Suit No.2047 of 1981

19th September, 2002

Petitioner Counsel: Mr. C. S. BALSARA, M/s. VIMADALAL & Co
Respondent Counsel: Mr. NIKHIL MEHTA, Mr. V. T. BHAGAT, Vasant & Co., Mr. S. JOSHI, Nandala Kothari & Sabir & Co.

Cases Cited:
Central Bank of India Vs. Ravindra, A.I.R. 2001 S.C. 3095 [Para 7,9]
Kaluram Vs. Chimniram, A.I.R. 1934 Bom. 86 [Para 9]
Jafar Husain Vs. Bishambhar Nath, A.I.R. 1937 Allahabad 442 [Para 10]
Mustt. Jubeda Khatun Vs. Sulaiman Khan, A.I.R. 1986 Gauhati 71 [Para 10]
Jagannath Prosad Singh Chowdhury Vs. Surajmul Jalal, A.I.R. 1927 P.C. 1 [Para 11]
Jaigobind Singh Vs. Lachmi Ram, A.I.R. 1940 F.C. 20 [Para 11]
Soli Pestonji Majoo Vs. Ganga Dhar Khemka, A.I.R. 1969 SC 600 [Para 11]

JUDGMENT

JUDGMENT:- The plaintiffs have filed the present suit. It is the case of the plaintiffs that original defendant no.1 since expired and defendant no.2 approached them for a loan which the plaintiffs agreed to advance on the condition that as a security, the defendants should create a mortgage. Accordingly, the plaintiffs advanced a sum of Rs.80,000/- by cheque in favour of defendant no.3. The amount was to carry interest at 14% per annum compounded in the case of default of payment of interest which was to be payable monthly. The case of the plaintiffs is that on 23.2.1979 the defendants deposited with the plaintiffs the title deeds of the property with an intent to create an equitable mortgage. By an Indenture of Mortgage dated 23.2.1979, the property was mortgaged by the defendants in favour of the plaintiffs. The defendants agreed to pay a sum of Rs.80,000/- on 22.2.1980. He further agreed to pay interest on the said sum of Rs.80,000/- at the rate of 14% per annum free from income-tax by equal monthly payments on conditions stipulated therein. It was agreed that on failure to pay any instalment of interest, unpaid instalment of interest would be added to the mortgage debt. In other words, the interest could be compounded. The case of the plaintiffs is that interest was paid at the rate of 14% per annum upto 22.12.1979 (wrongly typed as 1970). By letter of 10.3.1980, the Advocate on behalf of the plaintiffs recorded that the defendants had committed default in payment of interest and that the due date for payment of the mortgage amount had expired on 22.2.1980. Under the circumstances, the case of the plaintiffs is that by their Advocate's notice, they called upon the defendants to pay the said amount of Rs.80,000/- with interest thereon at the rate of 14% per annum from 23.12.1979 till payment. It is the case of the plaintiffs that after receipt of the said letter, original defendant no.1 approached the plaintiffs that due date for repayment of the mortgage amount be extended by a further period of one year i.e. upto 22.2.1981. It is contended on behalf of the plaintiffs that they informed original defendant no.1 that they would be agreeable to extend the due date by a further period of one year i.e. upto 22.2.1981 provided the defendants agreed to pay interest at the rate of 15% per annum instead of 14%. The case of the plaintiffs is that the defendants agreed to the same and paid interest upto 22.2.1980 at the rate of 14% per annum and interest for the period 23.2.1980 to 22.5.1980 at the rate of 15% per annum. It is the further case of the plaintiffs that their Advocate prepared an agreement for extension of the due date and requested the plaintiffs to sign the same. The defendants failed to attend and sign the agreement. The extended due date for repayment of the mortgage expired on 22.2.1981. By the Advocate's notice dated 2.4.1981, defendant nos.1 & 2 were informed that they had agreed to pay interest at the enhanced rate of 15% instead of 14% and a demand was made that the defendants pay the principal amount of Rs.80,000/together with interest thereon at the rate of 15% per annum from 23.5.1980, failing which they had instructions to proceed in the matter. Again by a subsequent notice of 1.10.1981 interest was demanded on the principal amount at the enhanced rate of 15% per annum. On failure, the present suit.

