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Judgment
Venkatasubba Rao, J.—It is sufficient for the present purpose to refer to the terms of the mortgage-deed, dated 23rd November 1911 (Ex.
B). By that deed, defendant 1 agrees to repay the sum lent, namely Rs. 5,000, with simple interest at Rs. 1-0-3 per cent per month by 23rd
November 1912, (that is, one year), and in default to pay the said amount with compound interest at the enhanced rate of Rs. 1.2-3 per cent per
month with annual rests. It is common ground that a stipulation for the payment of compound interest at a rate higher than that of simple interest is a
penalty within the meaning of Section 74, Contract Act, and can be relieved against. But the question that has been debated is, What is the extent
of the relief that can be granted? It is contended for the plaintiff, that this stipulation consists of two separate and severable parts, one of which is
not penal; but that the joining of the two makes it a penalty. The argument is put thus: A stipulation to pay compound interest at an enhanced rate
amounts to stipulating te pay compound interest at the same rate (this part being not penal) along with an additional or a further sum (this part being
penal). In regard to the former part, it is outside Section 74 and the amount can in no circumstances be reduced; but in regard to the latter it
amounts to a penalty and the Court can relieve against it. First, then, is the argument, that a stipulation to pay compound interest at the same rate is
never a penalty ounds? On this point, there is a preponderance of authority in favour of ithe plaintiffs'' contention. The position for which they
contend is assumed in Veera Beddi v. Madam Subanna (1910) 8 IC 339 and in Venkataohalam Chetty v. Veerappan Ambalagaran (1912) 14 IC
In Sundar Koer v. Rai Sham Krinhen (1907) 34 Cal 150 their Lordships of the Judicial Committee make the following observation:
Compound interest is in itself perfectly legal, but compound interest at a rate exceeding the rate of interest on the prinoipal moneys, being in excess
of and outside the ordinary and usual stipulation, may well be regarded as in the nature of a penalty.
This passage has not received a uniform interpretation. In Venkataramiah v. Subramania AIR 1917 Mad 5 Abdur Rahim, J., with whom
Seshagiri Ayyar, J., concurs, observes:
All that the Judioial Committee held in that case was, that a stipulation to pay compound interest at a higher rate than what was originally agreed
upon might be regarded as penalty. They do not say that in no case the stipulation to pay compound interest, if at the same rate, can be regarded
as penalty.
The learned Judges repelled the contention, that no stipulation for payment of compound interest at the same rate as the original rate of interest
should be treated as a penalty. Abdur Rahim, J., goes on to say:
I do not see any distinction in principle between such a case and a Case where a higher rate of simple interest is provided for.
The original rate there was 18 per cent simple interest. On certain default being made, compound interest at the same rate was payable. This
provision was held to be penal and the Court allowed only 18 per cent simple interest and a further sum of Rs. 100 as compensation. It must be
noted, that in that case Seshagiri Ayyar, J., observes that G. Seetharamiah v. T. Pitohayya AIR 19154 Mad 1054 to which he was a party, does
not establish the contrary. The decision in Venkataramiah v. Subramania AIR 1917 Mad 5 has been dissented from by Ayling and Odgers, JJ., in
Malli Chettiar Vs. Veeranna Tevan and Others, and by another Bench of this Court in Ananjaperumal Konar (dead) and Another Vs. Pichamuthu
Nadar and Another, . The point again came up for decision before Krishnan and Odgers JJ., in Bamlingam v. Subramania AIR 1927 Mad 620.
Odgers, J., adhered to the view he had expressed in Malli Chettiar v. Veeranna Tevan AIR 1921 Mad 378, but Krishnan J.''s approval of the rule
was only qualified. Says the learned Judge:
That a stipulation by way of compound interest is not necessarily a penalty has been laid down by the Privy Council in Sund.ar Koer v. Bui Sham
Krishnen (1907) 34 Cal 150.
In that passage, I underline the word necessarily. The original rate of interest was 24 per cent simple; the interest payable on default was 24
percent compound with six months rests. Krishnan, J., goes on to observe that on the evidence in the case he did not consider that the agreement
to pay enhanced rate was a penalty. The plaintiff, therefore, cannot rely upon the view of Krishnan, J., as supporting their contention. So much then
for the cases on the point. When it is said that agreeing to pay compound interest at the same rate is not a penalty, what does that statement imply?
