Srinivasavardacharur & Ors Vs.
Gopala Menon & Ors  INSC 202 (4 October 1966)
04/10/1966 MITTER, G.K.
CITATION: 1967 AIR 412 1967 SCR (1) 721
Usurious Loans (Madras Amendment) Act (8 of
1937), s. 3-Rate of interest permissible.
The first appellant advanced monies to D
against mortgages of her property. D was adjudicated an insolvent in 1949 and
her properties got vested in the Official Assignee of Madras. The Official
Assignee brought the properties to sale which were ultimately purchased by the
The Trial Court decreed the appellants' suit
for enforcement of the mortgages against the property and awarded interest at
the rate of 15 per cent compoundable with yearly rests.
In appeal the Division Bench of the High
Court found that in the circumstances of the case a rate of 10, per cent
compound interest with yearly rests was just. With certificate the appellants
came to this Court. Section 3 of the Usurious Loans (Madras Amendment) Act,
1937 fell for consideration.
HELD : The net result of the various clauses
of s. 3 to be that the court must go back to the date of the original
transaction and form an opinion as to the rate of interest which would be
reasonable after considering (a) the value of the security offered;
(b) the financial condition of the debtors
including the result of any earlier transaction;
(c) the known and probable risks in getting
(d) whether compound interest was provided
for and if so the frequency of the Period of calculation of interest for being
added to the principal amount of the loan. [725 E-G] In the circumstances of
the case the Division Bench rightly held that 10 per cent compound interest
with yearly rests would meet the justice of the case. The security was not
inadequate and the threat of a suit by the brother of the mortgagor was not
serious. [726 A-B] Venkatarao v. Venkatratnam, A.I.R. 1952 Madras 872 and Sri
Balasaraswati v. A. Parameswara Aiyar, A.I.R. 1957 Mad. 122 referred to.
There was also no reason to interfere with
the scaling down of the rate of interest to 6 per cent from the date of filing
of the suit. Although the reasons were not indicated it was fairly clear that
the High Court was, using its discretion as regards interest pendente lite.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 636 of 1964.
Appeal from the judgment and decree dated
September 1, 1959 of the Madras High Court in O. S. Appeal No. 104 of 1955.
T. V. R. Tatachari, for the appellants.
R. Thiagarajan, Jayaram and M. R. K. Iyer,
for respondents, Nos. 1 and 9.
722 The Judgment of the Court was delivered
by Mitter, J. This is an appeal from a judgment of the High .Court at Madras on
a certificate granted by it.
The main question in this appeal relates to
the rate of interest payable in respect of four mortgages executed in between
March 20, 1936 and January 2, 1938. Both the learned trial Judge, Ramaswami J.
of the Madras High Court and the Bench of two Judges in appeal were of the view
that the provision for interest in the impugned mortgages should be reduced;
but whereas the learned trial Judge reduced the rate of interest from 15 pet
cent compoundable every quarter to 15 per cent compoundable with yearly rests,
the Judges in appeal after taking all the circumstances into consideration held
that 10 per cent compound interest with yearly rests would not be excessive and
they reduced the rate accordingly. They also scaled down the rate of interest
to 6 per cent from the date of the institution of the suit.
The creditor has come up before this Court in
appeal and his substantial complaint is that the rate of interest should not
have been cut down by the Division Bench of the Madras High Court.
The power of the court to reduce interest in
a case like this is derived from s. 3 of the Usurious Loans (Madras Amendment)
Act VIII of 1937. Sub-section (1) of that section gives the court the power to
give relief in various ways if it has reason to believe that the transaction as
between the parties thereto was substantially unfair. One of such reliefs is
the reopening of the transaction and relieving the debtor of all liability in
respect of any excessive interest. Explanation I to the section lays down that
"if the interest is excessive, the court shall presume that the
transaction was substantially unfair; but such presumption may be rebutted by a
number of special circumstances justifying the rate of interest."
Sub-section (2) of s. 3 provides by clause (a) that the word
"excessive" in the section means in excess of that which the court
deems to be reasonable having regard to the risk incurred as it appeared or
must be taken to have appeared, to the creditor at the date of the loan. Under
clause (b) of the said subsection the court has also to take into account any
amounts charged or paid etc. and if compound interest is charged, the period at
which it is calculated and the total advantage which may reasonably be taken to
have been expected from the transaction. Clause (c) of sub-section 2 provides that
in considering the question of risk, the court shall take into account the
presence or absence of security and the value thereof, the financial condition
of the debtor and the result of any previous transactions of the debtor, by way
of loan, so far as the same were known, or must be taken to have been known, to
the creditor. Clause (d) of the said sub-section enjoins upon the court to
consider also all circumstances materially affecting the relations 723 the
parties at the time of the loan or tending to show that the transaction was
unfair, including the necessities or supposed necessities of the debtor at the
time of the loan so far as the same were known, or must be taken to have been
known, to the creditor.
