Cash Loan Given In Breach Of Income Tax Act Can Still Be Recovered: Madras High Court

The Madras High Court at Madurai has held that a cash loan advanced in breach of the Income Tax Act does not become illegal merely for that reason, and the lender can still seek recovery of the money. 

A bench of Justice G.R. Swaminathan and Justice R. Poornima was dealing with a case in which P. Palanikumar claimed to have lent ₹25 lakh in cash instead of through an instrument as contemplated under Section 269SS of the Income Tax Act.

The bench held that while the Income Tax Department was free to take action for any violation of the Act, such a breach would not render the transaction illegal or prevent the lender from seeking recovery of the amount.

“It is true that as per the provisions of Section 269SS of the Income Tax Act, any transaction beyond Rs.20,000/- should be through an instrument. In this case, the plaintiff claimed that he had advanced a sum of Rs.25,00,000/- in cash. Obviously, the plaintiff has breached the provisions of the Income Tax Act,1961. The Income Tax authorities are very much at liberty to take action against the plaintiff in this regard. But then, the fact that the transaction was carried out in breach of Section 269 SS of the Income Tax Act will not render the transaction illegal or disentitle the plaintiff to seek recovery on that basis,” the court said.

The court was hearing an appeal filed by Palanikumar against a judgment of the IV Additional District Judge, Madurai.

Palanikumar had originally filed a suit seeking recovery of ₹31,54,167 along with interest at 12% per annum. According to him, he advanced a loan of ₹25 lakh to R. Selvi on June 5, 2015, and obtained a promissory note from her. When the amount remained unpaid, he issued a legal notice. Selvi sent a reply notice but did not comply with the demand. Palanikumar thereafter approached the court seeking recovery of the money along with interest.

Selvi did not file a written statement or adduce any evidence. She also did not cross-examine Palanikumar. Despite this, the trial court dismissed the suit, holding that Palanikumar had failed to establish that he possessed the financial wherewithal to advance such a large sum.

The High Court noted that Palanikumar had not produced his income-tax returns and that there was nothing on record to show that the suit transaction was reflected in them. However, it held that this alone could not justify a finding that the transaction had never taken place.

“The Court below had come to the conclusion that the plaintiff did not have the means to advance such a huge sum of Rs.25,00,000/- to the defendant. It is true that the plaintiff did not mark his I.T returns. There is nothing on record to show that the suit transaction was reflected in the plaintiff's IT returns. Merely because a particular transaction was not reflected in one's IT returns, it cannot be concluded that the transaction did not take place,” the court observed.

The bench added that if the trial court had doubts regarding Palanikumar's capacity to lend the money, it ought to have questioned him and clarified those doubts during the proceedings. It further noted that Selvi had neither denied receiving the money nor disputed her signature on the promissory note.

The court also observed that Selvi's title documents had been produced by Palanikumar and that she had not explained how those documents came into his possession.

Thus, noting that the trial court's decision was flawed, the bench was inclined to interfere with the same and set aside the judgment and decree.

For Appellant: Advocate Raghuvaran Gopalan for Advocate L. Siva

For Respondent: Advocate J. Lawrance