TaxTMI 
TaxTMI 
2014 (11) TMI 1240
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.... Court in State of Haryana and Ors. v. S.L. Arora & Co. (2010) 3 SCC 690, wherein it is held that an award of interest on interest from the date of award is not permissible Under Sub-section (7) of Section 31 of the Arbitration and Conciliation Act, 1996 (for short, "the Act, 1996"), is in consonance with earlier decisions of this Court. A two-Judge Bench of this Court, by the said reference order, is of the opinion that the present appeal and the connected matters would need to be heard by a Bench of three Judges of this Court. 2. By the referral order dated 13.03.2012, it is found that the learned Counsel for the Appellants therein would doubt the correctness of the decision in the S.L. Arora case (supra) in light of McDermott International INC v. Burn Standard Co. Ltd. and Ors. (2006) 11 SCC 181; Uttar Pradesh Cooperative Federation Limited v. Three Circles (2009) 10 SCC 374; Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A. (1999) 4 SCC 327; and Central Bank of India v. Ravindra and Ors. (2002) 1 SCC 367. Therein, the Appellants would contend that, in accordance with the decision of this Court in the aforementioned cases, the interest awarded on the principal am....
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....n would not amount to award of interest on interest. The S.L. Arora case (supra) held contrary to the aforementioned principle. To support their contention, the Appellants also made a reference to the ONGC case (supra) and the Central Bank of India case (supra). Issues: 5. The issues that arise for the consideration of this Court are firstly, whether in light of the Three Circles case (supra) and McDermott case (supra) there exists any infirmity in the decision rendered by this Court in the S.L. Arora case (supra); and secondly to determine whether Sub-section (7) of Section 31 of the Act, 1996 could be interpreted to include interest pendente lite within the sum payable as per the arbitral award, for the purposes of awarding post-award interest. Submissions: 6. Shri K.K. Venugopal, learned Senior Counsel appearing for the Appellants herein, in the first instance, would submit that the decision in the S.L. Arora case (supra) was incorrect in ignoring the earlier decisions of this Court, namely the Three Circles case (supra), the McDermott case (supra), the ONGC case (supra) and the Central Bank of India case (supra). In light of the aforesaid latter cases, it is contend....
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....rd itself. 8. Per contra, Shri L. Nageshwara Rao, learned Senior Counsel and Additional Solicitor General of India would submit that there was no infirmity whatsoever in the S.L. Arora case (supra) and that, therefore, the present reference was not required. Furthermore, the learned Additional Solicitor General would submit that the term "sum" as found in Sub-section (7) of Section 31 of the Act, 1996 should be read as "principal amount" as held in the S.L. Arora case (supra). Discussion: 9. At the outset, it would be necessary to discuss the correctness of the reference order in light of the S.L. Arora case (supra). This Court, in the S.L. Arora case (supra), was required to adjudicate upon two primary issues namely-firstly, whether Sub-section (7) of Section 31 of the Act, 1996 authorised the arbitral tribunal to award interest on interest from the date of award; and secondly, whether the arbitral tribunal could grant future interest from the date of award. 10. In the S.L. Arora case (supra), this Court had sought to clarify whether the arbitral tribunal's power to grant post-award interest extended only on the principal amount or on the aggregate of the principal....
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....rmott case (supra) and the Three Circles case (supra). It may be reiterated that the referral order dated 13.03.2012 takes note of the contention of the Appellants that the S.L. Arora case (supra) erroneously held the Three Circles case (supra) and the McDermott case (supra) to be per incuriam in holding that interest awarded on the principal amount upto the date of award becomes the principal amount. 13. Before I consider the correctness of the aforementioned decisions, it would be necessary to elaborate upon the concept of "per incuriam". The latin expression per incuriam literally means 'through inadvertence'. A decision can be said to be given per incuriam when the Court of record has acted in ignorance of any previous decision of its own, or a subordinate court has acted in ignorance of a decision of the Court of record. As regards the judgments of this Court rendered per incuriam, it cannot be said that this Court has "declared the law" on a given subject matter, if the relevant law was not duly considered by this Court in its decision. In this regard, I refer to the case of State of U.P. v. Synthetics and Chemicals Ltd. (1991) 4 SCC 139, wherein Justice R.M. Sahai....
