Even govt must pay interest on wrongfully retained money: SC

Money received and retained without legal authority carries with it the right to interest — even for the government — the Supreme Court has ruled, stressing that undue retention of any money warrants proper compensation to its owner by the state and its departments.

“Money received and retained without right carries with it the right to interest. There being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue department of the Government cannot shrug off its apparent obligation to reimburse the deductor’s lawful monies with accrued interest for the period of undue retention of such monies,” a bench of justices JB Pardiwala and R Mahadevan stated in its February 18 judgment, released this month.

The present ruling came as the court directed the Delhi government to pay interest on the refund of ₹28.1 lakh to a couple — former National Commission for Women (NCW) chairperson and lawyer Poornima Advani and her husband Shailesh K Hathi — who lost an e-stamp paper meant for purchasing a house in 2016. Advani died in April 2023, but her husband carried on the legal battle.

While the judgment reinforces the principle that individuals must be compensated when the state unduly retains their money, experts believe this ruling could have broader implications for cases involving delayed refunds by government agencies, including tax authorities.

Advocate Abhishek Gupta said: “This is truly a watershed decision that will not only be cited in taxation cases but also likely to be invoked in other realms of disputes between the government and private individuals.” He added that the application of doctrine of restitution by the Supreme Court to award interest even without any statutory backing shall serve as a guiding principle in interpretation of similarly worded legislations that are silent on the aspect of interest.

In July 2016, Advani and Hathi purchased an e-stamp paper worth ₹28.1 lakh for a property transaction in Delhi. However, due to a delay in finalising their loan, the execution of the sale deed was postponed. In August 2016, their broker informed them that the crucial stamp paper had been misplaced.

Realising the gravity of the loss, they filed a police complaint and published notices in newspapers. With no alternative, they purchased a new stamp paper and completed the transaction. Seeking a refund for the lost stamp paper, they approached the Delhi revenue department, submitting an affidavit and an indemnity bond to assure the authorities that the lost paper could not be misused. However, their request was rejected in 2016 by the Collector of Stamps, leading them to file a writ petition in the Delhi high court.

A single judge bench in the Delhi high court in 2018 directed the government to refund the amount, but denied any interest on the sum. Dissatisfied, the couple moved an appeal before the division bench of the high court, which dismissed their plea on the grounds that interest had not been explicitly argued before the single judge.

Determined to assert their right, the couple approached the Supreme Court, which ruled in their favour, emphasising that when the government retains money unlawfully, it is bound to return it with interest. The court referred to multiple precedents affirming that interest is a form of compensation for deprivation of rightful funds.

Taking note of the prolonged delay in refunding the amount, the Supreme Court awarded interest of ₹4.35 lakh on the principal sum of ₹28.1 lakh. “Considering the reasons assigned by the learned single judge while taking the view that the respondents could not have declined to refund the amount, and the fact that the retention of the said amount was for a long time, we are of the view that the appellants are entitled to have interest on ₹28,10,000,’ the bench ruled, directing the Delhi government to pay the interest amount within two months.