Girja Prasad Tewari v. State of U. P — 1979 DIGILAW 1262 (ALL)

JUDGMENT N.N. Mithal, J. - This is a plaintiff's second appeal in a suit for injunction filed by him for restraining the State of U.P. from realising a sum of Rs. 807,59 which was being demanded from him as arrears of interest on the loan advanced to the plaintiff. 2. Briefly stated the facts of the case were that the plaintiff had borrowed a sum of Rs. 5,000/- from the Director of Industries under an agreement and had paid the entire amount of the loan along with interest thereon. It is said that a sum of Rs. 807,59 was still being demanded by the defendant which was illegal and the interest will be penal in nature. 3. The suit was contested by the defendant and it was pleaded that the plaintiff had failed to pay instalments on time and according to the agreement the defendant was entitled to claim interest at the enhanced rate according to the Rules framed by the Government for advancement of the loan. It was also pleaded that the suit was bad for want of a valid notice under Section 80 C.P.C. The trial court decreed the suit and held that the plaintiff having paid back the entire amount due, the difference which was being claimed by the defendant was hit by Section 74 of the Contract Act and the amount was being claimed by way of penalty. On appeal the trial court judgment was upset and the court came to the conclusion that the enhanced rate of interest as claimed by the defendant was not penal in nature and thus dismissed the suit. The plaintiff has, therefore, come up in Second Appeal before this Court. 4. I have heard learned counsel for the parties. Two submissions have been made by the counsel for the appellant as under : 1. Clause 7 of the Agreement would not apply when Clause 8 has once been applied but applied only so long as money remains payable in instalments. 2. That the rate of interest claimed by the defendant was penal and the defendant was not entitled to claim the same. The Court should intervene to reduce the interest under Section 74 of the Contract Act. 5. In order to appreciate the argument of the learned counsel on the first point it is necessary to have clauses 7 and 8 of the Agreement of loan before us. The Court should intervene to reduce the interest under Section 74 of the Contract Act. 5. In order to appreciate the argument of the learned counsel on the first point it is necessary to have clauses 7 and 8 of the Agreement of loan before us. Clause 7 : "That the borrower shall truely observe the Uttar Pradesh Rules for the advance of loans for developing cottage industries in the rural areas promulgated by the State Government and for the time being in force and these and all subsequent amendment thereof shall at all times be binding on the borrower and Sureties." Clause 8 : "That if any of the instalments aforesaid shall be in arrears in whole or in part, the whole sum then remaining due to the Creditor under the deed of account of principal and interest shall thereupon become payable at once and the Borrower and Sureties will be liable to pay the same." 6. Under this agreement the plaintiff had borrowed a sum of Rs. 5,000/- from the State Government and it had been stipulated that the said amount would be repaid in 12 six monthly instalments of Rs. 416/10/8 together with interest at the rate of 4% per annum calculated from 1.4.1950. The argument of the counsel for the appellant is that if for any reason an instalment is not paid and Clause 8 become operative then the only remedy open to the State Government was to claim the entire amount due in one lump sum but in such circumstances Clause 7 also cannot be enforced and interest in excess of 4% as agreed cannot be claimed by the defendant on the lump sum money payable. According to him Clause 7 can apply in those cases only to which Clause 8 was not applicable. This submission of the learned counsel does not appear to be correct and a reading of Clauses 7 and 8 will go to show that they do not exclude each other. Clause 7 shall thus apply in both the eventualities. According to him Clause 7 can apply in those cases only to which Clause 8 was not applicable. This submission of the learned counsel does not appear to be correct and a reading of Clauses 7 and 8 will go to show that they do not exclude each other. Clause 7 shall thus apply in both the eventualities. It can possibly make no difference if the money due is paid by instalments or the same has become payable in a lump sum because applicability of Clause 7 is only dependent on the provision of paras 221 to 228 of Financial Hand Book Volume V Part I. These paras provide that for non-observance of instalment schedules the authority sanctioning the loan can impose penal interest in a proper case. Clause 8 on the other hand gives an option to the State Government to realise the amount in arrears in a lump sum in any event when the borrower fails to make payment of the instalments on time. If Clause 8 come into operation then also the terms of Clause 7 can still be made applicable because there in nothing in paras 221 to 228 of the Financial Hand Book Volume V part I to exclude its operation. These paras apply to the amount due irrespective of the fact whether it is payable by instalments or in the lump sum. The borrower, would be liable for payment of interest as may be prescribed under the Uttar Pradesh Rules in this respect. 7. A Circular was shown to me by the State Counsel in which it was provided that paras 221 to 228 of the Financial Hand Book, Volume V Part I would apply to a loan of the nature now in question. The relevant para 227 of the Financial Hand Book reads as under :- "The authority which sanctions the loan may in so far as the law allows, enforce a penal rate of compound interest upon all other due instalments of interest or principal and interest. If the penal rate is enforced it should not be less than 8 percent per annum." 8. This para, therefore, provides that on the default in payment of instalments at the appointed time by the plaintiff the defendant would become entitled to enforce Clause 8 as well as Clause 7 against the plaintiff. 9. This brings us to a consideration of the second point. This para, therefore, provides that on the default in payment of instalments at the appointed time by the plaintiff the defendant would become entitled to enforce Clause 8 as well as Clause 7 against the plaintiff. 9. This brings us to a consideration of the second point. The argument of the counsel was that the agreed rate of interest was 4% only. This interest could be increased by 8% compound by enforcement of Clause 7 of the agreement read with para 227 of the Financial Hand Book Vol. V part I and in this manner the total interest that would be chargeable would be more than 12% in all. According to the Counsel this three times increase in the rate of interest was clearly penal in nature. To support his contention he has relied on AIR 1916 Alld. p. 160 wherein the rate of interest was agreed as 12% in the bond and it also contained a stipulation that if the money was not paid by a certain date the rate of interest was to run at 24% from the date of the loan. This rate of interest was held to be penal in nature being retrospective in effect and was held to be hit by Section 74 of the Contract Act. 10. Similarly in AIR 1925 Alld. p. 25 in a mortgage deed the rate of interest was 1% per mensem simple but the deed contained a default clause according to which the interest was to be added to the principal then due and on the aggregate an interest at the rate of 1.5% per annum at compound rate was to be charged. In this case also increase in rate of interest was held to be highly excessive and penal in nature and the amount of interest was reduced to 1% per mensem, compound. 