Compound Interest as Compensation under the Consumer Protection Act, 1986 in Real Estate Disputes

The real estate sector has been facing a multitude of challenges and disputes, especially post-GST implementation. This often leaves buyers, promoters, and developers entangled in legal battles seeking redressal for various grievances. Post the implementation of GST, consumer courts have witnessed a surge in real estate disputes. Complaints against developers have surged post-GST implementation, regarding issues of hidden costs, poor quality work, ownership delays, illegal construction, and contract violations.

In analyzing the legal landscape, it becomes evident that the jurisdiction of consumer forums, such as the National Consumer Disputes Redressal Commission (NCDRC), extends to adjudicating disputes arising from deficiencies in real estate services. Section 2(o) of the CP Act[1] defines 'service,' encompassing construction activities undertaken by developers. Furthermore, Section 2(g) of the CP Act defines “deficiency” as any fault, imperfection, shortcoming, or inadequacy in the quality, nature, and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.

These provisions are often used by the consumer forum to award compensation to aggrieved purchasers falling within the category of “consumer” under clause 2(d) of the CP Act. For instance, the Supreme Court, in the case of Lucknow Development Authority v. M.K. Gupta[2], affirmed that inordinate delays in delivering possession constitute a deficiency in service, awarding compensation to the purchasers. Also, the court in Experion Developers Pvt. Ltd. v. Sushma Ashok Shiroor[3] held that interest on compensation shall accrue from the dates of deposits made by the consumer and not from the date of the last deposit, ensuring restitution for delays.

However, the intricacies surrounding the award of compensation, particularly in the form of compound interest, necessitate a nuanced understanding of legal principles and precedents. Furthermore, the introduction of GST has introduced additional complexities in real estate transactions, with issues such as tax implications, valuation methodologies, and contractual terms coming under scrutiny. Consumer forums are confronted with disputes ranging from excessive GST levies to contractual terms that are perceived as one-sided and oppressive to consumers.

One of the contentious issues in real estate disputes pertains to the award of compensation, particularly in the form of compound interest, under the Consumer Protection Act, 1986 (CP Act)[4]. Supreme court in a case of M/s Suneja Towers Private Limited & Anr. v. Anita Merchant[5] stated that Compound Interest cannot Be Awarded Casually As Compensation by Consumer Forums in Real Estate Disputes. The Court further clarified that compound interest can be awarded in situations after taking into account relevant factors which would include uncertainties of the market and several other imponderables. After placing reliance on appropriate provisions of CPA, the Court highlighted that the Forum is empowered to grant punitive damages as per the proviso to Section 14(1)(d) of the Consumer Protection Act of 1986, (Act) if it deems fit.

In this case, the purchaser Anita Merchant (respondent) booked three residential flats of a residential project, namely Siddharth Shila Apartments at Ghaziabad. Respondent made payment up to 6th installment but, defaulted thereafter and did not make the remaining payment despite numerous reminders. She later issued a notice to the appellants M/s Suneja Towers Pvt. Ltd. (Siddharth Shila Apartments), stating that even after 16 years, the possession has not been delivered. To which the they replied stating that there was only provisional allotment and no agreement as such was executed between the parties.

Moreover, the allotment had been canceled due to default on the purchaser’s part. Consequently, a cheque of Rs. 10,68,031/- was sent as a refund to them. The District Forum dismissed the complaints on the grounds of lack of jurisdiction. State Commission was approached which based on Manjeet Kaur Monga v. K.L. Suneja[6], (‘Dr. Monga’s Case’), directed respondents to refund the amount deposited by the respondent with ‘compound interest at the rate of 14% from the date of deposit’. National Commission was approached which dismissed the petition and refused to interfere with State Forum’s judgement. Therefore, the consumer approached the Supreme Court.

Sc held that Dr. Monga’s Case pertained to claiming compensation under the MRTP Act, whereas the present case was related to claiming compensation under the Consumer Protection Act, of 1986. Hence, Dr. Monga’s Case cannot be read in support of the principle that compensation under the Consumer Protection Act, of 1986 could also be in the form of compound interest. The Act of 1986 has empowered the Consumer Forums to direct payment of compensation to the consumers for any loss or injury suffered due to the negligence of the opposite party. However, there is no hard and fast rule as to how much interest should be granted and it would depend on the facts and circumstances of each case.  Claim for compensation by way of compound interest is to be declined if it does not have any nexus with the commercial realities of the prevailing market as has been held in IREO Grace Realtech (P) Ltd. v. Abhishek Khanna,[7] (‘Ireo Grace’). The Court observed that to determine the compensation, the Consumer Forum must examine the time value for money along with an in-depth and thorough analysis of all the facts and material surrounding factors, including realities and uncertainties of the market. As far as the award of compound interest in the instant case was concerned, SC noted that the same was without examining any factor which has led to serious inconsistencies. The State Commission straightaway jumped to the conclusion of awarding compound interest at the rate of 14%, without considering the refund Rs. 10,68,031/- on 08.11.2005 by the respondents, and without even specifying the period of such operation of compounding of interest. The Court viewed that if at all compounding of interest is allowed, that could not run beyond 08.11.2005, at least in regard to the said sum of Rs. 10,68,031/-, and the said interest does not exceed the amount of Rs. 2,48,52,000/-, which has already been received by the respondent pursuant to the order passed by the Court. Considering the peculiar circumstances of the case, as an extraordinary measure, the respondent was allowed to retain the received amount.

This judgment highlighted one of the most significant issues faced by the consumer courts while awarding compensation in real estate disputes under the Consumer Protection Act, of 1986. It clarifies that compound interest should not be awarded casually by consumer forums and must be grounded in the specifics of each case, considering market realities and the time value of money. This judgment emphasizes the necessity for a detailed and nuanced evaluation of all relevant factors before deciding on compensation. It also reinforces the consumer forums' mandate to ensure that awards are fair and proportionate, balancing the interests of both consumers and developers in real estate transactions. This ruling provides clearer guidelines, ensuring that compensation decisions are not arbitrary and are based on sound legal and economic principles.

[1] Consumer Protection Act, 1986

[2] 1994 AIR 787

[3]  2022 SCC OnLine SC 416

[4] Consumer Protection Act, 1986

[5] 2023 SCC OnLine SC 443

[6] (2018) 14 SCC 679

[7] (2021) 3 SCC 241

Dated: June 7, 2024

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