2. During the pendency of the suit, original defendant no.1 expired and his legal heirs have been brought on record.

3. Written statement was filed on behalf of defendant nos. 1 & 3. A preliminary objection was raised that the deed of mortgage is not registered as required under the provisions of the Indian Registration Act and on this count alone, the suit is liable to be dismissed. It is the case of the defendants that there was an agreement whereby defendant no.1 had agreed to purchase two buildings from one Mrs.Goolbai Kavarana, mother of the 1st plaintiff and mother-in-law of the 2nd plaintiff. There are other averments which I need not advert to. For reasons disclosed in para 4 of the plaint, it is contended that a sum of Rs.80,000/- could be retained by the defendants for fulfilment of the obligations by Goolbai. It is averred that for tax purposes, the plaintiffs suggested that the plaintiffs would pay Rs.80,000/-to the defendants and the defendants will execute the purported mortgage deed in favour of the plaintiffs and when Goolbai complies with the requirements, the said sum of Rs.80,000/- will be returned. There are some other averments which I need not advert to in view of what has transpired at the Bar at the hearing of the suit.

4. The following issues were framed:-

"1. Whether the plaintiffs prove that original defendant no.1 and defendant no.2 and 3 mortgaged the suit property in favour of the plaintiffs under the Indenture of Mortgage dated 23rd February 1979 on the terms and conditions therein, as contended in para 5 of the plaint?

2. Whether the plaintiffs prove that the original defendant no.2 and defendants nos.2 and 3 agreed to pay interest at the rate of 15% p.a. instead of 14% p.a. from 23rd February 1980 onward as contended in para 8 of the plaint?

3. Whether the plaintiffs prove that they are entitled to claim interest at 15% per annum or 14% per annum with interest on interest with monthly rest as alleged in paras 8 and 9 of the plaint?

4. Whether the defendants prove that the alleged Mortgage was created in the circumstances set out in paras 4 to 7 of the written statement?

5. Whether the defendants prove that the amount of Rs. 80,000/- was deducted from the amounts paid by the defendants to Goolbai for the accounting purpose as contended in para 8 of the written statement?

6. Whether the plaintiffs are entitled to a mortgage decree in the sum of Rs.1,00,991.88 together with further interest at the rate of 15% per annum compounded with monthly rest from 16th December 1981 till payment and for cost?

7. What reliefs?

5. At the time of hearing of the arguments on behalf of the defendants their learned counsel contends that they do not dispute that a sum of Rs.80,000/- was due and payable. Both the parties further agree that interest is payable at 14%. Considering that, to my mind, the only issue which requires to be answered is issue no.6.

6. Plaintiff no.2 has examined himself. The mortgage deed was tendered which is taken on record and it is marked as exh.'A'. In his further evidence, it is set out that interest was paid at 14% upto December 1979. At the request of the defendants, they sought one year's extension provided the defendants paid additional interest of one per cent. In answer to the averments in paras 10 and 11 insofar as the demand made by the Advocate's letter, the defendants in their written statement have not contested the receipt of the letter. The only dispute is that it was not agreed to pay interest at the rate of 15%.

7. From the above, the issues will have to be answered as to whether the plaintiffs are entitled to interest on the principal sum of Rs.99,722.29 as set out in the particulars of claim and in the prayer clause as amended. There is no dispute that the interest on the principal sum of Rs.80,000/ could have been compounded and interest claimed therein as on the date of the suit. The only issue is after the suit has been filed, whether on the principal amount, the rate of interest would be 14% compounded with monthly rests till the date of payment and further costs, charges and expenses. The defendants contend that they should be allowed to redeem the mortgage on payment of the principal sum with interest thereon at 6% from the date of the suit till decree and realisation. On behalf of the plaintiffs, their learned counsel has also submitted written arguments, placing reliance on Order XXXIV of the C.P.C. and some judgments as set out therein, including the judgment of the apex Court in Central Bank of India v. Ravindra (A. I. R. 2001 S.C. 3095).

