State Bank of Indore vs Parvati Bai

The Plaintiff a Nationalised Bank has a decree in its favour passed by the Courts below directing sale of an agriculrural holding for the recovery of mortgage money due and payable under a deed of simple mortgage, yet its grievance for recovery of interest to the extent of full as claimed in the suit, survives for adjudication. Hence this appeal.

The Courts below have held that the Plaintiff was not entitled to interest at the rate of Rs. 14% per annum, the rate being penal, also not to a quantum of interest beyond the ceiling imposed by Section 165 (3) of the M.P. Land Revenue Code 1959 (hereinafter referred to as ''the Code'' for short). The Courts below have held the lower rate of interest of 11% per annum only as allowable.

Vide order dated 16-10-1978 this Court admitted the appeal for hearing parties on the following three substantial question of law:

(1) Whether the lower Court has committed an error in applying the provisions of Section 165 (9-b) of the M.P. Land Revenue Code to the transaction in suit in view of Section 24 of the M P. Krishi Udhar Pravartan Tatha Prakirn Upabandha((Bank)) Adihiniyam 1972 ?

(2) Whether the Court below has committed an error in holding that interest at the rate of 14% per annum was penal and not can tractual ?

(3) Whether the lower Court has committed an error in adjusting Rs. 1,590/- paid by the Respondent towards principal and not to wards interest ?

Question No. (1):

Subsections (3) and (9-b) of Section 165 of the Code provide as under:

S. 165 : Right of transfer:

(3) Where a Bhumiswami effects a mortgage other than a usufructuary mortgage of his land in pursauance of the provisions of Sub-section (2), then notwithstanding anything contained in the mortgage deed, the total amount of interest accruing under the mortgage shall not exceed half the sum of the principal amount advanced by the mortgagee.

(9-b) Nothing in this section shall prevent a Bhumiswami from transferring any right in his land to secure payment of an advance made to him by a Commercial Bank for purpose of agriculture or improvement of holding or shall affect the right of any such Bank to sell such right for the recovery of such advance.

(underlining by me)

Section 24 of the M.P. Krishi Udhar Pravartaa Tatha Prakirn Upabanddha (Bank) Adhiniyam, 1972 (hereinafter referred to as ''Krishi Udhar Adhiniyam'' for short) reads as under:

Section 24 Exemption from legislations relating to money lending and agriculturists debt relief:

Nothing in any law for the time being in force dealing with money lending or agriculturists'' debt relief shall apply to financial assistance availed of by.

(underlining by me)

Admittedly the mortgage effected in favour of the Plaintiff-bank by the Defendant-Bhumiswami is a simple mortgage. Sub-section (9-b) of S. 165 of the Code is irrelevant for the purpose of the present case, because it only permits the Bhumiswami rights from being transferred to a commercial bank in spite of the restrictions imposed by the other provisions of that section. It does not provide any answer to the problem relating to the rate of interest recoverable by a bank or the maximum amount of interest which can be recovered by a bank. The Courts below have refused to extend and apply Section 24 of the Krishi Udhar Adhiniyam to the suit transaction holding that the Code was not a law dealing with money lending or agriculturist debt relief and hence, the provisions of Section 165 (3) of the Code were not affected by Section 24 of the Krishi Udhar Adhiniyam.

No doubt the Code, as its Preamble indicates, is an act to consolidate and amend the law relating to land revenue, the powers of land revenue officers, rights and liabilities of holders of land from the State Government, agricultural tenures and other matters relating to land and liabilities incidental thereto in Madhya Pradesh. It is not an act designed and enacted primarily for agriculturists'' debt relief. Yet, can it not be said that a few provisions contained in the Code do amount to law dealing with agriculturists'' debt relief'' ?

The term ''law'' has not been defnied either in the Code or in the Krishi Udhar Adhiniyam. Law is not necessarily a synonym for an Act or Stature. In its original and popular sense, law is a body of rules which have been laid down for determinging the legal rights and legal obligations which are recognised by Courts. See Rajkumar Narsingh Pratap Singh Deo Vs. State of Orissa and Another, 1797-98. There is no warrant for assigning the phrase any law in force'' a narrow meaning of only an Act or a Statute and not a provision in an Act or a Statute.

Krishi Udhar Adhiniyam was enacted, as its Preamble shows, with objective of making provisions to facilitate adequate flow of credit for agricultural production and development through banks and other institutional credit agencies also to make provisions for matters connected therewith or incidental thereto and it is to achieve that object in view, the State legislature has made certain provisions and given them an overriding effect.

In the opinion of this Court, the phrase ''in law for the time being in force'' as occuring in Section 24 of the Krishi Udhar Adhiniyam is wide enough to include within its compass, any provisions having the force of law operating in the held of money lending or agriculturists'' debt relief whereever contained, even in such acts as were not primarily enacted to deal with such subjects, but which still contain provisions touching these subjects, even incidentally.

