Forfeiture clauses and mesne profits must reflect proven loss and use value, not arbitrary sums or percentages.

Section 74 of the Indian Contract Act applies to forfeiture clauses and limits recovery to reasonable compensation not exceeding the stipulated amount. On the facts, the defendant breached the contract, but the plaintiff could retain only the earnest money of Rs. 1,000 and not the additional Rs. 24,000, because that stipulation was treated as a penalty and no further loss was proved. Mesne profits must be assessed on the value of use and occupation of the property, not by an arbitrary percentage of sale value; the trial court's rate of Rs. 140 per month was upheld, with interest payable as the profits accrued month by month, subject to the procedural limit in Order 20 Rule 12(c) CPC.

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Issues: (i) Whether the defendant committed breach of the contract and the plaintiff was entitled to forfeit the amount paid under the agreement beyond the earnest money; (ii) Whether the amount recoverable for wrongful retention of possession was correctly fixed as mesne profits.

Issue (i): Whether the defendant committed breach of the contract and the plaintiff was entitled to forfeit the amount paid under the agreement beyond the earnest money.

Analysis: The written agreement required payment of Rs. 1,000 as earnest money and a further Rs. 24,000 on delivery of possession, with forfeiture contemplated on default in completing the sale. On the evidence, the Court accepted that the plaintiff had performed his part by putting the defendant in possession of the land agreed to be sold and was ready to execute the sale deed, while the defendant failed to complete the purchase. The stipulation regarding forfeiture of the Rs. 24,000 payment was held to be a penalty, not earnest money. Section 74 of the Indian Contract Act applies to stipulations by way of penalty, including forfeiture of money already paid, and authorises only reasonable compensation not exceeding the amount stipulated. As no loss beyond retention of the earnest money and benefit from use of the retained sum was proved, compensation could not be assessed at ten per cent of the price.

Conclusion: The defendant committed breach, but the plaintiff could retain only the Rs. 1,000 paid as earnest money and not the balance of Rs. 24,000 as damages.

Issue (ii): Whether the amount recoverable for wrongful retention of possession was correctly fixed as mesne profits.

Analysis: Mesne profits are the profits actually received or which might with ordinary diligence have been received from the property, together with interest. The High Court's method of computing compensation as a percentage of the property's value was rejected as artificial because it was not based on the value of the user of the property. There was no reliable evidence of standard rent under the Delhi & Ajmer-Merwara Rent Control Act XIX of 1947. The trial court's assessment at Rs. 140 per mensem was accepted as not shown to be excessive, but interest on mesne profits was also held payable as they accrued month by month.

Conclusion: Mesne profits were payable at Rs. 140 per mensem with interest at six per cent on the amount accruing month by month, subject to the procedural limit in Order 20 Rule 12(c) of the Code of Civil Procedure.

Final Conclusion: The decree was modified by limiting forfeiture to the earnest money and by restoring the trial court's rate of mesne profits with interest, and the appeal was otherwise dismissed with parties left to bear their own costs.

Ratio Decidendi: Section 74 of the Indian Contract Act applies to forfeiture stipulations as well as to sums named as payable on breach, and in every such case the court can award only reasonable compensation not exceeding the stipulated amount; mesne profits must be assessed on the value of the use and occupation of the property, not on an arbitrary percentage of its sale value.

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