2019 INSC 0661
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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3559 OF 2010
M/S SHAHI AND ASSOCIATES   … APPELLANT(S) 
VERSUS
STATE OF U.P. & ORS.   … RESPONDENTS
J  U  D  G  M  E  N  T
S.ABDUL NAZEER, J.
1 . M/s. Shahi and Associates has filed this appeal impugning
the common final judgment and order dated 05.12.2007 passed
by   the   High   Court   of   Judicature   at   Allahabad   in   F.A.F.O   Nos.
3728   of   2007   and   947   of   2007,   whereby   the   High   Court   has
upheld the award of the Arbitrator.  However, relying on para 7­
A   of   Section   24   of   the   Uttar   Pradesh   Civil   Laws   (Reforms   and

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Amendment) Act, 1976 (for short 'U.P. Amendment Act'), it has
reduced   the   statutory   interest   to   6%   p.a.   from   18%   p.a.   as
awarded   by   the   Arbitrator.   The   appellant   has   questioned   the
reduction of the interest in this appeal.
2 . The   appellant   is   a   registered   partnership   firm   engaged   in
civil construction projects for the government of Uttar Pradesh.
The appellant entered into an agreement dated 08.07.1993 with
the   Superintendent   Engineer,   Drainage   Division,   District
Gonda,  U.P.  for  work   related   to  the  Gola   Pump  House.    Owing
to  certain  disputes that  arose  between  the  parties  with  respect
to the rate of payment for additional work under the agreement,
the   appellant   served   a   notice   invoking   arbitration   on   the
respondents   and   filed   the   claim   petition   on   11.09.1999.     Shri
B.M. Arora was appointed as the sole Arbitrator on 12.10.1999
and   the   proceedings   commenced   on   27.10.1999   under   the
Arbitration   and   Conciliation   Act,   1996   (for   short   'the   Act   of
1996').

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3 . The   sole   Arbitrator   passed   an   award   on   24.12.2001,
whereby the appellant was awarded a sum of Rs. 17, 86, 339/­
(seventeen   lakhs   eighty   six   thousand   three   hundred   thirty
nine).   The Arbitrator further held that the interest on the sum
awarded   would   be   payable   in   accordance   with   Section   31(7)(b)
of the Act of 1996, i.e. 18% p.a. from the date of the award till
the date of actual payment.   The operative portion of the award
is:
"According   to   the   above,   the   petitioner
becomes   entitled   for   receiving   a   total
amount   of   Rs.   17,86,339.00   (Rs.   Seventeen
lac eighty six thousand three hundred thirty
nine   only)   and   the   petitioner   is   hereby
awarded the same.
From the date of award to the actual date of
payment   an   interest   at   the   rate   which   is
given in the provisions of section 31(7)(b) of
the   Arbitration   and   Conciliation   Act,   1996
shall   also   be   payable   on   Rs.   17,86,339.00
which is the amount of declared award.
Both   the   parties   would   bear   their   own   cost
related with the arbitration."
4 . The respondents 1 and 2 being aggrieved by the aforesaid
award   filed   civil   miscellaneous   case   No.   5   of   2002   before   the
District Judge, Gorakpur, under Section 34 of the Act of 1996.

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The   District   Judge   while   upholding   the   sum   awarded   by   the
Arbitrator,   reduced   the   rate   of   interest   on   the   sum   awarded
from 18% p.a. to 6% p.a. by relying on para 7­A of Section 24 of
the U.P. Amendment Act.
5 . Being   aggrieved   by   the   aforesaid   judgment   dated
28.10.2006,   both   the   parties  filed   F.A.   F.O.   Nos.   3728   of   2007
and 947 of 2007 before the High Court.  The High Court by way
of   impugned   common   final   judgment   and   order   has   dismissed
both   the   appeals.     In   the   course   of   the   order,   the   High   Court
has  observed that the  District Judge has correctly  reduced the
rate of interest from 18% p.a. to 6% p.a. in view of para 7­A of
Section 24 of the U.P Amendment Act.
6 . Learned   counsel   for   the   appellant   submits   that   the
arbitration   proceedings   were   commenced   on   27.10.1999   under
the Act of 1996 and the provisions of Arbitration Act, 1940 will
have no application to the proceedings between the parties. The
U.P. Amendment Act was a State amendment which introduced
para   7­A   to   the   First   Schedule   of   the   Arbitration   Act,   1940.

