2026:HHC:38123

IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA

RSA No. 167 of 2008

Reserved on: 27.8.2026

Date of Decision: 09.9.2026

H.P. General Industries Corporation Ltd. & anr. ...Appellants

Versus

M/s Batra Traders ...Respondent

Coram

Hon’ble Mr Justice Rakesh Kainthla, Judge.

Whether approved for reporting?

1

Yes.

For the Appellants :M/s B.B. Vaid and Hemant Vaid,

Advocates.

For the Respondent :Mr Arhant Mahajan, Advocate,

vice Mr Rahul Mahajan,

Advocate.

Rakesh Kainthla, Judge

The present appeal is directed against the judgment

and decree dated 03.01.2008, passed by the learned District

Judge, Shimla (learned Appellate Court), vide which the

judgment and decree dated 28.09.2005, passed by the learned

Civil Judge (Senior Division), Shimla (learned Trial Court), were

set aside. (The parties shall hereinafter be referred to in the same

1

Whether reporters of Local Papers may be allowed to see the judgment? Yes.

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manner as they were arrayed before the learned Trial Court for

convenience).

2. Briefly stated, the facts giving rise to the present

appeal are that the plaintiff filed a civil suit for recovery of

₹2,15,600/- along with interest @ 18% per annum, and for a

permanent prohibitory injunction restraining the defendants

from forfeiting the property and appropriating the security. It

was asserted that the plaintiff is a proprietorship concern

dealing with the supply of empty bottles, gunny bags,

corrugated boxes, and all kinds of scraps. The defendants placed

an order with the plaintiff on 09.07.1991 for supply of 25,00,000

bottles of 750 ml each, 2,00,000 bottles of 375 ml each, and

2,00,000 bottles of 180 ml each. The defendants started

purchasing empty bottles from the open market. The plaintiff

objected to it, and the dispute was resolved on 31.01.1992. The

defendants extended the time for supply of the order and placed

an additional order for supply of 6,00,000 bottles of 750 ml each

at the rate of ₹25.90 per dozen.

3. The defendants floated another tender for supply of

empty liquor bottles for the year 1992. The plaintiff’s bid was

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accepted, and the plaintiff was ordered to supply the empty

bottles at the rate of ₹28.25 per dozen. The plaintiff applied for

the refund of the security for the previous year’s order. The

defendants raised an additional demand instead of refunding

the security. The plaintiff sent a reply to the demand. The

defendants decreased the order by 20% for the year 1992–1993.

The plaintiff complied with the order but also served a notice

upon the defendants. There was no dispute regarding the refund

of the security for the year 1991–1992. However, the defendants

did not refund the security of ₹60,000/- and ₹5,000/-.

4. The defendants again floated a tender in the year

1993, and the plaintiff’s was accepted. Security of ₹60,000/-

and ₹15,000/- was deposited. The plaintiff supplied the bottles.

The defendants purchased the bottles from the open market. A

dispute arose between the parties, which was resolved with the

intervention of the Chief Secretary to the Government of

Himachal Pradesh. The plaintiff completed the supply, but the

defendants failed to refund the security.

5. A fresh tender was floated for the year 1994–1995,

and security was deposited. The dispute is pending before the

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Arbitrator. The plaintiff requested the defendants for the refund

of the security, but the defendants failed to refund it. The

defendants served a legal notice upon the plaintiff on 03.07.1997

threatening to forfeit the security in case of non-supply of the

bottles. The defendants are not entitled to retain the security;

hence, the suit was filed seeking the reliefs mentioned above.

6. The suit was opposed by filing a written statement

taking preliminary objections regarding lack of cause of action

and maintainability, the plaintiff being estopped by his act and

conduct and acquiescence to file the suit, the suit having not

been properly instituted by a competent person, the suit being

barred by limitation, the suit not being properly valued for the

purpose of court fees and jurisdiction, and the suit being bad for

misjoinder of causes of action. The contents of the plaint were

admitted to the extent that the defendants had invited tenders

for supply of empty bottles and the plaintiff’s bid was accepted.

