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Case Number

S.A No. 1189 of 1942.

Attorney(S)

Messrs. K. Rajah Ayyar and V. Seshadri for Applt.
Messrs. B. Sitarama Rao and C.A Seshagiri Sastri for Respts.

Judges

Patanjali Sastri, J.

Acts

USURIOUS LOANS ACT 1918
Amendment) Act, 1936.The

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Smart Summary

Case Summary — Usurious Loans Act (Madras Amendment), second appeal

Factual and Procedural Background

The respondents, owners of extensive garden lands and coffee plantations in the Madura District, had financial dealings with the appellant (a moneylender and commission agent at Dindigul) beginning in 1927. Periodic settlements of account were made; interest was calculated at 12% per annum and, at each settlement, accrued interest was added to the principal so that the composite sum thereafter bore interest at 12%.

At a settlement on 22 February 1933 the amount due was fixed at Rs. 17,000 and a promissory note for that sum was executed. No further advances were made, though some repayments occurred. On 30 November 1935 the balance was settled at Rs. 21,375 and another promissory note was given in discharge of the earlier note. On 15 March 1937 the respondents sold certain immovable properties to the appellant for Rs. 20,000; Rs. 19,500 of that sale price was applied towards the promissory note debt. A final settlement on 11 July 1937 fixed the sum due at Rs. 4,000 after adjusting the sale price and allowing Rs. 2,500 as remission. The parties agreed that if the respondents repaid by 30 March 1940 the Rs. 4,000 together with Rs. 20,000 (the sale price) and any rents then due, the appellant would reconvey the lands; if they defaulted, the appellant would enjoy the lands absolutely and could recover the Rs. 4,000 with interest as provided in the promissory note of 1935 and any unpaid rents.

The respondents defaulted, and the appellant sued for recovery of Rs. 4,000 with interest from 11 July 1937. The lower courts held that (i) the respondents were agriculturists within the meaning of the Usurious Loans Act as amended in Madras, (ii) compound interest at 12% had been charged and therefore, under the statutory proviso, interest was presumed excessive unless special circumstances rebutted that presumption, and (iii) no special circumstances were proved; the courts reopened the settled accounts, allowed only simple interest at 12% throughout (re-appropriating payments on that basis) and passed a decree for the amount found due to the appellant.

The appellant appealed to the court giving the present opinion. The appeal was dismissed with costs and leave refused.

Legal Issues Presented

Whether the respondents are "agriculturists" within the meaning of the Usurious Loans Act (Madras amendment) for the purpose of invoking the statutory presumption against compound interest.
Whether, on the facts (periodic settlements adding accrued interest to principal and charging interest on the composite sum), compound interest was in fact charged.
Whether the suit instrument (the promissory note Ex. A) which provided for simple interest only could isolate the "transaction" for the suit from the prior course of dealings so as to prevent the court from treating the entire course of dealings as a single "transaction" under Section 3.
Whether any special circumstances were proved to rebut the statutory presumption that compound interest charged on loans to agriculturists is excessive.

Arguments of the Parties

Appellant's Arguments

The respondents were not agriculturists and therefore could not rely on the presumption regarding excessive interest created by the Act (pointing to evidence that they ran shops at Madras and Trichinopoly selling plantains).
This was not a case where compound interest had been charged; the arrangements amounted only to payment of interest on interest, not to compound interest with specified rests.
Even if compound interest could be said to have been charged in the course of dealings generally, the specific promissory note under which the suit was brought provided only for simple interest at 12% and therefore the "transaction" before the court could not be treated as one charging compound interest.
There were precedents in which compound interest at 12% (with rests) was allowed; therefore no interference was called for here because not more than 12% had been charged at any time.

Respondents' Position

The respondents sought relief under the Usurious Loans Act, 1918 as amended in Madras, claiming the benefit of the statutory presumption that compound interest charged on loans to agriculturists is excessive and that the transactions were substantially unfair.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Venkataramanayya v. Mallikarjanudu	Interpretation that, in absence of statutory definition, "agriculturist" must be understood in its ordinary sense as a person who actually follows the calling of an agriculturist.	Cited to support the conclusion that the respondents, who personally supervised cultivation on extensive lands and sold produce, are agriculturists within the meaning of the Act.
Muthu Chettiar v. Meenakshisundaram Ayyar	Distinction between a stipulation to pay "interest on interest" and true "compound interest"; where instrument shows interest on unpaid interest but does not sink arrears into principal with specified rests, it may not be compound interest.	Relied on by the appellant to argue that the present case involved only "interest on interest" and not compound interest; the court distinguished the authority, finding the present facts showed sinking of accrued interest into principal at settlements and that essential features of compound interest were present.
Hiralal Sahu v. Lachhmi Prasad Narain Singh	Recognition (by the Privy Council) that interest charged in a manner similar to the present case—i.e., interest capitalised at settlements and added to principal—amounts to "compound interest."	Referenced to support the court's conclusion that the periodic capitalisation of interest and charging of interest on the composite sums constituted compound interest.
A.S. No. 390 of 1939 and A.S. No. 21 of 1940 (Dindigul matters)	Instances where courts allowed compound interest at 12% (and more) with yearly or shorter rests in exercising powers under the Act.	Noted by the appellant in support of non-interference; the court observed that those cases did not concern agriculturist debtors and therefore the statutory proviso (presuming compound interest excessive in loans to agriculturists) did not apply to them, making them inapposite.

