Introduction
The Supreme Court of India, in its landmark judgment dated April 1, 2025, addressed a long-standing dispute concerning the valuation of shares transferred by I.K. Merchants Pvt. Ltd. to the State of Rajasthan in 1973. The core issue revolved around the appropriate rate of interest payable on the enhanced valuation of shares, which had been delayed for over five decades. The Court’s decision balanced equitable considerations with commercial realities, setting a precedent for similar cases.
Facts of the Case
The appellants, I.K. Merchants Pvt. Ltd., had transferred their shares in Bikaner Gypsums Ltd. (later renamed Rajasthan State Mines and Minerals Ltd.) to the State of Rajasthan in 1973. Dissatisfied with the valuation, the appellants filed a suit in 1978, seeking a fair price for their shares. The Calcutta High Court, in its preliminary decree, appointed M/s. Ray & Ray as valuers, who determined the share value at Rs. 640 per share. The High Court initially awarded simple interest at 6% per annum, later corrected to 5%.
The appellants challenged the interest rate, arguing for a higher commercial rate (15% with monthly rests), while the State contended that the transaction was not commercial and justified the lower rate.
Key Issues
- Whether the transaction between the appellants and the State was a “commercial transaction” under Section 34 of the CPC, warranting a higher interest rate.
- Whether the interest rate of 5% per annum awarded by the High Court was equitable given the prolonged delay.
- The applicability of judicial precedents on interest rates in similar disputes.
Arguments Advanced
Appellants’ Submissions:
- The transaction was commercial, as it involved the sale of shares in a profit-making company.
- The State’s delay in payment deprived the appellants of the time value of money, justifying a higher interest rate (15% with monthly rests).
- Reliance on precedents like Union of India v. Tata Chemicals Ltd. (2014) and Alok Shanker Pandey v. Union of India (2007) to argue for compensatory interest.
Respondent’s Submissions:
- The transaction was not commercial but a rescue operation for a financially distressed company.
- Section 34 of the CPC caps interest at 6% unless the transaction is commercial.
- Cited Manalal Prabhudayal v. Oriental Insurance Co. Ltd. (2009) to argue against interference with the High Court’s discretionary interest rate.
Court’s Reasoning and Decision
The Supreme Court, comprising Justices R. Mahadevan and J.B. Pardiwala, held:
- Commercial Nature of Transaction: The Court acknowledged the commercial underpinnings of the share transfer but noted the State’s role in rescuing the company. It emphasized that while the transaction had commercial elements, the State’s involvement was not purely profit-driven.
- Equitable Interest Rate: Balancing the appellants’ loss of use of funds and the State’s financial burden, the Court modified the interest rate to:
- 6% per annum from July 8, 1975 (date of demand) till the decree.
- 9% per annum from the decree date till realization.
- Precedents Relied Upon:
- Clariant International Ltd. v. SEBI (2004): Interest should compensate for wrongful withholding of money.
- Thazhathe Purayil Sarabi v. Union of India (2009): Courts must grant interest to compensate for delayed payments.
- Rampur Fertiliser Ltd. v. Vigyan Chemicals (2009): Market-linked interest rates are appropriate.
The Court rejected the appellants’ claim for compound interest, citing Section 34 of the CPC, which only permits simple interest unless contractually agreed.
Conclusion
The judgment underscores the judiciary’s role in balancing equity and commercial practicality. By awarding a staggered interest rate, the Court ensured fair compensation for the appellants without imposing an undue burden on the State. This decision serves as a guiding precedent for disputes involving delayed payments in commercial transactions, particularly those involving state entities.
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