In effect the provisions of the section which
are relevant for the purpose of this appeal are as follows:(a)If the Court has
reason to believe that the transaction was unfair it will exercise the powers
given by subsection, (1).
(b)The court shall presume the transaction to
be substantially unfair if the interest is excessive, such presumption being a
rebuttable one by the special circumstances of the case;
(c)In order to find out whether the interest
is excessive the court must examine the circumstances of the case in the light
of the risk incurred or the risk as would be apparent to the creditor at the
date of the loan, and then judge whether compound interest at the rate
prescribed and with the rests provided for was justifiable keeping also in view
the security given by the mortgagor, the value of such security and the
condition of the debtor including the result of any previous transaction.
The net result of the above seems to be that
the Court must go back to the date of the original transaction and form an
opinion as to the rate of interest which would be reasonable after considering
(a) the value of the security offered;
(b) the financial condition of the debtor
including the result of any prior transaction;
(c) the known or probable risks in getting
repayment, (d) whether compound interest was provided for and if so the
frequency of the period of calculation of interest for being added to the
principal amount of the loan.
The facts of the case may now be briefly
stated. The original mortgagor Dhanakoti Ammal had succeeded to the properties
of her father along with her sisters under a will executed by him on the basis
that the properties were his self-acquired properties. Her brother Alavandar
filed a suit in the year 1919 through a next friend claiming that the
properties were not the self-acquired properties of his father and as such not
capable of bequest under a will.
This suit was dismissed as also the appeal
therefrom to 724 the Madras High Court preferred in 1922. By the year 1936 when
the first mortgage in favour of Srinivasavaradachariar, the appellant, before
us, was executed, Dhanakoti Ammal was involved in debts. The most important
item of her properties was a market on the outskirts of the city of Madras
which had become dilapidated and the Corporation of Madras was refusing to
renew the licence unless it was put in good order. She had further borrowed a
sum of money repayable with interest at 20 per cent compoundable monthly.
Her brother Alavandar who was due to attain
majority very soon threatened to file another suit impeaching the decree in the
earlier suit. As a matter of fact, the first two mortgages were executed in
1936 before Alavandar had filed his suit and the last mortgage was executed in
Dhanakoti Ammal got more and more involved
-in debt and was adjudicated an insolvent in 0. P. 148 of 1949. Her properties
got vested in the Official Assignee of Madras.
The Official Assignee brought the properties
to sale which were ultimately purchased by Dr. Gopala Menon for Rs. 5,0001-.
Dr. Gopala Menon tried to come to an arrangement with Srinivasavaradachariar
but nothing came out of it and the suit out of which this appeal has arisen was
filed in the year 1950. Other aliences were involved in the suit but we are not
concerned with them. According to the learned trial Judge the risks which the
creditor ran in advancing the money were considerable in that the adequacy of
the security was questionable in view of the threat of suit by Dhanakoti
Ammal's brother and the condition of the property in an undeveloped area of
Kodambakkam. The learned trial Judge could not find anything unfair in the
transaction, but nevertheless he thought that the rate of interest should be
scaled down to 15 per cent compoundable at the end of each.
The learned Judges of the Division Bench of
the Madras High Court found that the amount advanced under the old mortgages
came to nearly Rs. 48,000/that there was already a prior mortgage in respect of
which nearly Rs. 8,000/was due and the value of the security though not very
ample could not be said to be markedly inadequate and there was a shadow on the
title of the mortgagor by reason of the threat of suit by her brother. On a
consideration of the entire evidence bearing on the point revealing the
circumstances in which the loan transaction came into existence the appellate
bench held that 15 per cent compound interest calculated with quarterly rests
was certainly excessive. Taking note of several decisions of the Madras High
Court to which we shall presently refer, the learned Judges thought that the
rate of interest to be allowed was 10 per cent compound interest with yearly
It is difficult to predicate of any rate of
interest as being excessive divorced from the circumstances of the case unless
the rate 725 fixed is so high as to be suggestive of an unfair transaction on
the face of things. It is not for us to speculate as to why the Legislature of
the State of Madras proceeded in such a roundabout way in making amendments to
the Usurious Loans Act of 1918 for the purpose of giving relief to borrowers
when it is well known that at or about the time of the Madras amendment the
Legislatures of other States in India had fixed certain rates as being the
maximum beyond which the courts of law were not competent to go. So far as we
are aware difference was made in the treatment of unsecured loans and secured
loans and even in the case of the former the rate allowed was not to exceed 12
per cent simple in most of the States. With regard to the rate of interest
allowed by the Madras High Court after 1937 we find that in Venkatarao v.