Once it is held that a provision in the Code providing for relief or protection of an agriculturist debtor such as is contained in S. 165 (3) is also a ''law for the time being in force'' dealing with agriculturists'' debt relief, it follows that S. 24 of the Krishi Udhar Adhiniyam would override Sub-section (3) of S. 165 of the Code. The Plaintiff-bank being a Bank within the meaning of Section 2 (c) (iii) of Krishi Udhar Adhiniyam, S. 24 of the Adhiniyam would exclude the applicability of ceiling limit prescribed by Sub-section (3) of Section 165 of the Code to the case in hand.

The next question to be examined is whether a stipulation providing for payment of interest at an enhanced rate in case of default in payment by scheduled date is by way of penalty.

Sec 74 of the Indian Contract Act, 1872 which confers the Court with a power to relieve against penal provisions contained in a contract came to be amended by Act No. VI of 1899 whereby the provision was recast, also adding an explanation to the effect (hat a stipulation for increased interest from the date of default may be a stipulation by way of penalty. By the same amendment, a few illustrations were added to Section 74 of which Illustration (d) reads as under:

(d) A gives B a bond for the repayment of 1,000/- with a stipulation that in case of default, interest shall be payable at the rate of 75 per cent from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from a such compensation as the Court considers reasonable.

The explanation and the Illustration (d) have been subject matter of interpretative examination in several decisions. A few of them may be noticed.

In Bholanath v. Kamtaprasad 14 CPLR 53 : 3 MPLC 56 this Court held:

Illustration (d) to Section 74 is an instance in which the stipulation is obviously by way of penalty but is not intended to law down any hard and fast rule. It is for the Court in each case to examine not merely the form of the deed but the substance of the transaction and to judge whether it should be regarded as stipulation intended to be carried out as part of the contract or a provision to secure performance, one of the best tests in practice being to see whether the stipulation would be wholly unreasonable if regarded as an integral part of the contract.

In Bhagwant v. Ganpati 1 NLR 9 : 3 MPLC 290. This Court speaking of the amendment in Section 74 of the Contract Act, stated:

These amendments appear to embody an acceptance on the part of the Legislature of the view taken by a Full Bench of the Bombay High Court in Umarkhan Mohammad khan Deshmukh v. Salekhan 1LR 18 Bom. 106. A proviso for retrospective enhancement of interest in default of payment of the interest at a due dale is generally a penalty which should be relieved against, but a proviso for enhanced interest in the future cannot be considered as a penalty unless the enhanced rate be such as to lead to the conclusion that it could not have been intended to be part of the primary contract between the parties.

In Mohammad Abdul Sattar v. Kondiba AIR 1926 Nag. 173 : 13 MPLC 73, this Court provided a working test for determining the nature of a stipulation for increased rate of interest in the following terms:

Where the stipulation is retrospective and the increased interest runs from the date of the bond, and not merely from the date of default, it is always to be considered as a penalty and cannot be enforced, but where increased interest is claimed only from the date of default, it is allowed.

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Jyoti Cold Stores and Others Vs. Punjab Financial Corporation, Chandigarh, is a detailed decision taking note of several earlier authorities on the point and also very similar to the case at hand. Faced with Section 74 and the explanation appended thereto, the learned Judge of Punjab & Haryana High Court observed:

In this case we are mainly concerned with the explanation which only says that a stipulation for enhanced interest from the dale of default may be a stipulation by way of penalty. There is, however, nothing in this explanation to proclude the Court from coming to the conclusion that a stipulation for increased interest from the date of default ought not to be regarded as a stipulation by way of penalty. Read in the light of the illustrations, the explanation shows that it is for the Court to conclude on the facts of a particular case, whether the stipulation is by way of penalty or not. If the Court finds a stipulation to be a penalty, it may award compensation not exceeding he penalty stipulated for. If there is something unconscionable or unreasonable about the agreement, or if the enhanced interest be not moderate, the Court may find the stipulation to be a penalty. Stipulations for enhanced rate of interest may be prospective or retrospective in their operation. In the leading case of Mackintosh v. Crow (1883) ILR 9 Cal. 689, it was held that where money is borrowed under a contract for repayment with interest on a certain day and the contract stipulated that if the money is not paid at the due date it shall thenceforth carry interest at an enhanced rat, such a stipulation is not a penalty and the enhanced rate agreed to be paid may be recovered in its entirety.

