Tag Archives: interest

Interest – Meaning of

In Halsbury’s Laws of England, 4th Edition, Vol. 32, “interest” has been defined as follows:

“127. Interest in General.—Interest is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. Interest accrues from day to day even if payable only at intervals, and is, therefore, apportionable in respect of time between persons entitled in succession to the principal.”


According to Law Lexicon, by P.Ramanatha Aiyar, 3rd Edition (2005) Vol. 2:

“Interest” means the time value of the funds or money involved, which unless otherwise agreed, is calculated at the rate and on the basis customarily accepted by the banking community for the funds of money involved.”


In Words and Phrases Permanent Edition, Vol. 22, P. 148, “interest” means:

(i) “Interest” is compensation for loss of use of principal. Jersey City v. Zink, 44 A 2d 825 : 133 NJ Law 437 (1945).

(ii) “Interest” means compensation for the use or forbearance of money. Commr. of Internal Revenue v. Meyer, 139 F 2d 256 (6th Cir 1943).


Black’s Law Dictionary, 6th Edition. (p. 812) defines “interest” as:

For use of money.—Interest is the compensation allowed by law or fixed by the parties for the use or forbearance of borrowed money. Jones v. Kansas Gas and Electric Company, 222 Kan 390 : 565 P 2d 597 (1977).


There is no manner of doubt that normally a person would be entitled to interest for the period he is deprived of the use of money and the same is used by the person with whom the money is lying. State of Karnataka v. Karnataka Pawn Brokers Association, (2018) 6 SCC 363.



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Delay in Payment of Retirement Dues – Penal Interest

Interest on delayed payment on retiral dues has been upheld time and again in a catena of decisions. In Shamal Chand Tiwari v. State of U.P.¸(W.P. No. 34804 of 2004) decided on 06.12.2005 it was held: “Now the question comes about entitlement of the petitioner for interest on delayed payment of retiral benefits. Since the date of retirement is known to the respondents well in advance, there is no reason for them not to make arrangement for payment of retiral benefits to the petitioner well in advance so that as soon as the employee retires, his retiral benefits are paid on the date of retirement or within reasonable time thereafter. Inaction and inordinate delay in payment of retiral benefits is nothing but culpable delay warranting liability of interest on such dues. In the case of State of Kerala v. M. Padnaban Nair, 1985 (1) SLR 750, the Hon’ble Supreme Court held as under:
“Since the date of retirement of every Government Servant is very much known in advance we fail to appreciate why the process collecting the requisite information and issuance of these two documents should not be completed at least a week before the date of retirement so that the payment of gratuity amount could be made to the Government Servant on the date he retires or on the following day and pension at the expiry of the following months. The necessity for prompt payment of the retirement dues to a Government Servant immediately after his retirement cannot be overemphasized and it would not be unreasonable to direct that the liability to pay penal interest on these dues at the current market rate should commence at the expiry of two months from the date of retirement.” Dr. Chandrakant Sharma v. Vice Chancellor, 2017 (1) ESC 128.

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Arbitral Tribunal – Award of Interest

Section 31(7) of the Arbitration and Conciliation Act, by using the words “unless otherwise agreed by the parties”, categorically specifies that the arbitrator is bound by the terms of the contract so far as award of interest from the date of cause of action to date of the award is concerned. Therefore, where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest.
In Union of India v. Saraswat Trading Agency, (2009) 16 SCC 504, the Hon’ble Apex Court has observed in the said case that if there is a bar against payment of interest in the contract, the arbitrator cannot award any interest for such period. Union of India v. Bright Power Projects (I) Pvt. Ltd., 2015 (4) AWC 3862.

The grant of award of interest on arbitrable claims by the Arbitral Tribunal is not inherently illegal or against any public policy or per se bad in law or beyond the powers of the Arbitral Tribunal. In other words, it is permissible to award interest in arbitrable claims by the Arbitral Tribunal.

Indeed, Sections 31(7)(a) and (b) of the Act empower the Arbitral Tribunal to award interest on the awarded sum and secondly, it is always subject to the agreement between the parties.

It is a well settled principle in Arbitration Law that the award of an Arbitral Tribunal once passed is binding on the parties. The reason being that the parties having chosen their own arbitrator and given him authority to decide the specific disputes arising between them must respect his decision as far as possible and should not make any attempt to find fault in each issue decided by him only because it is decided against one party. It is only when the issue decided is found to be bad in law in the light of any of the specified grounds set out in Section 34 of the Act, the Court may consider it appropriate to interfere in the award else not. Union of India v. Susaka Pvt. Ltd., (2018) 2 SCC 182.


