The Court may exercise discretion under Section 34 CPC to reduce unconscionable interest rates to prevailing market rates.

The Appellants (Tenants) took a residential property on lease from the Respondent (Landlord) in August 2012 for two years at a monthly rent of Rs. 2,500, providing an interest-free security deposit of Rs. 8,00,000

In October 2012, the Tenant advanced a "friendly loan" of Rs. 12,00,000 to the Landlord via cheques at an agreed interest rate of 1.75% per month

Following the Landlord's failure to repay the loan and security deposit upon the lease's expiry in 2014, the Tenant filed a suit for recovery

The Trial Court decreed the suit, awarding the principal sum of Rs. 25,25,000 along with interest at the rate of 21% per annum from 23.02.2022 until realization

The Appellant challenged the judgment, specifically contesting the 21% interest rate

1. Whether the grant of interest at the rate of 21% per annum by the Trial Court was legally justified under the Code of Civil Procedure

Section 34 of the Code of Civil Procedure, 1908 (CPC), which governs the award of interest in money decrees. It stipulates that during the pendency of a suit and post-decree, the court may award interest at such rate as it "deems reasonable," typically not exceeding 6% per annum for non-commercial transactions

Central Bank of India v. Ravindra & Ors., Tomorrowland Limited v. HUDCO, and Small Industries Development Bank of India v. M/s. Sibco Investment Pvt. Ltd., which collectively establish that the power to award interest is a discretionary, equitable remedy that must be exercised judiciously, fairly, and in alignment with prevailing market rates to prevent undue enrichment or unfair deprivation.

The Court observed that while Section 34 of the CPC grants discretionary power to award interest, this discretion is not absolute and must not be exercised in an "arbitrary or fanciful" manner

In the present case, the court noted that the loan was characterized as a "friendly loan" rather than a commercial transaction

Consequently, the High Court found that the Trial Court’s award of 21% interest was "unconscionable" and "arbitrary"

The Court reasoned that judicial discretion under Section 34 requires the interest rate to reflect the market rates prevalent at the time of the judgment. By applying the principles of equity and fairness, the Court determined that a reduction in the interest rate was necessary to align with the reasonable standards envisioned by the CPC

The High Court partly allowed the appeal, modifying the Trial Court's decree by reducing the interest rate from 21% per annum to 6% per annum. All other aspects of the principal recovery remained undisturbed as the principal amount had already been deposited and released