It was asserted that the plaintiff failed to supply the bottles as

per the demand, and letters were sent to the plaintiff from time

to time. An audit objection was raised regarding the new order at

a higher rate when the old rate was prevailing. The plaintiff

repeated the violation of the terms and conditions of the tender.

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The defendants suffered a loss of ₹5,70,356/-; they forfeited the

security of ₹1,70,000/-. and asked the plaintiff to deposit the

remaining amount of ₹3,05,356/-. The suit was filed without

any basis; hence, it was prayed that the suit be dismissed.

7. A replication denying the contents of the written

statement and affirming those of the plaint was filed.

8. The learned Trial Court framed the following issues

on 20.05.1999:

(i)Whether the plaintiff has performed and complied

with the terms and requirements of the contract

regarding supply of bottles which was executed

between him and defendants for the year 1991, 1992

and 1993 and is therefore entitled to refund the

security amount as alleged? OPP.

(ii)Whether the order of forfeiture of security amount

is justified and defendants are entitled to some

more amount besides the security amount on

account of alleged non-performance/breach of the

terms and conditions of the contract? OPD.

(iii)Whether the suit is barred by time? OPD.

(iv)Whether the plaintiff is estopped to sue by his acts,

deeds and conduct? OPD.

(v)Whether the suit has not been properly instituted?

OPD.

(vi)Whether the plaintiff has no enforceable cause of

action? OPD.

(vii)Whether the plaint is not properly verified, if so, its

effect? OPD.

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(viii)Whether the suit is bad for mis-joinder of cause of

action? OPD.

(ix)Whether the suit has not been properly valued for

the purpose of court fee and jurisdiction? OPD.

(x)Relief.

9. The parties were called upon to produce the evidence.

The plaintiff examined B.C. Bhardwaj (PW-1), Gopal Kishan

(PW-2), Anant Ram (PW-3) and Ram Avtar (PW-4). The

defendants examined Shri B.C. Gupta (DW-1).

10. The learned Trial Court held that the plea taken by

the defendants that the plaintiff had failed to supply the bottles

as per the demand was probable. The defendants issued repeated

letters and telegrams to the plaintiff pointing out the shortfall.

The plaintiff failed to adhere to the schedule of supply. The

security amount was liable to be forfeited for breach of terms

and conditions as per Clause 9 of the agreement. The plaintiff

had completed the supply in the year 1993, and the suit was to be

filed within three years. However, it was filed after the lapse of

about five years and was barred by limitation. Hence, the learned

Trial Court answered Issue Nos. 3, 4, 6, and 7 in the affirmative,

Issue No. 2 partly in the affirmative, the rest of the issues in the

negative, and dismissed the suit.

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11. Being aggrieved by the judgment and decree passed

by the learned Trial Court, the plaintiff filed an appeal, which

was decided by the learned District Judge, Shimla (learned

Appellate Court). The learned Appellate Court concurred with

the findings recorded by the learned Trial Court that the

agreement between the parties contained a penalty clause;

however, the defendants were not justified in forfeiting the

penalty without showing the extent of damages suffered by

them. The defendants claimed that there was a short supply, but

had not proved the damages suffered by them. The statement

made by Shri B.C. Gupta (DW-1) that the defendants could not

fulfill the obligation to the Excise Department was not

corroborated by any material on record. Hence, the learned First

Appellate Court allowed the appeal, set aside the judgment and

decree passed by the learned Trial Court, and decreed the suit.

12. Being aggrieved by the judgment and decree passed

by the learned First Appellate Court, the defendants have filed

the present appeal, which was admitted on the following

substantial questions of law:

(i)Whether the learned First Appellate Court was

justified in applying the provisions of Section 74 of

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the Indian Contract Act when there was a breach of

the terms of the supply order, which itself rendered

the forfeiture of the security amount, moreover,

when there is no such plea of the plaintiff and still

the First Appellate Court can invoke the said

provisions?

(ii)Whether there is misreading, misappropriation and

non-application of mind to the pleadings as well as

oral and documentary evidence?

