2021 (10) TMI 192 - HC - Indian Laws

High Court clarifies presumption under Negotiable Instruments Act, reinstates trial court decision

The High Court held that the first appellate court erred in not applying the presumption under Section 118 of the Negotiable Instruments Act to the ... Presumption under Section 118 of the Negotiable Instruments Act, 1881 - Rebuttal of statutory presumption and burden of proof - Non-adherence to Section 269SS of the Income Tax Act, 1961 does not extinguish civil right to recover loan - Non-disclosure in income-tax returns not a bar to civil recovery - Consequences of delay in prosecuting appellate remedy - forfeiture of interest for delayed periodPresumption under Section 118 of the Negotiable Instruments Act, 1881 - Rebuttal of statutory presumption and burden of proof - Whether the court below was justified in displacing the presumption in favour of the holder of the promissory note and non-suiting the plaintiff on the basis that the presumption under Section 118 was rebutted. - HELD THAT: - The promissory note (Ex.A.1) bore the defendant's signature which was not denied; the trial court rightly invoked the presumption under Section 118 that a negotiable instrument was made for consideration. The appellate court's task was to determine whether the defendant had rebutted that presumption. The defendant advanced alternate explanations (alleged handing over of blank signed notes to third parties) and produced the scribe as witness, but the trial court found the defence inconsistent and non-specific (notably the non-examination of a key person referred to in the defence). The testimony of the scribe did not negative the loan but rather corroborated aspects of the plaintiff's case; minor discrepancies as to venue were held immaterial. Applying the statutory rule that the court must presume the fact until contrary is proved, the appellate court erred in displacing the presumption without adequate basis. The finding that the presumption was rebutted was perverse and was set aside, restoring the trial court's decree. [Paras 8, 9, 13, 15]The appellate court wrongly held that the presumption under Section 118 was rebutted; the presumption ought to have been applied and the trial court's decree restored.Non-adherence to Section 269SS of the Income Tax Act, 1961 does not extinguish civil right to recover loan - Non-disclosure in income-tax returns not a bar to civil recovery - Whether non-compliance with the mode prescribed by Section 269SS and non-disclosure of the transaction in income-tax returns disentitles the lender from civil recovery of the loan. - HELD THAT: - Section 269SS prescribes the mode in which certain loans are to be taken by the borrower; judicial precedent and statutory construction show that the obligation in Section 269SS is on the borrower to take the loan in prescribed manner and does not confer on a court a power to extinguish the lender's civil remedy for recovery. Failure to disclose the transaction in income-tax returns or non-adherence to Section 269SS may invite departmental penal consequences against the lender but does not, in itself, render the loan irrecoverable in a civil suit. The appellate court's approach of denying the presumption under Section 118 on the ground of non-compliance with Section 269SS lacked statutory foundation and amounted to judicial innovation. The court therefore held that non-compliance with Section 269SS or non-disclosure in returns does not operate to defeat the plaintiff's right to recover the lent amount. [Paras 10, 11, 14, 15]Non-adherence to Section 269SS and omission in income-tax returns do not bar civil recovery; the appellate court erred in treating such non-compliance as extinguishing the plaintiff's claim.Consequences of delay in prosecuting appellate remedy - forfeiture of interest for delayed period - Whether the appellant is entitled to interest for the period attributable to delay in filing the appeal. - HELD THAT: - Although the appellate challenge succeeded and the trial court's decree was restored, the court noted that the appellant had delayed in filing the appeal. As a consequence of that delay the appellant was denied any interest for the period of delay. This is a remedial, procedural consequence distinguished from the substantive right to recover the loan. [Paras 15]The second appeal allowed and trial court decree restored, but no interest is granted for the period of delay in filing the appeal.Final Conclusion: The impugned first appellate judgment and decree are set aside; the trial court's decree in favour of the plaintiff on the promissory note is restored. Non-compliance with Section 269SS of the Income Tax Act and omission in income-tax returns do not extinguish the civil right to recover a loan, and the appellate court erred in denying the statutory presumption under Section 118 of the Negotiable Instruments Act on that basis. The appellant is not entitled to interest for the period of delay in prosecuting the appeal. 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 perverseRs.2. Whether the plaintiff can be non-suited on the ground of non-adherence to the provisions of the Income Tax Act, 1961Rs.Issue-Wise Detailed Analysis:Issue 1: Finding of the First Appellate Court on Ex.A1 Promissory NoteThe plaintiff's case was based on a promissory note (Ex.A1) executed by the defendant, who allegedly borrowed Rs. 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, 1961The 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 Rs. 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.