Let us suppose, that the agreement is that the interest shall be paid at the end of the year.
If the debtor keeps his word and pays the interest, the lender can again lend out that sum and earn interest upon it. In that sense, a provision to
pay compound interest at the same rate is a normal incident of a business transaction and cannot be regarded as penal in (nature; but supposing,
that under the contract interest at a certain rate is payable annually, but the default clause which makes the compound interest payable at the same
rate provides that the rests shall be not annual but monthly, is there any reason to hold that this provision is not in the nature of a penalty? Then let
us take the present case. The deed provides that both the principal and the interest shall be paid at the time fixed; in default, the compound interest
provision is to take effect. The liability to pay compound interest arises alot only on the breach of the covenant to pay the interest that accrues due
but the principal as well. In such a ease, can it be said that the object of providing for compound interest is nothing more than to enable the lender
to earn interest upon his interest that is, the interest which in due course he would have received? If the borrower pays off the interest on the due
date, the compound interest provision becomes innocuous; but under this bond (Ex. B), the lender can refuse to receive interest on the due date
unless the principal also is paid along with it. It seems to me that not only are the decisions conflicting but that they should be examined with special
reference to the distinction to which I have adverted.
Assuming that a stipulation to pay compound interest at the original rate is never a penalty, is there any reason for holding that when compound
interest at an enhanced rate is agreed to be paid, the Court must treat the agreement as consisting of two parts, as contended for by the plaintiff? It
may be that the Court in the exercise of its discretion may grant as reasonable compensation, on a consideration of the entire evidence, compound
interest at the original rate. But the question is, is it bound to do so? In other words, is that to be regarded as an inflexible rule of law? Mr.
Varadachari, the plaintiffs'' learned Counsel, has no doubt been able to point to several cases where the Court, after holding that the term regarding
payment of compound interest at an enhanced rate is a penal provision, allowed compound interest at the original rate: P.C. Muthu Chettiar Vs.
Maruthanayagam Pillai and Others, , G. Seetharamaiah v. Pitehayya AIR 1915 Mad 1054 Anna, malai v. Veerabhadram (1903) 26 Mad 111,
Sundar Koer v. Rai Sham Krishen (1907) 34 Cal 150 and Sreenivasa v. D. Bangia AIR 1915 Mad 529. In the first two of these cases merely
compound interest was allowed In the remaining three, a further sum was allowed over and above such compound interest at the original rate. Mr.
Varadachari''s contention is that the cases recognize the doctrine of splitting up to which I have referred; in other words, the argument amounts to
this that compound interest at the original rate along with some compensation (though a nominal sum, for the breach, is the minimum sum that the
Court can allow. The short observation in the very concise judgment in Annamalai v. Veerabhadram (1903) 26 Mad 111:
The stipulation in the document for of compound interest must be looked pensation for non-payment of interest only and not for non-payment of
principal,
has been relied upon as supporting the theory of splitting up. This case, under, stood in this sense, Kamesam, J., has refused to follow in Muthu
Cheitiar v. Maruthanayagam Filial AIR 1930 Mad 111, but, in my opinion, it decides nothing of the kind. The Advocate-General for the defendant
relies, on the other hand, on the Zamin-dar of Karvetnagar v. Subbaraya Pillai AIR 1919 Mad 1127, and numerous unreported decisions, for
showing that where there was a term for payment of compound interest at enhanced rate, the Courts felt themselves free to deal with the matter as
one entirely within their discretion. In the Zamindar of Karvetnagar v. Subbaraya Filial AIR 1919 Mad 1127, the original rate was 6 per cent
simple interest. In the event of a default, 12 per cent compound interest was agreed to be paid. The Court granted not 6 per cent compoud
interest, but 12 per cent simple interest. To the facts of the unreported decisions cited before us, it is unnecessary to refer; it is sufficient to state
that they all bear out the learned Advocate General''s contention. The conflict between the two sets of cases is, in my opinion, only apparent, but I
think it eminently necessary that the question should be set at rest. A stated provision is either penal or not penal; if it is penal, the whole matter is
left at large and there can be no middle course. Varada-chari by way of answer, contends thus: Where a creditor stipulates for compound interest
at the same rate, he gets it; why should the fact that another stipulates for a higher rate, place him at a disadvantage? The answer, to my mind, is
perfectly simple.