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Interest – Concept of

In the case of Hello Mineral Water (P) Ltd. v. Union of India, 2004 (174) ELT 422, a Division Bench of the court explained the concept of interest as under:
“Interest is normal accretion on capital.
If on facts of a case, the doctrine of restitution is attracted, interest is often the normal relief. Restitution in its etymological sense means restoring to a party on the modification, variation or reversal of a decree or order what has been lost to him in execution of decree or order of the court or in direct consequence of a decree or order. The term “restitution” is used in three senses, firstly, return or restoration of some specific thing to its rightful owner or status, secondly, the compensation for benefits derived from wrong done to another and, thirdly, compensation for the loss caused to another. Reference in this regard may be had to the Judgment of the Hon’ble Supreme Court in the case of South Eastern Coal Fields Ltd. v. State of M.P., (2003) 8 SCC 648.
In Hari Chand v. State of U.P., 2012 (1) AWC 316, the Court dealing with a stamp matter held that the payment of interest is a necessary corollary to the retention of the money to be returned under order of the appellate or revisional authority.
Thus, the concept of interest is that when a person is deprived of the use of his money, to which, he is legitimately entitled, he has a right to be compensated for the deprivation, which may be called interest or compensation. Interest is paid for the deprivation of the use of money in general terms, which is return or compensation for the use or retention by a person of a sum of money belonging to another. It is a consideration paid either for the use of money or for forbearance of the money. In this sense, it is a compensation allowed by law or fixed by parties, or permitted by custom or usage for use of money belonging to another or for the delay in paying money after it has become payable. Delayed payment normally attracts interest. Ansal Housing and Construction Ltd. v. State of U.P., 2015 (108) ALR 22.

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Interest and Compensation

The essence of interest in the opinion of Lord Wright, in Riches v. Westminitser Bank Ltd., 1947 AC 390 : (1947) 1 All ER 469 is that:
“….it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or, conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation;
The money due to the creditor was not paid, or, in other words,
‘was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute’.
A Division Bench of the High Court of Punjab in CIT v. Sham Lal Narula, AIR 1963 P&H 411 held as under :
“The words “interest” and “compensation” are sometimes used interchangeably and on other occasions they have distinct connotation. “Interest” in general terms is the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. In its narrow sense, “interest” is understood to mean the amount which one has contracted to pay for use of borrowed money………..
In whatever category “interest” in a particular case may be put, it is a consideration paid either for the use of money or for forbearance in demanding it, after it has fallen due, and thus, it is a charge for the use or forbearance of money. In this sense, it is a compensation allowed by law or fixed by parties, or permitted by custom or usage, for use of money, belonging to another, or for the delay in paying money after it has become payable.’ Tamil Nadu Generation and Distribution Corporation Ltd. V. PPN Power Generating Company Private Ltd. (2014) 11 SCC 53

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Possession – Does not give any right or interest in the property

In Sham Lal v. Rajinder Kumar, (1994) 30 DRJ 596, on the question of possession, the Court in Para 13, held as below:

“Possession is flexible term and is not necessarily restricted to mere actual possession of the property. The legal conception of possession may be in various forms. The two elements of possession are the corpus and the animus. A person though in physical possession may not be in possession in the eye of the law, if the animus be lacking. On the contrary, to be in possession, it is not necessary that one must be in actual physical contact. To gain the complete idea of possession, one must consider:

(1)    The person possessing,

(2)    The things possessed and,

(3)    The persons excluded from possession.

A man may hold an object without claiming any interest therein for himself. A servant though holding an object, holds it for his master. He has, therefore, merely custody of the thing and not the possession which would always be with the master though the master may not be in actual contact of the thing. It is in this light in which the concept of possession has to be understood in the context of a servant and a master.”

The ratio of this judgment is that merely because the plaintiff was employed as a servant or chowkidar to look after the property, it cannot be said that he had entered into such possession of the property as would entitle him to exclude even the master from enjoying or claiming possession of the property or as would entitle him to compel the master from staying away from his own property.

Principles of law which emerge in this case are crystallized as under:

(1)    No one acquires title to the property if he or she was allowed to stay in the premises gratuitously. Even by long possession of years or decades such person would not acquire any right or interest in the said property.

(2)    Caretaker, watchman or servant can never acquire interest in the property irrespective of his long possession. The caretaker or servant has to give possession forthwith on demand.

(3)    The courts are not justified in protecting the possession of a caretaker, servant or any person who was allowed to live in the premises for some time either as a friend, relative, caretaker or as a servant.

(4)    The protection of the court can only be granted or extended to the person who has valid, subsisting rent agreement, lease agreement or licence agreement in his favour.

(5)    The caretaker or agent holds property of the principal only on behalf of the principal. He acquire no right or interest whatsoever for himself in such property irrespective of his long stay or possession. Maria Margarida Sequeira Fernandes and others v. Erasmo Jack De Sequeira (dead) through Lrs. (2012) 5 SCC 370.

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