Supreme Court enhances interest rate in share valuation dispute: I.K. Merchants vs. State of Rajasthan (2025)

Introduction

Date of the Judgment: April 01, 2025

Citation: 2025 INSC 418

Judges: J.B. Pardiwala, J., R. Mahadevan, J.

When is a commercial transaction not really commercial? The Supreme Court of India recently grappled with this question in a dispute over the valuation of shares that had dragged on for five decades. The court was tasked with determining a fair interest rate to compensate I.K. Merchants Pvt. Ltd. for the delayed payment of shares sold to the State of Rajasthan back in 1973. The bench, comprising Justices J.B. Pardiwala and R. Mahadevan, modified the High Court’s decision, enhancing the interest rate to ensure a more equitable outcome.

Case Background

The dispute originated from a suit filed by I.K. Merchants Pvt. Ltd. in the High Court of Calcutta in 1978, seeking ₹4,34,21,553.00 from the State of Rajasthan. Alternatively, the appellants sought a fair price for their shares in Rajasthan State Mines and Mineral Ltd. (formerly Bikaner Gypsums Ltd.), which they had sold to the State of Rajasthan in 1973. The appellants also requested interest and costs.

On August 14, 2012, a single judge of the High Court rejected the valuation reports submitted by both parties and issued a preliminary decree. This decree directed the State of Rajasthan to appoint a chartered accountancy firm (Price Water House, Ray & Ray, or Lodha and Company) to determine the fair value of the shares at the time of their transfer. The remuneration of the valuer was to be borne entirely by the State of Rajasthan.

Timeline:

Course of Proceedings

Aggrieved by the preliminary decree, the respondents appealed to the High Court in A.P.D.No.63 of 2013, where the appellants filed a cross-objection. During the appeal’s pendency, the High Court, on August 20, 2019, appointed M/s. Ray & Ray Co. as the valuer to determine the shares’ proper value when transferred to the State Government. The valuer assessed the shares at ₹640/- per share.

The respondents rejected this valuation, leading the High Court to hear the matter on merits. On April 28, 2021, the High Court declared that the respondents/plaintiffs were entitled to ₹640/- per share, with 5% simple interest per annum from July 8, 1975, until the payment date.

Both Respondent Nos. 1 & 2 filed separate appeals (CA.Nos. 6145 and 6144 of 2021), and the appellants filed C.A.No.6146 of 2021. On October 1, 2021, the Supreme Court set aside the High Court’s order and remanded the matter to address objections and cross-objections on the valuation based on M/s. Ray & Ray’s report. The Supreme Court clarified on November 26, 2021, that the appellants could contest the issue of interest and costs.

Following these orders, the High Court reheard the matter and, on April 26, 2022, upheld the valuer’s opinion, reaffirming the valuation. The High Court granted 6% simple interest per annum on the enhanced valuation but rejected the request for enhanced interest rates, costs, and damages. Subsequently, the interest rate was corrected to 5% per annum on May 2, 2022.

Legal Framework

The judgment primarily revolves around the interpretation and application of Section 34 of the Code of Civil Procedure, which governs the awarding of interest in money decrees. The provision states:

“34. Interest. —(1) Where and insofar 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.”

Section 34(1) of the Civil Procedure Code allows the court to order interest on the principal amount from the date of the suit to the date of the decree, in addition to any interest awarded for the period before the suit. It also allows for further interest at a rate not exceeding 6% per annum from the date of the decree to the date of payment. However, the proviso states that if the liability arises from a commercial transaction, the interest rate may exceed 6% per annum but cannot exceed the contractual rate or the rate at which nationalized banks lend for commercial transactions.

Explanation I to section 34(1) defines a “commercial transaction” as one connected with industry, trade, or business of the party incurring the liability.

Arguments

Arguments by the Appellants (I.K. Merchants Pvt. Ltd.)

• Right to Interest: The appellants argued that they have a legal right to interest due to the delay in receiving the fair value of their shares. They contended that interest is compensation for the time value of money, as they were unable to invest the sum when it was due.

  Example: If the money had been invested in 1973, it would have grown significantly over the years.

• Reliance on Precedents: The appellants cited several Supreme Court decisions to support their claim for interest:

  • Union of India v. Tata Chemicals Ltd: The obligation to refund money carries with it the right to interest.
  • Fertilizer Corporation of India Ltd and others v. Coromandal Sacks Private Ltd: Interest is the normal accretion on capital, compensating for the willful withholding of payment.
  • Bernard Francis Joseph Vaz and others v. Government of Karnataka and others: Delay in disbursal of compensation diminishes the value of money over time.