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.... Gas Commission v. M.C. Clelland Engineers S.A. (1999) 4 SCC 327. That being the position, we are unable to find any ground to set aside the judgment of the Division Bench of the High Court while considering the ground of 'interest on interest'. 17. It would be crucial to note that the reliance upon the McDermott case (supra) by this Court in the Three Circles case (supra) is not in consonance with the doctrine of precedents. On a perusal of the McDermott case (supra), it is observed that the substantive proposition of that case did not address the issue on the power of the tribunal to award 'interest on interest' or compound interest. The proposition on 'interest on interest' was made only in one of the submissions of the Respondent therein. The ratio decidendi of that decision merely laid down the discretion of the arbitrator to decide the rate of interest awarded Under Sub-section (7) of Section 31 of the Act, 1996, on a part or whole of the award money. In this regard, the Court observed as follows: 154. The power of the arbitrator to award interest for pre-award period, interest pendent lite and interest post-award period is not in dispute. Sectio....
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.... 19. This Court, therefore, in the S.L. Arora case (supra) has disagreed with the reasoning laid down in the McDermott case (supra) as well as the Three Circles case (supra). This Court, on perusal of the relevant paragraphs in the aforesaid decisions, held that the observations therein must be treated as per incuriam on the issue around awarding of 'interest on interest' or compound interest. It was observed that: 28. ...But a careful reading of the decision in Mcdermott, shows that the portion of Mcdermott extracted in Three Circles, assuming it to be the law laid down in Mcdermott, is not a finding or conclusion of this Court, nor the ratio decidendi of the case, but is only a reference to the contention of the Respondent in Mcdermott. 29. Paras 1 to 27 (of the SCC report) in Mcdermott state the factual background. Paras 28 and 29 contain the submissions of the learned Counsel for BSCL, the Respondent therein. Paras 30 to 44 contain the submissions made by the learned Counsel for Mcdermott, the Appellant therein, in reply to the submissions made on behalf of BSCL. The passage that is extracted in Three Circles is part of para 44 of the decision which contains the ....
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.... measure for delayed payment and included such interest along with the principal amount in the 'sum' so awarded. This Court observed as follows: 4. There cannot be any doubt that the Arbitrators have powers to grant interest akin to Section 34 of the Code of Civil Procedure which is the power of the court in view of Section 29 of the Arbitration Act, 1940. It is clear that interest is not granted upon interest awarded but upon the claim made. The claim made in the proceedings is under two heads-one is the balance of amount claimed under invoices and letter dated February 10, 1981 and the amount certified and paid by the Appellant and the second is the interest on delayed payment. That is how the claim for interest on delayed payment stood crystallized by the time the claim was filed before the Arbitrators. Therefore, the power of the Arbitrators to grant interest on the amount of interest which may, in other words, be termed as interest on damages or compensation for delayed payment which would also become part of the principal. If that is the correct position in law, we do not think that Section 3 of the Interest Act has any relevance in the context of the matter which ....
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....ast case relied upon by the Appellants herein is the Central Bank of India case (supra). This Court in the Central Bank of India case (supra), Under Section 34 of the Code of Civil Procedure, 1908 (for short, "the Code"), sought to determine whether the liability of the borrower to pay interest on the principal sum, would include interest that became merged with the principal sum adjudged. This aforesaid decision discussed the scope for charging compound interest Under Section 34 of the Code. The Court sought to determine the meaning attached to phrases 'principal sum adjudged' and 'such principal sum', pursuant to the 1956 amendment to the Code. Further, the Court sought to determine whether such 'principal sum' would include liability to pay compound interest thereon. However, the issue with respect to award of interest upon interest under Sub-section (7) of Section 31 of the Act, 1996 was not the subject matter in the aforesaid decision. 28. In my considered view, the Central Bank of India case (supra) cannot be relied upon by the Appellants herein in support of their contention that the arbitral tribunal possessed the power to award interest on intere....
