2021 (10) TMI 192 - HC - Indian Laws

Recovery of suit amount on the basis of promissory note - Money Suit - legally enforceable debt or not - suit was dismissed after holding that presumption under Section 118 of the Negotiable Instruments Act, 1881 could not be invoked - transaction did not conform to the mandate set out in Section 269SS of the Income Tax Act, 1961 - HELD THAT - Section 118 of the Negotiable Instruments Act, 1881 states that the presumptions set out therein 'shall be made'. This is equivalent to saying 'shall presume'. It was held in PR. METRANI VERSUS COMMISSIONER OF INCOME-TAX 2006 (11) TMI 136 - SUPREME COURT that a presumption in the form of 'shall presume' leaves no option with the Court not to make the presumption. The Court is bound to take the fact as proved until evidence is given to disprove it. Therefore, the first appellate court had no option but to apply Section 118 of the Negotiable Instruments Act, 1881. In case after case, it has been held that merely because the transaction in question has not been shown in the income tax returns, it would not be rendered void. If the lender has advanced a certain amount which ought to have been reflected in the tax returns but he failed to disclose the same in his returns, that would not exonerate the borrower from the liability to repay. The default committed by the lender may attract penal action from the department. But his right to recover the amount from the borrower cannot be extinguished - the law of limitation can render a claim otherwise valid unenforceable. The government of the day can bring in legislation offering succour to debtors. If the suit transaction falls within the scope of a debt relief legislation, the lender cannot maintain an action outside its framework. But failure to disclose in the tax returns cannot render the amount irrecoverable. It cannot extinguish the right of the creditor. A civil remedy can be stifled only by a statutory provision and not by judicial innovation. In the case on hand, the first appellate court contrary to the statutory mandate failed to presume a certain fact in favour of the plaintiff and that led to the dismissal of the suit. It also misconstrued the evidence on record - the substantial questions of law is answered in favour of the appellant - second appeal allowed.

Summary

Issues Involved:
1. Whether the finding of the first appellate court that the plaintiff is not entitled to recover the suit amount on the basis of Ex.A1 promissory note is perverse?
2. Whether the plaintiff can be non-suited on the ground of non-adherence to the provisions of the Income Tax Act, 1961?

Issue-Wise Detailed Analysis:

Issue 1: Finding of the First Appellate Court on Ex.A1 Promissory Note

The plaintiff's case was based on a promissory note (Ex.A1) executed by the defendant, who allegedly borrowed ?1,50,000/- and failed to repay. The trial court decreed in favor of the plaintiff, invoking the presumption under Section 118 of the Negotiable Instruments Act, 1881. The first appellate court reversed this decision, stating that the presumption could not be invoked due to non-compliance with Section 269SS of the Income Tax Act, 1961.

The High Court noted that the defendant had rebutted the presumption by examining witnesses and presenting an alternative version. However, the trial court found the defendant's defense inconsistent and unsupported by clear evidence. The High Court emphasized that the presumption under Section 118 must be applied unless disproved, and the first appellate court erred in not doing so. The High Court ruled that the first appellate court's approach lacked legal foundation, as there is no statutory provision exempting the court from making this presumption due to non-compliance with the Income Tax Act.

Issue 2: Non-Adherence to the Income Tax Act, 1961

The first appellate court non-suited the plaintiff on the grounds of non-compliance with Section 269SS of the Income Tax Act, which mandates that loans above ?20,000/- must be transacted through specified banking instruments. The High Court clarified that Section 269SS imposes obligations only on the borrower, not the lender. Furthermore, non-disclosure of the transaction in the plaintiff's income tax returns does not render the loan void or unrecoverable. The High Court cited precedents affirming that the lender's failure to disclose the loan in tax returns may attract penal action but does not extinguish the borrower's liability to repay. The right to recover a lent amount is a recognized civil right, which can only be nullified by statutory provisions, not judicial innovation.

Conclusion:

The High Court found that the first appellate court misapplied the law and misconstrued the evidence. The presumption under Section 118 of the Negotiable Instruments Act should have been applied, and non-compliance with the Income Tax Act does not invalidate the loan. The High Court set aside the first appellate court's judgment and restored the trial court's decision, with a modification that the appellant is not entitled to interest for the delay period in filing the appeal. The second appeal was allowed, and no costs were awarded.