' The present mortgage suit has been filed under Order XXXIV, Rule 4, C. P. C. By the plaintiff bank againt the defendants for the recovery of Rs, 8,08,393.27. Defendant No, 1 is a partnership firm and defendants Nos. 2 to 6 are its partners. The defendants have filed written statements in which the mortgage is admitted. On 13-1.1982, when this matter had come up before me. Mr. Shahenshah Husain, learned counsel for the defendants, stated that the defendants were only challenging the quantum of interest and that penal interest could not be granted in a mortgage /suit. Only a bank officer (P.W. 1-Exh. 5) gave evidence on behalf of the plaintiff and then Mr. Inamul Haq, learned counsel for the plaintiff, closed their side. Mr. Shahanshah Husain then stated that the defendants did not want to lead any evidence and on 3-2-1982 made a statement that the defendants were only challenging the claim of penal interest in the present mortgage suit.
2. I have heard Mr. Inamul Haq, learned counsel for the plaintiff, and Mr. Shahenshah Husain, learned counsel for the defendants, on the question of penal interest. Learned counsel for the defendants had made a reference to order XXXIV, Rules 2 and 4, C.P.C. And section 74 of the Contract Act for the propotition that in a mortgage suit under Orde XXXIV, C. P. C. Penal interest cannot pe granted. Reference may here be made to the registered mortgage deed dated 22-5- 1975, which is an admitted document. Clause (1) of the mortgage deed (Exh. 5/1) shows the interest payable on the loan as 2 per cent above State Bank of Pakistan rate subject to a minimum of 11 per cent per aunum with quarterly rests. Clause 3 (a) required the defendants to pay the loan secured by the mortgage by a monthly instalment of Rs, 6.000 each with interest. Clause 4 (a) of the mortgage deed provides that in case the defendants fail to repay any single instalment on the due date, the entire mortgage money proved by the mortgage shall become payable immediately by the defendants. The crucial clause of the mortgage deed is clause 4 (b) and the same is reproduced here :- "In case the Mortgagor or the Principal Debtor commits default in payment of instalments on the due date thereof, or any other sum due on account of financial facility hereby availed of, in accordance with the stipulation agreed hereto, the Mortgagor or the Principal Debtor shall pay penal interest at the rate of 2% per annum in addition to the usual interest, rests and charges on all sums due and during all period subsequent to the default till payment/ adjustment of the entire amounts. And the Bank shall be fully entitled to charge and recover such penal interest without any prior notice at its discretion and without causing any harm and repudiate all or any other remedies available and rights accrued to the Bank by virtue thereof and further charging of such penal interest shall not deem to extend the period of facility enjoyed by the borrower in any way."
3. The contention of Mr. Shahenshah Husain, learned counsel for defendants, was that under Order XXXIV of the Code of Civil Procedure the mortgagee can only claim the principal loan and interest, and although the mortgage deed may provide for payment of penal interest by the mortgagor, penal interest not being included in the term "interest", the same connot be claimed by the mortgagee in a mortgage suit filed under Order XXXIV, C.P.C. As the mortgage deed is an admitted document, learned counsel for the defendants conceded that there is a' contract between the parties, whereby the defendants have agreed to pay such penal interest but contended that such penal interest cannot be claimed in the present mortgage suit. On the other hand, it was urged by Mr. Lnamul Haq, learned counsel for the plaintiff, that the so called penal interest is not in fact penal in nature and . That in any case this penal interest of 2% per annum in addition to the usual interest is nevertheless interest and as can be claimed by the plaintiff in the present suit under Order XXXIV of the Code of Civil Procedure.
4. Reference may now be made to the case law cited by both learned counsel in support of their respective contentions. Mr. Inamul Haq referred to the following reported judgments :-
(1) Ganga Parsad v. Vishunathsingh AIR 1933 Oudh 81. Tarachand v. Haibat Shah AIR 1935 All, 1003.
(iii) Rajwanta Kaur v. Sham Narain Singh 23 I C 88.
(iv) Subramania v. Visalakshi Amal AIR 1934 Mad. 109 and
(v) Suddersa v. Chotma! 163 I C 954.
Mr. Shahenshah Husain referred to the following judgment : Edupuganti Pitehayy v. Gonuguntala Venkata Ranga Row AIR 1944 Mad.
243.
