Report No. 178

13. Section 34 of Code of Civil Procedure, 1908: Pendentelite and Post-decretal interest to be increased from 6% to 12% and Section 34(2):

Section 34 of the Code of Civil Procedure, 1908 deals with award of interest by the Court in suits for money. It reads as follows:

"34. Interes.- (1) Where and in so far as a decree is for the payment of money, 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, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six per cent, per annum, as the Court deems reasonable on such principal sum, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit.

Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent, per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advanced by nationalized banks in relation to commercial transactions.

Explanation .- In this sub section, "nationalized banks" means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

Explanation I.- 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.

(2) Where such a decree is silent with respect to the payment of further interest on such principal sum from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest and a separate suit therefor shall not lie"

This section lays down the principles for granting interest in suits. Firstly, under sub-section (1), by using the word 'may' a discretion is given to the Court either to grant or not to grant interest for the period pending the suit, upon the principal sum adjudged. Secondly, sub-section (1) states that the Court will have discretion to award 'reasonable' rate of interest from the date of institution of suit up to the date of decree, on the principal sum adjudged.

This discretion under sub section (1) is with regard to the reasonable rate both for commercial and non-commercial transactions. Thirdly, for the period after decree, the Court is again given discretion under sub section (1) to grant interest but it shall not exceed 6% p.a. in noncommercial cases. In commercial cases, the court can award post-decretal interest at a rate more than 6% p.a. but not exceeding the contract rate or where there is no contract rate, the rate at which moneys are lent or advanced by nationalized banks in relation to commercial transactions.

So far as post-decree rate is concerned, prior to 1956, the Court had a discretion to award at a 'reasonable rate' but by Act 66 of 1956, it was 96 restricted to 6%. By Act 104/76, a rate above 6% was permitted in commercial transactions for the period after the decree.

It is common experience that in most of the cases the Courts, in their discretion have been awarding interest only at 6% from the date of suit till the date of decree though the maximum limit of 6% is presently applicable only to the interest that may be awarded after the decree in non-commercial cases. The result is that Courts have been awarding only 6% interest per annum from the date of filing of the suit till payment.

The vast discretion that has been given to the Court and the fact that in practice only a rate of 6% p.a. is being awarded, has induced most debtors to take advantage and drive those who have lent or advanced monies to them, to Court. Further, the upper limit of 6% p.a. in non-commercial cases for the period from date of decree appears to be too unrealistic from today's standards when there is serious and continuous erosion of the value of the rupee and in the context of long delays in courts, and in the view of the Commission, sub-section (1) of Section 34, does not keep the scales even between the plaintiff and the defendant and permits Courts to lean more in favour of the defendant in most cases.

Sub section (2) again states that where a decree is silent in respect of post-decree interest, interest is deemed to have been refused. This provision appears to be based on principles of constuctive res judi cata. There appears to be no logic why a person against whom a Court has passed a decree 97 should be allowed to go scot free without paying interest even if the decree is silent. The recent Arbitration and Conciliation Act, 1996 Section 31(3) provides just the contrary. Once the award is passed, the person against whom the award is passed has to pay interest at 18% "unless the Court directs otherwise".

A Constitution Bench of the Supreme Court of India, in its latest judgment, (Central Bank of India V. Ravindra and ors JT 2001 (9) SC 101 has held that the words 'principal sum adjudged' used in sub section (1) of section 34 mean not the principal sum which was the subject matter of any contract of loan but the said sum with interest, computed upto date of suit. It is on that sum that 'interest' pendente-lite or post-decree interest is awarded by the Court.

We propose, for the reasons given earlier, that the Court may award interest from the date of suit till the date of decree at a rate of interest up to a maximum of 12% per annum and similarly that the interest payable from the date of decree till the date of payment, in non-commercial cases can be up to a maximum of 12% per annum. So far as commercial cases are concerned, the interest that may be awarded after the decree till payment can go beyond 12% per annum subject, however, that it shall not exceed the contract rate or the rate at which monies are lent or advanced by a nationalized bank.

We also propose to amend Explanation I which defines nationalized banks as the corresponding new banks defined in Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 to also include the other corresponding 98 new banks covered by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

So far as post-decree interest is concerned, we have to first refer to Section 34(2). It states that where the decree is silent as to post-decretal interest, it must be deemed to have been refused. As stated earlier, the Commission is of the view that there is no justification whatsoever for a person who has suffered a decree, to refuse to pay interest merely because the decree is silent. The existing provisions of Section 34(2) which are akin to a principle of constructive res judicata do not appear to render justice to the decree-holder. A judgment for money is treated in England as a judgment-debt upon which interest is payable.

