MALLI CHETTIAR Vs. VEERANNA TEVAN

JUDGEMENT

(1.) The short point for decision is whether a stipulation to pay compound interest from date of default at the same rate as the simple interest is a penalty within Section 74, Indian Contract Act.

(2.) There is authority for saying that a stipulation for payment of compound interest at the same rate is not a penalty but that a stipulation for payment of compound interest at a higher rate is (See the cases collected in Pollock and Mulla's Contract Act 4 Edition page 435).

(3.) As the Privy Council said in Sunder Koer V/s. Rai Sham Krishan (1906) I.L.R. 34 Cal. 150 at p. 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. And again at page 157 referring to the amended explanation to Section 74, Indian Contract Act their Lordships say " The Indian Courts have invariably held that 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 a penalty, because an additional money payment in that case becomes immediately payable by the mortgagor." This latter observation has strictly no application to the present case as it is clear that the interest was only to be compounded from the date of default.