In the first case, the Court holds that there is nothing objectionable in the contract and it accordingly enforces it; in the second case, the contract
as such is in the view of the Court, unenforceable. How can it then make a new contract for the parties? How can it say, for the contract which the
parties have made, I shall substitute a fresh contract to some extent and for the remaining I shall substitute a fresh contract to some extent and for
the remaining, I shall make such order as I think best? This is opposed to the fundamental conception of contracts and to the well understood
duties of Court in regard to th9m. By way of illustration, I may refer to Kola Ghand v. Shilohunder (1892) 19 Cal 392 (F.B.). That decision was
given before the explanation to Section 74 was added by the amending. Act 6 of 1899, Section 4. The point arose, where a term amounts to a
penalty, does it go to the whole sum which accrues due, or, can it be split up into two distinct sums, namely, the money claimed from the date of
the bond to the date of the default and secondly, from the date of the default to the date of realization? The Pull Bench of the Calcutta High Court
repelled the contention which implied that the Court can make a new contract for the parties.
I therefore refer the following quesitions for the decision of a B''ull Bench 1. Is a stipulation for payment of compound interest at the original rate
in no circumstances a penalty? 2. Where the stipulation is to pay compound interest at the enhanced rate, is it to be treated as consisting of two
distinct and severable parts, namely, stipulating to pay compound interest at the same rate (this part not being penal) along with an additional or a
further sum (this part being penal), and is the latter part only that can be relieved against?
Curgenven, J.
I agree with the terms of the proposed reference. It is fairly well settled that compound interest at the original contract rate is not a penalty
within the meaning of Section 74, Contract Act, where it becomes payable upon default of payment of interest only. This view seems to have
formed the basis of certain observations of the Privy Council in Sundar Koer v. Rai Sham Krishen (1907) 34 Cal 150 and is indeed difficult to
escape from when we consider that a bond which simply provides for compound interest is identical in effect with a bond which provides for
simple interest, and for compound interest in default of due-payment of interest. But, as my learned'' brother points out, there are at least two other
classes of oases (and cases compounded of the two classes) where the principle is not so clear nor the authorities so reconcilable Compound-
interest may be stipulated for as a consequence of default in payment of principal as well as of interest, and if in such a case the creditor may refuse
to accept interest, although punctually tendered, so long as the principal due remains unpaid, I doubt, whether the language used by the Privy
Council in Sundar Koer v. Rai Sham Krishen (1907) 34 Cal 150 would apply. There is secondly the class of oases where compound interest at a
higher rate becomes payable, either for failure to pay interest only, or principal plus, interest. Is the entire enhancement-the conversion of simple to
compound interest as well as the rise in rate-in the nature of a penalty which may be relieved against, or does it lie only in the increase in rate, and
not in the conversion of the interest from the one kind to the other? Such questions frequently arise, and if the Courts are not to have an unfettered
discretion it is desirable that the scope of their powers should be authoritatively laid down.
Ramesam, J.
The suit out of which this appeal arises was filed on the footing of two mortgage bonds, Exs. A and B, dated 22nd and 23rd November 1911,
respectively. Ex. A is for Rs 6,000. It stipulates for an interest of 12.3/16 per cent per annum It provides for the payment of principal and interest
at the end of November 1912. In default of payment compound interest at the rate of Rs. 1-2-3 per cent per mensem with annual rests was
provided for. Ex. B is for Rs. 5,000. It provides for the payment of principal and interest by 23rd November 1912. The rate of interest and the
compound interest in default of payment are the same as in Ex. A. The debtor made two payments of Rs. 1,000 each on 23rd May 1914 and 17th
January 1916 towards the first document and another payment of Rs. 500 on 23rd May 1914 towards the second document. Calculating
according to the terms of the document and giving credit to these payments with counter interest the amount claimed in the plaint was Rs. 50,886-
6-9. Defendant 1 was the executant of the documents. The mortgaged properties were purchased by defendant 2 and he is therefore impleaded.
