2023 (3) TMI 1606 - HC - Indian Laws

Loan recovery between real estate businessmen held commercial dispute; Order XIIIA CPC invoked, hefty deposit and tax probe

HC held that the recovery suit, arising from a loan supported by a loan agreement, promissory note, receipt and post-dated cheques between two real estate ... Commercial Dispute or not - suit for recovery based on a loan agreement, promissory note, receipt and post-dated cheques between two real estate businessmen - Violation of Provisions of Income Tax for loan transactions in Cash - HELD THAT:- In Ambalal Sarabhai Enterprises Limited v. K.S. Infraspace LLP and Another, [2019 (10) TMI 1601 - SUPREME COURT], the Supreme Court observed that the question of whether the suit falls within the scope of a “commercial dispute”, as defined under the Commercial Courts Act, cannot be dealt with in abstract. Instead, the nature of the dispute and the jurisdiction to try the same is to be reflected in the suit itself, since in a civil suit, the pleadings, namely, averments in the plaint would, at the outset, be relevant to confer jurisdiction. It was further held that the very purpose for which the Commercial Courts Act has been enacted is to expedite the adjudicatory process and to place the trial of the suits relating to Commercial Dispute on a fast track. The provisions of the Act are, therefore, required to be strictly construed, as, if the provisions are given a liberal interpretation, the object behind the Act will be defeated. In the present case, the plaintiff in his plaint has asserted that he is engaged in the business of Real Estate Development and Construction. The defendant is also engaged in the Real Estate business. It is alleged by the plaintiff that the loan was extended to the defendant by the plaintiff on the representation of the defendant that he required financial assistance to tide over his financial crises. The loan transaction is supported by the alleged loan Agreement, Receipt, Promissory Note and the post-dated cheques of the defendant, which would be ordinary transaction of merchants and financers. The loan carried interest and, therefore, was not a “friendly loan”. The present suit has, therefore, been rightly filed by the plaintiff as raising a “commercial dispute”. In Kailash Devi Khanna [2019 (8) TMI 1944 - DELHI HIGH COURT], a learned Single Judge of this Court has rightly held that all suits for recovery of monies cannot fall under Section 2(1)(c)(i) of the Commercial Courts Act; where the suit is not based on any transaction relating to Mercantile Document, such suit cannot be considered as a suit raising a “commercial dispute”. As noted hereinabove, such is not the case in the present suit. There are no merit in the objection of the defendant that the present suit does not fall within the scope of a “commercial dispute” as defined in the Commercial Courts Act - exercising powers under Rule 6(1)(b) read with Rule 7 of Order XIIIA of the CPC, as applicable to “commercial dispute”, the defendant is directed to deposit a sum of Rs. 4,50,00,000/- as was mentioned in the alleged Loan Agreement to be payable by the defendant, in Court, within a period of four weeks of this order, failing which the defence of the defendant shall stand closed and the plaintiff shall be entitled to a decree of the amount claimed. In case, the defendant deposits the amount in compliance with this order, the Registry is directed to invest it in an interest bearing fixed deposit for a period of one year with automatic renewal. Though on merit the adjudication of the Suit shall proceed, it is directed that a copy of the file of the present Suit, including the defence of the defendant, be forwarded to the Chief Commissioner of Income Tax, Delhi, who may, if so advised, institute an inquiry into the accounts of the parties to the Suit so as to determine if there is a case of evasion of tax, and if so, take appropriate action thereon - Application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the suit for recovery based on a loan agreement, promissory note, receipt and post-dated cheques between two real estate businessmen is a 'commercial dispute' under Section 2(1)(c)(i) of the Commercial Courts Act, 2015. 1.2 Whether, on the pleadings and material on record, the plaintiff is entitled to summary judgment under Order XIIIA CPC, or whether a conditional order should be made, and if so, on what terms. 1.3 Whether the admitted large cash transactions between the parties warrant reference of the matter to the Income Tax authorities for possible violation of tax laws, including Section 269SS of the Income Tax Act, 1961. