JUDGMENT
K.A. Swami, J.
1. This Appeal by the plaintiff – Life Insurance Corporation of India is preferred against the Judgment and decree dated 23rd February 1983 passed by the learned 9th Additional City Civil Judge, Bangalore in Original Suit No. 7903/1980.
2. The suit was filed for recovery of a sum of Rs. 88,858-02 by sale of the mortgaged property. The property mortgaged is described in the Schedule to the plaint. It is a residential site with building bearing No. 177, West of Chord Road, Second Stage, Bangalore. For the purpose of construction of a house on the aforesaid site the defendants raised a loan of Rs. 65,000/- from the plaintiff. Under the Mortgage Deed 30 half yearly instalments were granted to the defendants for payment of the amount of Rs. 65,000/- advanced on mortgage. According to the case of the plaintiff, the defendants failed to pay the instalment from the beginning. The first instalment became due on 27-2-1975 and the second instalment became due on 27-8-1975. The defendants failed to pay not only the first and second instalments but also the subsequent instalments. Therefore, plaintiff filed the suit on 8-8-1980 for recovery of the aforesaid sum due under the Mortgage Deed.
3. The defendants did not dispute the mortgage and the loan obtained by them. However, they disputed the correctness of the contention of the plaintiff that it was entitled to claim 14% interest on the entire sum.
4. The trial Court on the basis of the pleadings of the parties framed the following two issues:
“1. Whether the plaintiff proves that as on the date of the suit the defendants were due on the Mortgage transaction as stated in paragraph-8 of the plaint?
2. To what reliefs the parties are entitled?”
5. The trial Court answered the first issue on holding that the defendants as on the date of the suit were liable to pay a sum of Rs. 80,000/-. During the pendency of the suit, the defendants had paid a sum of Rs. 10,000/- on 6-10-1980 and Rs. 40,000/- on 6-11-1980. Therefore, these two sums were also directed to be adjusted in the amount decreed. It is the plaintiff who has come up in Appeal.
6. Sri Ramanna, learned . Counsel appearing for the plaintiff/appellant advanced one and the only contention that as per the terms contained in the Mortgage Deed dated 27-8-1974 – Ex.P-1, the defendants were liable to pay on the entire sum 14% interest because they committed more than one default in payment of the instalments. The trial Court has held that the stipulation as to payment of additional interest of 2 1/2 per cent over and above 11 1/2% on the entire sum is penal in nature. Therefore, it has relieved the defendants from that burden. Accordingly, it has excluded 2 1/2% additional interest claimed by the plaintiff and passed the decree for the remaining sum.
7. The learned Counsel for the appellant did not dispute the fact that the calculation made by the trial Court on excluding the additional interest of 2 1/2% is correct; however, he maintained that the trial Court was not right in disallowing additional interest of 2 1/2% over and above 11 1/2% on the entire sum. Therefore, the following point arises for consideration:
Whether the Clauses contained in the Mortgage Deed regarding payment of additional interest in the event of commission of the defaults as stipulated in the Mortgage Deed on the entire sum becoming due, is penal in nature? If so, whether the mortgagee (the plaintiff herein) would be entitled to the additional interest of 2 1/2% on the entire sum due?
8. The relevant Clauses under the Mortgage Deed Ex.P-1 are as follows:
NOW THIS DEED WITNESSETH AS FOLLOWS:-
In pursuance of the aforesaid Agreement and in consideration the sum of Rs. 40,000 (Rupees Forty Thousand only) now lent and advanced and paid by the Mortgagees to the Mortgagor on or before the execution of these presents (the receipt whereof the Mortgagor doth admit and acknowledge) and of the convenant on the part of the Mortgagees hereinafter contained to lend and advance a further sum not exceeding Rs. 35,000 (Rupees Thirty Five Thousand only) in accordance with the provisions hereinafter appearing, the Mortgagor and the comortgagee do and each of them doth hereby jointly and severally covenant with the Mortgagees that the Mortgagor and the comortgagor and each of them shall on the 27th day of August 1989, or earlier under the provisions in that behalf hereinafter contained pay to the Mortgagees in Bangalore at the Divisional Office at present at J.C. Road, Bangalore-2 the said sum of Rs. 75,000/- (Rupees Seventy Five Thousand only) by 30 half yearly instalments of Rs. 2,500/- (Rupees Two Thousand Five Hundred only) each, the first of such half yearly instalments to be paid on or before the 27th day of February 1975 and the subsequent instalments to be paid punctually every six months thereafter and shall also pay the further advance or advances which may be made by the Mortgagees to the Mortgagor hereafter in equal half-yearly instalments to be paid along with the instalments of the original advance to the intent and purpose that the whole of the subsequent advance or advances shall also be fully repaid on the 27th day of August 1989 and will also in the meanwhile and thereafter so long as the said principal sum advanced (or which may be hereafter advanced) or any balance thereof shall remain unpaid, pay to the Mortgagees on the amount then due interest at the rate of 11 1/2 per cent per annum by