Defendant 6 is a purchaser of some of the properties from defendant 2 and he is also therefore impleaded. It is unnecessary to refer to the other
defendants. Issue 6 in the case raises the question whether the rate of interest was penal. The other questions raised by the defendants relating to
some arrangements between the plaintiffs and defendants, and estoppel precluding the plaintiffs from claiming interest at 12-3/16 per cent per
annum, are the subject of issues 6 and 7 and they having been decided by the lower Court against the defendants need not be referred to here. The
Subordinate Judge, finding that the clauses in the documents relating to interest amount to stipulations by way of penalty within the meaning ''of
Section 74, Contract Act, awarded as reasonable compensation simple interest at the rate of Rs. 1-2-3 per cent per annum and accordingly gave
a decree for Rs. 32,368-1-3 as on 3rd September 1928 including costs. An arithmetical error in his decree will be referred to later on. The
plaintiffs filed this appeal.
The appeal originally came on before our brothers Venkatasubba Rao, J., and Curgenven, J., and the following two questions were referred to
the Pull Bench : (1). Is a stipulation for payment of compound interest at the original rate in no circumstances a penalty? (2). Where the stipulation
is to pay compound interest at an enhanced rate, is it to be treated as consisting of two distinct and severable parts, namely, stipulating to pay
compound interest at the same rate (this part not being penal) along with an additional or a further sum (this part being penal), and is the latter part
only that can be relieved against?
The appeal accordingly comes before us The first question referred to us obviously refers to a secondary stipulation for payment of compound
interest and not to a primary stipulation. It could not refer to a primary stipulation for payment of compound interest because no such question
arises in this case, not to say that the answer to it is perfectly plain. Taking it therefore that the first question refers to a secondary stipulation for
payment of compound interest at the original rate, here again the point does not arise in this case, for the stipulation for payment of compound
interest is at an enhanced rate and it is agreed on all hands that that stipulation is a stipulation by way of penalty whatever the exact meaning of the
word ""penalty"" may be. Mr. Varadachari, the learned advocate for the appellants, addressed to us a lengthy argument on the meaning of the word
'' penalty"" in Section 74, Contract Act. We think it is used in the sense of a secondary stipulation which provides for the payment of an additional
burden on default. It is said that all compound interest is payable only on default of payment of interest, and in that sense the stipulation for payment
of compound interest would always be penalty in the sense suggested above. This is not so. The parties may themselves contemplate at the time of
the transaction that there might be delays in payment and in such cases compound interest at the same rate should be provided for and in such
cases the theory on which all Courts have hitherto proceeded is that compound interest at the same rate is not a penal term in a primary stipulation.
On account of the difficulty of expressing the idea of compound interest in vernacular there may be a number of sentences in a document which
may have the appearance of a secondary stipulation. Where the rate is the same as a matter of construction the Court should properly construe the
stipulation as to compound interest as a primary stipulation unless such a construction is impossible.
Where the rate is increased it is to be certainly regarded as penalty. It is unnecessary to discuss this question as to the exact meaning of the
term ""penalty"" as it is agreed on all hands that the stipulations in these documents amount to stipulations by way of penalty within the meaning of the
section of the Act. If so, it follows that the Court should award reasonable compensation not exceeding the amount of the stipulation. This means
that the Court sometimes may award to the plaintiff the amount according to the secondary stipulation as a reasonable compensation. But, of
course, it is not so bound to give. What the Court should give depends on the actual circumstances of each case. Mr. Varadachariar contended
before us that in all such cases as this, this Court should always award to the plaintiff compound interest at the original rate. While conceding that
the Court may sometimes do so, we do not think it is safe to lay down any such inflexible rule of law. There are undoubtedly cases in which
compound interest at the original rate has been awarded. One such case is the decision of myself and Jackson, J., Jn Muthu Chettiar v.
Maruthainayagam Pillai AIR 1930 Mad. 428. In that case the appellant contended for the compound interest at the enhanced rate and he relied on
the decision of the Privy Council in Sundar Koer v. Raisham Krishen (1907) 34 Cal 150 for arguing that even compound interest and also some
enhanced rate of interest may be awarded.
