KANTETI RAMA KRISHNAYYA Vs. NETI VENKATA SOMAYAJULU

JUDGEMENT

(1.) It is sufficient for the present purpose to refer to the terms of the mortgage- deed, dated 23 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 23 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/s. Madam Subanna (1910) 8 IC 339 and in Venkataohalam Chetty V/s. Veerappan Ambalagaran (1912) 14 IC 283. In Sundar Koer V/s. 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.

(2.) 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.

(3.) 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.