Court's Reasoning and Analysis

The court proceeded by addressing the appellant's principal contentions in sequence, applying the wording and the proviso inserted into Clause (b) of sub-section (2) of Section 3 of the Act.

On whether the respondents were "agriculturists," the court observed that the proviso uses an undefined term and that, following authority, the term should be given its ordinary meaning: a person who actually follows the calling of an agriculturist. The lower courts had found that the respondents owned extensive lands where plantains and coffee were grown and that they personally supervised cultivation. Although they operated shops to sell produce (on a commercial scale), the court held that selling produce does not negate the fact that they were agriculturists; the statutory language was general and intended to cover agriculturists "big or small." For these reasons the respondents were held to be agriculturists within the Act.

On whether compound interest was charged, the court examined the factual pattern: at settlements accrued interest was capitalised and added to principal, after which the composite sum bore interest at 12% until the next settlement; debtors lost the right to have unpaid interest separated from the principal. Although no express covenant specifying compound interest with periodic rests existed, the court found the "essential features" of compound interest present in these dealings. The court distinguished Muthu Chettiar (where the instrument's language led to holding that "interest on interest" did not amount to compound interest) and relied on Hiralal Sahu where similar arrangements had been treated as compound interest.

On the appellant's contention that the promissory note providing for simple interest limited the relevant "transaction" to that instrument alone, the court rejected a narrow interpretation. It held that, in the context of Section 3, "transaction" is wide enough to include a course of dealings by way of advances and repayments that led up to the suit, even where promissory notes were taken as collateral securities on settlements of account. A narrow view would unduly limit the provision's usefulness.

Finally, addressing the appellant's reliance on prior cases where compound interest had been allowed, the court noted those cases did not involve agriculturist debtors. Where the statutory proviso applies (i.e., loans to agriculturists where compound interest is charged) the Act mandates a presumption that such interest is excessive unless special circumstances justify it. The court concluded that where the proviso applies it precludes allowing any compound interest to the creditor because all compound interest is, by the statutory presumption, excessive. The lower courts' remedy—reopening accounts, disallowing compound interest and allowing simple interest at the agreed rate of 12% throughout—was regarded as correct in the circumstances and the court saw no reason to interfere.

Holding and Implications

Holding: The appeal is dismissed. The decree of the lower courts, which reopened accounts, disallowed compound interest and allowed simple interest at 12% throughout, is affirmed. Costs were awarded against the appellant and leave to appeal was refused.

Implications:

The court confirmed that, for purposes of the Usurious Loans Act (Madras amendment), an owner who actually supervises cultivation on extensive lands and sells produce remains an "agriculturist" in the ordinary sense and may attract the Act's protections.
Where interest is capitalised at settlements so that unpaid interest is sunk into principal and the composite sum thereafter carries interest (even without an express covenant specifying periodic rests), the transaction may be treated as charging compound interest.
Where the statutory proviso applies (loans to agriculturists with compound interest charged), the court will presume the interest to be excessive and, absent proof of special circumstances, will not allow compound interest to the creditor; instead, relief may include reopening accounts and allowing simple interest at a reasonable rate (in this case the agreed 12% throughout).
The decision disapproved the narrow approach that would confine the meaning of "transaction" under Section 3 to the single instrument that happens to be the subject of the suit, instead endorsing a broader view encompassing the overall course of dealings between the parties.

Judge: N.R.R. (opinion concluded with "The appeal fails and is dismissed with costs. Leave refused.")

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K. Venkanna Chettiar And Sons By Managing Partner, K.V Muthukrishna Chettiar v. K.K Sheik Muhammad Rowther And Another

The only question raised in this second appeal relates to the respondents' claim to relief under the Usurious Loans Act, 1918, as amended by the Usurious Loans (Madras Amendment) Act, 1936.

