The Bench Comprising of Justices JB Pardiwala and R Mahadevan
Introduction:
The Supreme Court, examined the scope of Section 34 of the Code of Civil Procedure, 1908 (CPC), particularly regarding the rate of interest in commercial transactions. The Court ruled that in the absence of an agreement between the parties, the interest rate could exceed 6% per annum, considering the facts and circumstances of the case.
Facts:
In 1973, the appellants sold their shares to the State of Rajasthan at ₹11.50 per share. In 1978, they filed a civil suit before the Calcutta High Court seeking a fair valuation of the shares. In 2012, the High Court issued a preliminary decree, directing a Chartered Accountant firm to value the shares. The Chartered Accountant valued the shares at ₹640 per share. The High Court upheld this valuation but awarded only 5% simple interest. On appeal, the Supreme Court remanded the matter, directing reconsideration of objections and cross-objections. The High Court reaffirmed its decision to grant 5% simple interest, leading to another appeal before the Supreme Court.
Issues:
- Whether the sale of shares in this case constituted a "commercial transaction" under Section 34 CPC.
- Whether the courts have discretion to award interest exceeding 6% in such cases.
- Whether the appropriate rate of interest for the delayed payment of enhanced share valuation?
Contentions of the Petitioner:
The sale of shares was a commercial transaction, as it involved trade and business interests. Due to the prolonged delay in payment, the interest rate should be higher than 6% per annum. The High Court's award of only 5% simple interest was inadequate and did not consider inflation or commercial usage.
Contentions of the Respondent (State of Rajasthan):
The transaction was not a commercial transaction but an administrative decision, so Section 34 CPC should not apply. The interest rate should not exceed 6% as per the statutory cap. A higher interest rate would impose an excessive financial burden on the government.
Court Analysis:
The Supreme Court rejected the argument that the transaction was not commercial, holding that the sale of shares involved trade and business. Under Section 34 CPC, courts have the discretion to award interest at three stages:
- Pre-suit interest (based on agreements or commercial usage).
- Pendente lite interest (from suit filing to decree).
- Post-decree interest (from decree until realization, generally capped at 6%, unless a commercial transaction allows for a higher rate).
Courts must determine interest rates based on fairness, economic prudence, and the "loss of use" principle. The interest should compensate the claimant without being punitive.
Conclusion:
The Supreme Court modified the High Court’s order, granting:
- 6% simple interest from July 8, 1975 (date of default) till the decree date.
- 9% simple interest post-decree till realization, considering inflation and commercial factors.
- The State of Rajasthan was directed to pay the interest and enhanced share value within two months.
The judgment states the discretion of courts in commercial matters to award interest exceeding 6% under Section 34 CPC when justified by the circumstances.
