Andhra Pradesh High Court - Amravati
Vardhineedi Narasimha Rao, E.G.Dist 3 ... vs Bhiraka Poorna Malli Ram Prasad, ... on 18 November, 2024
1
APHC010165462017
IN THE HIGH COURT OF ANDHRA PRADESH
AT AMARAVATI [3369]
(Special Original Jurisdiction)
MONDAY, THE EIGHTEENTH DAY OF NOVEMBER
TWO THOUSAND AND TWENTY-FOUR
PRESENT
THE HONOURABLE SRI JUSTICE T MALLIKARJUNA RAO
APPEAL SUIT NO: 920/2017
Between:
Vardhineedi Narasimha Rao, E.g.dist & 3 Others and ...APPELLANT(S)
Others
AND
Bhiraka Poorna Malli Ram Prasad W G Dist Anr and ...RESPONDENT(S)
Others
Counsel for the Appellant(S):
1. DASARI S V V S V PRASAD
Counsel for the Respondent(S)
1.
The Court made the following JUDGMENT:
1. The Appeal, under Section 96 of the Code of the Civil Procedure, 1908
(for short, 'C.P.C.'), is filed by the Appellants/
Appellants/Defendants 1 to 4 challenging
the decree and Judgment, dated 27.06.2017 in O.S.No.81 of 20
2010 passed
by the learned VI Additional District Judge (Fast Track Court), Narsapur,
Narsapur (for
short, 'trial court').
2. 1st Respondent is the Plaintiff,, who filed the suit in O.S.No.81
O.S.No. of 2010
for recovery of Rs.13,95,552/
Rs.13,95,552/- based on the registered mortgage deed dated
28.09.2000 with interest and costs.
costs
3. Referring to the parties as they are initially arrayed in the suit is
expedient to mitigate any confusion and better comprehend the case.
4. The facts leading to the present Appeal, in a nutshell, are as under:
Defendants 1 and 2, parents of Defendants 3 and 4, borrowed
Rs.1,05,000/- from Plaintiff for family needs, bank debts, and
business investment. They secured a loan under the registered
mortgage deed dated 28.09.2000, in favour of the Plaintiff, agreeing
to repay the said amount with 24% annual interest within two years
in four instalments, Rs.25,000/- for the first three instalments and
Rs.30,000/- for the final instalment with accrued interest on or
before 27.09.2002. Failure to repay within the stipulated time would
result in the Plaintiff being entitled to recover the entire mortgage
amount, along with compound interest at 30% per annum with
yearly rests from the Defendants personally and against schedule
property and other assets. The Defendants defaulted on repayment,
prompting the Plaintiff to issue a registered notice on 28.07.2010.
While Defendants 1 and 2 received the notice, Defendants 3 and 4
avoided it. Plaintiff later came to know that Defendants 1 to 4 had
created a second mortgage for the suit schedule property in favour
of Defendant No.5, though Plaintiff holds a first charge on the
property. The 5th Defendant is added as a party to this suit to
prevent complications for mortgage foreclosure and recovery of the
outstanding amount.
5. In the written statement, Defendants 1 to 4 refuted the plaint averments.
They contended that the Plaintiff issued a registered legal notice dated
02.06.2009 with false and untenable allegations, to which the Defendants
responded on 09.07.2009 with the actual facts. After receiving the reply, the
Plaintiff took no further action. The Plaintiff is a tenant of Defendant No.2,
who owns the leased premises, and pays a rent of Rs.2,000/- per month.
Subsequent to the lease, the Defendants demanded Rs.1,05,000/- from the
Plaintiff as an advance for the premises. The Plaintiff paid the said amount
on the condition that it would be treated as an advance and requested a
registered mortgage deed as collateral, which was not intended to be acted
upon. As per an oral agreement before elders, the Plaintiff was entitled to
recover double the above amount (Rs.2,10,000/-) through rent adjustments
over 105 months (28.09.2000 to 28.06.2009), after which rent would
increase to Rs.3,000/- per month. Accordingly, the Plaintiff deducted rent
from the advance and is liable for the increased rent from 28.06.2009
onwards. The Plaintiff's notices of 02.06.2009 and 28.07.2010 falsely
claimed the Defendants borrowed Rs.1,05,000/- from the Plaintiff. The
mortgage deed was never intended to bind the parties, and the Plaintiff is
not entitled to any relief. Rent deductions discharged the transaction, and
the Plaintiff's claim for compound interest is usurious and penal. The
Defendants request the suit be dismissed with compensatory costs.
6. The 5th Defendant remained exparte in the suit.
7. Based on the pleadings, the trial Court framed the following issues:
(1) Whether the Registered Mortgage Deed dated 28.09.2000 is true, valid
and supported by consideration?