(iii)Whether the suit of the plaintiff was within

limitation and the First Appellate Court was

justified in not giving any findings on limitation?

13. I have heard M/s B.B. Vaid and Mr Hemant Vaid,

learned counsel for the appellants/defendants, and Mr Arhant

Mahajan, learned vice counsel representing the

respondent/plaintiff.

14. Mr B.B. Vaid, learned counsel for the

appellants/defendants, submitted that the learned Trial Court

had specifically held the suit to be barred by limitation.

However, the learned Appellate Court failed to record any

finding regarding the plea of limitation, and this issue was

simply ignored. It was an admitted case of the plaintiff that the

contract was fulfilled in the year 1993; therefore, the cause of

action for filing the suit arose in the year 1993. The suit was to be

filed within three years from the accrual of the cause of action,

and the suit was hopelessly barred by limitation. Therefore, he

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prayed that the present appeal be allowed, the judgment and

decree passed by the learned Appellate Court be set aside, and

the judgment and decree passed by the learned Trial Court be

restored.

15. Mr Arhant Mahajan, learned vice counsel

representing the respondent/plaintiff, submitted that time is

not the essence of the contract. The notice of forfeiture was

received on 03.07.1997, and the cause of action accrued on that

day. The suit was filed on 18.04.1998, within the period of three

years from the date of the accrual of the cause of action; hence,

the same was within limitation. The learned Appellate Court had

rightly held that the penalty clause is not sufficient to forfeit the

security, and the defendants were required to prove the actual

damage sustained by them. Since the defendants have not

proved the damages sustained by them, the learned Appellate

Court had rightly decreed the suit. There is no infirmity in the

judgment and decree passed by the learned Appellate Court;

hence, he prayed that the present appeal be dismissed. He relied

upon the following judgments in support of his submission:-

(i)Gomathinayagam Pillai vs. Palaniswami Nadar 1967

SC 868;

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(ii)Maula Bux v. Union of India (AIR 1970 SC 1955)

(iii)Union of India v. Rampur Distillery and Chemical Co.

Ltd.

16. I have given considerable thought to the submissions

made at the bar and have gone through the record carefully.

Substantial Question of Law No.3:

17. The plaintiff asserted in Para 4 of the plaint that

there was no dispute between the parties, but the security for the

year 1991–1992 of ₹60,000/- and ₹5,000/- for the bottles of 180

ml. was not refunded. He stated in Para 5 of the plaint that the

supply was completed for the year 1993, but the security of

₹60,000/- and ₹15,000/- was not refunded without any

justifiable reason.

18. Shri Ram Avtar Batra (PW-4) stated that he had

deposited money by way of security twice: the amount of one

security was ₹65,000/-, and the amount of the other security

was ₹75,000/-. He made the supplies to the defendants as per

their demand, but the defendants failed to refund the security

despite his performance of the agreement by him. He stated in

his cross-examination that he had stopped making supplies to

the defendants during the year 1991–1992 because the

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defendants had started making purchases from other sources.

He admitted that he had received telegraphic reminders from

the defendants for supply of bottles, and volunteered to state

that the defendants had not accepted the supply.

19. Therefore, as per the admitted version of the

plaintiff, the plaintiff had completed the supply, but the

defendants had failed to return the security deposited by him.

20. It was laid down by the High Court of Bombay in

Shankar Moreshwar Kulkarni Chinchwadkar v. State of

Maharashtra, 1968 SCC OnLine Bom 52: AIR 1970 Bom 8: 1969 Mah

LJ 677 that the suit for the recovery of security has to be filed

within three years from the completion of the contract. It was

observed at page 9:

“9. Where money is deposited by way of security for the

due performance of a contract or otherwise under the

terms of a contract and is refundable after the completion

of the contract, in our opinion, Article 62 is not applicable

to the suit for refund as the money was not received by

the defendant for the plaintiff's use. Such suit would be

governed by the residuary Article 120 of the Indian

Limitation Act, 1908.

11. Our attention was invited to the judgment of a Division

Bench of this Court in the case of Dhanraj Mills Ltd. v.

