1. Petitioner advanced a loan of Rs. 75,000-00 to the respondent No. 3 on 18.3.1971 against mortgage of Plot No. 28, Block B, Maharani Bagh, New Delhi. In the mortgage deed there was a special stipulation regarding the payment of interest and in case of default the additional interest. The relevant clauses are as under:
"(i) Interest shall be payable at the rate of 12% per annum on the said sum or such part thereof as may at any time remain due.
(iv) The defaulted Installments shall carry additional interest at the rate of 12 an 1/2% per annum.
(v) If default is made in the payment of any three of such Installments on the dates fixed with interest then due, the whole money remaining due shall become payable at once and interest payable thereafter shall be at the rate of 12 and 1/2% per annum in addition to the interest mentioned in clause No. 1(i) above."
2. On 19.6.1972 respondent No. 3 applied for second loan of Rs. 25,000/- which too was sanctioned against execution of the mortgage deed of the same property with the same stipulation as referred above. Loan of Rs. 75000/- was repayable in hundred monthly Installments carrying simple interest at the rate of 12% per annum whereas the loan of Rs. 25,000/- was repayable in 50 Installments with the same rate of interest. However, the respondent continued making the payment on or before 15th of each month. According to the respondent the repayment made on or before 15th was to the succeeding month but no such adjustment was made.
3. There was no other terms of the loan contained in the respective resolutions, namely, resolution No. 10 dated 14.08.71 and resolution No. 7 dated 22.06.72 by the petitioner-Bank as referred in the mortgage deed. The penal interest was to be charged on defaulted Installments whereas the petitioner-Bank also charged interest which amounted to compound interest. It is alleged that since these calculations were arbitrary the respondent challenged these entries by various letters and notices. When no action was taken these entries were challenged by way of civil suit firstly on 2.6.1983 and then in August 1984 seeking "permanent injunction against the petitioner. According to the petitioner though in the said suit respondent No. 3 had claimed excess payment made by her but when respondent No. 3 did not repay the entire dues with interest and additional interest in respect of the first loan and committed default, petitioner applied for arbitration under Section 6 of the Delhi Co-operative Societies Act, 1962 and filed a claim of Rs. 62,121.10 On the contrary respondent filed a counter claim on account of alleged excess payment besides other claims. The arbitrator dismissed the claim of the petitioner and allowed that of the respondent. Relevant observations of the Arbitrator in this regard and his interpretation of the terms of mortgage deed pertaining to interest are as under: "The simple interpretation of condition at S. No. 3 of Para-1 is that the whole amount of interest due on the date fixed for payment of Installment shall be paid along with such Installment which means that the amount paid by the borrower first needs to be appropriate towards the interest. The interest is payable @ 12% on the principle sum or part thereof as at any time remain due.
The payments are to be made in Installments in specified manner. If a borrower defaults in making payment of three Installments on the fixed dates, the whole money remaining due becomes payable at once and the Clause (1) of para-1 prescribe that the interest payable thereafter shall be @ Rs. 12-1/2% p.a. which will be in addition to the interest mentioned in clause. My interpretation to this additional interest is that Clause 1 prescribes the normal rate of interest on the principle due when the Installments are being paid as per specified terms. Normal interest will, thus, be. calculated for the period of 3 months when the borrower does not defaults.
Thereafter, the rate of interest will change to 12-1/2% which will be charged in addition to the normal rate of interest of 12% for the undefaulted period of first three months. The proposition would undirectly amount to saying that the penal interest should be treated as 1/2% only. This contention is also supported by the view taken in the case of Vaish Cooperative Bank v. Charan Singh, where the arbitration proceedings were finalized in pursuant to orders of the High Court, which matter has become final for the Bank. This also derives force from the fact that the Bank has from time to time been changing normal rate of interest. As evident from Resolution of 12th March, 1964, the rate of interest was 8.4% per annum as against 12% in 1971. It should have been really at a very tow figure in 1954 when the Bank prescribed the penal rate of 12-1/2%. It would really be unreasonable to interpret that the additional penal interest could be as high as 12-1/2% in 1954 when the normal rate of interest was much below, under the facts and circumstances of the case, the reasonable interpretation seems to be that they intended to prescribe the maximum rate of penal interest (which would include penalty as well as the normal interest). "
4. Feeling dissatisfied the petitioner preferred appeal before the Tribunal which failed too.
The observation of the Tribunal on this count also need to be reproduced and are as under:
"I find that the rate of penal interest at 12-1/2% was prescribed way back in the year 1954, when undisputedly the normal rate of interest ought to have been at a lower rate. Thus I tend to agree with the interpretation of the learned Arbitrator that this rate of 12-1/2% appears to include the normal rate of interest. This view also finds support from the fact that the normal rate of interest in the year 1964 was 8.4% and in the year 1971 it was only 12%. Then, it does not stand to reason as to how 12-1/2% rate of penal interest could be in the year 1954.
