ORDER
1. The defendant is the appellant.
The suit is for recovery of a sum of Rs. 82,599.89 with subsequent interest and for costs.
2. The case of the plaintiff is that on 23.02.1985, the defendant borrowed a sum of Rs. 50,000, promising to repay the same together with interest at the rate of 18% per annum and the same is evidenced by the letter dated 23.2.1985, written by the defendant to the plaintiff, wherein the defendant further requested the plaintiff to make arrangements for a loan accommodation of Rs. 25,000 repayable together with interest at the rate of 18% per annum for a period of three months. The defendant further requested the plaintiff to send the amount by way of a Demand Draft drawn in favour of M/s. Seshasayee Brothers Private Limited. As per the request of the defendant, the plaintiff sent further sum of Rs. 20,000 to the defendant by way of a demand draft in favour of M/s. Seshasayee Brothers (Private) Limited, in the first week of March 1985. The defendant has not paid any amount either towards principal or interest in respect of the amount borrowed on 23.2.1985. The plaintiff was having some dealings with M/s. Seshasayee Brothers Private Limited from the year 1984 and the defendant is one of the Executives of the said company. In respect of the amount payable to the company, on account of the dealings had by the plaintiff, he sent a cheque dated 15.7.1985 for Rs. 14,845.70 in favour of the defendant drawn on Bank of Baroda, Tiruchirappalli. The sum of Rs. 20,000 sent to the defendant in the first week of March 1985 by way of a demand draft drawn in favour of M/s. Seshasayee Brothers (Private) Limited has been credited to the liability of the plaintiff in respect of the dealings which he had with the said company. As per the letter of the defendant dated 7.11.1985, written on behalf of the said company, he has specifically stated that as per the statement of accounts sent along with the same, the claim of the company has been completely settled. But, however, the defendant encashed the cheque amount of Rs. 14,845.70, appropriated for himself, instead of returning the same to the plaintiff as the liability of the plaintiff to the company had already been completely settled. The defendant had withheld the said amount without any justification and therefore, the plaintiff is entitled to claim interest at the rate of 6% per annum. The demand made by the plaintiff, in his notice dated 18.1.1986 for the payment of the amount was denied by the defendant. Hence, the plaintiff had instituted the suit for a sum of Rs. 82,599.80
3. The defendant, in his written statement has denied the receipt of a sum of Rs. 50,000 from the plaintiff on 23.2.1985. It is stated that the plaintiff was having business transaction with M/s. Seshasayee Brothers Private Ltd., Madras and in respect of the said dealings, amounts were given credit to the said company account and the defendant had not borrowed any amount in his individual capacity. The defendant is one of the Principal Executives of the company and he did not have any private dealings with the plaintiff. With regard to the cheque dated 15.7.1985, it is stated that it was brought by the plaintiffs agent Senthil Arumugam and he represented that the plaintiff, due to certain reasons was unable to draw the cheque for himself out of his own accounts and requested him to make an endorsement and the defendant put his signature and delivered it back to Senthil Arumugam. The defendant was not liable to pay any amount and denied the entire claim of the plaintiff.
4. Based upon the pleadings, the trial Court framed the following issues among other issues:-
“1. Whether the transaction in respect of Rs. 50,000 was entered into by the defendant on behalf of M/s. Seshasayee Brothers Private Limited?
2. Whether the plaintiff is not entitled to claim the amount of Rs. 14,845.70 paid by way of a cheque?”
5. The plaintiff was examined as P.W. 1 and marked Exs. A.1 to 13. The defendant was examined as D.W. 1 besides two more witnesses. Exs.B.1 to 17 were marked.
6. The trial Court, after having taken into consideration all the aspects of the case and also the oral and documentary evidence accepted the case of the plaintiff and decreed the suit as prayed for.
7. Aggrieved by the decree and judgment dated 25.8.1988, the unsuccessful defendant has come up on appeal.
8. Though the appellant had raised several grounds in the appeal, learned Advocate for the appellant has confined his argument only to the question, “Whether Rs. 50,000, advanced by the plaintiff, by way of cash on 23.2.1985 is legal and recoverable in view of Section 269-SS of the Income Tax Act?”
9. Section 269-SS appears in Chapter XX-B, which was inserted by the Income Tax Act (Section Amendment) Act 1981, came into force with effect from 11.7.1981, states,
“No person shall, after the 30th day of June 1984, take or accept from any other person (hereafter in this Section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft, if,
(a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or
(b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment had fallen due or not, the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is (twenty) thousand rupees or more”.
In fact, the amount of Rs. 20,000 was increased from Rs. 10,000 with effect from
1.4.1989. By pointing out this provision, it is argued on behalf of the appellant that the amount advanced by the respondent/plaintiff is Rs. 50,000, admittedly given by way of cash on 23.2.1985, i.e. after the introduction of this Section on
11.7.1981 and that therefore, the said transaction or contract or agreement is not legal and that therefore, the plaintiff is not entitled to recover the said amount. It is also pointed out that failure to comply with the provisions of Section 269-SS would visit with penalty as provided under Section 271D of the Income Tax Act, which says,
“If a person takes or accepts any loan or deposits in contravention of the provisions of Section 269-SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted”.