half-yearly payments on the 27th day of August and on the 27th day of February each year without deduction, the first payment to be made on the 27th day of February 1975 PROVIDED HOWEVER THAT if any default is made in payment of any half yearly instalment of principal and/or interest or any part thereof on the days hereinbefore appointed for payment thereof then and in every such case, without prejudice to the Mortgagees’ other rights and remedies as herein provided, the Mortgagor and the comortgagor will also pay by way of additional interest to the Mortgagees, over and above the interest at the aforesaid rate of 11 1/2 per cent per annum, by half-yearly payments on the days for payment of interest hereinbefore appointed, so long as any half yearly instalments of principal and/or interest or any part thereof shall remain unpaid, simple interest at the rate of 2 1/2 per cent per annum on the balance of the loan then outstanding the remaining unpaid to be computed and charged from the date of commencement of the period in respect of which default is committed in payment of half-yearly instalment of principal or interest to the intent and purpose that in the event of any default being committed and charged at the increased rate of 14 per annum, instead of 11 1/2 per cent per annum so long as such default continue, but no further, and such additional interest also shall be charged on the said land hereditaments and premises hereby mortgaged Provided Always and it is hereby Agreed and Declared that the foregoing Stipulation for payment of additional interest at the rate of 2 1/2 per cent per annum, over and above the stipulate rate of interest of 11 1/2 per cent per annum, is and shall always be considered as part of the primary contract between the parties hereto, and not a stipulation by way penalty Provided further that if any default is made in payment of any yearly instalments of principal and/or interest or any part thereof on the days hereinbefore appointed for payment thereof, the Mortgagor and the comortgagor will, over and above the additional interest hereinbefore mentioned, also pay by way of compound interest to the Mortgagees by half-yearly payments on the days aforesaid so long as any half-yearly instalments of principal and or interest or any part thereof shall remain unpaid, interest on the unpaid half-yearly instalments of principal and or interest or part thereof at the aforesaid rate of 11 1/2 per cent per annum to be computed from the date on which such half-yearly instalments of principal or interest or part thereof should have been paid and all such compound interest also shall be charged on the said land hereditaments and premises hereby mortgaged PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED that the provisions herein contained for payment of additional interest and compound interest shall not in any manner prejudice or interfere with the power of sale and other powers and remedies herein contained for securing or recovering the principal sum and interest intended to be hereby secured. The payments provided in these presents shall be made to the Divisional Office of the Mortgagees at J.C. Road, Bangalore-2 unless otherwise directed by the Mortgagees.
1(a) It is agreed that if the entire building or any portion thereof is used/let out for non-residential purposes, the rate of interest chargeable on the loan will be 13% per annum during such period.
1(b) The rate of interest on the loan at present will be 11 1/2% per annum (i.e., 2 1/2% per annum above the bank rate) subject however to the condition that the rate of interest on the loan would increase or decrease as and when the Bank rate increases or decreases during the period of loan the minimum interest being not less than 8 1/2% per annum at any time.
2. In further pursuance of the said agreement and for the consideration aforesaid:
(a) The Mortgagor as beneficial owner doth here by grant convey assign and transfer unto the Mortgagees all that piece or parcel of land hereditaments and premises situate at No. 177, West of Chord Road, II Stage, Rajajinagar, Bangalore-10, in the City and Registration Sub-District of Rajajinagar more particularly described in the First Schedule hereunder written together with the buildings, messuages, tenements, houses, sheds and all other buildings, structures and appurtenances standing thereon together with Courts, trees, fences, hedges, ditches, ways, sewers, drains, water-courses, liberties, privileges, rights, easements and appurtenances whatsoever to the said hereditaments and premises or any part thereof belonging or in anywise appeartaining or generally held occupied or enjoyed therewith or reputed to belong or be appurtenant thereto AND ALL the estate right title interest claim and demand whatsoever of the Mortgagor into and upon the premises and every part thereof respectively and all deeds writings and evidences of title relating thereto and now in the possession of the Mortgagor or which can or shall be obtained by the Mortgagor without suit to HAVE AND TO HOLD the said lands, hereditaments and premises hereinbefore expresses to be here by granted conveyed assigned and transferred with their and every one of those rights members and appurtenances (hereinafter called “Mortgaged premises”) UNTO AND TO THE USE AND benefit of the Mortgagees their successors and assigns absolutely for ever subject to the proviso for redemption hereinafter contained.
