Mukteswar Trigunait and Others vs Satya Charan Srimani

Manohar Lall, J.—This is an appeal by the defendants against a decision of the learned Subordinate Judge, dated 17th February 1937, by which he decreed the suit of the respondent, which was instituted to recover the amount secured on a mortgage, dated 31st January 1929. The mortgage was for a sum of Rs. 5000, the interest stipulated was at the rate of Rs. 1-8-0 per cent, per mensem and the due date fixed for the payment of the principal was February 1930. There was a further stipulation that the mortgagor would pay interest at the rate stipulated every month, but in case he did not do so the amount of interest will be treated as principal at the'' end of six months, in other words, this was a usual term of interest to be compounded at the expiry of every six months. The suit was instituted on 15th February 1936.

The defence to the action, so far as it is relevant for the purposes of this appeal, was that the stipulation in the mortgage bond as to payment of interest was excessive and unfair and therefore came within the mischief of Section 3, Usurious Loans Act of 1918. Before us a new contention has been advanced that the stipulation for paying compound interest amounted to a stipulation by way of penalty within the meaning of Section 74, Contract Act. It was lastly argued that by virtue of Section 11, Bihar Money Lenders Act of 1938, the respondent should be prevented from recovering; any sum in excess of Rs. 5000, the principal.

No evidence whatsoever was adduced in the Court below showing the conditions under which the loan was taken in January 1929. But there are indications upon, the record; for instance, in Ex. 2 (a) an order of the Subordinate Judge of Dhanbad who gave sanction to the receiver on 30th January 1929, that the Court considered that the compound interest on the loan was quite justifiable. It appears that originally an agreement was arrived at between the mortgagor and the mortgagee that the interest should be charged at the simple rate of 18 per cent, and a draft was approved in that form by the Court, but later on the mortgagee refused to advance unless stipulation by way of compound interest was also added in the bond. The Court upon receiving a petition from the receiver who recommended that he could not secure a loan without paying at the compound rate, accepted the proposal in these terms: "In the circumstances I sanction addition of the clause of compound interest." It appears to me that this evidence is quite sufficient to shift the onus upon the defendants. The plaintiffs have discharged any onus which initially lay on them by showing that they satisfied the Court who was in a much stronger position to know whether the loan could be secured upon easier terms: see Ganga Pershad Sahu v. Maharani Bibi (1885) 11 Cal. 379. The Subordinate Judge of Dhanbad was the proper person to act upon the report of the receiver. No evidence is to be found in the record which would indicate in the slightest that the receiver was acting in collusion with the mortgagee or that fraud was practised by the mortgagee in obtaining the Court''s sanction.

The question then arises whether upon these facts the appellant has been able to bring his case within the express terms of Section 3, Usurious Loans Act of 1918. In order to avail himself of the provisions of that Section, the appellant has to establish that interest is excessive and that the transaction as between the parties thereto was substantially unfair. It was argued that the very fact that the interest charged is to be compounded at the rate of 18 per cent, shows that the interest is excessive. I do not agree with the contention. In a large number of cases decided in India as well as by their Lordships of the Judicial Committee, it has been established that contract to pay compound interest is perfectly legal. Indeed in many cases, contracts to pay compound interest at the rate of 18 per cent, or 24 per cent, have been upheld: see Raghunath Prasad Sahu v. Sarju Prasad Sahu A.I.R (1924) . P.C. 60.

In Sunder Mal v. Satya Kinker Sahana A.I.R (1928) . P.C. 64 Viscount Sumner in delivering the judgment of the Judicial Committee, explained the meaning of the phrase to borrow upon "reasonable commercial terms", which was often loosely used in this country, and pointed out that the word "commercial" should be understood in a case like the present, of a community, which was not a commercial community, and of transactions which no one would call mercantile, as a comprehensive, but convenient term for such terms as can be arranged freely between borrower and lender under the circumstances of the particular case.

In the present case, as I have already held, the terms which were arranged; were between the receiver and the mortgagee and these terms were arranged freely with the sanction of the Court and therefore the present rate of interest which was; agreed upon, must be held to be a reasonable commercial rate between the parties; to this transaction. The only thing which I find in the present case is that the amount of interest has become excessive by reason of deliberate non-payment by the mortgagor for the last ten years. But we cannot take that into consideration in reducing the rate of interest agreed upon and make out another contract between the parties.

I therefore hold that upon the facts established in this case, the learned Subordinate Judge was right when he held that the circumstances do not attract the operation of Section 3, Usurious Loans Act.

I now deal with the other question raised whether the stipulation to pay compound interest is a stipulation by way of penalty We were referred to the well known decision of the Privy Council in Rani Sundar Koer v. Rai Sham Krishen (1907) 34 Cal. 150. But in that case itself at p. 18 Lord Davey, in delivering the judgment of the Board pointed out:

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.

I therefore do not see how the stipulation to pay compound interest at the same rate as on the principal can be held to be a stipulation by way of penalty. The illustration (d) relied upon by the learned Counsel for the appellants does not support the argument at all.

It remains to deal with the contention that Section 11, Bihar Money-lenders'' Act of 1938, should be applied in favour of the appellants in this case. The matter was J considered by a Full Bench of this Court) in Sadanand Jha v. Aman Khan A.I.R (1939) . Pat. 55, and we are bound by the decision in that case and must hold that Section 11 cannot be applied to give any relief to the appellant.

In the result the appeal fails and must be dismissed with costs. The appellant is entitled to the issue of a certificate in the terms of Section 205, Government of India Act of 1935 that this case involves a substantial question of law as to the construction of those Sections of the Government of India Act of 1935 which have been elaborately considered in Sadanand Jha v. Aman Khan A.I.R (1939). Pat. 55 referred to above and is therefore fit to be taken to the Federal Court.

Harries C.J.

I agree. We are bound by the Pull Bench decision in the case in Sadanand Jha v. Aman Khan A.I.R (1939) . Pat. 55. The point under the Bihar Money-lenders'' Act does raise a substantial question on the construction of certain Sections of the Government of India Act, and I accordingly agree that a certificate should be granted entitling the appellants to appeal to the Federal Court.