Interest on Delayed Payments in Indian Law

The Legal Framework for Interest on Delayed Payments in India: A Scholarly Analysis

Introduction

The principle of awarding interest on delayed payments is a cornerstone of commercial and legal justice, designed to compensate a party for the time value of money and the loss of use of funds legitimately due. In India, the law governing interest on delayed payments is multifaceted, drawing from contractual stipulations, specific statutory enactments, equitable principles, and judicial pronouncements. This article undertakes a scholarly analysis of the legal framework surrounding interest on delayed payments in India, examining its conceptual underpinnings, statutory regimes, application in adjudicatory proceedings, and key interpretative challenges. The analysis draws significantly upon a range of judicial decisions from the Supreme Court and various High Courts, reflecting the evolving jurisprudence in this domain.

General Principles Governing Interest on Delayed Payments

Nature and Purpose of Interest

Interest is fundamentally viewed as a compensatory mechanism rather than a penalty. The Supreme Court, in *Dr. Poornima Advani v. Government of NCT*, elucidated that interest is "the normal accretion on capital."[9] When a person is deprived of the use of money to which they are legitimately entitled, they have a right to be compensated for this deprivation. This compensation, termed interest, addresses the profit the debtor might have made or the loss the creditor suffered due to the non-availability of funds.[9] This principle underscores that equity demands the payment of not only the principal amount but also the interest accrued thereon.[9] The Calcutta High Court in *P C Chandra & Company Private Limited v. Bharat Chemicals & Paints* reiterated this, citing Lord Wright, that interest is due because "the creditor has not had his money at the due date."[15]

Contractual Stipulations for Interest

Parties to a contract are generally free to stipulate terms for the payment of interest on delayed payments. Such contractual provisions are typically enforceable. For instance, in *Oriental Structural Engineers Pvt. Ltd. (S) v. State Of Kerala (S)*, the entitlement of the contractor to interest on delayed interim payments was explicitly provided for in sub-clause 60.8 of the agreement.[12] The existence of such a clause provides a clear basis for claiming interest at the agreed rate and terms.

Equitable Considerations

In the absence of a specific contractual or statutory provision, courts may award interest on equitable grounds. The Calcutta High Court in *Imran Enterprise & Anr v. State Of West Bengal & Ors* observed that interest is payable in equity even without an agreement or custom, especially when payment is intentionally delayed by authorities.[16] This equitable jurisdiction is invoked based on the circumstances justifying such an award.[16]

Statutory Regimes for Interest

Several statutes in India specifically address the issue of interest on delayed payments, creating specific rights and obligations.

The Interest Act, 1978

The Interest Act, 1978, empowers courts to allow interest in certain cases. However, its scope and interplay with special statutes are pertinent. The Gauhati High Court in *Assam State Electricity Board And Ors. v. Shanti Conductors Pvt. Ltd. And Anr.* noted that the Interest Act, 1978, itself does not create a right to file a suit solely for interest, but it allows for the award of interest in suits for recovery of debt or damages.[17] The court also observed the overriding effect of specialized legislation like the 1993 Act concerning small-scale industries.[17]

The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (IDP Act, 1993) and The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006)

These enactments were specifically designed to protect the interests of small-scale industries by ensuring timely payments and providing for interest on delays.

  • Prospective Application: The Supreme Court in *Shanti Conductors (P) Ltd. And Another (S) v. Assam State Electricity Board And Others (S)* (2019 SCC ONLINE SC 68)[7] and the Bombay High Court in *Snehadeep Structures Pvt. Ltd. v. Maharashtra Small Scale Industries Development Corporation Limited*[14] affirmed that the IDP Act, 1993, is non-retroactive. It applies only to transactions where the supply of goods or services occurs after its enforcement date (September 23, 1992).[7], [21] The date of the contract is immaterial if the supply occurred post-enforcement.[7] This principle of prospective application for statutes imposing new burdens was also noted in *State Of Chhattisgarh v. Pvr Ltd.*[24]
  • Rate of Interest: The Delhi High Court in *Kanhai Engineering (Towers) Pvt. Ltd. v. Telecommunications Consultants India Ltd.* discussed the rate of interest under the IDP Act, 1993, suggesting it could be based on floating bank lending rates plus a statutory margin.[19]
  • Suit for Mere Interest: The Gauhati High Court held that a suit for recovery of mere interest under the IDP Act, 1993, is maintainable.[17]
  • Scope of Industry Facilitation Council (IFC): In *Modern Industries v. Steel Authority Of India Limited*, the Supreme Court examined the meaning of "amount due from a buyer, together with the amount of interest" under Section 6(1) of the IDP Act, 1993, and the scope of the IFC's jurisdiction.[20]
  • Interaction with Arbitration Act: The MSMED Act, 2006, which repealed and replaced the IDP Act, 1993 (vide Section 32), is considered a special act. Issues regarding its precedence over arbitration agreements and the mandatory pre-deposit under Section 19 for challenging an award were discussed in *Ge T&D India Limited Petitioner v. Reliable Engineering Projects And Marketing*.[22]
  • Beneficial Legislation and Compound Interest: The IDP Act, 1993, and MSMED Act, 2006, are beneficial legislations. The Delhi High Court in *Union Of India v. Delhi Paper Products Co. Pvt. Ltd. Another* upheld an arbitral award granting compound interest under these Acts.[26]
  • Liability for Winding Up: The Rajasthan High Court in *M/S New Swan Autocomp Pvt Ltd v. M/S Incopac Parts Pvt Ltd* observed that liability to pay interest under Sections 4 and 5 of the IDP Act, 1993, even if the exact amount is disputed, can form the basis for a winding-up petition.[25]

Income Tax Act, 1961

Provisions for interest on delayed tax refunds are a significant aspect of tax law.