Laxmi Cotton Traders, Bombay, 60 Bom LR 1295 : (AIR 1960

Bom 404). In that case it was merely held that Article 145

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was not applicable to the facts which were similar to the

facts of this case, but it was not decided as to which of the

articles in the first schedule of the Indian Limitation Act

was applicable. In an earlier Bombay case, namely,

Lingangouda v. Lingangouda, ILR (1953) Bom 214 : (AIR

1953 Bom 79) —Chagla C.J. had taken the view that Article

120 was applicable in a similar matter. The reason given

in the judgment was that Article 62 should not apply to a

case where the terms of the article were not literally

complied with. It was observed that such a construction

would result in plaintiffs losing a large number of cases

on the ground of limitation, whereas if Article 120 was

held to be applicable, the plaintiffs would be safe. The

reasoning of this decision was not approved of by the

Supreme Court in (1965) 2 SCR 577 (AIR 1965 SC 1773),

referred to hereinabove. We are, however, bound by the

judgment of the Supreme Court on the point that Article

62 was not applicable. The only article with which we are

left is Article 120. In our opinion, Article 120 is applicable,

being the residuary article.

21. Similarly, the Rajasthan High Court also held in State

of Rajasthan v. Anand Construction Co., 1971 SCC OnLine Raj 7: AIR

1972 Raj 101 that in case of refund of the security deposit, the

obligation to refund the security arises on the completion of the

contract, and a period of three years would apply. It was

observed at page 102: -

10. In Nasiruddin v. Abdullah Mian, 1959 Raj LW 317 where

a tenant had deposited money with the landlord as a

security for the due fulfilment of the stipulation to do all

repairs which may be necessary at the termination of the

lease, and that if the tenant did not do so, the landlord

would be entitled to do it and deduct the cost out of the

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said deposit, the suit was filed for the refund of the

deposit and it was held that as there was no specific

article applicable to the case of this nature, Article 120 of

the Limitation Act of 1908 would apply. Reliance was

placed on Upendra Lal Mukhopadhya v. The Collector of

Rajshaye, (1886) ILR 12 Cal 113.

11. In Harij Gram Panchayat v. Thakkar Lakhiram Ramji,

AIR 1962 Guj 14, it was held that in a suit brought for the

refund of deposit by way of security for the due

performance of the contract, neither Art. 62 nor Art. 60

nor Article 97 of the Act of 1908 applies, and in the

absence of any specific Article application to the suit,

Article 120 applies.

12. The same view was taken by the Bombay High Court in

Shankar v. State, AIR 1970 Bom 8. It was held there that:

“Where money is deposited by way of security for

the due performance of a contract or otherwise

under the terms of a contract and is refundable

after the completion of the contract, Article 62 is

not applicable to the suit for refund as the money

was not received by the defendant for the plaintiff's

use. The right to refund did not arise immediately

on receipt by the defendant. The suit not being a

suit against a depository or pawnee to recover

movable property deposited or pawned, Article 145

also would not be applicable. Such suit would be

governed by the residuary Article 120.”

13. The Calcutta High Court in G.D. and Co. v. W.I. Theatres,

(1961) 65 Cal WN 504 came to the decision that to such

suits Article 146 of the Indian Limitation Act of 1908

would be applicable and if for any reason, this article is

not applicable, there is no doubt that Article 120 is

applicable. This was also a case for the refund of the

deposit made by the contractor. Bose J. in that case

observed that:

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“A deposit made as security for due performance of

a contract is refundable whether it is coupled with a

promise or agreement to repay it or not. Even if

nothing is agreed as to its repayment at the time

the deposit is made, the obligation to repay arises

upon the proper performance of the engagement by

reason of the very nature of the transaction of

deposit. If an express agreement is entered into for

repayment of the deposit, the transaction remains a

deposit, and its nature is not thereby altered. The

essence of the causes of action for a suit for refund

of a deposit is not the breach of the contract to

repay it, but the fact that the transaction is a

deposit which by its very nature is refundable.

