SEBI Act | Interest On Unpaid Penalty Applicable Retrospectively, Liability Accrues From Adjudication Order : Supreme Court
In a case involving SEBI's imposition of interest on unpaid penalties, the Supreme Court recently held that interest on unpaid penalty amounts can be applied retrospectively and the defaulter's liability to pay interest shall accrue from the date of expiry of the period specified in the assessment order.
No separate demand notice, after the liability is crystallized in the assessment order, is required to be issued by SEBI, the Court said.
"Under section 220(1) read with section 28A of the SEBI Act, interest becomes payable upon failure to meet the demand within the prescribed time. The appellants' failure to comply within the specified time rendered them 'defaulters' under Section 220(4) of the Income Tax Act, justifying the accrual of interest from the expiry of the 45-day compliance period", a bench of Justices JB Pardiwala and R Mahadevan observed.
On the aspect whether a separate demand notice is required to be issued, it said,
"Where the original adjudication order under the SEBI Act does not specify any time for payment, the period of 30 days under Section 220 of the Income Tax Act should be deemed to apply for making the payment, failure of which would trigger the liability to pay interest. Thus, the adjudication officer's order which specified payment within 45 days, effectively operates as a notice of demand, rendering any separate demand notice redundant."
The Court further held that under the SEBI Act, the adjudication officer is well within his rights to fix a period for payment.
"Adjudication amounts to a crystallization of liability, and the demand is a natural sequitur. Therefore, there is no corresponding requirement for issuance a separate notice of demand seeking payment of the amount determined under the adjudication order. The adjudication authority is well within his powers to fix a period for payment of the amount specified in the adjudication order, and upon default, the liability to pay interest becomes inevitable."
Reliance was placed on Explanation 4 of Section 28A of the Act, inserted on 21.02.2019, to highlight that interest under Section 220 of the Income Tax Act accrues from the date the amount becomes payable. Since Section 156 of the IT Act is not incorporated into the SEBI Act, "the original order by the Adjudicating Officer must be treated as the statutory trigger for the purpose of calculation of interest".
The Court also observed that interest on unpaid penalties is compensatory in nature, not penal. Its primary purpose is not to punish the defaulter, but to make good the financial loss occurred to the Revenue on account of delay in receiving the payment that was lawfully due.
"When a penalty is imposed, a specific period is granted for compliance. If the payment is not made within that stipulated period, the delay deprives the Revenue of the timely use of funds that rightfully belong to the public exchequer. Therefore, the accrual of interest upon default is automatic and flows from the nature of the liability – serving to compensate for the time value of money and the disruption caused by delayed payment, rather than to impose an additional punitive burden."
The Court was dealing with the appellants' challenge to SEBI's imposition of interest on unpaid penalties. The adjudication orders were passed in 2014 for alleged violation of Regulation Nos.13(4) and 13(4A) read with 13(5) of the SEBI (Prohibition of Insider Trading) Regulations. Even after the adjudication orders were affirmed by the Supreme Court, the penalty amounts remained unpaid by the appellants. Accordingly, SEBI issued demand notices in 2022 directing payment of the penalties alongwith 12% interest p.a. from 2014-2022. When the appellants failed to comply, SEBI issued attachment notices for their bank accounts. The appellants appeals were dismissed by the Securities Appellate Tribunal. Aggrieved by the same, they approached the Supreme Court.
The issue before the top Court was whether the appellants were liable to pay the interest imposed by the Adjudicating Officer, and if so, from what date (the date of expiry of adjudication orders or the date of demand notices).
After dealing with the parties' contentions, the Court opined that the Adjudicating Officer's order itself constituted a clear and enforceable demand for payment of penalties within 45 days. It held the appellants liable to pay interest at 12% per annum on the unpaid penalty amounts for the period of delay.
Insofar as the issue whether the interest was payable from the date of expiry of the period mentioned in the assessment notice, or the demand notice, the Court opined that the demand notice merely reiterated the earlier demand and did not create a fresh liability. It held that interest accrued from the expiry of the 45-day compliance period following the adjudication orders of 2014.
"Accepting the appellants' position would encourage defaulters to delay payment indefinitely under the guise of awaiting formal orders, thereby undermining the efficacy of the enforcement framework and resulting in a loss to the revenue", the Court said.
Case Title: JAYKISHOR CHATURVEDI & ETC. VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA, CIVIL APPEAL NO(S). 1551 - 1553 OF 2023
Citation : 2025 LiveLaw (SC) 730