11. A reference has also been made to AIR 1971 Mysore p. 250 where payment of interest was stipulated at 6% and in case a default was made in the payment of instalments it was to increase to 9%. There was further a stipulation that if the plaintiff failed to pay the recurring deposit the penal rate was to increase to 12%. It was held that a clause of this nature was penal in nature and party was not entitled to claim 12% interest. The amount of interest was reduced to 9%. 12. There was further a stipulation that if the plaintiff failed to pay the recurring deposit the penal rate was to increase to 12%. It was held that a clause of this nature was penal in nature and party was not entitled to claim 12% interest. The amount of interest was reduced to 9%. 12. It follows from the above decisions that Courts in the Country have always leaned against penal interest. It is surprising that the State which is supposed to be the custodian of the interests of its subjects was itself playing the role of money-lender in a much abused shylockian fashion. On the other hand the legislature is passing enactments by which curbs on private individuals are being placed in their carrying on money lending business and the rate of interest has been fixed with a ceiling at 17% in the case of unsecured loans. On the other hand the State is itself trying to use its legislative power to change interest at more than three times of the interest agreed upon. The very purpose of the State in advancing loans to small enterprenures is to help them in establishing their industries by advancing loan at cheap rates and to save them from the hands of merciless private money lender who used to charge exhorbitant rate of interest from needy persons. The State in such circumstances should try to charge as little interest as possible and for thar purpose has fixed only 4% per annum was to be charged initially. This 4% would suddenly be enhanced to more than 12% interest merely because the payment of the instalment had not been made on schedule, Surprisingly para 227 provides that a minimum 8% compound interest is to be charged from the borrower leaving hardly any discretion to the officers to charge lesser interest even in a just and proper case. The whole scheme, therefore, appears to be geared for charging penal interest rather than helping the small borrowers. 13. The whole scheme, therefore, appears to be geared for charging penal interest rather than helping the small borrowers. 13. Section 74 of the Contract Act lays down :- "When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for." 14. According to this Section if there is stipulation in a contract that a certain amount would be payable in the event of the breach of contract then if such amount as has been agreed to be paid was in the nature of penalty the Court has a discretion to allow an amount which it may deem proper but not exceeding the amount so mentioned. The explanation, however, clarifies the Section that if increased interest is payable from the date of default in a case it may also be in the nature of penalty. Thus Section 74 of the Contract Act would in terms apply to the case in hand. As we have observed above the original stipulation was for payment of interest at the rate of 4% per annum on the amount initially loaned to borrower. The amount was payable in 12 instalments and in the case of any default in the payment of any instalment the entire amount was to become due at once. To this extent there is nothing penal in the terms because payment by way of instalment was a concession which was granted by lender to the borrower and it would be within the power of the lender to withdraw the concession if the borrower tried to abuse the same. The same, however, cannot be said about the later part of the condition which requires payment of interest at the rate of 8% compound in addition to the interest of 4% payable in the earlier part of the agreement. The clause appears to be very harsh and unreasonable. The same, however, cannot be said about the later part of the condition which requires payment of interest at the rate of 8% compound in addition to the interest of 4% payable in the earlier part of the agreement. The clause appears to be very harsh and unreasonable. There may be cases where a borrower may be able to pay up 11 instalments on time and only at the time of making payment of the last instalment he may commit a default of few days. This little lapse on his part would render him liable for payment of additional 8% compound interest on the balance due. The term imposing a minimum 8% interest compound over and above the stipulated 4% interest therefore appears to be penal in nature and would attract application of Section 74 of the Contract Act. 15. Para 227 of the Financial Hand Book provides that the authority which has sanctioned the loan can enforce the penal rate of compound interest on the borrower. The discretion with the officer only lies to the extent that he may or may not impose penal interest but once he decides to impose the penal interest his hands are tied and a minimum of 8% compound interest has to be levied as penal interest. In the instant, case, it does appear from the agreement of loan that the last instalment and the 12th instalment was to be paid on 1-4-1956. The borrower, however, after paying the first instalment on time did not care to pay the remaining instalments on the due date with the result penal interest was imposed from the second instalment onwards. Keeping in view the conduct of the plaintiff and the circumstances of the case, it appears that interest of 9% including the initial interest of 4% on the sum loaned would meet the ends of justice. The defendant, therefore, would not recover any amount in excess of the amount as may be calculated according to the discretion made above and to that extent the plaintiff would be entitled to an injunction. 16. In the result, the appeal succeeds only in part. The defendant, therefore, would not recover any amount in excess of the amount as may be calculated according to the discretion made above and to that extent the plaintiff would be entitled to an injunction. 16. In the result, the appeal succeeds only in part. The plaintiff suit for injunction against the defendant shall stand decreed only to the extent that the defendant shall not recover any amount from the plaintiff which would be in excess of the amount calculating the interest of 9% simple on the sum borrowed including the interest of 4% payable on the loan initially. If after calculating the amounts as above there is still any amount in excess thereof the same (the excess amount) shall not be recovered from the plaintiff appellant. In other respects the appeal fails. In the circumstances the case, however, it is directed that parties shall bear their own costs of this appeal in this Court.