14. The person who holds the deposit and the person on

whose behalf or for whose benefit the deposit is held as

security are liable to refund it because it is a deposit. They

are both in the position of depositories. Accordingly, the

article applicable is Article 145 of the Indian Limitation

Act, and if for any reason this article is not applicable,

there is no doubt that Article 120 is applicable to the

present case.”

15. Thus there is sufficient authority for the view I have

taken in the matter. The contracts in this case were

completed on 27-1-1958, and the suit has been filed

within six years of that date. Although, on behalf of the

defendant, the Engineer-in-charge has deposed that the

amount of security deposit was refundable six months

after the completion of the contract, but no such period is

fixed in the agreement and in its absence the time will

begin to run from the date of the completion of the

contract. But in any case, the suit was instituted within

six years of the completion of the contract

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22. A similar view was taken by the High Court of

Allahabad in State of U.P. v. Chandra Gupta & Co., 1976 SCC OnLine

All 159: 1976 All LJ 426 wherein it was observed at page 434

“22. Article 56, quoted above, will show that it prescribes

a period of three years for a suit for the price of work done

by the plaintiff for the defendant at his request, where no

time has been fixed for payment. In this eventuality, the

period of limitation starts running from the date when

the work is done. In the instant case, however, we find

that Clause 7 of the Conditions of Contract provides for

payment on intermediate certificate to be regarded as

advances. Under this limitation clause, a contractor is

entitled to receive a monthly payment proportionate to

the part thereof that is approved for such purpose by the

Engineer-in-Charge. Similarly, a provision for final

payment has also been made in Clause 6. Accordingly, as

the contract provides for the time when the payment is to

be made, Art. 56 of the old Limitation Act would not be

applicable to the claim for the extra work. The other

Articles which were relied upon by the plaintiff were Arts.

120 and 115 of the said Act. Art. 115 will apply to a claim of

compensation for breach of any contract, express or

implied. The period of limitation in such cases is three

years, and it commences to run when the contract is

broken. Although it was vehemently urged by Sri Radha

Krishna that the correct Article applicable to the claim for

the extra work was Art. 120, we find that even applying

Art. 115, the suit of the plaintiff is within time; we do not

think it necessary to examine the question as to whether

Art. 120 applies. The facts of the case, stated above, would

show that the claim of the plaintiff was rejected by the

State of U.P. on 15-3-1959, whereas the suit was filed by

the plaintiff on 16-5-1962. The plaintiff, having given

two months' notice to the State of U.P., was entitled to the

exclusion of this period of two months, and as 15th of

May, 1962, was a public holiday, the plaintiff could,

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therefore, file the suit on 16-5-1962. Accordingly, the suit

filed by the plaintiff on the aforesaid date was within

time. This view of ours is supported by a decision of a

Division Bench of this Court in State of U.P. v. Suraj Prasad

Gupta [ F.A. No. 351 of 1968, decided on 3-2-1976]. In this

case also it was held that to a claim like the present, the

applicable provision is that provided by Art. 115 of the old

Limitation Act.

23. There remains to be considered the question as to

whether the claim made by the plaintiff for the refund of

the security deposit forfeited by the State was within

time. The real question in this case is about the character

of the deposit made by the plaintiff as a contractor. The

amount was deposited as security for the performance of

the contract. The question of limitation as to the refund of

the security amount came up for consideration before a

Division Bench of the Punjab and Haryana High Court in

(Zila Parishad, Ambala v. Banarsi Dass [A.I.R. 1973 Pun. and

Har. 276.] ). The Bench observed that a suit for return of

security deposit is not for compensation for the breach of

any contract; the deposit remains a deposit whether the

depositor has a right to deduct anything therefrom or not.

Thus, the suit would be governed either by Art. 145 or 120

of the Limitation Act. In Datt Singh v. Srihar Singh [1955

N.U.C. 3551], a learned Single Judge was also required to

consider a similar controversy. The commentator has

digested the observations made by the learned Judge in

the following terms:

“The claim for a return of the deposit money cannot by

any stretch of the language of Art. 115 be considered as

a suit for compensation for breach of any contract.