In the Calcutta case there were two documents. The first document provided for payment of interest at 10 per cent per annum every six
months. In default of any one payment the interest is to carry compound interest at the rate of 18 per cent per annum. On a second default in the
payment of interest the bond has to carry higher rate of interest, namely 12 per cent, the clause about compound interest operating on such higher
interest. The High Court and the Privy Council awarded interest on the bond at the rate of 12 per cent, but compound interest on it at the rate of
10 per cent, i.e., the original rate. As''I remarked in the decision in Muthu Ghettiar v. Maruthainayagam Pillai AIR 1930 Mad. 428 the documents
in the Calcutta case were very peculiar. They contained two separate stipulations by way of penalty on two defaults, a circumstance which is
unique in documents of this kind, and it is very difficult to shake off the feeling that those stipulations to some extent influenced the decisions of the
Courts in that case. But whatever it may be, the reasoning and the actual decision only show that the Courts have awarded what they thought
reasonable compensation in the circumstances of that case and the expectations of the parties. No case lays down any rule of law that in cases like
these compound interest at the original rate should be allowed. The matter is in the discretion of the trial Court. No doubt such discretion ought to
be judicially exercised.
Whether the original rate was a rate low enough like 8, 9 or 10 it may be that compound interest at that rate may be reasonably allowed ; but
where the original rate is high, anything like 12 per cent or more, one should be very cautious in awarding compound interest at the original rate. I
make these remarks merely as illustrative of my ideas and I do not intend to lay down any rule of law or any guiding principle intended to fetter the
discretion of the first Courts in dealing with such a matter. In this case the Subordinate Judge has exercised the discretion, and we do not see that
he misdirected himself on any principle of law in using his discretion. The Appellate Side Rules enable us to dispose of the case without answering
the questions referred and without the necessity of sending the case back to the Divisional Bench, vide. Rule 3 of the Appellate Side Rules. As we
proceed to dispose of the case it is unnecessary to answer the second question also.
While awarding simple interest, the Subordinate Judge in para. 17 of his judgment directed that Rs. 2,500 with corresponding interest should
be deducted. This is erroneous. At the time of these payments much more than the amounts paid was due towards interest to the creditor and the
payments should be credited towards interest only, and as the interest itself does not carry interest on the decree of the Subordinate Judge there
should be no counter-interest on these amounts. The"" counter-interest on Rs. 1,500 paid on 23rd May 1914 at the rate of Rs. 1-2-3 per cent per
annum amounts on 3rd September 1928 to Rs. 2,998-8-11, the counter-interest on the sum of Rs. 1,000 paid on 17th January 1916 comes to
Rs. 1,734-8-2, the total comes to Rs. 4,733-1-1. The sum mentioned by the Subordinate Judge as the total due on 3rd September 1928 would
be Rs. 37,101-3-0. As the appellants, though they lost on the main point raised in the case, have still substantially succeeded by their appeal to the
extent of Rs. 4,000 odd, I direct each party to bear his own costs. This disposes of the appeal.
There is a memorandum of objections by defendant 6. Defendant 6 purchased some of the mortgaged lands by a sale deed Ex. 8 dated 20th
February 1921 for Rs. 30,000. This amount was paid towards certain mortgages executed by defendant 1 and decrees against defendant 1 in
favour of one T. Sriramamurthi, Ex. 2 dated 19th September 1909, Ex. 3 dated 9th October 1911, Ex. 4 dated 15th October 1912, Ex. 5 dated
21st November 1912 and Ex. 6 dated 21st February 1913 and two decrees obtained in O.S. No. 8 of 1917 (Masulipatam Sub-Court) and 412
of 1915 (Gudivada Court). This Sriramamurti enter, ed into an agreement with defendants 1 and 2 and another that he would give a discharge of
all his debts on payment of Rs. 45,000 on certain dates: vide Ex. 7 dated 23rd March 1919.
