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Report No. 70

Chapter 75

Receipts Taken In Lieu of Interest

Section 77

75.1. Introductory.-

The general rule contained in section 76 is not so absolute as would appear at the first sight. In the first place, the liability under some clauses of section 76 is subject to a contract to the contrary, by the very wording of the clauses-e.g., clauses (c) and (d). In addition, there may be created an exception to the general rule, where the case falls within section 77.

Section 77 provides that the liability under clauses (b), (d), (g) and (h) of section 76 does not apply where the parties have contracted that the receipts from the mortgaged property shall be taken in lieu of interest on the principal money, or in lieu of interest and defined portions of the principal.

75.2. Rationale.-

The section is virtually an exception to section 76. The rationale of the exception may be briefly explained in terms of the effect on the mortgagor. It is no concern of the mortgagor whether the mortgagee collects the rents and profits [section 76, clause (b)] or keeps an accurate account [section 76, clause (g)] or applies the receipts properly [section 76, clause (h)], if the parties have contracted as above. If the usufruct exceeds the interest (or the interest and the defined portion of the principal as the case may be) towards which the usufruct is to be apportioned, then it is the mortgagee who will be benefited thereby.

If there is a loss, again, it is the mortgagee who must bear it.1-2 Thus, the mortgagor is not concerned with the gain or loss. That is why an exception is allowed to be made for these specified situations. To put the matter briefly, where all that appears is a loan and a delivery of possession of land as security, no condition for an account can be engrafted on the transaction; and the mortgagor will not be permitted to redeem on payment of the principal sum.3

1. AIR 1947 Madras 197 (200).

2. AIR 1914 Nagpur 16 (17).

3. Madhu v. Bagirathibai, 1877 Born PJ 169, cited by Ghose Law of Mortgage in India, (1902), p. 870.

75.3. Limitations of scope.-

At the same time, certain limitations of the scope of section 77 ought to be noted. In Muhammad Sadiq v. Harakh Narain, AIR 1936 Pat 583 (585), Courtney Terrell, C.J. observed as follows:

"Now the liability to account of a mortgagee in possession depends entirely upon whether under the contract he has to hand over from time to time anything of the rents and profits to the mortgagor, for, of such money he is a trustee for the plaintiff until it is paid over. In cases where only a portion, fixed or proportionate, of such rents and profits is to be retained by way of interest, the liability to account is clear. Similarly, where the whole of the rents and profits are to be retained in reduction of a fixed rate of interest and the mortgagor must pay the balance of the fixed date from some other source, it is clearly necessary to account because the mortgagee is in possession and the mortgagor cannot otherwise know how much excess he may have from time to time to pay."

Where, however, the mortgagee is entitled to retain the whole of the rents and profits and where, as in this case, his liability to make the stipulated payments to or on behalf of the mortgagor is independent of the amount of such rents and profits as he may in fact receive from the property, there can be no reason to call upon him to account.

The failure to pay over the stipulated amounts to the mortgagor is the failure of a debtor and not the failure of a trustee to account satisfactorily for the property of another and there is no reason to hold him liable to account with yearly rents or to apply the sums which he annually fails to pay in reduction of the capital of the loan."

75.4. Sections 76 and 77.-

Section 77 would apply so long as there is a certainty as to the purpose for which the profits are to be utilised. It is only in cases where there is uncertainty as to the amount of profits that section 67 comes into play. Section 77 applies to a case where it is agreed that the income from the mortgaged property is to be taken in lieu of interest on part of the amount secured by the mortgage, and in such a case there is no liability to render accounts. Where a mortgage deed provides that the mortgagee should appropriate the surplus profits towards interest and that the mortgagor has no claim for the profits while the mortgagee has no claim for interest, the mortgagee is not liable to account.1

1. AIR 1933 PC 136.

75.5. Section 11 and section 76(c).-

It would appear that in section 77, there is no exception overriding the provisions of section 76(c)1. It may be recalled that section 76(c) requires the mortgagee, in the absence of a contract to the contrary, to pay the Government revenue and public charges and rent etc. out of the income of the property. It would, therefore, appear that the obligation under section 76(c) is absolute, and not subject to the qualification, even where the income is to be adjusted towards the entire interest.

1. AIR 1943 Oudh 433 (434).

75.6. No change.- We have no change to recommend in section 76.

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