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TMI Blog2025 (2) TMI 1144X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuant to the terms of the agreement, the plaintiff paid a sum of Rs. 1,50,00,000/- to the defendants in cash, amongst payment by other modes, which came to be recorded in the terms of the Collaboration Agreement. Case of the plaintiff in the main suit 3. The plaintiff entity is a company incorporated under the Companies Act, 1956, and is engaged in the business of constructing and redeveloping immovable properties, either on a contractual or collaborative basis, and subsequently selling such properties. The Defendant No. 1 is the absolute owner of the suit property. 4. In late November 2019, the plaintiff, through its Directors, learnt that the suit property was available for collaboration. Acting on this information, the plaintiff initiated negotiations with the defendants. The plaintiffs sought to re-develop the property, consisting of a Basement, Stilt, and Ground to Third Floors. The defendants shared the title documents and proposed terms of consideration and sharing of the redeveloped property. 5. The parties entered into a Collaboration Agreement for re-development, agreeing that in exchange for constructing the property and paying Rs. 4.75 crore, the plaintiff would r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eiving such an amount in contravention of Section 269ST shall be liable to pay a penalty equivalent to the amount received. 10. Learned counsel argues that a conjoint reading of these provisions establishes a complete prohibition on the receipt of cash exceeding Rs. 2 lakh in a single transaction, with the imposition of a statutory penalty in case of any contravention. He emphasizes that the Collaboration Agreement, which forms the basis of the present suit, explicitly records that the plaintiff paid an amount of Rs. 1.5 crore in cash to defendant No. 1. He submits that this payment is in direct violation of Section 269ST (b) of the IT Act, which expressly forbids such transactions. In support of his argument, he relies on the decisions of the Supreme Court in the cases of Mannalal Khetan v. Kedar Nath Khetan (1977) 2 SCC 424 and Asha John Divianathan v. Vikram Malhotra (2021) 19 SCC 629 to contend that any agreement whose terms are expressly forbidden by law is void ab initio. Accordingly, the Collaboration Agreement, being founded on an illegal consideration, is null and void due to the statutory bar under Section 269ST(b) read with Section 271DA (1) of the IT Act. 11. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plaintiff to the submissions of the defendants on maintainability 14. Learned counsel for the plaintiff, Mr. Nakul Kumar Daksh, vehemently refutes the contentions advanced by the defendants. He submits that the objections raised are a mere façade designed to obfuscate the real controversy involved in the instant suit. He contends that the defendants, after having received substantial sums from the plaintiff, have wilfully evaded all communication, thus intending to unlawfully enrich themselves at the expense of the plaintiff. 15. Addressing the issue of payment in cash, learned counsel argues that even if such payment contravenes the statutory provisions, the resultant penalty would be borne by the defendants themselves and not the plaintiff. He submits that the onus of ensuring compliance with the provisions of Section 269ST of the IT Act, 1961 rests with the recipient of the funds. In the instant case, any contravention would render the defendants liable for penal consequences, not the plaintiff. 16. Learned counsel further contends that the plaintiff has adequately accounted for the source of the funds remitted to the defendants. He submits that there exists documentar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the Defendants, their family members, successor-in interest, associates, assignee or any other person acting on his behalf from entering into any Agreement, transferring , alienating and/or parting with possession or creating third party interest in whatsoever manner in respect of Property bearing No. D-25 , Anand Niketan, New Delhi - 110021 or any portion thereof; (c) to award the costs of the present suit throughout in favour of the Plaintiff and against the Defendant;" 19. Upon examining the prayer in the suit, it is evident that the relief sought by the plaintiff pertains to the recovery of a sum paid, which has been mentioned in the Collaboration Agreement. The relief sought, albeit for recovery, in substance, falls within the ambit of claims based on the principles of restitution and unjust enrichment. 20. While it is an admitted position between the parties that the plaintiff transferred the money in cash and that the same was received by the defendants, the pivotal issue requiring determination is whether this cash transaction, prima facie conducted in contravention of the statutory provisions of Section 269ST read with Section 271DA of the Income Tax Act, is rende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be imposed by the Joint Commissioner.]" 23. Further, reliance was placed on various provisions of the Indian Contract Act, 1872 such as Sections 2 (h), 10, and 23, which define agreements, enforceable contracts, lawful consideration, and object respectively. The relevant provisions have been reproduced hereunder for reference:- "2. Interpretation-clause - (h). An agreement enforceable by law is a contract; *** 10. What agreements are contracts. - All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in 1[India] and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. *** 23. What considerations and objects are lawful, and what not.