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....Central Bank of India case (supra) did not deal with the issue around interpretation of Sub-section (7) of Section 31 of the Act, 1996, nor did the principle laid down therein hold contrary to the decision in S.L. Arora case (supra). 31. However, out of sheer deference to the learned two-Judge Bench of this Court, I would clarify the apparent controversy around Sub-section (7) of Section 31 of the Act, 1996. The said provision reads as follows: 31. Form and contents of arbitral award.-- ... (7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. (b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment. 32. On a bare perusal of the said section, I find that in the first ins....
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.... to the procedure to be followed by the arbitrator, the arbitrator is required to follow the said procedure. Reason being, the arbitrator is appointed on the basis of the contract between the parties and is required to act as per the contract. However, this would not mean that in appeal parties can contend that the appellate procedure should be as per their agreement.... 35. In the event that the terms of the given contract, as applicable to the parties to the arbitration proceedings, are silent on the question of interest payable in the first stage, as given under Clause (a) of Sub-section (7) of Section 31 of the Act, 1996, only then would the provisions of the said clause apply. The said clause thereafter gives the arbitral tribunal the discretion to include the interest in the sum for which the award was made. The principles for levying such interest are found in the said clause itself. They are as follows: (1) Interest to be imposed at such rate as the arbitral tribunal deems reasonable; (2) The interest may be either on the whole or any part of the money; and (3) The interest may be for the whole or any part of the period between the date on which the cause of act....
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......It is a cardinal rule of interpretation that the language used by the legislature is the true depository of the legislative intent, and that words and phrases occurring in a statute are to be taken not in an isolated or detached manner dissociated from the context, but are to be read together and construed in the light of the purpose and object of the Act itself. 39. In the absence of a definition in the Act, 1996, I would notice that the word "sum", would simply refer to money in common parlance. Further, the dictionary meaning of the word may be taken into consideration. Webster's Third New International Dictionary, Volume III defines "sum" to mean, inter alia, the following: Sum: An indefinite or specified amount of money. Black's Law Dictionary, Seventh Edition, 1999, defines "sum" as: sum. 1. A quantity of money. P. Ramanatha Aiyar's Advanced Law Lexicon, Third Edition, 2005, Book 4, defines "sum", inter alia, as the following: Sum. When used with reference to values, 'sum' imports a sum of money. Corpus Juris Secundum, Volume LXXXIII, defines the word "sum" as follows: Sum. While the word 'sum' must be construed in connect....
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....es the term "interest" as follows: Interest is compensation paid by the borrower to the lender for deprivation of the use of his money. 43. Therefore, in light of the above, "interest" would be the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another. It may be understood to mean the amount which one has contracted to pay for the use of borrowed money. 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 could be said to be a charge for the use or forbearance of a particular amount of money. In this sense, it is a compensation allowed in law for use of money belonging to another or for the delay in paying the said money after it has become payable. This principle has also been noticed in the Central Bank case (supra). 44. It may be pertinent to take note of the approach of English Courts to interpret the term "interest". In Westminster Bank Ltd. v. Riches (1947) A.C. 390, the House of Lords elaborated upon the term "interest" for payment of moneys. Lord Wright observed that: The essence of interest is that it is a payment which becomes d....
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....d into some larger sum before being made payable under the terms of the contract. ... 46. It may be inferred from the aforesaid decisions, that for an amount to be referred as "interest", it must, prima facie, fulfill two conditions- (1) There must be a sum of money by reference to which the payment of interest may be ascertained. (2) The sum of money must, generally, be due to the person entitled to the interest. Furthermore, it would be gainsaid in stating that the mere fact that a payment of interest may be aggregated with a payment of a different nature, the said aggregation would not alter the distinct nature of interest from the money on which it is levied. 47. Further, this Court in the case of Bhai Jaspal Singh v. CCT (2011) 1 SCC 39, observed that: 36. Interest is compensatory in character and is imposed on an Assessee who has withheld payment of any tax as and when it is due and payable. The interest is levied on the actual amount of tax withheld and the extent of delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty which is penal in character [see Pratibha Processors v. Union of India (1996) 11 SCC 101].....
