Judgment

SHAH, AG. C. J.: Maula Bux - hereinafter called the plaintiff - entered into a contract No. C/74 with the Government of India on February 20, 1947, to supply potatoes at the Military Headquarters, U. P. Area, and deposited an amount of Rs. 10,000 as security for due performance of the contract. He entered into another contract with Government of India on March 4, 1947 No. C/120 to supply at the same place poultry, eggs and fish for one year and deposited an amount of Rs. 8,500 for due performance of the contract. Clause 8 of the contract ran as follows:

"The officer sanctioning the contract may rescind his contract by notice to me/us in writing:

(i) * * *

(ii) * * * *

(iii) * * *

(iv) If I/we decline, neglect or delay to comply with any demand or requisition or in any other way fail to perform or observe any condition of the contract.

(v) * * * *

(vi) * * *

In case of such rescission, my/our security deposit (or such portion thereof as the officer sanctioning the contract shall consider fit or adequate) shall stand forfeited and be absolutely at the disposal of Government, without prejudice to any other remedy or action that the Government may have to take * * *

In the case of such rescission, the Government shall be entitled to recover from me/us on demand any extra expense the Government may be put to in obtaining supplies/services hereby agreed to be supplied, from elsewhere in any manner mentioned in clause 7 (ii) hereof, for the remainder of the period for which this contract was entered into, without prejudice to any other remedy the Government may have."

The plaintiff having made persistent default in making "regular and full supplies" of the commodities agreed to be supplied, the Government of India rescinded the contracts - the first on November 23, 1947, and the second on December, 2, 1947, and forfeited the amounts deposited by the plaintiff.

2. The plaintiff commenced an action against the Union of India in the Court of the Civil Judge, Lucknow, for a decree for Rs. 20,000 being the amounts deposited with the Government of India for due performance of the contracts and interest thereon at the rate of 6 per cent per annum. The Trial Court decreed the suit. The Court held that the Government of India was justified in rescinding the contracts, but they could not forfeit the amounts of deposit, for they had not suffered any loss in consequence of the default committed by the plaintiff. The High Court of Allahabad in appeal modified the decree, and awarded Rs. 416.25 only with interest at the rate of 3 per cent from the date of the suit. The plaintiff has appealed to this Court with special leave.

3. The Trial Court found in decreeing the plaintiff s suit that there was no evidence at all to prove what loss, if any, was suffered by the Government of India in consequence of the plaintiff s default, and on that account amounts deposited as security were not liable to be forfeited. In the view of the High Court, to forfeiture of a sum deposited by way of security for due performance of a contract, where the amount forfeited is not unreasonable, S. 74 of the Contract Act has no application. The Court observed that the decision of this Court in Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515 did not purport to overrule the previous "trend of authorities" to the effect that earnest money deposited by way of security for the due performance of a contract does not constitute penalty contemplated under S. 74 of the Indian Contract Act, that even if it be held that the security deposited in the case was a stipulation by way of penalty, the Government was entitled to receive from the plaintiff reasonable compensation not exceeding that amount, whether or not actual damage or loss was proved to have been caused, and that even in the absence of evidence to prove the actual damage or loss caused to the Government "there were circumstances in the case which indicated that the amount of Rs. 10,000 in the case of potato contract and Rs. 8