This view also finds support from the fact that in the case of Charan Singh, decided by the Arbitrator in pursuance of the remand of Delhi High Court, the rate of penal interest at 1/2% has been determined and this order has become final for the bank, as the award, made in that case, has not been challenged on behalf of the appellant-bank, as admitted by the learned counsel during the course of discussions before me. The plea, taken by the learned counsel, that since a petty amount was involved in the case of Charan Singh and that he was a poor man, the bank did not consider it proper to take the matter further in appeal is not a valid ground to press now to take a contrary view on the same subject".
5. The main challenge through this petition is that in view of Section 21 of the Banking Regulations Act, 1949, the Arbitrator and the Tribunal have no jurisdiction to re-open the two loan accounts of 1971 and 1972 on the ground that the rate of interest charged by the petitioner bank was excessive as this was a subject matter of Written contract between the petitioner and respondent No. 3 under the two registered mortgage deeds. Further that the question of payment of penal interest @ 12-1/2% on the amount of defaulted Installment only over and above the normal rate of interest of 12% which was chargeable on the balance outstanding amount was also subject matter of a written contract between the parties and the same also could not be re-opened in view of provisions of Section 21-A of the Banking Regulation Act, 1949. Section 21-A of the Act provides as under: "21-A. Rates of interest charged by banking companies not to be subject to scrutiny by courts. - Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be reopened by any Court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive."
6. While canvassing the proposition that the Court cannot reduce the rate of interest agreed through a written contract, Mr. G.N. Aggarwal, learned counsel for the petitioner placed reliance upon the following observations of the Supreme Court in State Bank of India v. Yasangi Venkateswara Rao . "Entering into a mortgage is a matter of contract between the parties. If the parties agree that in respect of the amount advanced against a mortgage compound interest will be paid, we fail to understand as to how the Court can possibly interfere and reduce the amount of interest agreed to be paid on the loan so taken. The mortgaging of a property is with a view of secure the loan and has no relation whatsoever with the quantum of interest to be charged".
7. There is no gainsaying the fact that the terms of the written contract between the parties particularly the kind of one in question have to be kept intact by the Court but at the same there is a catena of authorities and unvarying current unanimous options that existence of provisions of Section 21A of the Act has no relevance when it is established that the bank has charged interest against the directive of the RBI and highly excessive and shocks the judicial conscience. At the same time, it is also well-settled that the Court has also jurisdiction to grant relief in respect of interest on failure in making payment in time which is regarded as penalty. In Srinivasavardachariar and Ors. v. Gopala Menon and Ors. the question arose before the Supreme Court that the rate of interest payable in respect of mortgage deed executed between the parties could be reduced or not. It was held that if the circumstances of the case warrant the Court has the discretion to scale it down. In this case even lowering the rate of interest from 15 to 10 per cent compoundable interest with yearly rests the Supreme Court found no reason to interfere with.
8. In S. Rajagopalaswami Naidu v. The Bank of Karaikudi Ltd. , the husband had mortgaged his property with the Bank and agreed to pay Rs. 5000/- within a specified date and balance was to be paid together with interest at the rate of 10-1/2%. It was further agreed that if the mortgagor failed to pay the interest periodically and regularly he would be liable to pay interest at the rate of 12% per annum from the date of such default and further if he failed to pay the entire amount stipulated within two years he would have to pay the whole amount together with interest at 3-1/2% per annum. It was held that in the light of the provisions of the mortgage deed and the circumstances that the rate of 12% is unfair and penal, the order was passed that the interest should be calculated at the rate of 10-1/2% which was the original contractual rate, from the date of the mortgage to the date of the preliminary decree and thereafter the interest shall be payable as directed by the trial court at the rate of 6% per annum till realisation.
9. However, in the instant case, by no stretch of imagination, the penal interest would have been incorporated in the mortgage deed or agreed at the rate of 12-1/2% over and above the normal rate of interest of 12%. We have yet to come across such a case as ordinarily and norms of the banking regulations, penal interest that too on the defaulted amount ranges between 0.5% to 3%. While interpreting the terms of the mortgage deed the Court is always advised to fall back upon the resolutions of the society and the guide-lines of the Reserve Bank of India issued from time to time.