The respondents who own extensive garden lands and coffee plantations in the District of Madura had dealings with the appellant, a money lender and commission agent at Dindigul, from 1927. There were settlements of account from time to time at varying intervals at which interest was calculated at twelve per cent per annum and added to the principal then due, the composite sum thereafter bearing interest at the same rate. At one of such settlements which took place on 22nd February 1933, the amount due to the appellant was fixed at Rs. 17,000 and a promissory note for that sum was executed by the respondents. There were no further advances after that date but some repayments were made. On 30th November 1935 the balance due was settled at Rs. 21,375 for which another promissory note was given in discharge of the earlier note. On 15th March 1937 the respondents sold certain immoveable properties to the appellant for Rs. 20,000 out of which Rs. 19,500 was adjusted towards the debt due under the promissory note. There was a final settlement on 11th July 1937 at which the sum due to the appellant, after deducting the sale price adjusted as aforesaid and Rs. 2,500 remitted on the occasion, was fixed at Rs. 4,000, and it was further agreed that, if the respondents repaid on or before 30th March 1940 this sum together with Rs. 20,000 the sale price and the rents if any due for the lands which were then leased to the respondents, the lands should be reconveyed to them by the appellant, but if they made default in such payment, the appellant should enjoy the lands absolutely and recover the balance of Rs. 4,000 with interest as provided in the promissory note of 1935 as well as the unpaid rents, if any, due under the lease. The respondents having made default, the appellant has brought the suit for recovery of Rs. 4,000 with interest from 11th July 1937.

The Courts below held that the respondents were agriculturists within the meaning of the Usurious Loans Act, 1918, as amended in Madras (hereinafter referred to as the Act), that compound interest at twelve per cent having been charged, the interest must be presumed to be excessive and the transaction unfair, that no special circumstances were proved to rebut the presumption and that, therefore, the respondents were entitled to relief under the Act. They accordingly re-opened accounts already settled between the parties and, allowing only simple interest at the agreed rate of twelve per cent throughout and re-appropriating the payments on that basis, passed a decree for the amount found due to the appellant.

Before me, Mr. Rajah Ayyar for the appellant assailed every part of the finding of the lower Courts as erroneous and unsustainable, and endeavoured to show that no case for relief under the Act was made out by the respondents. He contended, firstly, that the respondents were not agriculturists and could not therefore invoke the rule of presumption regarding excessive interest, secondly, that this was not a case where compound interest was charged and for that reason too such presumption could not be made, and lastly, that, in any case, the circumstances in which and the purposes for which the advances were made to the respondents were sufficient to rebut such presumption.

Before dealing with these contentions it will be convenient here to set out the material provisions of the Act.

Section 3(1): Notwithstanding anything in the Usury Laws Repeal Act, 1855, where, in any suit to which this Act applies, whether heard ex parte or otherwise the Court has reason to believe that the transaction was, as between the parties thereto, substantially unfair, the Court shall exercise one or more of the following powers, namely—

(ii) Notwithstanding any agreement purporting to close previous dealings and to create a new obligation, reopen any account already taken between them and relieve the debtor of all liability in respect of any excessive interest, and if anything has been paid or allowed in account in respect of such liability, order the creditor to repay any sum which it considers to be repayable in respect thereof;

Explanation 1:—If the interest is excessive the Court shall presume that the transaction was substantially unfair; but such presumption may be rebutted by proof of special circumstances justifying the rate of interest.

(2)(a) In this section “excessive” 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.

(b) In considering whether interest is excessive under this section, the Court shall take into account any amounts charged or paid whether in money or in kind, for expenses, inquiries, fines, bonuses, premia, renewals or any other charges, and if compound interest is charged, the periods at which it is calculated, and the total advantage which may reasonably be taken to have been expected from the transaction:

Provided that in the case of loans to agriculturist, if compound interest is charged the Court shall presume that the interest is excessive.”

The term “agriculturist” used in the newly inserted proviso to Cl. (b) of Sub-S. (2) is not defined in the Act, and it has been held that, in the absence of any such definition, the term must be understood in its ordinary sense of a person who actually follows the calling of an agriculturist. See Venkataramanayya v. Mallikarjanudu (1). It is common ground that the respondents own extensive lands on which they grow plantains and coffee, and it has been found by the lower Courts that they were personally supervising the cultivation of their lands. It would seem to follow, therefore, that they were following the calling of an agriculturist. But Mr. Rajah Ayyar called attention to the evidence showing that the respondents were running two shops, one at Madras and the other at Trichinopoly, where they were selling plantains and he urged that, even assuming that they were selling the produce grown on their own lands as found by the lower Court, the commercial scale on which they carried on their operations of cultivation and sale indicated that they were merchants and salesmen and not agriculturists. There can be little doubt that the respondents were growing produce on their extensive lands for the purpose of sale in their shops and that, in doing so they were carrying on a business. But can it be said that they ceased, on that account, to be agriculturists? Most land owners grow produce on their lands with a view to its sale either on the farm or in the local market and, as it seems to me, the extent of their agricultural and marketting operations cannot enter into the determination of the question as to whether they were agriculturists or not. It may be that the framers of the proviso had in view small land owners occupied in cultivating their lands and not persons engaged in growing and selling agricultural produce on a commercial scale. But the language used is general and covers all agriculturists big or small. I am therefore of opinion that the respondents are agriculturists within the meaning of the Act.

