Section 34 CPC| Exercise Of Discretion To Award Interest, Whether Pendente Lite Or Post-decree Must Be Guided By Equitable Considerations: Supreme Court
The appeals before the Apex Court were filed against the judgment of the Calcutta High Court granting simple interest at 6% per annum on the enhanced valuation of shares.
Justice J.B. Pardiwala, Justice R. Mahadevan, Supreme Court
The Supreme Court has observed that while the discretion to award interest, whether pendente lite or post-decree, is well recognized, but its exercise must be guided by equitable considerations. The rate and period of interest cannot be applied mechanically or at an unreasonably high rate without any rationale.
These appeals before the Apex Court were filed against the judgments of the Division Bench of the Calcutta High Court upholding the valuation of shares done by M/s. Ray & Ray at Rs.640 per share and granting simple interest at 6% per annum on the enhanced valuation of shares, however, rejecting the prayer of the appellants for enhancement of interest rates, costs and damages.
On the aspect of discretion to award interest, the Division Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan stated, “Be it noted, while the discretion to award interest, whether pendente lite or post-decree, is well recognized, its exercise must be guided by equitable considerations. The rate and period of interest cannot be applied mechanically or at an unreasonably high rate without any rationale. Though it is not possible to arrive at the actual value of improvement or the inflation on the fair consideration, if paid at the relevant point of time, it is just and necessary that the rate of interest must be a reparation for the appellant."
Factual Background
The shares belonging to the appellants were transferred to the State Government in 1973. In 1978, the appellants instituted the suit claiming a valuation of Rs.70.50 per share. The appellants preferred a suit before the Calcutta High Court praying for a decree for Rs.4,34,21,553 against the first Respondent and, in the alternative, a decree for a reasonable price of the shares of the appellants.
While rejecting the valuation reports produced by the parties, the Single Judge of the High Court passed a preliminary decree holding that the respondents/plaintiffs are entitled to Rs.640/- per share they sold to the appellant. When the Court reheard the matter, the impugned judgment and order came to be passed, and the interest portion was corrected from 6% to 5% per annum.
Arguments
One of the arguments raised by the Appellant was that the payment of interest owing to the delay in remittance of the fair value of the shares to the Appellants is a right recognized in law. It was further submitted that the appellants were deprived of the fair value of their shares, which were compulsorily acquired by the State Government for more than 50 years due to the faulty valuation commissioned by it. Therefore, payment of interest on the valuation, which had been upheld by this Court, followed as a matter of course.
Reasoning
The Bench noted that there had been a transaction of trade, viz. sale and purchase of good,s and this implied a commercial transaction between the parties. In the present case, the transaction, though commercial, was not between two businessmen or entities. The State and its instrumentality were parties to the contract with better bargaining or imposing authority, and from the records, the Bench found that there was no public interest in offering a lesser sum. Further, with the price fixed found to be unconscionable, this Court affirmed the enhanced price fixed by the High Court
Expounding on the law relating to public interest, the Bench said, “Generally, public interest is anathema to commercial transactions. However, by exception, when the terms are oppressive or one-sided, they are to be termed as unconscionable, arbitrary and by application of externalities, public interest will have to lean towards the individual who has been wronged, as such contracts are deemed to take away the fairness, affecting the free consent required to culminate into a valid contract. The constitutional courts, under such circumstances will be armed with Article 14 to strike down such contracts or to pass appropriate decrees or orders.”
It was further noticed that there was no agreement between the parties relating to the grant of interest for the delayed payment. Even the exchange of communications between the parties remained silent on this aspect. In the absence of any agreement or contract, the Bench held that the provisions of Section 34 of the Code of Civil Procedure dealing with ‘interest’ would come into play.
Referring to section 34 of the Code Of Civil Procedure, 1908, the Bench observed, “The above provision empowers the court to grant interest at three different stages of a money decree viz., (i) the court may award interest on the principal sum claimed at a rate it deems reasonable, for the period before the suit was filed. Such interest is generally governed by agreements between the parties; (ii) The court may award interest on the principal amount from the date of filing the suit until the date of the decree, at a reasonable rate. Here, the court has full discretion to determine the interest rate based on fairness, commercial usage and equity; and (iii)the court may grant interest on the total decretal amount (principal + interest before decree) from the date of the decree until payment, at a rate not exceeding 6% per annum unless otherwise specified in contractual agreements or statutory provisions. However, if the claim arises from a commercial transaction, courts may allow interest at a higher rate based on agreements between the parties.”
“Thus, it is abundantly clear that the Courts have the authority to determine the appropriate interest rate, considering the totality of the facts and circumstances in accordance with law. That apart, the Courts have the discretion to decide whether the interest is payable from the date of institution of the suit, a period prior to that, or from the date of the decree, depending on the specific facts of each case”, it said.
On a perusal of the facts of the case, the Bench noticed that the Respondent-State agreed to pay a fair valuation for the shares to the appellants, but is yet to make the payment. “Such being the scenario, wherein, the appellants having suffered a delay of five decades in receiving the payment, are entitled to be reasonably compensated by way of interest. However, their claim of interest at 18% with quarterly rest or 15% with monthly rest, in the opinion of this court, is unreasonable and cannot be accepted as such quarterly or monthly rest is beyond the scope of Section 34”, it said.
Thus, the Bench awarded simple interest at the rate of 6% per annum from July 8, 1975, on the enhanced valuation of shares till the date of decree and interest at the rate of 9% per annum from the date of decree till the date of realisation. “The interest shall be paid along with the amount due towards the enhanced value of the shares, after adjusting the amount already paid, to the appellants, within a period of two months from today”, it held while disposing of the Petition.
Cause Title: I.K. Merchants Pvt. Ltd. & Ors. v. The State of Rajasthan & Ors. (Neutral Citation: 2025 INSC 418)