-The consideration or object of an agreement is lawful, unless- it is forbidden by law; or is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent ; or involves or implies i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to convey the estate to A upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law. (j) A, who is B's mukhtar, promises to exercise his influence, as such, with B in favour of C, and C promises to pay 1,000 rupees to A. The agreement is void, because it is immoral. (k) A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code (45 of 1860)." 24. Upon examining the statutory provisions cited above, it becomes pertinent to turn to the Collaboration Agreement dated 09.12.2019 to assess its terms and the manner in which the transaction unfolded. Paragraph 7 of the agreement specifically details the mode and sequence of the transaction. For reference, the relevant contents of the said paragraph are reproduced hereunder:- "That out of the total consideration of Rs. 4,75,00,000 /-, a sum of Rs. 2,50,00,000/- (Rupees Two Crore Fifty Lakh Only) has been paid by the DEVELOPER to the OWNER in the following manner;- Rs. 90,00,000/- (Rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unlawful, as it cannot be presumed that the legislature would impose a penalty for something that is otherwise lawful. 27. However, if the controversy therein is appreciated in the right perspective, the Court in Mannalal Khetan has observed that a transfer made in violation of the statutory provisions cannot be upheld. In the instant case, the plaintiff herein is not seeking any enforcement of the agreement, but rather seeking recovery of an amount that admittedly has been paid. Even assuming that the payment was made in contravention of Section 269ST, the agreement is not per se void under any law as the object of the agreement is to be appreciated, not the mode of transaction, and the plaintiff remains entitled to seek restitution or recovery of the amount. 28. It be noted that it is not the case of the defendants that the agreement itself was unlawful or that the collaboration agreement was inherently barred by law. Rather, the sole contention of the defendant is limited to the mode of payment being inconsistent with the provisions of the Income Tax Act. While Mannalal Khetan dealt with a statutory prohibition that rendered the transaction itself legally void, the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction carried out for the purpose of such agreement. This distinction between the mode of transaction vis-à-vis the objective of the agreement is elucidated in the case of Sheela Sharma, a decision relied upon by the plaintiff. The Court in Sheela Sharma re-affirmed the settled position that a mere violation of fiscal statutes such as Section 269SS of the Income Tax Act does not, by itself, render the underlying transaction void or unenforceable in Civil Law. The Court placed reliance on K.T.S. Sarma v. Subramanian 2001 SCC OnLine Mad 520, a decision of the High Court of Madras, wherein it was held that the primary objective of Section 269SS is to curb tax evasion, and not to invalidate every cash transaction exceeding the prescribed threshold. The Court noted that unless a statute explicitly declares a transaction void, a civil suit seeking recovery of money advanced in cash remains maintainable, subject to the general principles of contract law. The Court also considered Mohammed Iqbal v. Mohammed Zahoor 2007 SCC OnLine Kar 282, wherein the Karnataka High Court ruled that a violation of Section 269SS merely invites a penalty under Section 271D, but does not extinguish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de repayment by citing technical violations of Income Tax laws. Thus, presuming for the sake of argument, that the underlying transaction is void under Section 23 of the Indian Contract Act, 1872, the defendant would still be bound by Section 65 of the Act, which mandates restitution in cases where an agreement is discovered to be void. The Supreme Court in Loop Telecom & Trading Ltd. v. Union of India (2022) 6 SCC 762, has categorically held that a party who has received an advantage under a contract, later found to be void, is bound to restore it or compensate for it, provided they are not in pari delicto. 37. In the present case, 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. However, the 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 prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Firstly, it seeks to invalidate the underlying Collaboration Agreement, based solely on a statutory provision of the IT Act that regulates the mode of payment rather than the purpose or substance of the agreement itself. Secondly, it would enable the defendant to unjustly enrich himself at the expense of the plaintiff by invoking a technical statutory provision to evade contractual obligations. Thirdly, it effectively penalizes the plaintiff for adhering to the mutually agreed terms of the Collaboration Agreement, while the defendant, who willingly received the cash payment without protest, now seeks to repudiate the agreement. 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. 42. Even otherwise, 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. 43. Accordingly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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