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....d "payment" as under Clause (b) of Sub-section (7) of Section 31 of the Act, 1996 to ascertain when the liability to pay post-award interest would come to an end. After making a reference to the S.L. Arora case (supra), this Court went into the dictionary meaning of the word "payment". The Court explained as follows: 15. The word "payment" may have different meaning in different context but in the context of Section 37(1)(b); it means extinguishment of the liability arising under the award. It signifies satisfaction of the award. The deposit of the award amount into the court is nothing but a payment to the credit of the decree-holder. In this view, once the award amount was deposited by the Appellants before the High Court on 24-5-2001, the liability of post-award interest from 24-5-2001 ceased. The High Court, thus, was not right in directing the Appellants to pay the interest @ 18% p.a. beyond 24-5-2001. 52. Clause (b) of Sub-section (7) of Section 31 of the Act, 1996 further states that the interest as envisaged under the said provision would be on the sum directed to be paid by an arbitral award. As noticed in the discussion hereinabove, the term "sum", as in Clause (a),....
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.... similar contexts, he must be presumed to intend it in each place to bear the same meaning". The court having accepted invitation to embark upon interpretative expedition shall identify on its radar the contextual use of the word or expression and then determine its direction avoiding collision with icebergs of inconsistency and repugnancy. 55. It can be concluded that it is a sound rule of construction whereby the same word appearing in the same section of the same statute must be given the same meaning, unless there is anything to indicate the contrary. The only exception to this rule of construction, whereby the said principle may be rebutted, is by making reference to the context in which the words are used. The word may be understood in a different sense, if the context so requires that to be done. The context herein, that is, under Clause (a) and under Clause (b) of Sub-section (7) of Section 31 of the Act, 1996, does not appear to be divergent from one another. The word "sum" has been used in both clauses in the context of what is to be paid as per the arbitral award. 56. Before I conclude, it would be profitable to take note of the Central Bank of India case (supra) w....
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....e difference between the receipt of proceeds by cash or by cheque, was of the view that it would be the actual "receipt" of the proceeds, in either case, that places such proceeds at the disposal of the payee. The said decision relied upon D & C Builders Ltd. v. Rees (1966) 2 Q.B. 617, wherein Lord Denning observed that: ...The cheque, when given, is conditional payment. When honoured, it is actual payment.... In other words, the Parkside Leasing Ltd. case (supra) was of the view that money would be "paid" only when the recipient would have the option to utilise the said money and exercise willful discretion. 59. For the purposes of the Act, 1996, interest could be included within the principal amount only when the said aggregate amount is paid to the party in whose favour the arbitral award was passed. In other words, once the interest amount is within the physical and actual possession of the party so entitled to it, only then could the interest amount be said to have merged with the principal amount. Therefore, in the present scenario, the Appellants would not be entitled to claim post-award interest on the aggregate of the principal amount and interest pendente lite, s....
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....st be imposed on the aggregate sum and interest pendent lite. The Arbitral Tribunal's authority to award "interest on interest" was not discussed therein. This Court, therefore, while deciding State of Haryana and Ors. v. S.L. Arora & Co. (2010) 3 SCC 690, rightly refused to treat the McDermott case as well as the Three Circles case as authorities for awarding "interest on interest" and held that both were wrongly decided. Further, the decisions in ONGC v. M.C. Clelland Engineers S.A. (1999) 4 SCC 327 as well as the Three Circles case pertain to an Award under the Arbitration Act, 1940, which did not contain a specific provision dealing with the arbitrator's power to grant interest. Likewise, the Central Bank of India v. Ravindra and Ors. (2002) 1 SCC 367 case arose Under Section 34 of the Code of Civil Procedure, 1908 (hereinafter referred to as "the Code of Civil Procedure"), and cannot be treated as an authority for award of interest under Clause (7) of Section 31 of the Arbitration Act, 1996 (hereinafter referred to as "the Act"). 64. It is not possible to agree with the conclusion in S.L. Arora's case that Section 31(7) of the Act does not require that interest,....