On that date Rs. 7,500 was paid. Another Rs. 7,500 was to be paid on 26th April 1919 and another Rs. 30,000 on or within 30th November
1919. These sums were paid in February 1912 and his bonds and decrees were discharged. The first two amounts totalling Eupees 15,000 were
raised by defendant 2 otherwise, but the sum of Rs. 30,000 was paid by defendant 4 in pursuance of his sale deed, Ex. 8. Exs. 2 and 3 contain
endorsements on them dated 20th February 1921. According to these endorsements, the amount of Rs. 30,000 was paid towards Exs. 2, 3, 4, 5
and 6 and towards two decrees. Of these five mortgages, Exs. 2 and 3 are prior to plaintiff l''s mortgages, Exs. A and B. Defendant 6 now claims
that in respect of such portion of the amount he paid as has gone in discharge of Exs. 2 and 3 he should be subrogated to the position of
Sriramamurti and to this extent he is entitled to priority over plaintiff l''s mortgage, and the sale of the plaintiffs should be subject to his mortgage.
The Subordinate Judge dealt with this in para. 12. His conclusion was that the amount due to defendants 3,10 to 14, 6 and 8 cannot be
ascertained for want of sufficient materials. The other defendants have not filed memoranda of objections. So far as defendant 6 is concerned, we
have got all the five mortgages which he has paid off, and though the decrees are not available no priority is claimed in respect of them. So we have
got materials to dispose of this matter. We proceed to do so accordingly. The oral evidence of Sriramamurti as D.W. 3 shows that at that time Rs.
70,000 was due to him and he accepted Rs. 45,000 in total discharge. Now we find with the help of the accounts furnished by the learned
advocates on both sides, on 1st December 1919 a sum of Rs 1,750 was due on Ex. 2 and, a sum of Rs. 15,500 was due on Ex. 3.
Now it is contended by the learned advocate for defendant 6 that he should be subrogated to the benefit of the whole of these amounts as due
on Exs. 2 and 3 and only the balance after deducting these amounts from Rs. 30,000 should be regarded as having been paid towards the other
three mortgages and the two decrees. But it seems to me that this contention is not permissible. There is nothing to show that the amounts paid by
defendant 6 were taken towards the full discharge of Ex. 2 and 3 and the balance only in discharge of the other debts.
We must take it that all payments were made pro rata towards all the debts. Thus taking the proportions he must be taken to have paid Rs.
772 towards Ex. 2 and Rs. 6,838 towards Ex. 3. The creditor condoned the interest up to 20th February 1921. Defendant 6 would be entitled to
recover the amount of Rs. 772 and Rs. 6,838 with further interest from 20th February 1921, according to the terms of the bonds till payment with
compound interest and any decree that the plaintiffs can obtain should be regarded as subject to the mortgages in favour of defendant 6 for the
amounts so due on Exs 2 and 3 so far as the properties sold to defendant 6 are concerned. We accordingly pass a decree for sale subject to the
mortgage amounts due to defendant 6 with interest. In the lower Court defendant 6 would be entitled to costs calculated on Rs. 10,000 from the
plaintiffs which would be the sum due to him at the time of the written statement. In the memorandum of objeo-tions he will be entitled to costs
calculated on Rs. 15,000 to be paid by the appellants. We direct that in selling the properties the properties purchased by defendant 6 should be
sold, if necessary, after the other properties are sold to avoid the inconvenience of sale subject to mortgages. The plaintiffs, at their option, may
pay defendant 6 interest on both the amounts in respect of which priority is allowed, and ask for a sale for the total amount consisting of the
amount due to him and the amount so paid.
Time for redemption extended to six months from today. A fresh calculation will have to be made on this basis, i.e., the interest at the rate of
Rs. 1-2-3 up to the date fixed, on the principal amount will be calculated. As to the order in which the properties ought to be sold, the question of
the expediency of selling the properties of defendants 7 and 8 after the properties (not purchased by defendants 6 7 and 8) are sold will be
considered by the lower Courts in execution.
Anantakrishna Ayyar, J.
I agree. The suit was to recover money due on two hypothecation bonds executed by defendant 1 in favour of the plaintiffs. In my view, the
provisions of the two bonds are practically the same so far as the question u/s 74, Contract Act, is concerned. It is therefore enough to refer to the
terms of one of the bonds, Ex. B, dated 23rd November 1912. It is better to quote the terms of the bond:
As the consideration amount of the bond has been received in cash in the aforesaid manner, I shall pay the said principal amount with interest
thereon at Rs. 1-0-3 per cent per month by 23rd November 1912. If I fail to pay the same according to the due date, the interest of each year is
to be added to the principal and the amount of the principal and interest so accrued shall be paid by me with compound interest at Rs. 1-2-3 per
cent per month with annual rests till the entire debt is discharged.
