Interest is Payable on Principal Sum, Not on Interest: Supreme Court’s Precedent Applied: Allahabad High Court Quashes Consumer Forum’s Interest on Interest Award

On September 23, 2024, the Allahabad High Court, in Uttar Pradesh Avas Evam Vikas Parishad & Another v. State Consumer Disputes Redressal Commission and Others (Writ-C No. 27185 of 2022), quashed orders from the District Consumer Forum and State Consumer Disputes Redressal Commission that had directed the Uttar Pradesh Avas Evam Vikas Parishad (UPAVP) to pay interest on interest. The Court ruled that interest cannot be awarded on the interest component of a previous award, citing the Supreme Court’s decision in D. Khosla & Co. v. Union of India.

The case arose when the respondent, Bal Mukund (Respondent No. 3), was allotted a house under a UPAVP scheme in 2005. He deposited ₹452,325 after securing a loan, but the final costing for the house was delayed, preventing the execution of the sale deed and delivery of possession. Frustrated, Bal Mukund sought a refund in 2008, which UPAVP provided without deduction.

However, Bal Mukund filed a complaint seeking interest on the refunded amount, which was granted at 15% by the District Consumer Forum in 2010. UPAVP's appeal to the State Consumer Commission was dismissed in 2017, and the respondent filed an execution case, claiming further interest on the delayed interest payment. A recovery certificate was issued against UPAVP for ₹302,821 in 2020, which led UPAVP to file this writ petition.

The central issue was whether UPAVP could be ordered to pay additional interest on the interest already awarded. UPAVP argued that no law allows for such "interest on interest," invoking Section 34(2) of the Code of Civil Procedure and the Supreme Court’s ruling in D. Khosla & Co..

Respondent No. 3, Bal Mukund, argued that the interest awarded was a rightful compensation for the delay caused by UPAVP's failure to deliver the house. He cited Alok Shanker Pandey v. Union of India to argue that interest is a natural accretion on capital and is not punitive.

The Allahabad High Court sided with UPAVP, ruling that the recovery certificate issued by the District Consumer Forum was unlawful. The Court held that interest cannot be levied on the interest component of an award unless explicitly permitted by law or contract. It referenced Section 34 of the Code of Civil Procedure and the Supreme Court’s decision in D. Khosla & Co., which clearly states:

“Interest is payable on the principal sum adjudged and not on the interest part of the award.”

The Court found that the original interest award of 15% had already been paid by UPAVP, and there was no legal basis to demand further interest on this amount.

The Allahabad High Court quashed the orders of the Consumer Forum and the State Consumer Disputes Redressal Commission, ruling that the recovery of ₹302,821 as interest on interest was unlawful. The Court reaffirmed that interest is only payable on the principal sum and cannot be levied on the interest component.

Date of Decision: September 23, 2024

Uttar Pradesh Avas Evam Vikas Parishad & Another v. State Consumer Disputes Redressal Commission and Others