The Gauhati High Court has clarified that in the absence of any contractual agreement for interest, courts cannot award more than 6% per annum on refunded sums under Section 34 of the Civil Procedure Code, even where a substantial amount has been held for over seven years. This ruling reinforces the statutory ceiling on judicial interest awards in non-commercial contexts.
Background & Facts
The Dispute
The petitioners, three individuals, participated in an auction conducted by Punjab National Bank under the SARFAESI Act for the sale of a security asset. On 04.10.2016, they deposited a bid amount of Rs. 1,80,10,000 (Rupees One Crore Eighty Lakhs and Ten Thousand) as part of the auction process. Despite the deposit, the bank failed to hand over possession of the property. The petitioners demanded refund of the amount, which was not made for several years.
Key Facts
- The auction was conducted under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)
- Bid amount of Rs. 1,80,10,000 was deposited by petitioners on 04.10.2016
- The bank did not deliver the property or refund the amount for approximately seven years
- Refund was made only in mid-2023, according to petitioners’ submissions
- No written agreement existed between the parties regarding interest on the deposited amount
- The bank retained the funds and allegedly earned commercial interest by lending them to others
Procedural History
- 04.10.2016: Petitioners deposited Rs. 1,80,10,000 as bid amount
- 2018: Writ Petition (W.P.(C) No. 4423/2018) filed before Gauhati High Court seeking refund with interest
- 23.02.2022: Single Judge ordered refund of Rs. 1,80,10,000 with interest at prevailing banking rate, and 18% p.a. if delayed beyond 45 days
- 20.07.2022: Division Bench issued limited notice only on the 18% interest component
- 03.11.2022: Division Bench modified the order, restricting interest to 6% p.a. from 04.10.2016 and imposing Rs. 25,000 costs on the bank
- 26.02.2026: Review Petition (Review.Pet./14/2023) filed challenging the Division Bench’s order
- 26.03.2026: Judgment pronounced dismissing the review petition
Relief Sought
The petitioners sought restoration of the Single Judge’s order granting 18% interest on delayed refund, or alternatively, interest at prevailing banking rates from 04.10.2016, and compensation for unjust enrichment by the bank.
The Legal Issue
The central question was whether the deposit of a bid amount in a SARFAESI auction constitutes a commercial transaction attracting the higher interest rate under the second proviso to Section 34 of the Civil Procedure Code, and whether a Division Bench may alter a Single Judge’s interest award on a ground not raised in the appeal.
Arguments Presented
For the Petitioner
The petitioners’ counsel argued that the deposit of Rs. 1,80,10,000 was a commercial transaction under Section 34 CPC, as the bank held a large sum for seven years and earned commercial returns by lending it. He relied on the second proviso to Section 34 CPC, which permits interest at a rate higher than 6% in commercial transactions. He further contended that the Division Bench erred in modifying the interest rate because the appeal (W.A. No. 229/2022) was admitted only on the 18% component, not on the prevailing banking rate. The bank’s retention of funds without justification amounted to unjust enrichment.
For the Respondent
The bank’s counsel argued that no agreement existed between the parties for payment of interest. The auction process under SARFAESI Act did not create a contractual obligation to pay interest. The bank was merely holding the amount pending completion of formalities, and the Single Judge’s award of 18% was excessive. The Division Bench correctly applied Section 34 CPC, which limits interest to 6% in the absence of a contractual or commercial agreement. The order was not vitiated by any error apparent on the face of the record.
The Court's Analysis
The Court examined whether the deposit of a bid amount in a SARFAESI auction qualifies as a commercial transaction under Section 34 CPC. It noted that while the bank held a substantial sum for seven years, there was no express or implied agreement between the parties regarding interest. The Court emphasized that Section 34 CPC distinguishes between commercial and non-commercial transactions, with the second proviso permitting higher interest only where a commercial relationship exists.
"Admittedly, there is no commercial agreement or a commercial contract between the petitioners and the respondent for the entire transaction and/or specifically for payment of interest on deposit."
The Court relied on State of M.P. v. Nathabhai and Mahabir Prasad Rungta v. Durga Datta, which hold that interest under Section 34 CPC is discretionary and cannot be awarded beyond 6% absent a contractual or commercial basis. The Court further cited Bengal Nagpur Railway Co. Ltd. v. Ruttanji Ramji, where the Privy Council held that courts of equity do not award interest in the absence of an agreement.
The Court rejected the argument that the bank’s use of the funds for lending created a commercial transaction. It held that the nature of the transaction - being a deposit in a statutory auction under SARFAESI - did not transform into a commercial contract merely because the bank benefited from holding the funds.
Regarding procedural grounds, the Court held that even if the Division Bench’s notice was limited to the 18% component, the underlying legal question - whether any interest beyond 6% was legally sustainable - was necessarily before it. The Court concluded that the Division Bench’s decision to cap interest at 6% was legally sound and within its discretion.
The Court also relied on Surendra Kumar Vakil & Ors. v. Chief Executive Officer, M.P. and Sasi (Dead) through LRs. v. Aravindakshan Nair & Ors., to affirm that a review petition cannot be entertained merely because the decision is alleged to be erroneous. An error apparent on the face of the record must be shown, which was absent here.
The Verdict
The review petition was dismissed. The Court upheld the Division Bench’s order dated 03.11.2022, which restricted interest to 6% per annum from 04.10.2016 until the date of refund. The bank was directed to pay costs of Rs. 25,000, as previously ordered. No further interest, including 18% or prevailing banking rates, was awarded. The refund of Rs. 1,80,10,000 had already been made, and no further directions were issued.
What This Means For Similar Cases
Interest Cannot Be Awarded Beyond 6% Without Contractual Basis
- Practitioners must now establish a clear contractual or commercial relationship to claim interest beyond 6% under Section 34 CPC
- Deposits made under statutory auctions (e.g., SARFAESI, E-Auctions) do not automatically qualify as commercial transactions
- Banks or institutions holding funds pending completion of formalities cannot be presumed to have entered into interest-bearing arrangements
Judicial Discretion Under Section 34 CPC Is Strictly Limited
- Courts cannot infer commercial intent from the mere fact that funds were held for long periods or used for lending
- The burden lies on the claimant to prove the existence of a commercial transaction, not on the defendant to disprove it
- Review petitions challenging interest awards under Section 34 CPC will fail unless an error apparent on the face of the record is demonstrated
SARFAESI Auctions Do Not Create Implied Interest Obligations
- Parties participating in bank-led auctions under SARFAESI must assume no entitlement to interest unless explicitly provided in auction terms
- Legal notices demanding interest on bid deposits without contractual basis are unlikely to succeed
- Litigation strategy should focus on recovery of principal and delay compensation under tort or unjust enrichment, not statutory interest