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Having referred to the Full Bench decision of Calcutta High Court in Kalachand Kyal v. Shiv Chandar Roy (1892) ILR 19 Cal 392 (FB), the Full Bench decision in Umar Khan v. Mahanadkhan Deshmukh v. Salekhan (1893) ILR 17 Bom. 106 (FB), and earlier decision of the Punjab High Court, the learned Judge concluded by saying:

Considering the facts of the present case, there is nothing to show that the increased rate of interest was not intended to be part of the primary contract between the parties. The enhanced rate of interest is also not unconscionable in the circumstances of the case. The industrialists are allowed the facility of getting loan at very moderate rates from the Punjab Financial Corporation and this facility is allowed so that the industries in the State may get a fillip. In order that the Punjab Financial Corporation should be able to run efficiently and he able to help the industries, it is necessary that the loans are repaid according to the contract. In case of default, the provision for enhanced rate of interest cannot be considered unreasonable provided the enhanced rate of interest is charged from the date of default.

Lastly, a decision by Mysore High Court in Venkataramanaswami Permanent Bhandar Ltd v. Fatima Bi and Ors. AIR 1971 Mys 250 may be referred to. The bond provided for repayment with interest at 6 per cent per annum but with rate of interest at the rate of % if default was made in payment of the prescribed instalments. The learned Judge held:

As per explanation to Section 74 of the Indian Contract Act a stipulation of increased interest from the date of default may be a stipulation by way of penalty. Circumstances of each case have to be taken into consideration in determining whether the particular covenant for payment of enhanced interest is excessive as to bring it within the meaning of penalty.... In the instant case, the ordinary rate of interest is 61/2 per-cent But the promisor could commit default in making payment and the period in default carries an interest at the rate of nine percent. It is perhaps to compensate the society for the delay in the recovery and reinvestment of the amount. Since there is also a further stipulation to charge penal interest at the rate of 12 percent, I am of the opinion that nine percent interest on default, cannot be said to be penal.

To sum up, illustration (d) does not control the language of S. 74 and the explanation. A stipulation in a deed providing for payment of interest at enhanced rate from date of default is not neeessarily penal though it may be so depending on the facts and circumstances of an individual case.

A perusal of mortgage deed Ex P/3 shows that an amount of Rs. 1,500/- for purchasing a pair of bullocks and an amount of Rs. 3,500/- for erecting a wire fencing was released by way of loan to the Defendant Respondent by the Plaintiff bank. The amount was repayable in annul instalments of Rs. 1,000/- with interest calculated at a rate 41/2 above the interest rate appointed by the Reserve Bank of India, subject to a minimum of Rs. 9.50 per-cent per-annum. Enhanced rate of interest was claimed from the date of default and not from the date of deed. The loan was released by a Commercial Bank to benefit an agriculturist borrower in its agricultural development. The idea behind stipulation for increased interest from the date of default was to prevent the default being committed and to compensate the Plaintiff-bank for the losses suffered by it in its credit rotation on account of the borrowers'' default. There does not appear to be any element of penalty involved. The provision is neither unreasonable nor unconcionable intended to confer an undue benefit on the Bank. There is nothing to indicate that the, increased rate of interest was not intended to be a part of primary contract between the parties In short, the provision cannot be said to be a penal so as to be required to be relieved against. The Courts below erred in holding claim for interest at enhanced rats to be penal.

In spite of holding that the claim for payment at enhanced rate of interest, is not penal by itself decree for payment at enhanced rate cannot be allowed to the Plaintiff, though for a reason different from the one assigned by the Courts below. The Plaintiff has failed to prove the circular providing the rate by which the enhanced interest would have been payable by the defaulting Defendant. The circular prescribing that rate has not been even tendered in evidence.

It may be placed on record that Shri Chitale the learned Counsel for the Appellant also submitted that it was for the Defendant-Respondent to have raised pleadings and taken a specific plea in the written statement that the claim for enhanced interest was penal and then to have substantiated the plea by adducing evidence and unless that was done, the Court could not have refused to enforce the stipulation for payment of interest at a higher rate. It is difficult to agree with such a tall contention. Pleadings or no pleadings, if the Court is satisfied that a particular provision is penal, it has to be relieved against for it is a toad on the conscience of the Court and an obligation to be discharged by it in seeing that unreasonable and unconscionable stipulations are not protected by its command.

For the foregoing reasons, the appeal is allowed. Judgments and decrees of the Courts below are set aside. The case is sent back to the trial Court for passing a decree afresh, calculation the amount due and payable by Defendant, consistently with the law laid down hereinabove.

It may be made clear that this Court has not disturbed the findings of the trial Court on any issue except those of interest rate and ceiling limit on recovery of quantum of interest by reference to Section 24 of Krishi Udhar Adhiniiyam, S. 165 of the M.P. Land Revenue Code and Section 74 of the Contract Act.

No order as to costs of this appeal. Counsel''s fee as per schedule if pre-certified.

Date for appearance before trial Court is appointed as 10-4-1992.