2016 (8) TMI 1549 - HC - Indian Laws

Court upholds legality of transaction, requires defendants to deposit loan amount within six weeks

The court found the transaction between the parties to be legal, emphasizing the acceptance of cheques and promissory notes as evidence of a legitimate ... Dishonor of Cheque - insufficiency of funds - whether cheque was issued as a guarantee to make payment or not - section 138 of the Negotiable Instruments Act - HELD THAT:- The transaction between the plaintiff and the defendants was an illegal transaction. If the plaintiff has not disclosed these amounts in his Income Tax Returns, if the cheques given by defendant No. 2 had been honored, the Income Tax Authorities would have asked the plaintiff to explain the source of that money and if necessary would have taxed the plaintiff. The defendant No. 2 having not denied the fact that the defendant No. 2 had issued cheques for ₹ 1 crore towards repayment of the amount of ₹ 1 crore that the plaintiff had given, the defendant No. 2 not having denied the promissory notes or the memorandum of settlement and the fact that the defendant Nos. 2 and 3 have admitted their liability when their anticipatory bail application was being heard by this Court, the amount of ₹ 1 crore with interest as mentioned in the memorandum of settlement, is payable to the plaintiff. The defences raised by the defendants are nothing but after thoughts. Once having admitted before this Court, they cannot take a contrary view - Admission is the best form of evidence and an admission does not require any proof. The admission made by the defendant Nos. 2 and 3 as recorded in the orders passed by this Court that they owed money to the plaintiff and they are trying to settle the claim with the plaintiff, is an admission of fact which requires no proof. The defendant Nos. 2 and 3 cannot take the defences which they have raised in their affidavit in reply. The defendant Nos. 2 and 3 are granted a chance to defend the suit but subject to a condition that defendant Nos. 2 and 3 jointly or severally deposit a sum of ₹ 1 crore with the Prothonotary and Senior Master, High Court, Bombay, within six weeks from today and the Prothonotary and Senior Master will invest the same in fixed deposit with a nationalised bank initially for a period of one year and renew it year to year until the hearing and final disposal of this suit - If this amount is deposited, leave to defend to defendant Nos. 2 and 3 is granted. If this amount is deposited, then the defendant Nos. 2 and 3 to file their written statement within two weeks of depositing the said amount. Within one week thereafter, parties will file and exchange affidavit of documents and within one week thereafter complete discovery and inspection and file and exchange and their statement of admission and denial with reasons for denial. The suit be listed for issues 12 weeks thereafter. The summons for judgment stand disposed. Issues Involved:1. Legality of the transaction between the plaintiff and defendants.2. Admissibility of promissory notes and cheques as evidence.3. Defenses raised by defendants regarding the nature of the transaction and the promissory notes.4. Implications of non-disclosure of the loan in income tax returns.5. Admission of liability by defendants during anticipatory bail proceedings.Detailed Analysis:1. Legality of the Transaction:The plaintiff provided Rs. 1 crore in cash to defendant No. 2 for a friendly loan. Defendant No. 2 issued promissory notes and cheques as security. The court had to determine if this transaction was illegal. It was noted that despite the large sum being handed over in cash, the plaintiff accepted cheques and promissory notes from defendant No. 2, which indicated a legitimate transaction. The court concluded that the transaction was not illegal, emphasizing that if the cheques were honored, the transaction would be accounted for in the system.2. Admissibility of Promissory Notes and Cheques as Evidence:Defendant No. 2 did not dispute signing the promissory notes or issuing the cheques. The cheques were dishonored due to 'payments stopped by the drawer' and 'funds insufficient.' The court noted that the defendants admitted to the transaction in a memorandum of settlement and during anticipatory bail hearings, reinforcing the validity of the promissory notes and cheques as evidence.3. Defenses Raised by Defendants:Defendant No. 2 raised defenses including:- The promissory notes and cheques were security for amounts given by the plaintiff for liaison work.- The Rs. 1 crore was unaccounted cash requiring security.- The source of the Rs. 1 crore was not properly explained.- The funds were illegal and thus unrecoverable.Defendant No. 3 argued:- No privity of contract with the plaintiff.- The suit lacked cause of action against defendant No. 3.- The promissory note was not executed by defendant No. 3.- The suit was barred by the law of limitation.The court found these defenses to be dishonest and afterthoughts, especially since the defendants admitted their liability during anticipatory bail proceedings.4. Implications of Non-Disclosure in Income Tax Returns:The court addressed the argument that the plaintiff violated Income Tax Act provisions by paying Rs. 1 crore in cash. It was noted that the Income Tax Act does not prohibit the recovery of amounts not disclosed in tax returns. The court referenced judgments supporting that non-disclosure in tax returns does not render a loan irrecoverable. The court emphasized that the moment the plaintiff sought to recover through cheques, the transaction became accountable, allowing revenue authorities to track and tax it if necessary.5. Admission of Liability by Defendants:The court highlighted that admissions made by defendants during anticipatory bail hearings were significant. Defendant No. 2 admitted financial losses and readiness to return the money, while defendant No. 3 acknowledged efforts to reconcile the transactions. These admissions were considered the best form of evidence, requiring no further proof. The court concluded that the defendants could not contradict their earlier admissions.Conclusion:The court ruled that the defenses raised by the defendants were not credible. It granted the defendants leave to defend the suit on the condition that they deposit Rs. 1 crore with the court within six weeks. If the amount is deposited, the defendants must file a written statement and complete necessary legal formalities. If the defendants fail to comply, the suit will proceed without their defense. The summons for judgment was disposed of accordingly.