Sales Tax and Other Tax Legislations

State and Central tax laws often contain provisions for interest on delayed payment of taxes.

Interest in Adjudicatory Proceedings

Arbitral Awards

  • Pendente Lite Interest: The Supreme Court in *Secretary, Irrigation Department, Government Of Orissa And Others v. G.C Roy* established that arbitrators have the authority to award pendente lite interest (interest during the pendency of arbitration proceedings) unless explicitly restricted by the arbitration agreement.[4] This power is considered an implied term of the arbitration agreement.[4]
  • Compound Interest: The power of arbitrators to award compound interest under the Arbitration and Conciliation Act, 1996, was clarified in *Hyder Consulting (Uk) Limited v. Governor, State Of Orissa Through Chief Engineer*.[6] The Court, upholding *State Of Haryana v. S.L Arora and Co.*, held that post-award interest under Section 31(7)(b) of the 1996 Act applies to the principal sum awarded, not to any interest component, thus generally disallowing compound interest unless specifically authorized by the award or contract.[6] However, as noted earlier, courts have upheld arbitral awards granting compound interest under specific beneficial legislations like the IDP Act/MSMED Act.[26]
  • Rejection of Interest Claim: An arbitrator may reject a claim for interest if, for instance, there is no contractual provision and the claimant is responsible for delays, as indicated in *Jupiter Rubber Pvt. Ltd. v. Union Of India*.[23]

Court Decrees

Courts routinely award interest on decreed amounts. For example, in *Amar Chand v. Pepsu Road Transport Corporation Patiala And Ors*, the Punjab & Haryana High Court emphasized the employer's legal obligation to pay interest on delayed retiral benefits, especially when the delay is attributable to the employer.[13] Similarly, in *State Of Haryana v. B.L Gulati And Another*, the Supreme Court directed payment of interest on arrears from a specific date.[11]

Distinguishing Interest from Other Monetary Claims

Interest v. Penalties

While interest is compensatory, penalties are punitive. The Supreme Court in *Construction And Design Services v. Delhi Development Authority* dealt with liquidated damages under Section 74 of the Indian Contract Act, 1872.[2] While this case focused on liquidated damages versus penalties for breach of contract (delay in project completion), the underlying delay often has a time-value-of-money component that interest aims to cover. The distinction is crucial as genuine pre-estimates of loss (liquidated damages) are enforceable, whereas penalties are not.[2]

Interest as Part of Sale Consideration

As seen in *CIT v. Pratham Developers*, interest on delayed payments from a purchaser can, in certain contexts, be treated as an enhanced part of the sale price rather than purely as interest income, particularly for determining profits derived from an industrial undertaking for tax deduction purposes.[8]

Key Judicial Interpretations and Contentions

Prospective v. Retrospective Application of Statutes

A recurring theme in litigation concerning interest is whether statutes imposing liability for interest apply retrospectively. The consistent judicial view, as affirmed in *Shanti Conductors*[7] regarding the IDP Act, 1993, and discussed generally in *State Of Chhattisgarh v. Pvr Ltd.*[24], is that statutes imposing new financial burdens or obligations are presumed to be prospective unless the legislature clearly indicates otherwise.

The "Interest on Interest" Debate

The question of whether "interest on interest" (compound interest or compensatory interest on statutory interest) is permissible has seen divergent judicial views, particularly in tax law. While *Sandvik Asia Ltd.*[1] opened the door for such claims as compensation, *Gujarat Fluoro Chemicals*[3] expressed reservations, limiting claims to statutorily provided interest. In arbitration, *Hyder Consulting*[6] generally disallows compound interest under the 1996 Act unless specified, though special acts like MSMED may permit it.[26]

Interpretation of "Sum Due" for Interest Calculation

The base amount on which interest is to be calculated is critical. *Modern Industries*[20] dealt with the "amount due" under the IDP Act, 1993. In the context of arbitral awards, *Hyder Consulting*[6] clarified that post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, is on the "sum" awarded, which typically means the principal sum unless interest has been explicitly made part of the principal by the tribunal for the pre-award period.

Conclusion

The legal framework governing interest on delayed payments in India is complex and dynamic, shaped by a blend of contractual autonomy, specific legislative interventions aimed at protecting vulnerable parties (like small-scale industries) or ensuring state revenue (tax laws), and overarching principles of equity and justice. The judiciary plays a crucial role in interpreting these provisions, balancing the rights of creditors to be compensated for delays against the obligations of debtors. Key areas of ongoing development include the precise scope of "interest on interest," the interplay between general and special statutes, and the application of these principles in diverse contexts such as tax refunds, commercial contracts, and arbitral awards. A clear understanding of this framework is essential for legal practitioners, businesses, and adjudicatory bodies to ensure fair and predictable outcomes in disputes involving delayed payments.

References