When an employee makes a deposit for due

performance of the duties, the deposit is in the nature

of a trust, and the proper Article in such a case is Art.

145, which provides for a greater period of limitation

than Art. 120. Even if Art. 145 is not applied, there is no

escape from the conclusion that the other Article

applicable to a case of this type is Art. 120.”

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24. For the reasons given above, we find that a suit

relating to a deposit would fall under the residuary Art.

120 of the Act. The period provided under this Article is

six years. Applying this period, we find that the suit is

within time and, therefore, the claim of the plaintiff for

the refund of the security deposit cannot be defeated on

the ground of limitation.”

23. These judgments were followed by this Court in M/s

Kumar & Company v. State of H.P., Civil Suit No. 33 of 1990, decided

on 03.06.2000.

24. In the present case also, the agreement for the year

1991–1992 came to an end in the year 1992, and the agreement

for the year 1993 came to an end in the year 1993. This is also

evident from the fact that, as per the plaint, a fresh tender was

floated in the year 1994–1995 and there was a dispute regarding

the same, which is the subject matter of the arbitration. Hence,

the learned Trial Court had rightly held that the suit was to be

filed within three years, and the learned Appellate Court erred in

ignoring these findings.

25. Mr Arhant Mahajan, learned counsel for the plaintiff,

referred to the performance report (Ext. PB) and stated that

orders were being placed in the year 1994–1995, and the

contract had not come to an end. This submission cannot help

the plaintiff. It is undisputed that different tenders were floated

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for different years, and merely because orders were placed in

different years cannot mean that those were referable to the

tenders for the years 1991–1992 and 1993–1994, for which the

security is being claimed. Therefore, not much advantage can be

derived from the performance report.

26. It was submitted that a notice (Ext. PA) was issued to

the plaintiff for forfeiting the security amount, which would

furnish a cause of action. This submission can also not help the

plaintiff, because the plaintiff has not challenged the order of

forfeiture but has claimed the refund of the security deposited

by him, and any order of forfeiture will not have the effect of

extending the period of limitation in the present case.

27. It was further submitted that time is not the essence

of the contract and the suit cannot be said to be barred by

limitation. This submission is only stated to be rejected. This

principle cannot apply to the refund of security, which becomes

due after the completion of the contract.

28. It is an admitted version that different tenders were

being floated for different years; therefore, the tender came to

an end once a new tender was floated, and the plaintiff cannot

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claim that time was not the essence of the contract when the

period of limitation started running from the expiry of the

previous tender.

29. The judgment in Gomathinayagam Pillai (supra) and

Hind Construction (supra) related to the performance of the

contract and not the refund of the security, and will not help the

plaintiff.

30. A reference was made to the letter dated 01.06.1992

(Ext. P-9), vide which the plaintiff had demanded the refund of

the security. This letter will not help the plaintiff because it

would show that the demand for the refund was made on

01.06.1992, and a cause of action arose from that date. The

plaintiff was required to file the suit within three years, but

failed to do so.

31. Thus, the learned Trial Court had rightly held that

the suit was barred by limitation, and the learned First Appellate

Court erred in not recording any finding regarding this issue.

Hence, this substantial question of law is answered accordingly.

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Substantial Question of Law No. 1:

32. The learned First Appellate Court had rightly held

that the security amount could not be forfeited simply because

of default, and Section 74 of the Indian Contract Act will apply to

the refund of the security deposit. It was laid down by the

Hon’ble Supreme Court in Maula Bux v. Union of India, (1969) 2

SCC 554: 1969 SCC OnLine SC 291 that the security could not be

forfeited simply because of breach of the contract unless the

damages are shown. It was observed at page 557:-

4. Under the terms of the agreements the amounts

deposited by the plaintiff as security for due performance

of the contracts were to stand forfeited in case the

plaintiff neglected to perform his part of the contract. The

High Court observed that the deposits so made may be

regarded as earnest money. But that view cannot be

accepted. According to Earl Jowitt in Dictionary of English

Law at p. 689: “Giving an earnest or earnest-money is a

mode of signifying assent to a contract of sale or the like,

by giving to the vendor a nominal sum (e.g. a shilling) as a

token that the parties are in earnest or have made up their

minds”. As observed by the Judicial Committee in

Chiranjit Singh v. Har Swarup: [1925 SCC OnLine PC 63: AIR

1926 PC 1]

“Earnest money is part of the purchase price when

the transaction goes forward; it is forfeited when

the transaction falls through, by reason of the fault

or failure of the vendee.”