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.... of money may include interest from the date of cause of action to the date of the award. 67. The Oxford Dictionary gives the following meaning to the word "sum": Sum, 'if noun': A particular amount of money. Sum, 'if verb': The total amount resulting from the addition of two or more numbers, amounts, or items. 68. In Black's Law Dictionary, the word "sum" is given the following meaning: SUM. In English law-A summary or abstract; a compendium; a collection. Several of the old law treatises are called "sum." Lord Hale applies the term to summaries of statute law. Burrill. The sense in which the term is most commonly used is "money"; a quantity of money or currency; any amount indefinitely, a sum of money, a small sum, or a large sum. U.S. v. Van Auken 96 U.S. 368 : 24 L. Ed. 852; Donovan v. Jenkins 52 Mont. 124, 155 P. 972, 973. 69. Thus, when used as a noun, as it seems to have been used in this provision, the word "sum" simply means "an amount of money"; whatever it may include-"principal" and "interest" or one of the two. Once the meaning of the word "sum" is clear, the same meaning must be ascribed to the word in Clause (b) of Sub-section (7....
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....te of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the "principal" sum without interest. 75. Thus, it is apparent that vide Clause (a) of Sub-section (7) of Section 31 of the Act, Parliament intended that an award for payment of money may be inclusive of interest, and the "sum" of the principal amount plus interest may be directed to be paid by the Arbitral Tribunal for the pre-award period. Thereupon, the Arbitral Tribunal may direct interest to be paid on such "sum" for the post-award period vide Clause (b) of Sub-section (7) of Section 31 of the Act, at which stage the amount would be the sum arrived at after the merging of interest with the principal; the two components having lost their separate identities. 76. In fact this is a case where the language of Sub-section 7 Clause (a) and (b) is so plain and unambiguous that no question of construction of a statutory provision arises. The language itself provides that in the sum for which an award is made, interest may be included for the pre-award period and that for the post-award period interest up to the rate of eighteen per cent per annum may be awarded on such sum directed to be pa....
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....lar facts as found. The desirability or the undesirability of one conclusion as compared with another cannot furnish a guide in reaching a decision." [Shop and Store Developments Ltd. v. I.R.C. (1967) 1 A.C. 472, per Lord Morris of Borth-y-Gest at p. 493. But see I.R.C. v. Bates (1965) I W.L.R. 1133, per Lord Denning M.R., affirmed in H.L. at (1967) 2 W.L.R. 60 sub. Nom. Bates v. I.R.C.; Luke v. I.R.C. (1963) A.C. 557, per Lord Reid.] Where, by the use of clear and unequivocal language capable of only one meaning, anything is enacted by the legislature, it must be enforced however harsh or absurd or contrary to common sense the result may be. [Cartledge v. E. Jopling & Sons, Ltd. (1963) A.C. 758. Cf. Miller v. Salomons (1853) 7 Ex. 475, per Pollock C.B.; Re British Farmers', etc., Company (1878) 48 L.J. Ch. 56, per Jessel M.R.; Magor and St. Mellons R.D.C. v. Newport Corporation (1952) A.C. 189.] The interpretation of a statute is not to be collected from any notions which may be entertained by the court as to what is just and expedient: [Gwynne v. Burnell (1840) 7 Cl. and F. 572 per Coleridge J.] words are not to be construed, contrary to their meaning, as embracing or excludi....
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....he instant lis is, "Whether grant of interest by the Arbitral Tribunal Under Section 31(7) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act") amounts to granting "interest on interest"? 81. The aforesaid question can be answered by a plain and simple reading of Section 31(7) of the Act which reads as under: 31(7)(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. (b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment. 82. Section 31(7)(a) of the Act deals with grant of pre-award interest while Sub-clause (b) of Section 31(7) of the Act deals with grant of post-award interest. Pre-award interest is to ensure that arbitral proceedings are co....