Mr. Shahenshah Husain further referred to Halsbury's Laws of England 3rd Edition, Volume 27, para. 346 at p. 204 and to the Manual of Law Terms by K. G. Iyer page 331.
(i) In AIR 1933 Oudh 81, in a suit for foreclosure, the mortgage deed provided for payment of interest on the loan @ 12 annas per cent, per month, and in case of default in payment of Interest annually, the mortgagor had made himself liable to pay interest 2 % per month on the unpaid interest till the paymnt of the entire mortgage money. The defendant did not make any payment and the plaintiff, therefore, claimed an amount which included the principal, interest, and interest upon interest as per the terms of the mortgage deed, and claimed a decree for foreclosure. A division Bench of the Oudh Chief Court held as follows: - "Having given our consideration to all the terms and conditions of the deed, we are of opinion that the provision for interesst on interest was intended only as compensation to the mortgagee in the event of default on the part of the mortgagor. Even if the provision is to be considered penal, we think that the plaintiff can reasonably claim compensation at the rate charged by him, because, as we have already pointed out, the amount calculated at that rate works out to a considerably smaller sum than the amount for which the defendant would have been. Liable if he had been made to pay compound interest even 12 per cent per annum. We can therefore, see no ground for interference with the decree of the lower court so far as the amount allowed by. Way of interest is concerned.
(ii) In AIR 1935 Allahabad, a single Judge of the Allahabad High Court held that under Order XXXIV, rules 4 and 11, C.P.C. The rate of interest to be awarded is the contractual one and that the Court has no discretion to award a less amount of interest.
(iii) In 23 I. C. 88 a Division Bench of the Allahabad High Court while dealing with rule 2 of Order XXXIV of the Code of Civil Procedure observed as follows :- " It seems to us that the clear meaning of the rule is that the Court must ascertain the amount due on the mortgage upto the date mentioned. That amount must be according to the contract between the parties (unless the Court for some legal reason sees fit to interfere with the contract as to the rate of interest). The only section of the Code of Civil Procedure which gives any discretion in the matter of interest to the Court is Section 34. This section applies to decrees for the payment of money and in our opinion does not in any way permit the court to reduce the interest below the contracted rate when it is taking the accounts and making the decree as provided for by Order XXXIV."
(iv) In AIR 1943 Mad. 109 it was observed, without any discussion, by a Single Judge of the Madras High Court that merely because the interest clause in the mortgage deed was penal, it could not be said that it was unenforceable.
(v) 163 I. C. 954 is a decision of a Single Judge of the Nagpur Judicial Commissioner's Court. In that case the mortgage deed provided as follows:- " We will pay interesst at the rate of Re. 1 per cent, per month. We agree to pay annual interest at Compound rate on the whole amount borrowed and pay the principal sum within five years on default in payment of interest in any year we agree to pay compound interest at the rate of Rs, 1.4, per cent. Per month on the whole amount."
' It was held that the stipulation to pay compound interest could only come into operation after the debtor's default in payment of the simple interest. Therefore, it could not be treated as being a part of the primary contract. It was then held that the original rate of interest was only Re. 1 per cent.
Simple and the compound interest was to become chargeable only on the debtor's failure to pay the simple interest. Therefore, the secondary agreement not only made the interest compound but also enhanced the rate of interest from Re. 1, to Rs, 1.4, per cent, per month and consequently the stipulation was regarded as a penalty.
(vi) AIR 1944 Madras 243 was cited by Mr, Shahenshah Husain, learned counsel for the defendants and drew my attention to the following passage in the judgment of the Single Judge of the Madras High Court:- "The excess over the original advance is certainly the compensation which the creditor gets for lending his money for the particular period. The fact that it is not described in so many words as interest will not alter its character. Halsbury's Laws of England, Vol, 23, S. 253 defines interest as follows:- "In the rest when considered in relation to money denotes the return of consideration or compensation for the use of retention by one party of a sum of money or other property belonging to another."
Undoubtedly the excess over Rs, 2,500 repayable by the debtors in this case is the compensation to the creditor for the use of his money. The definition of interest in the English Money-lenders' Act, after excluding certain charges, says : "But save as aforesaid, interest includes any amount, by whatsoever name called, in excess of the principal paid or payable to a money-lender in consideration of or otherwise in respect of a loan.