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Since   the   Arbitration   Act,   1940,   has   been   repealed   under
Section   85   of  the   Act   of  1996,   the  Schedule  to   Arbitration   Act,
1940  also stands repealed  and para 7­A has become obsolete.
Therefore,   the   Arbitrator   has   rightly   awarded   interest   @   18%
p.a.   under   Section   31(7)(b)   of   the   Act   of   1996.     The   District
Judge   as   also   the   High   Court   have   wrongly   relied   upon   the
repealed   provision   and   reduced   a   statutorily   permissible
interest rate.
7 . On   the   other   hand,   learned   Additional   Advocate   General
appearing   for   the   respondent­State   has   sought   to   justify   the
impugned judgment.  
8 . We   have   carefully   considered   the   submissions   of   the
learned counsel made at the Bar.  
9 . The   Act   of   1996   has   come   into   force   with   effect   from
22.08.1996.  Section 85 of the Act of 1996 expressly repeals the
provisions   of   the   Arbitration   Act,   1940.   Thus,   the   Act   of   1996
would   be   applicable   to   all   arbitral   proceedings   which   have
commenced on or after the said Act came into force.   Para 7­A

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of Section 24 of the U.P. Amendment Act was an amendment to
the   First   Schedule   of   Arbitration   Act,   1940.     This   amendment
was introduced by the U.P. Act No. 57 of 1976.   The provisions
of the Arbitration Act, 1940 including the State amendment will
have no application to the proceedings commenced after coming
into force of the Act of 1996.
10 . Section   31(7)(b)   of   the   Act   of   1996,   before   its   amendment
by   Act   3   of   2016,   which   has   come   into   force   with   effect   from
23.10.2015,   is  relevant   for   the   purpose   of  this  case,  empowers
the Arbitrator to award pre­award and post­award interest. This
Section   clearly   states   that   unless   otherwise   specified,   the
awarded   sum   would   carry   an   interest   @   18%   p.a,   as   extracted
below:
"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

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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".
      (Emphasis supplied)
11 . Section   31(7)(b)   of   the   Act   of   1996   clearly   mandates   that,
in the event the Arbitrator does not give any specific directions
as   regards   the   rate   of   interest   on   the   amount   awarded,   such
amount 'shall' carry interest @ 18% p.a. from the date of award
till   the   date   of   payment.     Since   the   Arbitration   Act,   1940   has
been   repealed   by   way   of   Section   85   of   the   Act   of   1996,   the
Schedule   to   the   Arbitration   Act,   including   the   State
amendment,   also   stands   repealed.     The   only   exception   is
provided in sub­section (2)(a) of Section 85 where a proceeding
which had commenced when the Arbitration Act of 1940 was in
force   and   continued   even   after   coming   into   force   of   the   Act   of
1996,   and   all   parties   thereto   agreed   for   application   of   the   old
Act of 1940.   Therefore, the provisions of Arbitration Act, 1940
including  the  State  amendment  namely   para  7­A of  Section  24

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of   U.P.   Amendment   Act   will   have   no   application   to   the
proceedings   commenced   after   coming   into   force   of   the   Act   of
1996.    
12 . In   the   instant   case,   though   the   agreement   was   earlier   to
the date of coming into force of the Act of 1996, the proceedings
admittedly   commenced   on   27.10.1999   and   were   conducted   in
accordance   with   the   Act   of   1996.     If   that   be   so,   para   7­A   of
Section 24 of the U.P. Amendment Act has no application to the
case   at   hand.     Since   the   rate   of   interest   granted   by   the
Arbitrator   is   in   accordance   with   Section   31(7)(b)   of   the   Act   of
1996, the  High  Court and  the  District Judge were not  justified
in   reducing   the   rate   of   interest   by   following   the   U.P.
Amendment Act. 
13 . The   appeal,   therefore,   succeeds   and   it   is   accordingly
allowed.     The   judgments   of   the   High   Court   of   Judicature   at
Allahabad dated 05.12.2007 in F.A.F.O Nos.3728 and 947 all of
2007   and   the   order   of   the   District   Judge,   Gorakhpur   in   Misc.
Case  No.5  of  2002  dated  28.10.2006  are  set  aside  only  insofar

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as   reduction   of   rate   of   interest   is   concerned.     The   interest
awarded by the Arbitrator in accordance with Section 31(7)(b) of
the Act of 1996 is restored.
14 . There will be no order as to costs.    
 ………………………………………… J.
      (ARUN MISHRA)
…………………………………………J.
      (S. ABDUL NAZEER)
…………………………………………J.
      (M.R. SHAH)
New Delhi;
August 8, 2019.