2025 (2) TMI 1144 - HC - Income Tax

Suit for recovery - Contravention of the statutory provisions of Section 269ST r.w.s. 271D - plaintiff transferred the money in cash and that the same was received by the defendants - Whether the collaboration agreement is void on account of being violative of the statutory provisions? - HELD THAT - The defendant received Rs. 1.5 crore in cash a fact that remains undisputed. The defendant now seeks dismissal of the suit for recovery in limine by relying on Section 269ST of the Income Tax Act 1961 arguing that the transaction itself is illegal. Court cannot lose sight of the crucial fact that Section 271DA of the Income Tax Act imposes a penalty only on the recipient of the cash amount thereby making the defendant the culpable party in the eyes of law. The provision does not render the underlying transaction void but only prescribes a fiscal penalty for the contravention which would also be chargeable against the hands of the recipient who in the instant case is the defendant. Therefore the defendant cannot take advantage of his own wrongdoing to escape liability. As in Loop Telecom 2022 (3) TMI 1629 - SUPREME COURT clarified that the Principle of In pari delicto applies only when both parties are equally responsible for the illegality. Here it remains undisputed that the plaintiff made a payment under the Collaboration Agreement while the defendant was the party who violated Section 269ST by receiving the amount in cash. As per Loop Telecom the defendant cannot be allowed to unjustly enrich himself by retaining the money under the guise of statutory violation of Section 269 ST which draws the penal liability solely against him. Thus the defendant cannot be permitted to benefit from the alleged statutory illegality especially when it is he who has committed the contravention under Section 269ST of the Income Tax Act. As the Supreme Court in Loop Telecom emphasized Section 65 of the Contract Act mandates restitution where one party has derived an advantage under a void agreement provided they are not in pari delicto. Since the plaintiff merely discharged a contractual obligation and the defendant was the one in violation of the law he cannot escape the liability for restitution. Thus even if the Collaboration Agreement is alleged to contravene the provisions of the Income Tax Act the determination of such a violation falls exclusively within the domain of the Income Tax Authorities under Section 271D of the Act. The mere receipt of cash in violation of Section 269ST does not by itself render the underlying agreement void or unenforceable in a Civil Court. In the absence of any established intent on the part of the plaintiff to evade tax liability which is also a matter to be adjudicated by the competent Income Tax authority there exists no statutory bar preventing this Court from entertaining the suit for recovery. The statutory penalty prescribed for contravention of Section 269ST is imposed upon the recipient and not the payer and the imposition of such a penalty does not automatically nullify the underlying transaction. The defendant has failed to demonstrate any legal bar to the maintainability of the present recovery suit within the confines of Order VII nor can such a bar be implied by an overextended interpretation of a fiscal statute whose objective is merely to regulate cash transactions rather than to vitiate otherwise valid agreements. Accordingly the plea raised by the defendant seeking rejection of the plaint under Order VII Rule 11 (d) of the CPC on the ground of statutory violation is misconceived as the same fails to establish any express legal prohibition that would preclude the Court from adjudicating the instant claim for recovery.

ISSUES PRESENTED and CONSIDERED

The core legal question considered was whether the plaint should be rejected under Order VII Rule 11(d) of the Code of Civil Procedure, 1908, on the grounds that the Collaboration Agreement is void due to the alleged violation of Section 269ST(b) of the Income Tax Act, 1961, which prohibits cash transactions exceeding Rs. 2 lakh. The Court also examined whether the suit for recovery based on this agreement is maintainable.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents

The defendants invoked Section 269ST(b) of the Income Tax Act, which prohibits cash transactions of Rs. 2 lakh or more in a single transaction, and Section 271DA(1), which imposes a penalty for such violations. They argued that the Collaboration Agreement, which involved a cash payment of Rs. 1.5 crore, was void under these provisions. They also cited Sections 2(h), 10, and 23 of the Indian Contract Act, 1872, which define a contract and render agreements void if the consideration or object is unlawful or expressly prohibited by law.

Court's interpretation and reasoning

The Court analyzed whether the cash transaction, in violation of Section 269ST, rendered the agreement void. It distinguished between the mode of transaction and the objective of the agreement, emphasizing that the Income Tax Act provisions are regulatory, imposing a penalty on the recipient rather than nullifying the agreement. The Court referred to precedents such as Mannalal Khetan and Asha John Divianathan, clarifying that a transaction is not automatically void due to statutory penalties unless explicitly stated by law.

Key evidence and findings

The Court noted that the defendants admitted to receiving Rs. 1.5 crore in cash and had not contested the agreement's legality beyond the mode of payment. The plaintiff argued that the funds were duly accounted for and that any penalty under the Income Tax Act would be borne by the defendants as the recipients.

Application of law to facts

The Court applied the principles from precedents, noting that the violation of Section 269ST does not render the transaction void but subjects the recipient to a penalty. The Court emphasized that the agreement's purpose was not unlawful, and the plaintiff's claim for recovery was based on restitution and unjust enrichment principles.

Treatment of competing arguments

The defendants' argument that the agreement was void due to the cash transaction was countered by the plaintiff's assertion that the penalty was the defendants' responsibility. The Court agreed with the plaintiff, stating that the statutory provisions did not preclude the recovery suit.

Conclusions

The Court concluded that the suit for recovery was maintainable, as the statutory provisions cited by the defendants did not render the agreement void. The defendants could not evade liability by invoking a regulatory provision intended to curb tax evasion.

SIGNIFICANT HOLDINGS

The Court held that "mere non-compliance with the provisions of Section 269ST does not ipso facto render a transaction void." It emphasized that the provisions are regulatory, aimed at curbing tax evasion, and do not invalidate genuine transactions. The Court stated, "The law cannot be construed in a manner that allows a party to benefit from its own wrongdoing or to exploit regulatory provisions as a shield against legitimate contractual liabilities."

The Court dismissed the defendants' application for rejection of the plaint, affirming the maintainability of the suit for recovery based on restitution principles. It highlighted that the penalty under Section 271DA is imposed on the recipient, not the payer, and does not nullify the underlying transaction.

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