(b) The Mortgagor and the comortgagor as beneficial owner have simultaneously assigned unto the Mortgagees as collateral security Life Insurance Policies particulars of which are set out in the Second Schedule hereunder written with all moneys (including bonus accrued and to accrue hereinafter) which shall become payable thereunder and the benefit of all powers and remedies for enforcing the same to HOLD the said policies and the moneys upto the Mortgagees absolutely subject to the proviso for redemption hereinafter contained.
xxx xxx xxx
10. If the Mortgagors shall make default in payment of any half yearly instalment of principal as aforesaid within a month from the due date thereof or in payment of any two half-yearly instalments of interest or in payment of any rates taxes land revenue assessments dues duties rent and charges payable in respect of the mortgaged premises or in the event of the Mortgagors failing or neglecting to comply with the requirements contained in Clause 4 hereinbefore mentioned or if the Mortgagor and the comortgagors shall commit any breach of any of the covenants conditions or agreements contained herein or in the event of the Mortgagor and the comortgagor becoming insolvent or if the Mortgagor and comortgagor shall make assignment of all or any of his/her/their properties for the benefit of credit or if any executing or attachment shall issue on any of the mortgaged premises or part thereof are in any way dealth with or a Receiver is appointed thereof or if any event shall happen so as in the opinion of the Mortgagees materially to impair the securing hereby created or to render it insufficient within the meaning of Section 66 of the Transfer of Property Act 1882 or if any default shall be committed in payment of any one instalment of insurance premium on the said policies or any of them as and when it falls due or in maintaining the said policies as provided in Clause 5 hereinabove mentioned or if the said mortgaged premises or any part thereof are taken up by Government or by a Public body entitled to do so far a public purpose or if there is default on the part of the Mortgagor and the comortgagor in production of the necessary wealth-certificate or a certificate of payment of Income-tax or other taxes due upto the date of these presents under Section 230A of the income tax Act, 1961 as may be required for registration of this deed then and in any of the aforesaid cases, notwithstanding anything herein contained to the contrary, the Mortgagees may deemed payment of the whole of the principal sum or the balance thereof then due with interest, additional interest costs and expenses and the same shall be deemed at the option of the Mortgagees to have become immediately payable as if the due date had then elapsed AND the security hereby constituted shall at the option of the Mortgagees become immediately enforceable AND in such cases all such rights and remedies shall be available to the Mortgagees as would be available under the terms of these presents or by law upon default being made in payment of the principal money or interest or all other moneys hereby secured.”
Reading these two Clauses together it becomes clear that as per the terms stipulated in the Mortgage Deed if the mortgagor commits any default in payment of instalment amount due, until that amount is paid the mortgagee would be entitled to additional interest of 2 1/2% over and above 11% until the instalment amount is paid and that has to be added on as principal amount to the mortgaged amount. In the event the mortgagor commits more than two defaults in payment of the instalments the entire amount becomes due and the mortgagee will be entitled to recover the entire sum with 14% interest.
9. The question for consideration is whether the terms stipulated in the Mortgage Deed that in the event of commission of two defaults in payment of the mortgaged amount, entire sum would become due and on that entire sum the mortgagor is liable to pay 2 1/2% interest over and above 11 1/2% interest as agreed upon is penal in nature? It may be relevant to notice that as per the terms of the Mortgage Deed the mortgagee has agreed to give concession to the mortgagor in payment of the mortgaged amount in 30 half yearly instalments with interest at the rate of 11 1/2%. The additional interest at the rate of 2 1/2% is stipulated only in the event of default in payment of the instalments as and when they become due. Therefore, if the mortgagors were to pay the mortgaged money without committing any default in 30 half yearly instalments the mortgagee would not be entitled to claim 2 1/2% interest over and above 11 1/2%. It would be entitled to claim only 11 1/2%. It is only in the event of commission of two defaults in payment of instalments, the whole amount would become due and the mortgagee would be entitled to recover the entire amount outstanding on the date the default of second instalment is committed. Therefore, the commission of the second default by the mortgagors would naturally enure to the benefit of the mortgagee because the mortgagee would be entitled to recover the entire sum without waiting for the other instalments becoming due. In other words; the concession shown by the mortgagee to the mortgagor for payment of the mortgage money in 30 half yearly instalments the mortgagee would be entitled to withdraw that concession and it would be entitled to claim the whole sum as due on that date. Therefore, it becomes clear that additional 2 1/2% interest over and above 11 1/2% stipulated under the Mortgage Deed is nothing but penal. When the entire amount becomes due on the commission of the second default by the mortgagor the mortgagee would be entitled to recover the entire sum. But allowing 2 1/2% interest over and above 11 1/2% would be nothing but granting double benefit to the mortgagee. It would be highly unfair, unreasonable, opppressive, and would cause great prejudice and loss to the mortgagor, because in the normal course, if the entire amount is paid by the mortgagor without committing any default, the mortgagee as per the terms stipulated in the deed, would not be entitled to more than 11 1/2% and at the same time the mortgagor would be paying the mortgage money not in a lump sum but in 30 half yearly instalments. The consequences of second default would be that the mortgagee would be entitled to recover the whole sum at a time, therefore in such a situation it would be highly penal if the mortgagee were to recover 2 1/2% additional interest over and above 11 1/2% interest. Therefore, we are of the view that the mortgagee in such a situation would be entitled to interest only at the rate 11 1/2% per annum. The trial Court has also held thus:
“The clause that additional interest of 2 1/2% has to be paid in the event of default it appears to me was inserted only as a leaver to compel the borrower to pay instalment and interest that has accrued on due dates. Hence, in my opinion, it is unfair and unreasonable to permit the plaintiff to charge interest at 14% in place of 11 1/2%. In other words, the defendants should be relieved from paying additional interest of 2 1/2%, Now the calculations of the amount that is due to the plaintiff by the defendants is to be made keeping this finding in view.”
