2001 (7) TMI 1328 - HC - Income Tax

Summary

Issues:
1. Whether the transaction in respect of Rs. 50,000 was entered into by the defendant on behalf of M/s. Seshasayee Brothers Private Limited.
2. Whether the plaintiff is entitled to claim the amount of Rs. 14,845.70 paid by way of a cheque.
3. Whether Rs. 50,000 advanced by the plaintiff by way of cash on 23.2.1985 is legal and recoverable in view of Section 269-SS of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Transaction on Behalf of M/s. Seshasayee Brothers Private Limited:
The plaintiff claimed that the defendant borrowed Rs. 50,000 on 23.02.1985, promising to repay with 18% interest per annum. The defendant requested an additional loan of Rs. 25,000, which the plaintiff partially fulfilled by sending Rs. 20,000 via a demand draft. The defendant argued that the transactions were on behalf of M/s. Seshasayee Brothers Private Limited, with whom the plaintiff had business dealings, and denied any personal borrowing. The trial court, after considering the evidence, accepted the plaintiff's version and decreed the suit in favor of the plaintiff.

2. Claim of Rs. 14,845.70 Paid by Cheque:
The plaintiff issued a cheque for Rs. 14,845.70 to the defendant, which was supposed to settle the plaintiff's liability to M/s. Seshasayee Brothers Private Limited. The defendant encashed the cheque but did not return the amount to the plaintiff after the liability was settled. The trial court found that the defendant withheld the amount without justification and ruled in favor of the plaintiff.

3. Legality and Recoverability of Rs. 50,000 in Light of Section 269-SS of the Income Tax Act:
The appellant argued that the cash transaction of Rs. 50,000 violated Section 269-SS of the Income Tax Act, which mandates that loans above Rs. 20,000 be made via account payee cheque or bank draft. The court examined Section 269-SS, which aims to counteract tax evasion, and the penalty provision under Section 271D. The court also considered Section 23 of the Contract Act, which voids agreements with unlawful considerations or objects. The appellant contended that the transaction was void and unenforceable.

The court, however, noted that Section 269-SS does not declare such transactions void but imposes a penalty for non-compliance. The court relied on precedents distinguishing between agreements forbidden by law and those merely declared void. It concluded that the transaction was not inherently illegal or void and that the defendant must restore the benefit received under Section 65 of the Contract Act. The court also invoked Section 70, which mandates compensation for benefits enjoyed under non-gratuitous acts.

Conclusion:
The court dismissed the appeal, affirming the trial court's judgment. It held that the defendant could not use Section 269-SS to avoid repayment, as the section's primary purpose was to prevent tax evasion, not to invalidate transactions. The court emphasized that the defendant must restore the amount received, as the transaction was not for illegal purposes and the plaintiff was entitled to recover the sum. The principles of equity and prevention of unjust enrichment under Section 70 of the Contract Act further supported the plaintiff's claim.