Admittedly vide letter dated 29.3.78 (Annexure R-3) the Reserve Bank of India had advised the Bank that over due interest cannot be calculated in the interest as recorded in the mortgage deed. Petitioner-Bank, therefore, had no authority as per its own bye-laws to charge over due interest. So much so the General Body of the Petitioner-Bank in its letter dated 3.2.1964 waived the charging of penal interest even.
10. Further the resolution No. 10 dated 14.8.1971 and resolution No. 7 dated 22.6.72 (Annexure P-2 and P-5) of the Board of Directors of the Petitioner-Bank show that the Registrar was to be requested to allow interest at the rate of 12% per annum as per agreement and CDP at the rate of 12.5% per annum up to 23.5.1992 and at the rate of 3% thereafter till the whole debt was paid. As is apparent the interpretation of the term of the mortgage deed with regard to the rate of interest when viewed in the light of the aforesaid resolutions as well as the policy of the Reserve Bank of India and even otherwise from the point of view of common sense and the prevalent practice of the penal interest being within range of 0.5% to 3% as provided by the Arbitrator and the Tribunal are in consonance with established norms and practice as is demonstrated from the aforesaid resolutions.
11. We find that any resolution of the petitioner-Bank or for that purpose guide-lines of the Reserve Bank of India would have no application if they levy the penal interest at the rate higher than or over and above the- normal rate of 12%. It was rightly interpreted . that the rate of interest in case of CDP as a penal interest would be 12.5% instead of 12% up to 23.5.92 and thereafter additional penal interest at the rate of 2% per annum would be applicable. If at all there is any such clause the said clause itself is penal in nature and therefore have to be struck down by the Courts while exercising their jurisdiction under Section 74 of the Contract Act. Section 74 provides as under:
"74. Compensation for breach of contract where penalty stipulated for -
when a contract "has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by wax of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
12. The bare reading of the aforesaid provision shows that any stipulation for increase of interest from the date of default, or stipulation by way of penalty like the above referred clauses of the mortgage deed in question are penal in nature.
13. Even otherwise, the incorporation of penal interest higher than the normal rate of 12% is violative of the provisions of Section 5A of the Banking Regulations Act, 1949. Section 5A provides as under:
"5-A. Act to override memorandum, articles, etc. - Save as otherwise expressly provided in this Act -
(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a banking company, or in any agreement executed by it, or in any resolution passed by the banking company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of the Banking Companies (Amendment) Act, 1959; and
(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.
14. In view of this provision the relevant clauses of the mortgage deed in question are void ab initio if at all such clauses exists in the form and the petitioner-Bank wants us to interpret.
15 As regards the contention of the petitioner that respondent No. 3 was precluded from filing a fresh counter claim before the Arbitrator to the tune of Rs. 78,192.75 after having brought it down to Rs. 58866.18 after giving the adjustment of principal amount and additional interest of the compensation and also having foreclosed the claim with regard to the loan of Rs. 25000/- there is no force at all as the party is free to revise its earlier counter claim if some error is detected. The proceedings before the Arbitrator were independent proceedings and therefore there was nothing wrong in putting up up todate and rectified counter claim. Same is the fate of the contention that before passing the final award the Arbitrator should have sought the modification of the order dated 19.9.1986 and the order of the High Court disposing the revision petition and misc. applications which arose out of the proceedings of civil suit which were ultimately dismissed on the ground that it was barred by Section 93 of the DCS Act with the dismissal of the main petition and the suit all applications giving rise to the revision petition before the High Court stood dismissed and the order dated 18.9.1996 automatically stood vacated having even otherwise become infructuous by operation of law as the genesis of the civil suit itself became non-existent.
16. Having come to this conclusion we do not find any ground to interfere in the findings of the two forums below. Even otherwise the finding of the Arbitrator unless suffers from the vice of perversity or illegality or such infirmity which when examined is found wholly unsound the courts are advised not to disturb the award. Further keeping in view the peculiar facts of this case particularly the fact that the respondent No. 3 had been making the excess payment in Installments and has not made in one go the interest of justice would demand that the amount of the counter claim alone without any interest should be refunded within one month. It is ordered accordingly. The petition has no merit and is hereby dismissed with above modification.