The post deceretal interest as introduced 1985 in England is 15% under the Judgment Debts (Rate of Interest) Order, 1985. Under Section 44 of the Administration of Justice Act, 1970, the Court cannot award a different rate for the period after the decree (see Annual Practice, 1991 Vol. 1 page 61). (see also Halsbury's Laws of England, Vol. 26, 4th Ed. Para 553). Under American law too, post-decretal interest is mandatory under Title 28 (see American Jurisprudence, Vol. 45 para 62), even though the judgment does not contain any specific recital to that effect.

We propose to amend sub section (2) of section 34 by providing that where the judgment and decree are silent with respect to payment of further interest on the principal sum from the date of decree to the date of payment or other earlier date, the decree holder may apply to the Court within 30 days from the date of judgment before the Court which passed the decree to pass 99 an order with regard to the further interest payable from the date of decree to the date of payment or other earlier date.

In as much as the time for filing an appeal against the main judgment and decree is 30 days under the Indian Limitation Act, 1963 where an appeal is preferred to a Court sub ordinate to a High Court it becomes necessary to make a further provision for extension of the period of limitation for filing an appeal against the main judgment and decree, in cases where an application is filed, within 30 days of the judgment before the Court for passing an order in relation to post decretal interest as stated above. It is proposed to say that while computing the period for filing an appeal against the judgment and decree the period of 30 days for filing an appeal shall be counted from the date on which the Court passes an order on the application for grant of interest for the period after the decree.

In the light of the above proposals section 34 is proposed to be recast as follows:

"34. Interest (1) Where and in so far as a decree is for the payment of money, the Court may, in the decree order interest to be paid on the principal sum adjudged, from the date of the suit to the date of decree at a rate not exceeding twelve percent. per annum, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding twelve percent. per annum as the Court deems reasonable on such principal sum, from the date of the 100 decree to the date of payment or to such earlier date as the Court deems fit:

Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed twelve percent., per annum, but shall not exceed the contract rate of interest or where there is no contractual rate, the rate at which monies are lent or advanced by nationalized banks in relation to commercial transactions.

Explanation.- I In this sub section, "nationalized banks" means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

Explanation.- II A transaction is a commercial transaction, if it is connected with the industry, trade or business of the party incurring the liability.

(2) Where a judgment and decree are silent with respect to the payment of interest on such principal sum from the date of the decree to the date of payment or other earlier date, the decree holder may apply to the Court which passed the decree for an order in relation to the liability of the judgment debtor to pay interest for the said period and as to the rate at which interest is payable for the said period and the Court shall pass a reasoned order on the said application and in case interest is awarded, the Court shall amend the judgment and decree in accordance with the said order.

(3) The application referred to in sub-section (2) shall be filed within a period of 30 days of the date of judgment and decree in the suit and while computing the period for filing an appeal against the judgment and decree under the provisions of the Limitation Act, 1963, the period between the date of the 101 application referred to in sub-section (2) and the date of passing of the order thereon, shall also be excluded, irrespective whether any interest was awarded or not in such application."

The 144th Report of the Law Commission recommended in Chapter III that the court may be empowered to grant interest at a rate higher than the contractual rate, where the contractual rate is quite low, for the period during the pendency of the suit.

The Commission also noticed that section 79 of Negotiable Instruments Act, 1881 directs calculation of the contractual rate of interest until 'such date after the institution of the suit'. Some courts have held that the discretion given in section 34 will not, therefore, to apply while some other courts have held that section 79 of the Negotiable Instruments Act prevails. The Commission favored the view that the discretion under section 34 for pendente lite interest shall prevail and that section 79 of the Negotiable Instruments Act be amended by substituting the words "not later than the institution of the suit" for the words "such date after the institution of the suit" in section 79 of the Negotiable Instrument Act, 1881.

We are of the view on the first question that in the light of the proposal to increase the maximum interest up to 12% for the period during pendency of the suit, no further amendment as suggested in the 144th Report 102 is necessary. On the second question, we reiterate the same recommendation for amendment of section 79 of the Negotiable Instruments Act, 1881 as suggested in the 144th Report.