Source: Supreme Court 

Why in News?

A bench of Justice Surya Kant and Justice Ujjal Bhuyan held that under Section 34 of the Civil Procedure Code, 1908 (CPC) award of interest is discretionary.  

• The Supreme Court held this in the case of M/s Tomorrowland Limited v. Housing and Urban Development Corporation Limited and Another (2025). 

What was the Background of M/s Tomorrowland Limited v. Housing and Urban Development Corporation Limited and Another Case?  

• In 1990, the Ministry of Urban Development (MUD) decided to develop 71 acres of land at Andrew's Ganj, New Delhi, through HUDCO (Respondent No. 1). 
• HUDCO invited bids for various properties, including land to establish a 5-star hotel with an already-built car park to be leased for 99 years. 
• The Appellant emerged as the highest bidder for the hotel site and car park, receiving an allotment letter on 31st October 1994. 
• The Appellant was required to pay Rs. 64.10 crores for the hotel site and Rs. 14 crores for the car parking space in three installments. 
• The Appellant paid the first installment of Rs. 27.04 crores along with interest and maintenance corpus, totaling Rs. 28,11,31,939. 
• A dispute arose because HUDCO did not execute required documents after obtaining clearances under income tax and urban land ceiling laws. 
• HUDCO could not execute the 'agreement to sub-lease' because it did not have a perpetual lease from MUD. 
• The Appellant filed Suit No. 275/1996 in the High Court seeking extensions for payment and an injunction against cancellation. 
• The High Court issued a conditional order requiring the Appellant to deposit Rs. 15 crores by 08th April 1996, which the Appellant failed to do. 
• HUDCO cancelled the allotment on 02nd May 1996 and forfeited the entire amount of Rs. 28,11,31,939. 
• HUDCO invited fresh bids in November 1996, this time disclosing that a lease in its favor was yet to be executed. 
• The Appellant filed a second suit (No. 1/1997) in the Civil Court seeking a declaration that the cancellation was null and void. 
• The first suit was dismissed as withdrawn unconditionally by the Appellant. 
• Leela Hotels Limited emerged as the highest bidder in the fresh bid, though their allotment was contingent on the outcome of the Appellant's pending suit. 
• MUD executed the perpetual lease deed in favor of HUDCO on 04th July 1997. 
• The Civil Court and First Appellate Court ruled in favor of the Appellant, declaring the cancellation null and void. 
• The High Court overturned these decisions, noting that the Appellant's suit suffered from a fatal defect of not claiming possession as required by Section 34 of the Specific Relief Act, 1963 (SRA). 

What were the Court’s Observations? 

• The Court in this case dealt with the following three issues: 
  • Whether Respondent No. 1/HUDCO was in breach of its reciprocal contractual obligations qua the Appellant? 
  • If so, whether the Appellant is entitled to a refund of the forfeited amount under Clause 5(vi) of the Allotment Letter? 
  • If Issue (b) above is answered in the affirmative, whether the Appellant is entitled to interest on refund of the forfeited amount? 
• With respect to Issue (i): 
  • The Court concluded that Respondent no 1 was in breach of its contractual duty under Clause 5 (vi) of the Allotment Letter. 
  • It was held by the Court that Respondent no 1 was in breach of several obligations as contemplated in the Allotment Letter. 
• With respect to Issue (ii): 
  • The Court in this regard held that the parties had ample knowledge of the obligation cast upon Respondent No 1 to refund the amount paid by the Appellants. 
  • The Court further held that it is a settled position if law that a commercial document ought not to be interpreted in a manner that arrives at a complete variance with what may originally have been the intention of the parties. 
  • As a result the Court held that the Respondent no 1 is liable to refund of amount.  
• With Respect to Issue (iii): 
  • It was observed that the law on award of interest is provided for under Section 34 of Civil Procedure Code, 1908 (CPC). 
  • The provision states that “the court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged from the date of the suit to the date of the decree.” 
  • The Court laid down that the general rule is that in commercial disputes, the award of interest pendente lite or post decree is typically granted as a matter of course. 
  • However, in the present case the Court held that the facts are such as warrant deviation from the general rule as the conduct of the appellant cannot be said to be equitable. 
  • Hence, it was concluded that the appellant was not entitled to the discretionary relief of interest under Section 34 of CPC.

What is the Law on Interest under CPC?

• Section 34 of CPC provides for an award of interest. 
• Section 34 (1) provides that: 
  • The court has discretion to order interest on principal sums in money decrees. 
  • There are three phases in which interest may be awarded: 
    • Pre-suit interest: For any period before filing the suit 
    • Pendente lite interest: From the date of filing suit to the date of decree 
    • Post-decree interest: From the date of decree to the date of payment 
  • For post-decree interest:  
    • The default maximum rate is 6% per annum. 
    • For commercial transactions, the rate can exceed 6%, limited by: a) The contractual rate of interest, or b) The rate at which nationalized banks lend money for commercial transactions (if no contractual rate exists). 
• Explanation 1 appended defines "Nationalized bank" as  a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970). 
• Explanation 2 provides that for the purposes of this section, a transaction is a commercial transaction, if it is connected with the industry, trade or business of the party incurring the liability. 
• Section 34 (2) provides that: 
  • If a decree is silent about post-decree interest, it's deemed that the court has refused such interest 
  • When post-decree interest is deemed refused, a separate suit cannot be filed to claim it. 
• In the case of Central Bank of India v. Ravindra & Ors (2002), the Court held that: 
  • Award of interest pendente lite or post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC de hors the contract between the parties. 
  • The discretion shall be exercised fairly, judiciously, and for not arbitrary or fanciful reasons.