Interest On Unpaid Penalties Is Compensatory In Nature, Not Penal: Supreme Court

The Supreme Court observed that an interest on unpaid penalties is compensatory in nature, not penal and its primary purpose is not to punish the defaulter.

The Court observed thus in Civil Appeals filed under Section 15Z of the Securities and Exchange Board of India Act, 1992 (SEBI Act), challenging the Judgment of the Securities Appellate Tribunal (SAT), Mumbai, which dismissed the challenge to the notices of attachment.

The two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan elucidated, “At this juncture, it is to be pointed out that interest on unpaid penalties is compensatory in nature, not penal. Its primary purpose is not to punish the defaulter, but to make good the financial loss occurred to the Revenue on account of delay in receiving the payment that was lawfully due. When a penalty is imposed, a specific period is granted for compliance. If the payment is not made within that stipulated period, the delay deprives the Revenue of the timely use of funds that rightfully belong to the public exchequer.”

The Bench added that the accrual of interest upon default is automatic and flows from the nature of the liability serving to compensate for the time value of money and the disruption caused by delayed payment, rather than to impose an additional punitive burden.

Senior Advocates Purvish Jitendra Malkan and Benni Chatterji represented the Appellants while Senior Advocate Pratap Venugopal represented the Respondent.

Facts of the Case

The Appellants were the promoter-directors of a company limited by shares, which was listed on the Bombay Stock Exchange and engaged in providing various financial services, including lending, loan syndication, advisory, and portfolio management, among others. The company in the year 1995-96 went in to initial public offer for fully paid-up share capital of 56,48,500 shares of face value of Rs. 10/- each. The fully paid up 5,64,85,000 shares of the company were split from Rs. 10/- to Re.1 each from June 30, 2005. While so, the Respondent-SEBI conducted examination of scrip of the company and found that the promoters and directors of the company purchased shares of the company on various dates in violation of the provisions of Regulation Nos. 13(4) and 13(4A) read with 13(5) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.

Upon issuance of show cause notices (SCNs), the Adjudicating Officer passed adjudication orders under Section 15-a of SEBI Act read with Rule 5 of SEBI Rules, imposing penalty on the Appellants. Challenging these orders, the Appellants preferred Appeals before SAT, which were dismissed. Consequently, they filed Appeals before the Supreme Court which upheld the quantum of penalty imposed on the Appellants. Thereafter, SEBI through its Recovery Officer, issued demand notices directing the Appellants to pay the penalties imposed along with interest @ 12% p.a. However, the Appellants failed to comply with the demand and resultantly, SEBI issued notices of attachment of bank accounts to the Principal Officer/Chairman & Managing Director/CEO of all Banks in India, ordering the attachment with immediate effect. Being aggrieved by the actions of the Respondent, the Appellants filed Appeals before SAT, which got dismissed. Being aggrieved, they approached the Apex Court.

Reasoning

The Supreme Court after hearing the contentions of the counsel, noted, “… once Section 28A of the SEBI Act came into force with effect from 18.07.2013, the legal position stands settled that any penalty imposed by the Adjudicating Officer under the SEBI Act and remaining unpaid beyond the stipulated period is recoverable in the same manner as arrears of income tax under the Income Tax Act, 1961. As a necessary corollary, interest on such unpaid penalty also becomes statutorily leviable under section 220(2) of the Income Tax Act, which prescribes simple interest at the rate of 1% per month (12% per annum) for any amount specified in a demand notice that is not paid within the prescribed time.”

The Court said that in cases where directors of a company are prosecuted, the company is also liable to be prosecuted, because, in certain cases, but for the violation by the company, the directors cannot be prosecuted.

“Thus, it can be seen that adjudication under SEBI Act is triggered only by a violation. … All that is required is an enabling provision to demand interest. Once such a provision is available, the liability to pay interest becomes axiomatic upon the expiry of the period provided for payment of the penalty. As stated earlier, the enabling provision to recover interest was already in vogue when the adjudication order was passed. Accordingly, the appellants are liable to pay interest at 12% per annum on the unpaid penalty amounts for the period of delay”, it held.

The Court further remarked that the contentions of the Appellants that interest cannot be levied retrospectively is misplaced, as is their reliance on the Judgments of Supreme Court since not only are the facts different, but also are the statutory provisions involved.

“We have already held that the liability to pay penalty stood triggered from the date of adjudication and that no separate notice of demand is necessary. Further, in the present case, as the adjudication order itself specified the time for payment of the penalty, the liability to pay interest would commence upon the expiry of the period mentioned in the assessment notice. An “explanation” in any law serves to clarify, restrict, or expand the scope of the main provision. The nature and effect of an Explanation must be understood in the context of the object of the Act, and in particular, the provision to which the Explanation is inserted. The Explanation introduced in 2019, in our view, did not bring about any substantive change but merely clarified the existing legal position”, it enunciated.

The Court was of the view that the adjudication officer’s order which specified payment within 45 days, effectively operates as a notice of demand, rendering any separate demand notice redundant.

Conclusion

The Court, therefore, held, “Thus, we hold that interest must accrue from the expiry of the 45-day compliance period following the adjudication orders dated 28.08.2014. The subsequent demand notices are nothing but reminders and are not the first demand notices before the accrual of liability for interest. Accepting the appellants’ position would encourage defaulters to delay payment indefinitely under the guise of awaiting formal orders, thereby undermining the efficacy of the enforcement framework and resulting in a loss to the revenue.”

The Court concluded that authorities relied upon by the Appellants lack persuasive value, and there is no infirmity or illegality in the order passed by the Tribunal that would warrant interference.

Accordingly, the Apex Court dismissed the Appeals and directed the Appellants to pay interest calculated by SEBI within 15 days.

Cause Title- Jaykishor Chaturvedi & Etc. v. Securities and Exchange Board of India (Neutral Citation: 2025 INSC 846)

Appearance:

Appellants: Senior Advocates Purvish Jitendra Malkan, Benni Chatterji, AOR Khushboo Aakash Sheth, and Advocate Dharita Malkan.

Respondent: Senior Advocate Pratap Venugopal, Advocates Amarjit Singh Bedi, Surekha Raman, Shreyash Kumar, and Imlikaba Jamit.

Click here to read/download the Judgment