' The word "interest" has a basic meaning of advantage or profit. When used with reference to a loan, interest means the profit or advantage of the creditor which be gets by giving to another the use of his money. If the contract stipulates that for the use of the creditor's money a certain profit shall be repayable to the creditor, that profit is interest, by whatever name it is called, or if it is called by no name at all."
' Mr. Shahenshah Husain had also relied upon para. 346 at page 204 of Halsbury's Laws of England, 3rd Edition, volume 27, which is reproduced here: - "346. Reduction of Interest on Punctual Payment: To induce punctual payment a proviso is often inserted for reduction of the rate of interest if paid within the time prescribed. Even a verbal agreement to reduce the rate of interest stipulated for in mortgage may be valid. An agreement for increasing the rate of interest on failure in punctual payment is, however, regarded as a penalty against which the courts will grant relief. A proviso for reduction is construed strictly, so that the mortgagor must pay the higher rate unless payment is made within the stipulated time. Unpunctuality on one occasion will not, if the words of the covenant point to payment of interest on any occasion, deprive the mortgagor of the benefit of the proviso for the future. In the case of the principal where prompt payment is the consideration for which the creditor agrees to forgo part of his claim, the reservation of a right to have a full payment of money actually due, should there be a failure to pay a smaller sum on a day certain, cannot be treated as a penalty. Where a mortgagee agreed to take a portion of his debt in lieu of the whole upon payment on a given day, the court refused to grant relief against the effect of non-payment on that day."
5. Interest signifies fixed profit or return on the loan of money. As observed in AIR 1944 Madras 243, if the loan agreement stipulates that for the use of the creditor's money a certain profit shall be repayable to the creditor, that profit is interest, by whatever name it is called or by no name at all.
In the instant case the mortgage deed is admitted. It, therefore, follows that contract to pay the interest specified in the mortgage deed is not challenged. It is also not the case of the defendants that any pressure or influence was exerted on the defendants to execute the mortgage deed or that the plaintiff bank were able to obtain an unconscionable bargain. It can safely be assumed that the defendants executed the mortgage deed with open eyes. Here the primary contract was to repay the loan in instalments with interest @ 2 % above State Bank rate subject to a minimum of 11% per annum with quarterly rests. The stipulation that in case of default in the payment of any instalment additional 2 % penal interest would be payable, was in the nature of a secondary contract and in reality intended to ensure the due performance of the primary contract. The court in such cases may interfere and grant relief to the debtors in respect of their contractual obligations provided it is satisfied that the secondary contract is unjust or unreasonable. In my view the stipulation for payment of additional 2% interest in case of default is neither unjust nor unreasonable. Judicial notice can be taken of the fact that Banks in Pakistan charge interest in the region of 4% above State Bank rate and by charging 2% additional interest, the plaintiff Bank in fact has charged interest @, 4% above State Bank rate.
6. In view of the enunciation of the law and the observations made in the previous paragraph, I am of the opinion that the defendants are in law liable to pay the additional interest of 2% termed in the mortgage deed as penal. Mr. Shahenshah Husain, learned counsel for the defendants had also conceded that this 2% penal interest could be claimed and recovered by the plaintiff bank in another suit or competent legal action but not in the present mortgage suit. His contention in this regard has already been noted in this judgment and that is that this 2% penal interest is not "interest" but a penalty. In the present case I have found it difficult to accept the contention of Mr. Shahenshah Husain. Even if this 2% penal interest is in the natuae of a penalty, having reached the conclusion that this 2% penal interest is neither unjust nor unreasonable and could be recovered by the plaintiff bank from the defendants, I am of the view that this 2% penal interest will in the instant case be treated as interest. It cannot be held otherwise. If this additional 2% interest is recoverable, then it is recoverable in relation to the mortgage loan advanced by the plaintiff to the defendants.
It becomes a profit or return for the use of the money lent by the plaintiff bank to the defendants. It is, therefore, interest, even if it is treated as compensation, it will be covered by the meaning of "interest".
7. The 2% penal interest in clause 4 (b) of the mortgage deed not being unjust or unreasonable, can be recovered by the plaintiff bank. Further this interest can be recovered in the present mortgage suit. As this was the only issue raised on behalf of the defendants, the plaintiff bank is entitled to a preliminary decree as prayed.
' I accordingly pass a preliminary decree as prayed by the plaintiff in the present suit with costs.
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