1. This is an appeal by the mortgagor, against a decree for sale passed in the mortgagee's suit. Only two points have been raised in the appeal: One relates to an item of Rs. 7,000, which formed part of the consideration recited in the mortgage bond; the other question relates to the rate t f interest.
2. The first question formed the subject of issue 6 and has been discussed pretty fully in para. 9 of the lower Court's judgment. Before the lower Court, the accounts showing a loan of Rs. 6,000 to defendant is mother were not available, as they were in the records of the High Court in a pending appeal. Defendant 1 did not deny the arrangement that the sum of Rs. 7,000 now claimed was to be utilised in discharge of the above debt due by his mother to the plaintiff. His only contention was that the plaintiff promised to satisfy him that such a debt was really due from the mother by the production of the accounts, but that he had not done so. We are not prepared to accept his statement that he felt any doubt about the truth of the mother's indebtedness, though technically he is entitled to the proof of it by the production of the accounts. Whatever strength there was in this contention, in the Court below, it ha i now been shown to be unfounded. The accounts have been called for from the records of the other case and after their production, the appellant's learned Counsel has not gone the length of denying the fact of the debt due by the mother to the plaintiff but merely raised a point that Rs. 200 or Rs. 300 out of the Rs. 7,000 might have remained after the discharge of the mother's debt. No such point was raised before the Court below and there is an incidental atatement in the evidence of P.W. 2 that the balance that remained after the discharge of the mother's debt, w s paid over to defendant 1. In these circumstances, we see no reason to differ from the conclusion arrived at by the lower Court on this point.
3. The second question, as to interest, arises under the following circumstances: The mortgage deed Ex. A provides for repayment of the principal in a year's time. Interest was fixed at Re. 1-8-0 per cant, per mensem and was made payable once every six months.
4. In default of payment of interest on the expiration of six months, the debtor agreed that the said amount of interest should be added to the principal and that he should pay compound interest on the aggregate amount calculated once every six months. There can be little doubt that the terms of the document were meant to provide that up to the date of payment, the debt shall carry compound interest at 18 per cent per annum with six monthly rests. There is a clause at the end of the document which runs as follows:
Inasmuch as various other persons 'whom I approached for obtaining a loan for the purpose of effecting improvements in my village and bringing them to a good state demanded a high rate of interest, and as there is stringency in the money market, I applied to you for a loan and you agreed to comply with my request in consideration of my interest. Hence I have of my free will consented to the aforesaid rate of interest of Rupees one and annas eight and executed this mortgage bond.
5. The evidence of the plaintiff and his agent P.W. 3 does not carry the story as to the insertion of this clause very far. They only say that that clause was found in the draft prepared by their vakil. There is some difference between the parties as to whether the draft was brought by the defendant himself or by the plaintiff and also whether the draft was returned to the defendant or not. But we do not think anything turns upon that. We are certainly not prepared to believe the defendant's story that he did not read the document before he signed or that he was assured that this was a formal clause not intended to be enforced. But it is significant that neither the plaintiff nor P.W. 3 says that any representation of the kind implied in this clause was made to either of them by defendant 1. It is somewhat difficult to understand why defendant 1 should have gone out of his way to ask the lawyer, who drafted the document, to put in this clause, because, if anything it is more to the interest of the plaintiff than to that of the defendant to have a clause of the kind. It is suggested that the lawyer, who drafted the document, might have put a question like that to defendant 1 and on receiving an answer from him in the affirmative, he might have put in that clause. We do not say that it is not possible but we have no evidence of that;, kind. There is however some force in the respondent's argument that it is not unlikely that defendant 1 would have attempted to raise loans in other quarters and he must have ultimately agreed to these terms because he could not obtain loans elsewhere. There is the undisputed fact that there was a delay of a month eft-two between the time when the loan was applied for and the time when the loan was ultimately advanced. Giving full effect to these considerations, there is no doubt that there is no basis for any suggestion of overreaching by the creditor.
6. If the matter rested only upon Section 16, Contract Act, there can be no doubt as to the answer. The case is clearly covered by illus. (d) to Section 16 which provides that if a banker in view of the stringency of the money market declines to make the loan except at an unusual high rate of interest and a debtor accepts the loan on these terms, that is a transaction in the ordinary course of business and the contract cannot be said to be induced by undue influence. The question is whether under the terms of the Usurious Loans Act (10 of 1918), the position is not different. The preamble of Act 10 of 1918 shows that that legislation was introduced for the very purpose of giving the Court larger powers in dealing with matters of this kind. In certain cases prior to 1918, the Privy Council had held that in the application of Section 16, Contract Act, Courts in India-ought not to be guided by the rules adopted by the Court of Equity in England, so that the jurisdiction of Indian Courts prior to 1918 was very much more 'restricted than the jurisdiction of the Court of Equity in England. In 1900 the English Money Lenders Act, was passed and a question was raised with reference to its terms, whether that Act only conferred upon other Divisions of the High Court and upon County Courts the same powers as were exercised by the Courts of Equity prior thereto or a wider jurisdiction and it was ultimately decided by the House of Lords in Samuel v. Newbould (1906) AC 461, that that Act was intended to confer a wider jurisdiction than was 'exercised by the Courts of Equity in England and that this power was not limited by the restrictions observed in the earlier cases. It is with these precedents before it that the Indian Legislature! introduced this legislation in 1918, with the avowed object of conferring larger powers upon the Court.
