Interest

Sec 34 of CPC 1908

(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, 2[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:

1[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 nationalised banks in relation to commercial transactions.

Explanation I.-In this sub-section, “nationalised bank” means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 (5 of 1970).

Explanation II.-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 3[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 therefore shall not lie.

Interest is not awarded as damages. Interest can be awarded either under the statute or under an agreement between the parties or as per the usage and custom and if the claim of interest does not fall in any of these categories , the plaintiff shall not be entitled to recover it from the defendant.

This section applies only where the decree is for the payment of money.

This section does not apply where the decree is for the enforcement of a mortgage or charge. Mortgages suits are governed exclusively by Order XXXIV rule 11.

This section applies only where the decree is for the payment of money.

A reading of section 34 shows that the Court while decreeing the suit will adjudge (i) the principal sum and (ii) any interest on such principal sum prior to the date of the institution of the suit. Both amounts adjudged by the Court by way of “principal sum” as well as “interest” thereon for the period prior to the institution of the suit together may be termed as “aggregate amount adjudged” as payable on the date of the suit.

Interest under section 34 is not payable on such aggregate amount. It is made payable only on the principal sum adjudged. No interest under section 34 is payable on the amount of interest adjudged on such principal sum. Interest whether simple or compound will remain “interest” for the purpose of section 34 and shall never merge in the principal. The Legislature while using the expression “in addition to any interest adjudged on such principal for any period prior to the institution of the suit” in section 34 in contradistinction to the expression “principal sum” has not made any distinction between the interest computed by way of simple interest or compound interest. Interest under section 34, therefore, can be allowed only on the principal sum and not on the principal sum plus interest accrued thereon till the filing of the suit.”

In A.I.R. 1934 Bombay 86, in the case of Kaluram Bholaram v. Chimniram Motilal, it was observed that the Court has jurisdiction to give compound interest under section 34 C.P.C.

It is common knowledge that provision is made for the payment of compound interest in contracts for loans advanced by banks and financial institutions and the said contracts are enforced by courts. Hence, it cannot be said that award of interest on interest i.e. compound interest is; against the public policy of India. “

Shriniwas Raghvendra Javalgekar vs The Bank Of Maharashtra And Anr. on 25 April, 1994