1982 Supreme(Kar) 232

Karnataka High Court
GOWDA.D.S - Appellant
Versus
CORPORATION BANK - Respondent
Decided On : 10-22-82
R.F.A. : 107 of 1981

Headnote:

The Court held that the terms of the mortgage deed providing for payment of interest at 16% with monthly rests are not valid under statutory directives of the Reserve Bank of India or could not be supported by banking practice. The Court also held that the interest charged by the bank including penal interest and service charges was excessive and the Court could call into aid the provisions of the Mysore Usurious Loans Act, 1923 to mitigate the rigour of the loan transaction.

Fact of the Case:

D. S. Gowda was allotted a site No. 132/4 at Rajamahal Vilas Extension, Bangalore by the Bangalore development Authority. He wanted to construct some residential flats in that site. He approached the Corporation Bank Ltd., for financial help for his project. The Corporation Bank Ltd., readily acceded to his request and gave advance and overdraft facilities. D. S. Gowda took the loan and commenced construction. The loan sanctioned was perhaps found insufficient. So he could neither finish the building nor could repay the loan. On Nov. 26, 1973, he executed an irrevocable power-of-attorney in favour of the bank manager authorising him to supervise and/or to put up construction according to the sanctioned plan and to induct tenants and recover rents from them. Still the loan could not be cleared. It went on mounting with addition of compound interest, penal interest and service charges. In 1975, the building still remained unfinished with the outstanding loan and interest mounting up to rupees four lakhs and seventy one thousand. The bank then thought that it must have adequate security from D. S. Gowda. On Oct. 10, 1975, d. S. Gowda executed a deed of equitable mortgage in favour of the bank with deposit of title deeds of hi', site for total liability of rupees five lakhs. It appears the bank gave him further accommodation at the time of executing the said deed. The material terms of the said deed are : "3. The mortgagor hereby covenants to repay the mortgage loan of Rs. 5,00,000 as above together witrr interest thereon at the rnte of 16% p. a. subject to such rate of interest as may be prescribed, within a period of two years. The mortgagor further agrees to pay interest on the mortgage amount at the end of each calendar month without default and that in the event of default overdue interest may be charged". On Nov. 7, 1975, D. S. Gowda again at the instance of the bank, executed a promissory note evidently as a collateral security, undertaking to pay Rs. 5,00,000 with interest at 16% p. a. , with quarterly rests.

Finding of the Court:

The Court held that the terms of the mortgage deed providing for payment of interest at 16% with monthly rests are not valid under statutory directives of the Reserve Bank of India or could not be supported by banking practice. The Court also held that the interest charged by the bank including penal interest and service charges was excessive and the Court could call into aid the provisions of the Mysore Usurious Loans Act, 1923 to mitigate the rigour of the loan transaction.

Issues: 1. Whether the plaintiff is entitled to collect interest with quarterly rests ? 2. Whether defendant proves that only Rs. 4,00,000 was advanced and mortgage was taken for Rs. 5,00,000 inclusive of interest and penal interest as alleged at para 5 of the written statement ? 3. Whether the defendant proves that the suit transaction is hit by the usurious Loans Act (Karnataka Act) and whether defendant is entitled for the benefits thereunder as contended ?

Ratio Decidendi: The Court held that the terms of the mortgage deed providing for payment of interest at 16% with monthly rests are not valid under statutory directives of the Reserve Bank of India or could not be supported by banking practice. The Court also held that the interest charged by the bank including penal interest and service charges was excessive and the Court could call into aid the provisions of the Mysore Usurious Loans Act, 1923 to mitigate the rigour of the loan transaction.

Final Decision: The Court allowed the appeal and in reversal of the judgment and decree, the matter stands remitted to the court below to dispose of the suit on merits and in the light of the observations made.