(2) Whether the Defendants 1 to 4 created any 2nd Mortgage of suit schedule
property? If so, what is its effect?
(3) Whether the Registered Mortgage deed came into existence in the
circumstances claimed by the Defendants?
(4) Whether the Plaintiff is entitled to a simple money decree and mortgage
decree
(5) To what relief?
8. During the trial, on behalf of the Plaintiff, P.Ws.1 and 2 were examined
and marked Exs.A.1 to A.7. On behalf of the Defendants, D.W.1 was
examined, and Exs.B.1 to B.8 documents were marked.
9. After completing the trial and hearing the arguments of both sides, the
trial Court preliminary decreed the suit with costs for Rs.13,95,552/- and with
the subsequent interest of 12% per annum from the date of the suit till the
decree with the future interest of 6% per annum thereafter till realization on
the sum of Rs.1,05,000/- and the period for redemption is six months.
10. Sri Dasari S.V.V.S.V. Prasad, counsel for the Appellants/Defendants 1
to 4, contended that the trial court failed to apply Section 3(1) of the
Usurious Loans Act, 1918, as the 1st Respondent/Plaintiff's interest claim
was excessive and the transaction unfair. While the Rule of Damdupat does
not apply in Andhra Pradesh, the Usurious Loans Act should have been
enforced to prevent predatory lending. The trial court also overlooked the
alleged mortgage debt related to an advance for a shop room owned by the
2nd Defendant, where the Plaintiff is an admitted tenant. Furthermore, the
Plaintiff failed to provide evidence to support the 30% interest claim. The trial
court should have dismissed the suit, reducing the interest and adjusting
amounts against rent.
11. Despite several opportunities provided to him, there is no representation
on behalf of the 1st Respondent/Plaintiff. Consequently, the arguments on
behalf of the 1st Respondent/Plaintiff have been deemed heard.
12. Concerning the pleadings in the suit, the findings recorded by the Trial
Court and in light of the rival contentions and submissions made on either
side before this Court, the following points would arise for determination:
1) Is the trial Court justified in holding that Ex.A.1 registered
mortgage deed is true, valid and supported by
consideration?
2) Whether the interest claimed by the Plaintiff is usurious
and excessive?
3) Does the trial court's Judgment need any interference?
POINT NO.1:
13. The Plaintiff testified as PW.1 to establish the authenticity of the
registered mortgage transaction, as evidenced by Ex.A.1. To substantiate his
claim that a legal notice was issued before the filing of the suit, the Plaintiff
relied on Ex.A.2, the office copy of the legal notice. Ex.A.3 demonstrates that
the notices were sent through postal services. Exs.A.4 to A.7 confirms that
Defendants 1 to 4 received the legal notice in question. In response, the
Defendants placed a copy of the legal notice sent by the Plaintiff, marked as
Ex.B.1. Additionally, they relied on Ex.B.2, a reply notice issued by
Defendants 1 to 4 dated 09.07.2009, as well as Ex.B.4, a further reply notice
dated 04.08.2010. Ex.B.5 is the office copy of the legal notice issued by the
2nd Defendant to the Plaintiff, while Ex.B.6 is the reply notice sent to the 2nd
Defendant's counsel. Exs.B.7 and B.8 include the corresponding postal
acknowledgements. Thus, the parties have no dispute regarding the exchange
of legal notices. The notices exchanged reveal that the stand taken by both
parties remains consistent, both in the notices and in the suit itself.
14. To substantiate the Ex.A.1 mortgage transaction, the Plaintiff examined
PW.2, P. Venkata Subba Rao, one of the attestors to Ex.A.1. PW.2 affirmed
the Plaintiff's stand and corroborated his presence, along with Yudham Raju,
and their attestation of Ex.A.1. He further testified that Kapila Venkata Krishna
Rao prepared the mortgage deed.
15. It is undisputed that, according to the Defendants, the schedule property
was mortgaged to the 5th Defendant as a subsequent mortgage, for which the
Defendants issued Ex.B.2, a reply notice. Notably, the Plaintiff did not send
any rejoinder in response to this notice. The Defendants acknowledged the
execution of Ex.A.1 mortgage deed on 28.09.2000, but they contended that it
was executed solely as security for an advance paid by the Plaintiff for
premises leased by the 2nd Defendant. Given this assertion, the burden of
proof rests on Defendants 1 to 4 to substantiate their claim. Furthermore, the
Defendants argued that they are illiterate and, therefore, unaware of the
specific recitals contained in Ex.A.1. However, apart from the 1st Defendant,
the remaining Defendants were not examined to support this defence. In light
of the 2nd Defendant's alleged role in the matter, the trial Court rightly
observed that the 2nd Defendant is a material witness. The trial Court further
held that the failure to examine the 2nd Defendant warrants an adverse
inference against the Defendants, thereby undermining the credibility of their
defence.