The lower Court held that Section 74, Contract Act, applied to the case, and awarded to the plaintiff compensation by way of simple interest
at Rs. 1-2-3 per cent per mensem from the end of the first year to the date fixed by the decree for payment. The plaintiffs have preferred this
appeal, and their learned advocate claims compound interest at Rs. 1-0-3 per cent per mensem. Two questions have been referred for the
decision of the Full Bench. It seems to me that the case is clearly covered by Section 74, Contract Act, and that all that the plaintiffs would be
entitled to receive is reasonable compensation. As this is the main question in the appeal itself, we resolved to dispose of the appeal itself.
The present is not a case where the parties provided for one rate of interest for a particular time and for another rate, simple interest, thereafter
in respect of the principal amount, as was the case in Sundar Koer v. Rai Sham Krishan (1907) 34 Cal 150, nor is the present case, where
provision is made in the bond that only arears of interest should carry compound interest with yearly rests at a different rate, Sundar Koer v. Rai
Sham Krishen (1907) 34 Cal 150; nor again is the present a case where compound interest at the original rate was provided for in the document.
So far as Section 74, Contract Act, is concernedi it does not prohibit a primary contract to pay compound interest at a specified uniform rate. In
some of the vernaculars there would seem to be no specific vernacular expression corresponding to the English expression ""compound interest,
and consequently the idea has to be expressed by a number of ""words or phrases, and the Court will have to construe the contract in each case
whether it provides or not in the first instance for compound interest at ''the agreed rate. To use the words of the Privy Council at p. 158 of Sunder
Koer v. Rai Sham Krishen (1907) 34 Cal 150 ""Compound interest is in itself perfectly legal."" ""Provisions for payment of interest at a particular rate
on arrears of interest with yearly rests, would prima facie not be penal either: sea Sunder Koer v. Rai Sham Krishen (1907) 34 Cal 150. But, as
already remarked, the present is a case where the provision is that the principal and interest were to be repaid at the expiry of one year from the
date of the mortgage, the primary rate of interest being Rs. 1-0-3 ; the further provision is made that in case of default of payment as aforesaid,
com. pound interest, and that a higher rate namely at Rs. 1-2 3, was to be charged from the date of default. The present case comes exactly within
the decision of the Privy Council in Sunder Koer v. Rai Sham Krishen (1907) 34 Cal 150, where their Lordships remarked at p. 158 as follows:
That compound interest at a rate exceeding the rate of interest on the principal money, being in excess of and outside the ordinary and usual
stipulation, may well be regarded as in 4he nature of a penalty.
As the contract which has been broken in the present case contains a stipulation by way of penalty, (this in fact has been admitted by the
learned advocates) all that the plaintiffs would be entitled to receive from the defendant who has broken the contract would be ""reasonable
Compensation not exceeding the amount so named or the penalty stipulated for."" The question therefore arises what is such reasonable
compensation that should be awarded to the plaintiffs in this case. The lower Court, after considering the circumstances of the case, awarded as
compensation simple interest at the rate of Rs. 1.2-3 from the date o� default. It has noticed several circumstances in the case, such as, that the
suit mortgage bond was dated in 1911, the time for payment was 1912, and the suit was instituted only in 1924 and that the rate of interest
provided for in the first instance is Rs 1-0-3. No doubt it is open to the Courts if, in their discretion they choose to do so, to award compound
interest, but at the same time it is also open to the Courts to award compensation by decreeing simple interest at a rate not exceeding Rs. 1.2.3. It
was open to the parties in the present case to have primarily provided for compound interest with annual rests at Rs 1-0-3, if that was their
intention ; but they have not done so. I am not now deciding for the first time what compensation should be awarded to the plaintiffs in this case.
The lower Court has awarded compensation, and the question before the appellate Court is whether the decision of the lower Court in that respect
should be interfered with. Ordinarily, in such matters, an appellate Court would not be inclined to interfere with the discretion exercised by the
lower Court unless the lower Court''s decision was perverse or contrary to law, or unless the appellate Court is satisfied that the lower Court has
committed some error of law or has failed to take into account important circumstances appearing in the case. After considering all the
circumstances of this case I am unable to say that the lower Court''s decision is open to any such objection.