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of dispute as 'commercial dispute' under Section 2(1)(c)(i) of the Commercial Courts Act Legal framework 2.1 Section 2(1)(c)(i) of the Commercial Courts Act defines 'commercial dispute' as a dispute arising out of 'ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents'. 2.2 The Court referred to: (i) Ambalal Sarabhai Enterprises Ltd. v. K.S. Infraspace LLP (Supreme Court) on the need to determine 'commercial dispute' from the nature of the pleadings and to apply a strict construction consistent with the object of speedy adjudication; (ii) decisions of the Calcutta High Court in South City Projects (Kolkata) Ltd. and Padma Logistics & Khanij Pvt. Ltd., which treated documented loan transactions between real estate developers as 'commercial disputes' when supported by mercantile documents and not being mere 'friendly loans'. Interpretation and reasoning 2.3 The Court held that a loan transaction between 'merchants' (persons whose business is buying and selling goods, here in real estate) supported by mercantile documents, and carrying interest, falls within 'ordinary transactions of merchants' and therefore within Section 2(1)(c)(i). 2.4 The plaintiff pleaded that both parties are engaged in real estate development/business; the alleged loan was extended to tide over financial crisis in the course of such business; and the transaction is supported by a loan agreement, promissory note, receipt and post-dated cheques, all carrying interest. These are mercantile documents whose enforcement is in issue. 2.5 The Court distinguished cases relied upon by the defendant: (a) Kailash Devi Khanna - correctly held that not all money recovery suits are 'commercial disputes', particularly where not based on mercantile documents; unlike the present case, which is document-based. (b) Ladymoon Towers and Glasswood Realty - concerned admitted 'friendly loans' or hand loans without documentation; here the transaction is supported by formal documents and interest, which is antithetical to a 'friendly loan'. Conclusions 2.6 The dispute arises out of an ordinary business/mercantile loan between merchants in the real estate sector, evidenced by mercantile documents and carrying interest. 2.7 The suit is therefore a 'commercial dispute' within the meaning of Section 2(1)(c)(i) of the Commercial Courts Act, and the objection to maintainability as a commercial suit is rejected. Issue 2 - Entitlement to summary judgment or conditional order under Order XIIIA CPC Legal framework 2.8 Order XIIIA CPC (as applicable to commercial disputes) permits the Court to decide a claim without recording oral evidence if: (a) the plaintiff has no real prospect of succeeding, or the defendant has no real prospect of successfully defending; and (b) there is no other compelling reason for a full trial (Rule 3). 2.9 Under Rule 6(1)(b) read with Rule 7, the Court may make a 'conditional order' where it appears that a claim or defence may succeed but it is improbable that it will; such conditions may include deposit of money or furnishing security. 2.10 The Court referred to: (a) IDBI Trusteeship Services Ltd. v. Hubtown Ltd. (Supreme Court) summarising principles (in the context of Order XXXVII) on substantial defence, triable issues, and conditional leave to defend where the defence is plausible but improbable. (b) Uttam Singh Duggal & Co. Ltd. v. Union Bank of India (Supreme Court) on speedy judgment where plain admissions make it impossible for the party making them to succeed. 2.11 The Court also noted the presumptions under Sections 118 and 139 of the Negotiable Instruments Act in favour of consideration for signed cheques, as explained in Kalamani Tex v. P. Balasubramanian, with the standard of rebuttal being 'preponderance of probability', and that bare denial is insufficient. Interpretation and reasoning 2.12 The following factual considerations were identified: (a) The plaintiff claims to have advanced Rs. 4,30,00,000/- to the defendant in cash, with an agreed 'lumpsum interest/profit' of Rs. 20,00,000/- and execution of a loan agreement, promissory note, receipt, and three post-dated cheques totalling Rs. 4,50,00,000/-. (b) The defendant admittedly signed the loan agreement, promissory note, receipt, and cheques. The documents, however, contain handwritten insertions (such as cheque numbers and certain particulars) which the defendant alleges are not in his handwriting. The core recitals - including the typed statement that Rs. 4,30,00,000/- was given as loan and that it is repayable with specified interest, as well as the bank name - are typed. (c) In the written statement, the defendant admits to having taken loans totalling about Rs. 50-60 lakhs from the plaintiff between 2013-2014 and to having repaid a 'substantial