16. As rightly observed by the trial Court, the Defendants have not claimed
that they signed blank papers without knowledge of the recitals in Ex.A.1, nor
have they asserted that they were uninformed about the contents of the
mortgage deed. Upon reviewing the legal notices exchanged between the
parties, this Court concurs with the trial Court's conclusion that the notices do
not substantiate the defence put forward by the Defendants. DW.1, in his
cross-examination, clearly admitted that the Defendants mortgaged the plaint
schedule property in exchange for a loan of Rs.1,05,000/- and agreed to repay
the mortgage debt in four instalments. He further acknowledged that, in the
event of failing to repay within the agreed instalments, they would be liable to
pay compound interest at a rate of 30% per annum, as stipulated in Ex.A.1.
Additionally, DW.1 admitted that no instalment had been paid by them as per
the terms outlined in Ex.A.1. He also confirmed that there was no lease
agreement between the Plaintiff and the 2nd Defendant, to show that the
Plaintiff was a tenant of the 2nd Defendant. In light of these admissions, this
Court upholds the trial Court's finding that the Defendants have failed to prove
that the mortgage deed was executed as they alleged.
17. After careful consideration, this Court views that the trial Court correctly
appreciated the evidence. There is no reason for this Court to arrive at a
different conclusion than the one arrived at by the trial Court. The findings
arrived at by the trial Court are correct, and the appellants have shown no
justifiable reasons for arriving at different conclusions, the view taken by the
trial court does not call for any interference. I agree with the conclusion
reached by the trial Court. Accordingly, the Point No.1 is answered.
POINT NOs.2 & 3:
18. The Plaintiff calculated the interest on the mortgage amount at 30% per
annum with compound interest, per the terms of the mortgage deed, from the
date of the agreement until the filing of the suit. Despite the Defendants
specifically challenging the Plaintiff's entitlement to claim interest at such a
high rate, the trial Court did not address the Defendants' objections regarding
the rate of interest. Instead, the trial Court primarily focused on the parties'
arguments regarding the principle of damdupat (the rule limiting interest to
principal amount in certain circumstances). Notably, the trial Court's
observations on the issue of damdupat have not been significantly contested
in this Appeal.
19. In considering the excessive nature of interest, the Court has to keep in
view the amounts charged or paid and the nature of the transaction, the
absence of security and the value thereof, the financial condition of the debtor
and the result in previous transactions of the debtor and whether it is
substantially unfair. This Court views that it has only a limited power of
consideration, where the interest contracted for between the parties, as in
each case, is usurious or unconscionable or excessive and therefore liable to
be reduced.
20. It is profitable to refer to a case in Sri Balasaraswathi Ltd.,
Tirunelveli V. A.Parameswara Aiyar and another 1 , the High Court of
Madras held that:
No absolute maximum rate of interest, beyond which it will automatically become
usurious or unconscionable, can be laid down, even after the coming into
operation of the Constitution of India. Courts will have to see the circumstances
of each case and judge whether the rates in those circumstances will be penal,
usurious and unconscionable.
Of course, there may be some cases where the rate is so excessive that there
may be a conclusive presumption that it is penal, usurious or unconscionable, as
AIR 1957 MADRAS 122 (V 44 C 40 FEB.)
where the rate is 100 per cent per annum, or it is compound interest at even 10
per cent per annum with daily rests.
It cannot be said that compound interest, without more, by itself will be presumed
to be penal, usurious and unconscionable, either regarding secured or unsecured
debts, even after the coming into operation of the Constitution of India. It is
evident that three per cent compound interest, with yearly rests for a loan
ensuring for three or four years, will be more advantageous to the borrower than
12 per cent simple interest.
21. In General and Credit Corporation (India) Ltd., V. Sri Raja Inuganti
Venkata Rama Rao Bahadur Garu and others2, the composite High Court of
Andhra Pradesh held that:
In deciding whether the interest rate is excessive, there can be no hard and fast
rule. Each case has to be decided on its own merits, taking into account the
various factors, such as the security which the creditor obtained for the amount
advanced by him, the pecuniary position of the debtor, the rate of interest
prevailing at that time and the advantages which the debtor would derive from
the loan. A debtor would get relief under the Usurious Loans Act only if it is
established that the transaction is substantially unfair. It is true that the
Explanation introduced by the Madras amendment has laid down that if the
interest is excessive, the Court shall presume that the transaction was
substantially unfair, but such a presumption may be rebutted by proof of special
circumstances justifying the rate of interest.