Venkataratnam(l) a bench consisting of Govinda Menon and Ramaswami JJ.
observed, "that anything above 12 per cent per annum simple interest is
excessive, considering the nature of transaction in this State." There the
suit was on a mortgage which provided for payment of interest at 12 1/2 per
cent per mensem with annual rests.
In Sri Balasaraswati v. A. Parameswara
Aiyar(2) a Division Bench consisting of Rajamannar C. J. and Panchapekesa Ayyar
J. observed, "in normal cases where the security is ample to cover the
loan and there is no danger at all to the principal and interest the court will
hold more than 12 per cent simple interest to be excessive, as held in A.I.R.
1952 Madras 872 and by us in A.S. 348 and 361 of 1948".
According to the learned Judges "Where
the security is not sound, 10 per cent compound interest can be allowed as in
A.I.R. 1954 Madras 764." In the result the learned Judges only allowed
simple interest at 12 per cent per annum. In the instant cases the learned
Judges in appeal also referred to a judgment, of Subba Rao J. (as he then was)
in C. S. 163 of 1949 as containing an observation that the dictum in Venkatarao
v. Venkatratnam(l) that "anything above 12 per cent simple interest was
excessive would not be taken as a principle of law applicable to all cases
irrespective of the circumstances obtaining at the time of the
That transaction also related to Dhanakoti
Ammal-the original debtor in this case and Subba Rao J. (as he then was)
reduced the rate of interest from 15 per cent compound interest to 12 per cent
per annum simple. We have not had the benefit of reading the judgment of his
Lordship, but we take it that the result of it is as indicated in the judgment
in appeal before us.
It appears to us therefore that in the
opinion of a number of Judges of the Madras High Court who were cognizant of
the state of affairs prevailing in the State interest beyond the rate of 12%.
per annum simple would be considered excessive by court of law where the
security was not inadequate and the risk run by the creditor was not abnormal.
There can be no dispute that (1) A.I.R. 1952 Madras 872.
(2) A.I.R. 1957 Madras 122, 129.
726 interest payable at the rate of 10 per
cent compoundable annually over a number of years would be more in the interest
of the creditor than 12 per cent per annum simple for the same period. In our
opinion the learned Judges of the Division Bench of the Madras High Court were
right in holding that 10 per cent compound interest with yearly rests would
meet the justice of the case. The security was not inadequate and the threat of
suit by Alavandar in view of the fact that his earlier suit which had been
taken in appeal to the Madras High Court and subsequently lost, was never
regarded seriously. This is corroborated by the fact that even after the
institution of that suit in 1937 the appellant before us advanced further sums
of money to Dhanakoti Ammal at the same rate of interest as before; if he had
thought that his security was put in jeopardy by the institution of the suit he
would have been careful not to advance any further amounts and would in any
case have insisted on the rate of interest being higher than that provided for
in the earlier mortgages.
In our opinion the Division Bench of the
Madras High Court made a correct assessment of the situation and their
pronouncement with regard to the rate of interest prior to the date of the suit
ought not to be disturbed.
We also find no reason to interfere with the
scaling down of the rate of interest to 6 per cent from the date of the filing
of the suit. Although the reasons are not indicated, it seems fairly plain that
their Lordships were using their discretion as regards interest pendente lite.
We cannot overlook the fact that the mortgages -were executed as far back as
1936 and 1938 and that the creditor who had waited till 1950 for the
institution of the suit would, in any event, get interest substantially
exceeding the principal amount of the loans. In this view of things we are not
prepared to interfere with the exercise of the discretion exercised by the
learned Judges of the Madras High Court even though they have given no reasons
for the reduction of rate of interest pendente lite.
In the result the appeal fails and is
dismissed with costs.
G. C. Appeal dismissed.