In the present case, the deposit was made not as a sum of

money by the purchaser to be applied towards part

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payment of the price when the contract was completed

and till then as evidencing an intention on the part of the

purchaser to buy property or goods. Here the plaintiff had

deposited the amounts claimed as security for

guaranteeing due performance of the contracts. Such

deposits cannot be regarded as earnest money.

Section 74 of the Contract Act provides;

“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 way 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.

1.***”

2.There is authority, no doubt coloured by the view which

was taken in English cases, that Section 74 of the Contract

Act has no application to cases of deposit for due

performance of a contract which is stipulated to be

forfeited for breach, Natesa Aiyar v. Appayu Padayachi

[1913 SCC OnLine Mad 208: ILR (1915) 38 Mad 178]; Singer

Manufacturing Company v. Raja Prosad [ ILR (1909) 36 Cal

960]; Manian Pattar v. Madras Railway Company. [1905 SCC

OnLine Mad 88: ILR (1906) 29 Mad 118] But this view is no

longer good law in view of the judgment of this Court in

Fateh Chand case (supra). This Court observed at p. 526:

“‘Section 74 of the Indian Contract Act deals with

the measure of damages in two classes of cases: (i)

where the contract names a sum to be paid in case

of breach, and (ii) where the contract contains any

other stipulation by way of penalty…,’ ‘The

measure of damages in the case of breach of a

stipulation by way of penalty is by Section 74,

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reasonable compensation not exceeding the penalty

stipulated for.’”

The Court also observed:

“It was urged that the section deals in terms with

the right to receive from the party who has broken

the contract reasonable compensation and not the

right to forfeit what has already been received by

the party aggrieved. There is, however, no warrant

for the assumption made by some of the High

Courts in India that Section 74 applies only to cases

where the aggrieved party is seeking to receive

some amount on breach of contract and not to cases

whereupon breach of contract an amount received

under the contract is sought to be forfeited. In our

judgment, the expression “the contract contains

any other stipulation by way of penalty”

comprehensively applies to every covenant

involving a penalty whether it is for payment on

breach of contract of money or delivery of property

in future, or for forfeiture of right to money or

other property already delivered. Duty not to

enforce the penalty clause but only to award

reasonable compensation is statutorily imposed

upon courts by Section 74. In all cases, therefore,

where there is a stipulation in the nature of penalty

for forfeiture of an amount deposited pursuant to

the terms of contract which expressly provides for

forfeiture, the court has jurisdiction to award such

sum only as it considers reasonable, but not

exceeding the amount specified in the contract as

liable to forfeiture, and that,

“There is no ground for holding that the expression

‘contract contains any other stipulation by way of

penalty’ is limited to cases of stipulation in the nature of

an agreement to pay money or deliver property on breach

and does not comprehend covenants under which

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amounts paid or property delivered under the contract,

which by the terms of the contract expressly or by clear

implication are liable to be forfeited.”

5. Forfeiture of earnest money under a contract for sale of

property — Movable or immovable — If the amount is

reasonable, does not fall within Section 74. That has been

decided in several cases: Chiranjit Singh v. Har Swarup;

Roshan Lal v. Delhi Cloth and General Mills Company Ltd.

Delhi [1910 SCC OnLine All 98: ILR (1911) 33 All 166]; Mohd

Habibullah v. Mohd Shafi [1919 SCC OnLine All 87: ILR 41 All

324]; Bishan Chand v. Radhakishan Das. [1897 SCC OnLine

All 52: ILR (1897) 19 All 490] These cases are easily

explained, for forfeiture of a reasonable amount paid as

earnest money does not amount to imposing a penalty.