22. In Sethmal & company rep. by Power of Attorney Agent, Mr
W.S.Seetharam and another V. M/s. Sri Laxmi Paradise (Leela Mahal) rep.
by its Partners3, the composite High Court of Andhra Pradesh held that:
The following guidelines are discernible from the conspectus of the above
precedents for the guidance of the Courts:
(1) The Court must go back to the date of the original transaction and form an
opinion as to the reasonable rate of interest;
(2) The Court should consider as to whether the stipulated rate of interest in a
given case is excessive;
(3) The Court shall take into account any amounts charged or paid, whether in
cash or kind, towards expenses, renewals, enquiries or any other charges, etc.;
(4) If the compound interest is charged, the Court shall consider the frequency of
the charge of calculation of interest for being added to the principal amount of the
loan;
(5) Whether it is a secured or unsecured debt;
(6) The adequacy of the security offered;
A.I.R. 1959 ANDHRA PRADESH 433 (Vol. 46, C.124)
1999 (5) ALT 186
(7) The financial condition of the debtor, including the result of any prior
transaction;
(8) the known or probable risks in getting repayment of the debt from the point of
view of the creditor;
(9) The purpose for which the loan was contracted, viz., whether it is commercial
or personal purposes or for discharging the other earlier debts;
(10) The relation in which the creditor stood to the debtor and the necessities of
the borrower known to the creditor.
(11) The cumulative effect of these and other circumstances emanating from the
evidence on record in a given case to enable the Court to come to a conclusion
that the rate of interest charged is excessive, and consequently, the transaction
between the parties is substantially unfair;
23. In State Bank of India V. unknown 4 , the composite High Court of
Andhra Pradesh held that:
"In deciding whether a rate of interest is excessive or not, courts will have regard
to the particular facts of a case before them. Such an enquiry will be conducted
by the courts primarily on the basis of the security given by the debtor for the
repayment of the loan and the solvency of the debtor and the market rate of
interest prevailing. Normally, whether the security offered by the debtor is good
and adequate as it is in a case of mortgage of property, the courts will hold the
charging of compound interest to be excessive. The rate of interest, which may
not be excessive on an unsecured loan, may, therefore, be found to be excessive
by the courts where there is good security."
24. After reviewing the material on record, this Court finds that the
cumulative effect of the evidence suggests the stipulated interest rate is
excessive, rendering the transaction substantially unfair. In determining the
appropriate rate of interest, Courts may take judicial notice of factors such as
inflation and the decline in bank lending rates. The significant reduction in
bank lending rates is a key factor in adjusting pre-litigation interest. Therefore,
the presumption of unfairness is warranted. Consequently, the trial Court's
Judgment permitting the Plaintiff to claim 30% per annum with compound
interest from the date of the transaction to the filing of the suit is erroneous
and requires interference. Considering the nature of the loan, which the
Defendants took for family necessities, to settle bank debts, and to invest in
their business, an interest rate of 30% per annum with compound interest is
excessive and inconsistent with established standards.
A.I.R. 1986 AP 291
25. This Court holds that if the interest rate is found to be unconscionable
or usurious, it has the authority to intervene. After considering relevant case
law, this Court finds it appropriate to reduce the compounding interest rate of
30% to a simple interest rate of 24% per annum from the date of the Ex.A.1
mortgage transaction until the filing of the suit is just and reasonable.
26. The findings arrived at by the trial Court on the appreciation of evidence
in this case, therefore, correct and do not call for interference, except the rate
of interest as indicated above. Accordingly, the points No.2 and 3 are
answered.
27. As a result, the Appeal is allowed in part, without costs. The
Judgment and decree passed in O.S.No.81 of 2010, dated 27.06.2017 by the
learned VI Additional District Judge, (Fast Track Court), Narsapur, which
decreed the suit, is hereby set aside. The suit is now preliminarily decreed for
Rs.1,05,000/- with proportionate costs, along with simple interest at the rate of
24% per annum from the date of the suit transaction until the filing of the suit.
The Plaintiff is also entitled to interest at 12% per annum from the date of the
suit until the trial court's Judgment and further interest at 6% per annum on
Rs.1,05,000/- until the realization. The remainder of the trial court's Judgment
stands upheld.
Miscellaneous petitions pending, if any, in this Appeal shall stand closed.
___________________________
JUSTICE T. MALLIKARJUNA RAO
Date: 18.11.2024
SAK
THE HON'BLE SRI JUSTICE T.MALLIKARJUNA RAO
APPEAL SUIT NO. 920 OF 2017
Date: 18.11.2024
SAK