8. The question, therefore, would be, if the defendants are to redeem the mortgage, what would be the interest on the principal sum to be awarded from the date of the suit till decree and from decree till realisation. Let me first advert to Order XXXIV rule 11 of the C.P.C. That order reads as under:-

"In any decree passed in a suit for foreclosure, sale or redemption, where interest is legally recoverable, the Court may order payment of interest to the mortgagee as follows, namely:-

(a) interest upto the date on or before which payment of the amount found or declared due is under the preliminary decree to be made by the mortgagor or other person redeeming the mortgage-"

9. The question that arises is whether the Court is bound to award interest in terms of the contract, including interest on interest. A Division Bench of this Court in Kaluram v. Chimniram (A.I.R. 1934 Bom. 86) took the view that the Court has jurisdiction to give compound interest under section 34. The Court proceeded on the footing that the contract would come to an end when the suit was commenced. An argument advanced on behalf of the defendant that compound interest was not payable was not accepted. Beaumont, C.J., observed that there is jurisdiction to give compound interest. Similarly, in the concurring judgment of Blackwell,J., it was observed that the Court is clearly entitled to allow compound interest at the rate which was the subject of implied agreement between the parties during the currency of the transactions between them. Even though compound interest has been awarded, it is for the period as the Court observed, during the currency of the transactions.

The issue of awarding compound interest came up for consideration before the Apex Court in the case of Central Bank of India v. Ravindra (A.I.R. 2001 S.C. 3095). The section then construed was the amendment to section 34 as amended by the 1956 Amendment Act by Act no.66 of 1956. One of the questions considered was as under:-

"Capitalisation of interest debited on periodical rests - does it convert interest into the principal sum?"

After considering the case law, the Apex Court observed that English decisions and the decision of this Court and almost all High Courts of the country have noticed and approved the long established banking practice of charging interest at reasonable rates on periodical rests and capitalising the same on remaining unpaid. Such a practice is prevalent and has also been recognised in non-banking money lending transactions. The Legislature has stepped in from time to time to relieve the debtors from hardship whenever it has found the practice of charging compound interest and its capitalisation to be oppressive and hence needing to be curbed. The practice is permissible, legal and judicially upheld excepting when superseded by legislation. There is nothing wrong in the parties voluntarily entering into transactions, evidenced by deeds incorporating covenant or stipulation for payment of compound interest at reasonable rates, and authorising the creditor to capitalise the interest on remaining un paid so as to enable interest being charged at the agreed rate on the interest component of the capitalised sum for the succeeding period. Interest once capitalised, sheds its colour of being interest and becomes a part of principal so as to bind the debtor/borrower. The Court then observed that while decreeing the suit, if the decree be for payment of money, the Court would adjudge the principal sum on the date of the suit. The Court may also be called upon to adjudge interest due and payable by the defendant to the plaintiff for the pre-suit period which interest would, on the findings arrived at and noted earlier, obviously be other than such interest as has already stood capitalised and having shed its character as interest, has acquired the colour of the principal and having stood amalgamated in the principal sum, would be so adjudged. The principal sum adjudged would be the sum actually loaned plus the amount of interest on periodical rests which according to the contract between the parties or the established banking practice has stood capitalised. Interest pendente lite and further interest shall be awarded on such principal sum i.e. the principal sum adjudged on the date of the suit. The Court also noted that once a suit is filed in the Court, so far as section 34 of the Civil Procedure Code is concerned, the relationship of parties ceases to be governed by contract between the parties and comes to be governed by section 34 of the Civil Procedure Code. The summation is as under:-

"Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC dehors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercised fairly, judiciously and for reasons and not in an arbitrary or fanciful manner."