But if forfeiture is of the nature of a penalty. Section 74

applies. Where under the terms of the contract the party

in breach has undertaken to pay a sum of money or to

forfeit a sum of money which he has already paid to the

party complaining of a breach of contract, the

undertaking is of the nature of a penalty.

33. The High Court of Allahabad followed this judgment

in Chandra Gupta & Company (supra) and observed:-

20. A similar question regarding the right of the Union of

India to forfeit the security came up for consideration

before the Supreme Court in Maula Bux v. Union of India

[(1969) 2 SCC 554: A.I.R. 1970, S.C. 1955]. In that case,

Maula Bux had entered into a contract with the

Government of India for the supply of certain goods and

had deposited a certain amount of security for the due

performance of the contract. It was stipulated in the

contract that the amount of security was to stand

forfeited in case the appellant neglected to perform his

part of the contract. On Maula Bux committing default in

the supply, the government did not only rescind the

contract but also forfeit the security deposit. Holding that

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a case of forfeiture of earnest money was different from

forfeiture of security deposit for due performance of the

contract, the Supreme Court held that under Sec. 74, only

a reasonable amount can be forfeited if a contract is not

performed. But, where under the terms of the contract the

party in breach has undertaken to pay a sum of money or

to forfeit a sum of money which he has already paid to the

party complaining of a breach of contract, the

undertaking is of the nature of penalty. It further held

that the amount deposited by way of security for

guaranteeing the due performance of the contract could

not be regarded as earnest money. Applying the law to the

facts of the present case, we find that as the defendant,

admittedly, did not suffer any damage, it was not entitled

to forfeit the security deposit, in as much as forfeiture of

security would amount to imposition of penalty. This case

was followed by the Supreme Court in Union of India v.

Rampur Distillery and Chemicals Limited [(1973) 1 SCC 649:

A.I.R. 1973 S.C. 1098]. It was held in this case that the party

to a contract taking security deposit from the other party

to ensure due performance of the contract is not entitled

to forfeit the security deposit on the ground of default,

when no loss is caused to him in consequence of such

default. We, accordingly, find that the learned Civil Judge

was not right in holding that the forfeiture of security by

the defendant in the instant case was justified. We,

therefore, hold that the plaintiff is entitled to get a decree

for the sum of Rs. 6,650/- under this head.

34. The defendants claimed in the written statement that

they had suffered a loss of ₹5,70,356/-; however, there was no

evidence of this fact. Shri B.C. Gupta (DW-1) stated that the

bottles were not supplied despite repeated letters and telegrams,

and the defendants could not fulfil their obligation to the Excise

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Department for supply of liquor bottles to various liquor

licenses. The learned First Appellate Court had rightly pointed

out that this statement does not give the details of the loss

suffered by the defendants. The cost of the liquor bottles

purchased from the market and the difference in price vis-à-vis

the tender were not outlined to calculate the loss suffered by the

defendants. Hence, his statement was not sufficient to infer that

the defendants had sustained the loss of ₹5,70,356/-.

35. It was submitted that no party had pleaded the

applicability of Section 74 of the Indian Contract Act, and the

learned First Appellate Court erred in invoking this provision.

This submission cannot be accepted. The Court is bound to apply

the law and cannot refuse to apply the law simply because no

person has brought the law to the attention of the Court in its

pleadings. Therefore, this substantial question of law is

answered accordingly.

Substantial Question of Law No. 2:

36. The learned First Appellate Court failed to appreciate

the plea regarding limitation and record any findings. However,

it had rightly held that the security amount could not be

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forfeited simply because of default. Therefore, this substantial

question of law is answered partly in the affirmative.

Final Order:

37. In view of the above, the present appeal is allowed.

The judgment and decree passed by the learned First Appellate

Court are ordered to be set aside, while those passed by the

learned Trial Court are ordered to be restored.

38. Pending application(s), if any, also stand(s) disposed

of.

39. Records of the learned Courts below be sent down

forthwith.

(Rakesh Kainthla)

Judge

9

th

September, 2026

(Chander)