7. The terms of the Act show that two conditions must be satisfied before a debtor can claim relief under that Act, namely, that the interest is excessive and that the transaction is as between the parties thereto substantially unfair. In the case which was ultimately decided by the House of Lords in Samuel v. Newbould (1906) AC 461, there was considerable discussion as to the considerations with reference to which this question of the rate of interest being excessive was to be decided and in another case reported in Carrlngtons Limited v. Smith (1906) 1 KB 79 Channel, J., who was one of the learned Judges who decided the House of Lords case at an earlier stage, forcibly pointed oat certain difficulties attending the decision of this question. The same matter was also raised before the House of Lords and it may be useful to refer to the observations of one of the learned Lords in that connexion. At p. 473 in 1906 A C Lord James observes:
What amounts to excessive interest is to be determined by the tribunal in each case, the question of risk being a material matter for consideration. When excessive interest is apparently established, any facts that tend to show that such excess does not render the contract 'harsh and unconscionable' should be proved in evidence by the lender. This burden is on him.
At p. 475 the same learned Lord adds:
The word 'excessive' applied to interest is, of course, a relative and elastic term, impossible of absolute definition. But we know the general rule of interest in commercial transactions and in loans on perfect security. We know the rate of interest juries are in the habit of giving in cases of adjudging damages. But in respect of ordinary loans deviations from these guides, dependent upon the facts of each case, must doubtless be expected and ought to be allowed. But such doviation must be reasonable in relation to facts.
8. Difficulties of this kind have been pointed out in later English cases as well and some solution was found by Parliament, by the Amending Act of 1927, wherein it was provided that a provision for interest above 48 per cent is prima facie harsh and unconscionable and is sufficient to throw upon the creditor the burden of justifying it. See observations on this new Act in Reading Trust Ltd. v. Spero (1930) 1 K.B. 492. The Indian Legislature did not leave the matter in the condition in which it was in England before the Act of 1927, nor has it so far adopted the definite standard adopted in England by the Amending Act of 1927. It tried to furnish some guidance in the application of the Act by a series of explanations inserted in Sub-section 2 of Section 3 of the Act. Clause (a) of that sub-section provides that 'excessive' means in excess of that which the Court deems to be reasonable, having regard to the risk incurred as it appeared or as it must be taken to have appeared to the creditor at the date of the loan.
9. On behalf of the respondent, Mr. Krishnaswami Ayyar pointed out that in the application of this rule, Courts in India cannot proceed on the same basis as the Courts in England where it is easy enough to say what a commercial or reasonable rate of interest on loans will be and he pressed upon us the observations of the Privy Council in Sunder Mull v. Satyakinker Sahana 1928 PC 64. Those observations were made in dealing with the question of the authority of a joint family manager or a widow, that is, a person with limited powers, to borrow loans at an exorbitant rate of interest. In the course of the judgment, their Lordships pointed out the ambiguity attending the use of the expression 'commercial rate of interest.' But, even there, Viscount Sumner points out the difference, especially in dealing with cases of compound interest, between cases where it is at a moderate rate with infrequent rests and cases where compound interest is coupled with a high rate of interest and with frequent rests: and in the several cages cited to us by one side or the - other, a clear distinction has been drawn between unsecured debts and secured debts. It is sufficient to refer, amongst English cases, to the decision of the Court of Appeal in Salaman v. Blair and Blair v. Johnston (1915) 111 LT 426. These considerations are crystallized by the legislature in Sub-clauses (b) and (c) of 01. 2 of Section 3, Usurious Loans Act. Sub-clauses (b) provides that in cases in which compound interest is charged, the Courts shall take into account the periods at which it is calculated and Sub-clauses (c) provides that in considering the question of risk, the Court shall take into account the presence or absence of security and the value thereof.