The reference was answered as under:-

"(1) Subject to a binding stipulation contained in voluntary contract between the parties and/or an established practice or usuage interest on loans and advances may be charged on periodical rests and also capitalised on remaining unpaid. The principal sum actually advanced coupled with the interest on periodical rests so capitalised is capable of being adjudged as principal sum on the date of the suit.

(2) The principal sum so adjudged is such principal sum within the meaning of Section 34 of the Code of Civil Procedure, 1908 on which interest pendente lite and future interest i.e. post-decree interest at such rate and for such period which the Court may deem fit, may be awarded by the Court."

Considering the above, it would be clear that the judgment of this Court in Kaluram's case (supra) would no longer be good law even considering that section 34 was amended in 1956 and then in 1976. In view of the law declared by the apex Court in Central Bank of India (supra), where it was expressly held that once a suit is filed and considering section 34 of the Code of Civil Procedure, the relationship of the parties ceases to be governed by the contract and is governed by section 34 of the Code of Civil Procedure.

10. The present suit is a suit for recovery of money secured by the mortgaged property and for its sale if the amount is not paid. Insofar as the mortgage suit is concerned, the interest thereon would be covered by the provisions of Order 34 rule 11, part of which has been reproduced earlier. The question that arises is whether a view different than the view insofar as section 34 can be taken insofar as interest after the date of the suit and whether interest can be capitalised or interest on interest can be awarded. A Division Bench of the Allahabad High Court in Jafar Husain v. Bishambhar Nath (A.I.R. 1937 Allahabad 442) held that the words "on the principal amount found or declared due" in sub-clause (i) of clause (a) of rule 11 of Order 34 of the Code of Civil Procedure refers not only to principal sum secured by the mortgage deed but also to the amount due on account of interest which has become a part of principal in accordance with the terms of the deed on the date when the preliminary decree is prepared. The mortgagee is, therefore, entitled to interest on the principal sum and on the interest due, which has become part of the principal at the contract rate, from the date of the suit till the date fixed for payment, if the mortgage deed provides for it. A Full Bench of the Gauhati High Court is Mustt. Jubeda Khatun v. Sulaiman Khan (A.I.R. 1986 Gauhati 71) in a mortgage suit held that on a reading of Order 34 rule 11, the Court can award interest "at the rate agreed between the parties" as stipulated in the deed. It was, therefore, held that when there is a stipulated rate of interest, the Court is ordinarily bound to decree interest at the rate till the date fixed for payment of the decretal amount, unless it is penal or is excessive and the transaction is substantially unfair or is contrary to any law.

11. Order 34 rule 11 before its amendment in 1956 had come up for consideration before the Privy Council in Jagannath Prosad Singh Chowdhury v. Surajmul Jalal & Ors. (A.I.R. 1927 Privy Council 1). Considering the provisions of Order 34 then existing and referring to section 34 of the C.P.C., the Privy Council held as under:-

"Up to this point, till the period for redemption has expired, the matter remains in contract and the interest has to be paid at the rate and with the rests specified in the contract of mortgage."

That case came up for consideration before the Federal Court in Jaigobind Singh and others v. Lachmi Narain Ram and others (A.I.R. 1940 Federal Court 20). The Federal Court noted the amendment to Order 34 and then observed as under:-

"The use of the word "may" indicates that the Court is not bound to exercise at least one of the powers and may well not exercise any of the powers at all. The language as it stands can mean only this, that the Court has the discretion to exercise all or any or none of the specified powers."

Examining the position before 1929, the Court has observed as under:-

"By Act 21 of 1929, O. 34 was amended, and a new R. 11 was inserted, which deals specially with interest, and provides that the Court "may" order payment of interest to the mortgagee up to the date fixed for payment at the rate payable on the principal. It follows that this special provision, which removes any conflict that there might have been between S.34 and O.34 Rr. 2 and 4, gives a certain amount of discretion to the Court, so far as interest pendente lite and subsequent interest are concerned. It is no longer absolutely obligatory on the Courts to decree interest at the contractual rate up to the date of redemption in all circumstances, if there be no question of the rate being penal, excessive or substantially unfair ............"