amount', but provides no particulars or documentary proof of such earlier transactions or their repayment. (d) The defendant's principal defence is that the plaintiff procured his signatures on blank documents, blank sheets and blank cheques, allegedly in connection with extension of time for another loan, and later fabricated/forged the loan agreement and connected documents over those blank signed papers. The Court noted that: - the defendant is a seasoned businessman; - the alleged practice of signing blank papers and cheques is baldly asserted without details of dates, occasions or circumstances; and - this defence appears 'more fanciful than real'. (e) The plaintiff relied also on a Memorandum of Equitable Mortgage and a Cancellation Deed allegedly executed between the plaintiff's father and uncle to show sourcing of funds. The Court found serious doubt about the genuineness of these two documents, noting: - inconsistent expiry dates of the Notary's licence appearing on different pages of the same document; - the claim that a large loan was given and repaid in cash; and - the absence of any mention of loan repayment in the Cancellation Deed. The Court treated these circumstances as casting doubt on these mortgage-related documents and the alleged source of funds. (f) While accepting that a presumption under Sections 118 and 139 NI Act arises regarding consideration for the signed cheques, the Court emphasised that this presumption is rebuttable. At the present (summary judgment) stage, the defendant is only required to raise a 'probable defence' on a standard of preponderance of probability; full substantiation awaits trial. (g) The entire alleged loan was claimed to have been advanced in cash; apart from the disputed documents, there is no independent evidence (such as bank records or tax returns) of the plaintiff possessing or disbursing such a large cash amount. 2.13 Balancing the above, the Court held that: - the defendant's defence cannot be rejected as wholly untenable or impossible; - however, given the admitted signatures on principal documents and the nature of the defendant's 'blank signed papers' plea, the defence is improbable; and - the case therefore falls within the category where the defence may possibly succeed but is highly unlikely to do so, justifying a conditional order rather than outright summary judgment or unconditional trial. Conclusions 2.14 The defence raised by the defendant is not so strong as to constitute a substantial or fair defence warranting unconditional trial; it is considered highly improbable though not impossible. 2.15 In exercise of powers under Order XIIIA Rule 6(1)(b) read with Rule 7, the Court directed the defendant to deposit Rs. 4,50,00,000/- (the amount reflected as payable in the loan documents) in Court within four weeks. 2.16 It was ordered that: - if the defendant fails to deposit the said amount within four weeks, his defence shall stand closed and the plaintiff shall be entitled to a decree for the amount claimed; - if the defendant deposits the amount, the Registry shall invest it in an interest-bearing fixed deposit for one year with automatic renewal, pending further adjudication of the suit. 2.17 The application under Order XIIIA was accordingly disposed of on these conditional terms. Issue 3 - Reference to Income Tax authorities regarding large cash transactions Legal framework 2.18 The Court adverted to Section 269SS of the Income Tax Act, 1961, which restricts taking or accepting certain loans or deposits otherwise than by account payee cheque, bank draft or prescribed electronic modes, above specified thresholds. Interpretation and reasoning 2.19 Both parties admit to large cash transactions: - the plaintiff claims to have advanced Rs. 4,30,00,000/- in cash; - the defendant admits having taken loans of Rs. 50-60 lakhs in cash from the plaintiff. 2.20 Neither party has produced income tax returns or bank documents showing availability or movement of such large cash amounts. 2.21 The Court observed that, prima facie, these appear to be unaccounted cash transactions, potentially in violation of Section 269SS of the Income Tax Act. The Court held that it cannot ignore or become a party to possible violations of tax law while adjudicating the civil dispute. Conclusions 2.22 While the civil adjudication on merits of the suit will proceed, the Court directed that a copy of the suit file, including the defendant's defence, be forwarded to the Chief Commissioner of Income Tax, Delhi. 2.23 The Chief Commissioner was left at liberty to examine the accounts of both parties, enquire whether there is tax evasion or violation of tax provisions (including Section 269SS), and take appropriate action as advised.