The Supreme Court of India recently issued a significant ruling, affirming that courts have the discretion to award interest exceeding 6% per annum in commercial transactions. The judgment, delivered on April 1, 2025, clarified the interpretation of Section 34 of the Code of Civil Procedure, 1908 (CPC) regarding the determination of interest rates in cases of delayed payments.

Background of the Case

The ruling arose from a dispute concerning the valuation of shares transferred by the appellants to the State of Rajasthan in 1973. The appellants argued that they had been deprived of the fair value of their shares for nearly 50 years, making it imperative for the court to award a just compensation that included an appropriate rate of interest.

The bench, comprising Justices JB Pardiwala and R Mahadevan, examined whether the transaction could be classified as a commercial transaction and whether the court had the authority to grant interest exceeding 6% in the absence of a contractual agreement between the parties.

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Case Details

• In 1973, the appellants sold their shares to the State of Rajasthan at Rs. 11.50 per share.
• Dissatisfied with the valuation, the appellants filed a civil suit in 1978 before the Calcutta High Court, seeking a fair reassessment.
• The case remained unresolved for decades, and in 2012, the High Court granted a preliminary decree, directing a chartered accountant firm to determine the share value.
• The firm valued the shares at Rs. 640 per share, a significant increase from the original sale price.
• Despite upholding the valuation, the High Court awarded only 5% simple interest, prompting the appellants to challenge the ruling.

The Supreme Court was tasked with deciding the appropriate rate of interest on the enhanced valuation of shares. The central question was whether a commercial transaction without an explicit agreement on interest rates could warrant an interest rate exceeding 6%.

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Rejecting the argument that the share transfer was not a commercial transaction, the Court held that the sale of shares inherently involved trade and business interests. The ruling emphasized that courts retain the authority to award higher interest rates in commercial transactions based on the totality of facts and circumstances.

"The above provision empowers the court to grant interest at three different stages of a money decree: (i) for the period before the suit was filed, (ii) from the date of filing to the date of decree, and (iii) from the date of decree until realization, subject to statutory limits." – Supreme Court

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The Court clarified that under Section 34 CPC:

• Pre-suit interest: Determined by agreements between parties.
• Pendente lite interest: Can be set at a reasonable rate by the court.
• Post-decree interest: Capped at 6% per annum unless in commercial transactions, where a higher rate may be granted.

The Court highlighted that while awarding interest, it is crucial to ensure that:

1. The claimant is fairly compensated for the loss of use of money.
2. The award does not become punitive or excessively burdensome on the judgment debtor.
3. Economic considerations, inflation, and financial impact are taken into account.

"The rate of interest must be a reparation for the appellant. Courts must strike a balance between fairness and financial prudence." – Supreme Court

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Recognizing the prolonged nature of the dispute and the substantial financial impact, the Supreme Court modified the High Court's order and ruled:

• 6% simple interest per annum from July 8, 1975 (date of default) to the date of decree.
• 9% simple interest per annum from the date of decree until realization.
• The government must pay the due amount within two months after adjusting for previously paid sums.

"Considering the delay, commercial nature, and inflation impact, we find it just and appropriate to award 6% interest from 1975 to the decree date and 9% thereafter till realization." – Supreme Court

Case Title: I.K. MERCHANTS PVT. LTD. & ORS. VERSUS THE STATE OF RAJASTHAN & ORS.

Appearance:

For Petitioner(s) Mr. Ranjit Kumar, Sr. Adv. Mr. Gautam Narayan, Sr. Adv. Mr. Ashok Kumar Jain, Adv. Mr. Pankaj Jain, Adv. Mrs. Meenakshi Jain, Adv. Mr. Bijoy Kumar Jain, AOR

For Respondent(s) Mr. Shiv Mangal Sharma, A.A.G. Mr. Milind Kumar, AOR Mr. Dr. Manish Singhvi, Sr. Adv. Mr. Deepak Goel, AOR Mr. Apurv Singhvi, Adv. Ms. Shalini Haldar, Adv.