The matter had come up for consideration of the Apex Court in Soli Pestonji Majoo v. Ganga Dhar Khemka (A.I.R. 1969 S.C. 600). The Apex Court placed reliance on the judgment of the Federal Court in the case of Jaigobind Singh v. Lachmi Narain Ram (A.I.R. 1940 FC 20). The issue before the Apex Court was whether the High Court was right in awarding interest at the rate of 12% per annum with monthly rests even after the date of the suit and whether the maximum interest which should have been allowed could be more than 6% per annum simple on the principal sum adjudged. After considering the provisions of Order 34 as amended in 1956, the Court observed as under:-

"It was held by the Federal Court in Jaigobind Singh v. Lachmi Narain Ram, AIR 1940 FC 20 that the language of the rule gives a certain amount of discretion to the Court so far as interest pendente lite and subsequent interest is concerned and it was no longer absolutely obligatory on the Courts to decree interest at the contractual rates upto the date of redemption in all circumstances even if there is no question of the rate being penal, excessive or substantially unfair within the meaning of the Usurious Loans Act, 1918. In view of the principle laid down by the Federal Court in this decision we are of opinion that in the circumstances of the present case the respondent should be granted interest on the principal sum due at the contractual rate till the date of the suit and simple interest at 6 per cent p.a. on the principal sum adjudged from the date of the suit till the date of the preliminary decree and also at the same rate till the date of realisation."

In other words, it is now clear that it is no longer absolutely obligatory on the Court to award interest on the contractual rates upto the date of redemption and that it is in the discretion of the Court to award interest so far as interest pendente lite and subsequent interest. There does not appear to be any reconsideration of this law by the apex Court after the Amendment Act of 1976.

12. As noted earlier, interest at the rate of 14% was paid upto December 1979. Extension was granted on the ground that additional interest would be payable at one per cent more. There is some dispute as to whether the defendants agreed to the enhanced interest. We are not concerned with that, considering the agreement by the parties that interest paid would be at 14%. The mortgage was to secure the suit amount and the suit was filed in the year 1981. The suit has not come up for hearing until now. Neither of the parties can be blamed for disposal of the suit as it is on account of the large pendency of suits in this Court. The question therefore is whether the defendants can be saddled with compound interest considering the discretion left in the Court. It was contended on behalf of the defendants that interest payable would be at 6%. To my mind, it will not be possible to accept that submission. On the principal sum adjudged, including interest compounded as on the date of the suit which amount works out to Rs.99,724,29, the plaintiff would be entitled to interest at the rate of 14% from the date of the suit till the date of the preliminary decree and, thereafter, at the same rate on the principal amount till payment along with costs. In the light of that, the following preliminary decree:-

(i) The suit is decreed in the principal sum of Rs.99,724.29 with interest at 14% from the date of the suit to the date of this decree and at the same rate on the principal amount from the date of the decree till payment.

(ii) Cost.

(iii) If the defendants pay in the Court the amount as aforestated within six months and, thereafter, pay such amount as may be adjudged due in respect of subsequent costs, charges and expenses, the plaintiff shall deliver upto the defendant all documents in their possession or power relating to the mortgaged property, and shall, if so required, re-transfer the property to the defendants at their cost free from the mortgage and from all encumbrances, if any, given by the plaintiffs or any person claiming under them.

(iv) If the payment afore-stated is not made within six months from today or if the defendants fail to pay within such time, the Court may fix, the amount adjudged due in respect of subsequent costs, charges, expenses and interest, the plaintiffs shall be entitled to apply for a final decree against the defendants.

13. P.S. to give ordinary copy of this judgment to the parties concerned.

Order accordingly.