The question next arises whether compound interest has been charged in this case. It is true, as pointed out by Mr. Rajah Ayyar, that there was no stipulation in advance at any time to pay compound interest with specified rests, but, as already stated, accrued interest was capitalised and added to the principal at each settlement of account between the parties, and it was agreed that the composite sum should bear interest at the same rate of twelve per cent. Mr. Rajah Ayyar, however, contended that this did not amount to charging “compound interest” but was only payment of interest on interest, and he referred to Muthu Chettiar v. Meenakshisundaram Ayyar in support of that view. In that case, the mortgage bond contained a stipulation to “pay interest on interest at one per cent” if the mortgagor failed to pay interest before the 10th of every month. The principal sum carried interest at half per cent and was payable in three years from the date of the mortgage. Default having been made in the payment of interest, the mortgagee claimed compound interest at one per cent per mensem with monthly rests on the entire balance of the debt due at the date of default, while the mortgagor contended that the principal sum bore interest at only half per cent throughout, and that overdue interest alone carried interest at one per cent but without further rests. Their Lordships accepted this contention, observing that the expression “interest on interest” was an ambiguous phrase and that, on the true construction of the instrument as a whole, it did not mean compound interest. They pointed out that in compound interest the interest in arrear sinks into the principal and the composite sum carries interest at the stipulated rate, the debtor losing all right to have the unpaid interest separated from the principal debt and dealt with independently; whereas a stipulation “to pay interest on interest” might well refer, and in the instrument before them did refer, to interest to be borne by a sum in arrear if that sum was payable as interest. The distinction assumed all the more importance in that case as the rate of interest on the original debt and the rate payable on unpaid interest were different. In the present case, although there was no stipulation in advance to pay compound interest with periodical rests, by subsequent agreement between the parties at each settlement of account there was a sinking of the interest in arrear into the principal debt and the composite sum carried interest till the next settlement. It may also be said here that, after each settlement, the debtors lost their right to have the unpaid interest separated from the principal and dealt with independently. It seems to me therefore that the essential features of compound interest are here present, and no covenant to pay such interest is necessary to bring the proviso into play as it applies to all cases of loans to agriculturists where compound interest is charged. Reference may be made in this connection to Hiralal Sahu v. Lachhmi Prasad Narain Singh (2), where interest charged more or less in the same way as in the present case was regarded by the Privy Council as “compound interest.”

Mr. Rajah Ayyar next urged that even if it could be said that compound interest has been charged in respect of the dealings as a whole, the promissory note Ex. A for the enforcement of which the suit was brought, provided for payment of simple interest only at twelve per cent per annum on the amount found due on its date, and that, therefore, this “transaction” could not be said to be substantially unfair as no compound interest was charged in respect of it. In other words, the argument was that the word “transaction” in S. 3 must be taken to refer only to the transaction on which the suit was based, and not to the earlier dealings or settlements of account which led up to such transaction. I am unable to accede to this contention. Without attempting a precise definition of the scope of the term “transaction”, I think it will be sufficient for the purposes of this case to say that in the context of S. 3 it is wide enough to include a course of dealings by way of advances and repayments such as we have here, although promissory notes have been taken as collateral securities on settlements of account from time to time. The narrow interpretation suggested for the appellant would deprive the provision of much of its usefulness.

Lastly, reference was made to several cases where this Court allowed compound interest at twelve per cent and more with yearly or shorter rests in exercising its powers under the Act, e.g, A.S No. 390 of 1939 and A.S No. 21 of 1940 which also arose from the same place (Dindigul) where the dealings here in question were carried on, and it was submitted that no interference was called for in this case as no more than twelve per cent has been charged at any time in the course of the dealings. The cases referred to, however, did not concern agriculturist debtors and there was no question of applying the statutory presumption. But where, as here, the Court has to presume that any compound interest is “excessive” and that, in consequence, a transaction charging such interest is substantially unfair and the presumption has not been rebutted, it is difficult to see how the Court can, in relieving the debtor of liability in respect of the excessive interest, allow the interest already charged to stand as fair and reasonable or, indeed, award any compound interest, however reasonable it may seem; for ex hypothesi all compound interest is excessive. It seems to me that the newly inserted proviso, where it applies, precludes the Court from allowing any compound interest to the creditor. The Courts below have allowed twelve per cent simple interest throughout as the proper rate in the circumstances of the case, and I see no reason to interfere with their decision on the point.

The appeal fails and is dismissed with costs. Leave refused.

N.R.R

K. Venkanna Chettiar... v. K.K Sheik Muhammad R...