lordships of the Judicial Committee take'' it that 12 per cent simple interest is a very reasonable and proper rate of interest in India. The
decision of their Lordships referred to above has been discussed in -- ''Gajraj Singh v. Muhammad Mushtaq Ali'', 56 All 263 and the learned
Judges point out that in the absence of special circumstances to the contrary, the rate of 12 per cent per annum simple interest may be taken as a
fair and proper rate.
In -- ''Ram Bhujawan Prasad Singh v. Nathuram'', 50 Ind. App. 14 (PC) the Privy Council held that one per cent per mensem simple interest
is a fair commercial rate in the absence of special circumstances justifying a higher rate. After considering these and various other cases, Bennett
and Verma JJ. in -- Ziaul Rahman and Others Vs. Mt. Ganga Dei and Others, observe that in the United Provinces this rate is a proper rate. We
are also of opinion that in the Madras State it has been long understood that 12 per cent simple interest is a fair, proper and reasonable rate.
In -- K. Venkanna Chettiar and Sons by Managing Partner, K.V. Muthukrishna Chettiar Vs. K.K. Shaik Muhammad Rowther and Another,
Patanjali Sastri J. had to consider the proviso to the Explanation to Section 3 introduced with the object of relieving indebted agriculturists by
laying down that if compound interest is charged, the court should presume that interest is excessive where the loan is to an agriculturist. The
learned Judge considered the effect of the Madras amendment also. Though that was a case relating to agriculturists, we are of opinion that the
observations there are of considerable help for deciding this case. In a case where the debtor was an agriculturist, Rajamannar C. J. and
Krishnaswami Nayudu J. in -- ''Sevugan Chettiar v. Chinnasami Reddiar'', 1950 1 M.L.J. 181 held that the rate of 12 per cent per annum simple
interest was propel- and that wherever there is compound interest the same should be deemed as excessive whatever the rate may be. We do not
think that anything very useful can bo gathered from the decision of Horwill J. in -- Kattamuri Narasimhan Vs. Thumurugoti Premayya, .
The effect of Madras Act VIII of 1937 by which Sub-section (1) of Section 3 of the Usurious Loans Act was amended and explanations and
provisos were added is to make it obligatory upon the. court to find out whether there is excessive interest and when once that is done to presume
that the transaction was unfair. 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. In our opinion, whatever might have been the rates prevailing prior to 1918, it should be
deemed as stated by Varadachariar J. in -- Nageswara Ayyar Vs. M.L.M. Ramanathan Chettiar and Another, that the enactment of the Usurious
Loans Act was intended to cover cases which could not ordinarily he governed by Section 16 of the Contract Act. The transaction may not be
subject to the infirmities contemplated by the provisions of the Contract Act. such as undue influence or coercion. But still where the rate of interest
is excessive after the amendment it is possible for the court to presume that the transaction was unfair. The mere fact that in earlier transactions Rs.
1-0-6 per cent per mensem compound interest was charged would not make that rate of interest reasonable.
Mr. Venkatarama Raju''s argument that the mere fact that in Ex. P-2 and Ex. P-5 of 1923 and 1924 as well as in Ex. P-3 of even date as Ex. P-l,
interest was charged at Rs. 1-0-6 per cent per mensem compound interest should make the present transaction also a proper transaction does not
appeal to us because Ex. P-3 was executed in favour of Subbayya who was one of the persons who initiated the insolvency proceedings. Exhibits
P-5 and P-2 were in favour of the plaintiffs'' father. These transactions themselves may be unconscionable and unfair and we cannot, by comparing
those transactions, assume that the present transaction was fair and equitable. We therefore hold that Rs. 1-0-6 per cent per mensem compound
interest with annual rests is excessive within the meaning of the explanation inserted by Madras Act VIII of 1937 and that being so, the transaction
was unfair between the parties and the respondents are entitled to the benefit of the Usurious Loans Act as amended by the Madras Act VIII of
1937. The learned Judge has allowed 9 per cent simple interest. For the reasons which we have already given, especially in view of the
observations of the Judicial Committee, it seems to us that 12 per cent simple interest is fair, reasonable and just.
We, therefore, allow the appellants 12 per cent simple interest on the principal sum. The decree of the lower court will be modified
accordingly. As the first defendant-first respondent by not paying any substantial amount for nearly 20 years has contributed to the swelling up of
this principal sum, we feel that in the circumstances of the case he will have to pay the appellants'' costs both in this court and in the court below
and bear his own, and we order accordingly. Time for redemption 4 months.