Interest on Mesne Profits Cannot Exceed 6% Where Liability is Non-Commercial: Bombay High Court

Bombay High Court Settles Dispute Over Quantum of Mesne Profits and Interest in a 20-Year Property Case On September 10, 2024, the Bombay High Court, presided over by Justice Sandeep V. Marne, delivered a significant judgment in the ongoing dispute between M/s. Forbes Gokak Ltd. (landlord) and Bharat Petroleum Corporation Limited (BPCL) (tenant) regarding mesne profits and interest payments for the occupation of a high-value residential property in Mumbai. The case had dragged on for over two decades, with the parties in conflict over the appropriate compensation BPCL owed for overstaying after the expiration of its tenancy.

The case began when Forbes Gokak Ltd., the owner of a prime residential property in Cumballa Hill, Mumbai, filed a suit in 2003 (TE & R Suit No. 24/24 of 2003) against BPCL for recovery of possession of its ground-floor flat located at Lyndewode House, Bomanji Petit Road. The property, leased to BPCL, had been used as a guest house for the company’s top executives. BPCL refused to vacate the premises, forcing Forbes Gokak to take legal action.

In October 2010, the Small Causes Court ruled in favor of Forbes Gokak, ordering BPCL to vacate the premises. However, BPCL appealed the decision, seeking a stay on the order. The Appellate Bench of the Small Causes Court granted a stay but directed BPCL to pay interim compensation of Rs. 4,70,496 per month from October 2010 onward until the property was vacated. Despite the appeal, BPCL eventually handed over possession of the premises in December 2013, but the dispute over mesne profits continued.

Following BPCL's vacating of the property, the landlord initiated a separate inquiry for mesne profits, claiming substantial compensation based on the value of similar high-end properties in the area. Forbes Gokak presented valuation reports from its surveyors, M/s. Poonager Bilimoria & Company, estimating mesne profits at rates ranging from Rs. 3,95,000 per month in 2001 to Rs. 9,05,000 per month in 2013, with 18% interest. BPCL, on the other hand, argued that the rates proposed by the landlord were excessive and beyond the market norms for similar properties during the relevant period.

In 2022, the Small Causes Court issued its judgment, fixing the total mesne profits at Rs. 4,90,50,000 for the period between August 1, 2001, and December 31, 2013, calculated based on a monthly profit starting at Rs. 2,50,000 in 2001, increasing incrementally to Rs. 4,50,000 by 2013. The court also awarded 9% simple interest on the mesne profits, bringing the total payable amount to Rs. 10,90,10,640.

Both parties were dissatisfied with this ruling—BPCL sought a reduction in both the mesne profits and interest rate, while Forbes Gokak Ltd. sought an enhancement of both.

BPCL, represented by Senior Advocate Mr. G.S. Godbole, argued that the mesne profits were grossly inflated, citing market valuations that indicated significantly lower rental returns for similar properties during the period in question. BPCL also contended that the 9% interest rate was unwarranted, as the transaction was not commercial in nature and, therefore, should attract interest at the statutory rate of 6% under Section 34 of the Code of Civil Procedure. BPCL’s counsel pointed out that the company’s business activities related to petroleum products and not the renting of properties, and thus the transaction did not meet the definition of a commercial one.

Additionally, BPCL raised concerns about the methodology of interest computation, arguing that the interim compensation payments it had made during its occupation should be deducted from the interest calculations.

Forbes Gokak Ltd., represented by Senior Advocate Mr. Pankaj Sawant, contended that the mesne profits were set too low. The landlord's valuation expert, Mr. S.P. Rao, had submitted extensive evidence showing that properties in the same building were rented for significantly higher amounts during the same period. Forbes Gokak argued that the Small Causes Court had not given adequate weight to the high demand for properties in the elite Cumballa Hill area, which should have justified a much higher mesne profit, as high as Rs. 9,05,000 per month by the end of 2013.

Regarding the interest, Forbes Gokak insisted that BPCL, as a Navaratna Public Sector Undertaking (PSU), was using the property for commercial purposes—operating it as a guest house for high-ranking officials and foreign dignitaries—and should therefore be liable to pay 18% interest, which is typically applicable in commercial transactions.

Mesne Profits: The court upheld the Small Causes Court’s calculation of mesne profits, stating that it was reasonable and fair given the available evidence. The court rejected BPCL's claim that the mesne profits were excessive, emphasizing that the rental figures used in the original calculation were appropriate for the location and the nature of the property.

Interest Rate: The court found merit in BPCL's argument regarding the interest rate. Justice Marne noted that the transaction was not commercial in nature, as BPCL’s liability stemmed from renting a residential property, not connected to its core business of petroleum products. The court, therefore, reduced the interest rate from 9% to 6%, applying Section 34 of the Code of Civil Procedure, which limits the interest rate for non-commercial transactions.

Computation of Interest: The court also agreed with BPCL that the interim compensation payments it had made during the litigation should be deducted from the interest calculation. BPCL had deposited Rs. 4,70,496 per month from October 2010 to December 2013, which the Small Causes Court had not properly accounted for. The Bombay High Court directed the recalculation of interest, excluding these sums from the total amount payable.

The Bombay High Court’s ruling provides clarity on the legal principles surrounding mesne profits and interest in landlord-tenant disputes, particularly where the tenant is a large corporation. The court struck a balance between the competing interests of the parties, maintaining the mesne profits while providing relief to BPCL through the reduction of interest. The judgment also underscores the importance of distinguishing between commercial and non-commercial transactions when calculating interest rates under Section 34 of the Code of Civil Procedure.

Date of Decision: September 10, 2024

M/s. Forbes Gokak Ltd. vs. Bharat Petroleum Corporation Limited