I do not think it necessary to discuss the various decisions referred to by the learned advocate for the appellants. After the amendment of
Section 74, Contract Act in 1899, the decisions under the old section, that stipulation for increased interest from date of default would not
ordinarily be stipulation by way of penalty, are no longer law, since the explanation to Section 74, added in 1899, states that a stipulation for
increased interest from date of default may be a stipulation by way of penalty.
It is open to the Court in particular cases to award as compensation the higher rate of interest mentioned in the document from the date of
default if it should hold in the particular circumstances that that would be the reasonable compensation that should be awarded to the plaintiff. We
are not now concerned with the provisions of the Usurious Loan3 Act, or other similar enactments, but we are now considering only the
applicability of the provisions of Section 74, Contract Act. In the above view of the main question arising in this appeal it is not necessary to
discuss separately the two questions referred to the Pull Bench, nor give separate answers for the same. The Subordinate Judge was however, in
error & decreeing counter interest on the three sums of Rupees 1,000, Rs. 1,000 and Rs. 500 paid by the first defendant. When the said amounts
were paid to the plaintiffs a larger amount was due to the plaintiffs as interest, and two of these amounts were specifically paid towards interest. As
the plaintiffs have not been awarded compound interest, it follows that the three sums aforesaid should be credited towards interest due to the
plaintiffs, and the lower Court was in error in allowing in favour of the defendant counter-interest on those three amounts. The lower Court''s
decision should be modified accordingly in that respect.
This disposes of the questions -raised in the appeal by the plaintiffs. Defendant 6 has preferred a memorandum of objections claiming
subrogation in respect of the amount of Rs. 30,000 paid by him as purchaser of some of the items included in the mortgage to the plaintiffs and also
in a prior mortgage executed by defendant 1 in favour of one T. Sriramamurthy. Ex. 7 is important in this connexion, and I agree with my learned
brother, Sir V. Eamesam, J., that defendant 6 would be entitled to be subrogated only to the extent mentioned in his judgment. As the plaintiffs
have succeeded partly in this appeal, and having regard to all the circumstances, I also agree to the order as to costs proposed by my learned
brother.
Cornish, J.
I think it would be inexpedient to attempt to formulate a rule, as we are invited by the order of reference to do, the effect of which ''''might be
to fetter the discretionary power vested in the Court by Section 74, Contract Act. Compound interest is, as their Lordships have said in Sundar
Koer v. Rai Sham Krishen (1907) 34 Cal 150, perfectly legal. Nevertheless, it may amount to a penalty (vide Explanation to Section 74), and it
will if, as appears from the case above-mentioned, it is excessive or abnormal. Penalty has been defined as something which a debtor is to pay
over and above his original liability as a punishment: per Lush, L.J., in Exparte Burden, In re Nail (1881) 16 Ch D 675. Judged by this definition
the stipulations in the mortgage bonds before us increasing the interest from 12i% simple to 184% compound interest in the event of default on the
due date for payment waa certainly in the nature of a penalty. The only raison detre for the enhancement could be the imposition of a penalty It
follows that when the Mortagee attempted to enforce the stipulation, all that, the Court was concerned1 with u/s 74 was to decide what was the
reasonable amount of compensation, that should be given for the mortgagor''s breach of the contract. The Court is empowered by the section to
award the full amount of the stipulated penalty, but not more, if it considers that the-sum represents the right and reasonable measure of damages.
There may be cases where it would be reasonable to allow the stipulated penalty rate of compound interest and cases where it is unreasonable to
allow that rate. No bard and fast rule can be laid down. The Court must decide what is a reasonable-compensation according to the particular
circumstances of the case. And when the Court has exercised its discretionary power judicially, that is to say, after a due consideration of all the-
matters in evidence before it, the appellate Court ought not to interfere wither its decision. For this reason I think that, dealing with the case as a
Court of appeal, we should dismiss the appeal subject to the correction of the lower Court''s judgment relating to counter-interest. I agree with the
proposed order as to costs.