• Deprivation of Fair Value: The appellants asserted that they were deprived of the fair value of their shares for over 50 years due to faulty valuation by the State Government.

• Commercial Transaction: The appellants argued that the transaction was commercial, as it involved the compulsory acquisition of shares in a profit-making company (Bikaner Gypsums, later Rajasthan State Mines and Minerals Ltd.). They cited Section 34(1) of the Civil Procedure Code, which allows for a higher interest rate in commercial transactions.

• Breach of Assurance: The appellants claimed that the State Government had assured them of a representation before the valuer but later rescinded this assurance. They also alleged that the valuation report was not provided to them, and their objections were not invited.

• Loss of Investment Opportunities: The appellants contended that had they invested the money in 1973, it would have enhanced manifold in shares, gold, fixed deposits, or land.

• Reference to Alok Shanker Pandey v. Union of India: The appellants submitted that during the relevant period, the interest rate was 15%, and they should be entitled to at least that rate.

Arguments by the Respondents (State of Rajasthan & Rajasthan State Mines and Minerals Ltd.)

• Nature of the Amount: The respondents argued that the amount was neither a debt nor damages, which typically entail interest. They claimed that the company (Rajasthan State Mines and Minerals Ltd.) was mismanaged and eventually merged with the State Government.

• Initial Claim: The respondents pointed out that the appellants initially claimed only ₹70.50 per share in 1978 and sought an amendment to enhance the valuation 23 years later. They argued that the exorbitant interest sought in 2001 should not be computed from 1973.

• No Prejudice: The respondents argued that the appellants, who did not subscribe at ₹10/- per share for fresh capital infusion, have now received a valuation of ₹640/- per share, thus not being prejudiced.

• Not Compulsory Acquisition: The respondents denied that the shares were compulsorily acquired. They stated that the State intervened to infuse capital due to the company’s mismanagement.

• Not a Commercial Transaction: The respondents argued that the State was not engaged in any industry, trade, or business for profit and lacked a profit motive. The investment was to keep the loss-making company afloat, and therefore, it should not be termed a ‘Commercial transaction’.

• Reliance on Manalal Prabhudayal v. Oriental Insurance Co. Ltd.: The respondents submitted that appellate courts should not interfere with the discretion exercised by lower courts to award interest unless it is arbitrary and capricious.

• High Court’s Order: The respondents contended that the High Court reaffirmed the judgment and decree dated April 28, 2021, without any modification, and it does not have any legal sanctity. They argued that the High Court has not passed any specific order regarding interest from the date of the suit’s institution until the date of the decree.

• Financial Difficulties: The respondents submitted that the transfer of shares to the State in 1973 was due to the company’s financial difficulties and the shareholders’ lack of faith in the company.

• No Contract for Interest: The respondents argued that there was no contract for the payment of interest between the parties, and Section 34 of the Civil Procedure Code does not provide for any compound interest.

• Already Received Price: The respondents stated that the appellants have already received ₹11.50 per equity share and are only entitled to the difference in amount as upheld by the Court.

Issues Framed by the Supreme Court

1. What is the appropriate rate of interest on the enhanced valuation of shares, considering the prolonged delay in payment and the nature of the transaction?

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

Case Laws Relied Upon by the Court:

• Central Inland Water Transport Corporation Limited and another v. Brojo Nath Ganguly and another [(1986) 3 SCC 156]: The Court referred to this case to discuss the concept of unconscionable contracts and the power of courts to strike down unfair agreements, especially where there is inequality of bargaining power.
• Clariant International Limited and another v. Securities & Exchange Board of India [2004 (8) SCC 524]: This case was cited to emphasize that interest can be awarded based on agreements, statutory provisions, usage, or equitable considerations.
• Alok Shanker Pandey v. Union of India [(2007) 3 SCC 545]: The Court referred to this case to highlight that the grant of interest depends on the facts and circumstances of each case, and the Court has the discretion to determine the appropriate interest rate.
• Thazhathe Thazhathe Purayil Sarabi v. Union of India [(2009) 7 SCC 372]: This case was cited to support the view that courts are entitled to grant interest when there is no specific provision, and it is essential to grant interest for the period during which the money was due but could not be utilized.
• Rampur Fertiliser Limited v. Vigyan Chemicals Industries [(2009) 12 SCC 324]: The Court relied on this case to reiterate that in the absence of an agreement or statutory provision, interest can be awarded at the market rate, considering inflation and the fall in bank rates.
• M/s. Tomorrowland Limited v. Housing and Urban Development Corporation Limited and another [2025 LiveLaw (SC) 20]: This recent case was cited to emphasize that the award of interest is a discretionary exercise steeped in equitable considerations and that interest serves to compensate for the time value of money.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Central Inland Water Transport Corporation Limited and another v. Brojo Nath Ganguly and another [(1986) 3 SCC 156]: The Court used this authority to highlight the principle that courts can strike down unfair agreements, especially where there is inequality of bargaining power.
• Clariant International Limited and another v. Securities & Exchange Board of India [2004 (8) SCC 524]: The Court cited this authority to emphasize that interest can be awarded based on agreements, statutory provisions, usage, or equitable considerations.
• Alok Shanker Pandey v. Union of India [(2007) 3 SCC 545]: The Court referred to this authority to highlight that the grant of interest depends on the facts and circumstances of each case, and the Court has the discretion to determine the appropriate interest rate.
• Thazhathe Thazhathe Purayil Sarabi v. Union of India [(2009) 7 SCC 372]: The Court cited this authority to support the view that courts are entitled to grant interest when there is no specific provision, and it is essential to grant interest for the period during which the money was due but could not be utilized.
• Rampur Fertiliser Limited v. Vigyan Chemicals Industries [(2009) 12 SCC 324]: The Court relied on this authority to reiterate that in the absence of an agreement or statutory provision, interest can be awarded at the market rate, considering inflation and the fall in bank rates.
• M/s. Tomorrowland Limited v. Housing and Urban Development Corporation Limited and another [2025 LiveLaw (SC) 20]: The Court cited this recent case to emphasize that the award of interest is a discretionary exercise steeped in equitable considerations and that interest serves to compensate for the time value of money.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance equitable compensation for the appellants with the financial burden on the State Government. The prolonged delay in resolving the share valuation dispute, the commercial nature of the transaction, and the absence of a specific agreement on interest rates were key factors that weighed in the Court’s decision-making process.

Fact:Law

The court’s decision was more influenced by the factual aspects of the case, such as the prolonged delay and the nature of the transaction, than purely legal considerations.

Logical Reasoning

The Court’s logical reasoning can be summarized as follows:

Prolonged Delay in Payment of Share Value → Need for Compensation → Consideration of Commercial Nature of Transaction → Balancing Equity and Financial Burden → Award of 6% Interest from 1975-Decree and 9% Interest from Decree-Realization

The Court considered alternative interpretations, such as awarding interest at a higher rate or rejecting interest altogether. However, it rejected these alternatives in favor of a balanced approach that acknowledged both the appellants’ right to compensation and the State Government’s financial constraints.

The Court’s decision was based on the principle that while the discretion to award interest is well-recognized, its exercise must be guided by equitable considerations. The rate and period of interest cannot be applied mechanically or at an unreasonably high rate without any rationale.

“Considering the prolonged pendency of the dispute regarding the valuation of shares, which has only been determined recently, and the substantial share amount involved, and also keeping in mind that this is a commercial transaction, and the entire burden of interest along with principal value falls upon the Government, it is necessary in the present case to award reasonable interest, in order to strike a balance between the parties.”

The Court’s decision was unanimous, with both Justices J.B. Pardiwala and R. Mahadevan agreeing on the final outcome.

The Court’s decision introduces a balanced approach to awarding interest in cases involving prolonged delays and commercial transactions, emphasizing the need to consider both fairness and financial impact.

Key Takeaways

• Equitable Compensation: Parties are entitled to fair compensation for delayed payments, especially in commercial transactions.
• Balanced Approach: Courts must balance the need for equitable compensation with the financial burden on the judgment debtor.
• Reasonable Interest Rates: Interest rates should be reasonable and not punitive, considering the specific facts of each case.

Directions

The Supreme Court directed that the interest shall be paid along with the amount due towards the enhanced value of the shares, after adjusting the amount already paid, to the appellants within a period of two months from April 01, 2025.

Development of Law

The ratio decidendi of the case is that in disputes involving prolonged delays in commercial transactions, courts must strike a balance between equitable compensation for the claimant and the financial burden on the judgment debtor when determining the appropriate interest rate. This decision clarifies the application of Section 34 of the Civil Procedure Code and emphasizes the need for a case-by-case analysis to ensure fairness and economic prudence.

Conclusion

The Supreme Court’s judgment in I.K. Merchants Pvt. Ltd. v. State of Rajasthan modifies the High Court’s order, enhancing the interest rate to ensure a more equitable outcome for the appellants. The decision underscores the importance of balancing equitable compensation with financial realities and provides clarity on awarding interest in cases involving prolonged delays and commercial transactions.