10. Applying these considerations to the circumstances of this case, we find that even according to the mortgagee's admission, he had ample security and in the transactions between him and the debtor on a previous occasion, interest was charged only at 131 per cent, per annum, simple interest. In the transaction between him and defendant l's mother, the interest was at the same' rate and both of them were unsecured pro-note loans. In the mortgage loan contracted by defendant 1's mother during his minority from defendant 2, the rate of interest was only 9 per cent. The plaintiff has not suggested that he insisted on a higher rate of interest by reason of any special risk involved in the loan, but only maintained that this is the usual rate at which he lends. As we have already pointed out, the provisions of sub-clause (a) of clause 2 impose upon the Court the duty of coming to a conclusion as to what will be a reasonable rate of interest, having regard to the risk incurred. It is very doubtful, if this will take in the usual terms at which the creditor has been in the habit of lending. But the very fact that very shortly prior to this loan, the creditor has lent to defendant 1 and to his mother at 13 per cent simple interest is some argument against the creditor's general assertion that he has been usually lending at the rate of interest provided for in this document.
11. Several cases have been brought to our notice where Courts have in particular cases fixed particular rates of interest, as reasonable. They range from 12 per cent to 40 per cent. We do not think it is possible to draw anything like a general inference therefrom, After all, everyone of them emphasizes that each case must be dealt with on its own facts. It is necessary to refer to two cases, namely Nabin Chandra v. Mi Robeya 1928 Rang 7 and Mt. Durgawatikunwar v. Jagannatha Prasad 1929 All 680, just for the purpose of pointing out that the head notes of these cases are misleading. They are not cases governed by the Usurious Loans Act. They do not therefore afford any guidance in the decision of the present case. As already stated, another condition must be satisfied before rele under the Act can be claimed, namely that the transaction is substantially unfair. The explanation to sub-clause (b) of Clause 2 provides, that interest may of itself be sufficient evidence that the transaction was substantially unfair. It will perhaps be too much in this case to say that the case falls within that explanation. But we do not agree with the learned Counsel for the respondent ,that a transaction can be regarded as unfair within the meaning of Clause (d) only if we can ascribe some moral blameworthiness to the creditor, in the sense that he has tricked the debtor into entering into that bargain. The terms of Clause (d) show that taking undue advantage of the position of the debtor will no doubt be one category of cases falling under that clause but the earlier words also show that it is open to the Court to come to the conclusion that the transaction is substantially unfair, by taking into account the circumstances materially affecting the parties at the time of the loan.
12. In this case, it is not denied that defendant 1 was at the time of Ex. A aged about 20. He had quite recently quarrelled with his adoptive mother and obtained possession of his adoptive father's property by the aid of an order of a criminal Court under Section 144. So far as his debts went, he had only a small amount to pay to the plaintiff and even allowing for his readiness to pay his adoptive mother's debt to the plaintiff, he required in all only about Rs. 15,000 or Rs. 16,000, for these purposes. He borrows the balance of Es 18,000 for meeting the expenses of his family, defraying the cost of repairs to be executed in the village and paying kists. Having regard to his age at the time and the fact that he had also quarrelled with the only other elderly relation on the adoptive father's side, he was hardly very competent to come to a proper conclusion as to the prudence or otherwise, of borrowing on these terms, merely for the purpose of effecting improvements in his village. The plaintiff stated that defendant 1's natural father came to~ him, along with defendant 1, at the time when this loan was arranged. Defendant 1 stated that that was not so, but on the other hand, he had quarrelled with his natural father even before the. date of Ex. A. The learned Judge does not accept either version in the form put forward by each party, but he infers that he must have had the benefit of his-natural father's advice in entering into-this transaction. All that we can say is, that, as a question of probability, this inference is not by any means certain. Having regard to the fact that all the loans he, had till then to discharge carried lower rates of interest, it is very doubtful if any man of worldly experience could have advised this young boy to borrow on the terms contained in this document. We do not therefore think that the respondent's learned : Counsel is right in contending that this case does not fall within the terms of the Act at all.
13. Taking it that the circumstances of ' the case justify the exercise of the juris; diction conferred by the Act, the question remains, what will be the proper order to make? Numerous cases have pointed out that compound interest as such is not open to objection and it is well known that transactions amongst Chetties, both when they are lenders-and also when they are borrowers, carry compound interest. In this case the ; document provided for repayment of money within a year and as pointed out,' by the Privy Council in Lala Balla Mal v. Ahad Shah 1918 PC 249 a debtor ought not to invoke the aid of the Court in his favour, merely because by his own default in repaying ; the loan the amount has swelled considerably. In a document providing for the repayment of the loan within a year, it seems extraordinary that there should be a provision for compound interest with six monthly rests. It is only to this extent that the transaction seems to us to call for interference. We think the ends of justice will be met by directing that compound interest at 18 pen cent, per annum shall be calculated with annual rests. Subject to this variation, the decree of the Court below will be confirmed. But we do not think this variation will justify us in depriving the respondent of his costs in the appeal. The appellant will therefore pay-the respondent's costs of this appeal.