10. The learned Single Judge of this Court had an occasion to consider similar stipulation contained in a consent decree in ABDUL GHANISAB v. ALAMPALLI NANJUNDA SETTY on considering similar stipulation, the learned Single Judge has held thus:
“The first payment made by the Judgment-debtor was a delayed payment. He made that payment on May 31, 1954, with the result that the decree-holder sought to recover from him the entire sum of money claimed in the plaint, which was more than Rs. 1,200/- in excess of that for payment of which the consent decree provided.
The executing Court refused to recognise the right of the decree holder to claim that larger sum of money. It thought that it had power to relieve the Judgment debtor against that it considered to be in the nature of a penalty.
But, in the appeal preferred by the decree holder, he was able to get the order which he wanted. The lower appellate Court was of the view that the executing Court had no power to relieve the Judgment Debtor from his liability to pay the entire sum of money claimed by the decree holder in his plaint.
The Judgment debtor appeals.
I am not disposed to agree with the view taken by the lower Appellate Court in this case. Principle applicable to cases like the present one is that if a creditor agrees to reduce the amount of his claim on certain conditions but the agreement provides that, on the failure of the debtor to fulfil any of those conditions, the original claim shall revive, it is clear that the revival of the original claim is not in the nature of a penalty. But, if, on the contrary, a debtor agrees to pay a sum of money over and above his original liability is entitled to be relieved against what undoubtedly has to be regarded as a penalty. The same principle applies to a consent decree made by a Court.
In Sannappa v. Mallari Jois, where an instalment decree directed that in default of payment of any instalments, the whole of the decretal amount then due should be paid with interest at 12 per cent thereon from the date of suit till date of payment, it was held that the provision regarding payment of interest amounted to a penalty since the amount of the decree already included future interest and that the Court had power to relieve the Judgment debtor against such penalty.
In Muthuswami Mudaliar v. Malle Gowda it was pointed out that there was a well recognised distinction between an agreement under which in default of payment, the defaulting party has to pay a much larger sum than is admittedly due and, that, under which, in default of payment of a sum smaller than is admitted, he has to pay the full sum so admitted, and that the stipulation in the former case is in the nature of a penalty but not in the latter case.
In Kandarpa Nag v. Banwari Lal Nag Sir Asutosh Mookerjee, Acting C.J. pointed out that where a consent decree gives effect to an agreement which embodies a right to forfeiture, the Court in the exercise of its equitable jurisdiction, is competent to grant such relief against forfeiture, as it might have granted if there had been no consent decree and a suit had been instituted to enforce the compromise.
So tested, it cannot be disputed that, in this case, the provision for the payment of the amount claimed by the decree holder in the plaint, if there was default in the payment of any one of the instalments payable under the consent decree, was clearly in the nature of a penalty. The consent decree providing for the payment of a sum of Rs. 700 by the Judgment-debtor must, in the absence of any indication to the contrary, be regarded to have declared that the Judgment-debtor was not liable to pay any sum in excess of the sum of Rs. 700. The decree holder must be deemed to have admitted, when he consented to that decree, that what was payable by the Judgment-debtor to him did not exceed Rs. 700. It is impossible in this case to hold that the sum of Rs. 1,970-13-6 claimed by the decree-holder in his suit was really due to him by the Judgment-debtor.
The aforesaid Decision is in conformity with the view expressed by us on interpreting similar Clauses contained in Ex.P-1. We accordingly answer the point raised for determination against the plaintiff.
For the reasons stated above, the appeal fails and the same is dismissed. In the normal course we would have allowed costs but for the fact that the respondent has remained absent, we pass no order as to costs.