10. Thiru, Sampath Kumar, learned advocate for the appellant has further pointed out that the contract between the plaintiff and the defendant is unlawful and the same is also hit by Section 23 of the Contract Act, which states,
“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 injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful, is void”.
11. It is the further contention of the appellant that the transaction between the plaintiff and the defendant, by which the plaintiff had paid a sum of Rs. 50,000, to the defendant is forbidden by law as the same contravenes the provisions of Section 269-SS of the Income Tax Act and that therefore, the agreement is void and cannot be enforced. It is submitted that the very basis of the agreement between the plaintiff and the defendant is the borrowing and the lending and the lending is more than Rs. 20,000 in which case, it should not have been paid by way of cash and but by way of cheque or account payee bank draft and therefore, the transaction/contract/agreement between the plaintiff and the defendant is void and the respondent/plaintiff is not entitled to claim the amount.
12. Learned advocate for the appellant has also drawn the attention of the Court to Section 65 of the Contract Act, which reads as under:
“When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it”.
13. Learned advocate for the appellant relied upon the decision of Kuju Collieries Ltd. v. Jharkhand Mines Ltd., , wherein a fine distinction has been made in respect of Section 65 of the Contract Act. The Apex Court, in paragraph 6 has held,
“It may be that the panics or one of the parties to the agreement may not have, when they entered into the agreement, known that the agreement was in law not enforceable. They might have come to know later that the agreement was not enforceable. The second part of the Section refers to a contract becoming void. That refers to a case, where an agreement which was originally enforceable and was, therefore, a contract, becomes void due to subsequent happenings. In both these cases, any person who has received any advantage under such agreement or contract is bound to restore such advantage, or to make compensation for it to the person from whom he received it”.
In our case, mere is nothing on record to show that at the time when the agreement was entered into between the plaintiff and the defendant, they knew that it was not lawful and in the absence of the same, it cannot be construed that the contract is void and the plaintiff is not entitled to enforce the same.
14. Learned Advocate for the appellant further relied upon the case of Amrit Banaspati Co., Ltd., and another v. State of Punjab and another, . That is the case where a request was made by the Industrialist for the refund of tax lawfully collected and the State had agreed for such a course. That in the said context, the Court observed that,
“Exemption from tax to encourage industrialisation should not be confused with refund of tax. Taxation is a sovereign power exercised by the State to realise revenue to enable it to discharge its obligations……. Therefore, even a Legislature,
much less a Government, cannot enact a law or issue an order or agree to refund the tax realised by it from people in exercise of its sovereign powers, except when the levy of realisation is contrary to a law validly enacted. A promise or agreement to refund tax which is due under the Act and realised in accordance with law would be a fraud on the Constitution and breach of faith of the people.”
Both the decisions relied upon by the learned advocate for the appellant are of no help to sustain the case on hand.
15. Relying upon the decisions, appellant was trying to impress upon the Court to draw an inference favourable to the defendant. The learned advocate for the appellant has submitted that both the plaintiff and the defendant are at fault and that they are “in pari delicto” to the civil action and that therefore, the Court has to refuse to recognise the transaction between the two parties and to decline the claim of the plaintiff.
16. Per contra, learned advocate for the respondent has submitted that Section 269-SS of the Income Tax cannot be made applicable to the case on hand for the reason that the said Section and the chapter have been introduced in the Income Tax Act with the sole object of counteracting the evasion of tax and in the instant case, no question of evasion of tax arises and that therefore, the appellant/defendant cannot invoke and rely on the said Section to deny his liability.
17. Learned advocate for the respondent/plaintiff relied upon Section 65 of the Contract Act and we have already adverted to the said Section and it supports the case of the plaintiff. The Section is so clear that if an agreement is discovered to be void, as it has been done so, in the instant case, as the appellant/defendant put forward such a claim only before the appellate Court, which amounts to that “the agreement to be discovered to be void” and if that be so, the person, who
has received the advantage, namely, the appellant has under such agreement or contract is bound to restore it to the plaintiff.
18. The respondent/plaintiff relied upon the case of DIP Narain Singh v. Nageshar Prasad, A.I.R. 1930 All. 1. That is the case, where a distinction has been drawn between the agreement forbidden by law and one declared void. In that context, it was held that,
“There is a clear distinction between an agreement which may be forbidden by law and one which is merely declared to be void. In the former case, the Legislature penalises it or prohibits it. In the latter case, it merely refuses to give effect to it. If a void contract has been carried out and consideration has passed the promisor may not in equity be allowed to go back upon it without restoring the benefit which he has received.
19. In JantiBai Chunnilal v. Melu and another, (F.B), it has been held,
“When an enactment merely imposes a penalty, without declaring a contract made in contravention of it to be illegal or void, the imposition of the penalty, by itself and without more, does not necessarily imply a prohibition of the contract. In such cases, the question always is whether the Legislature intended to prohibit the contract. This must be decided upon a construction of the statute. If the object of the enactment, or one of its objects, in imposing the penalty is to protect the general public or any class thereof, it will be construed, in the absence of any other indication of contrary intention expressed in the statute, as implying a prohibition of the contract. On the other hand, if the object of imposing the penalty is merely the protection of the revenue, the contract will not be regarded as prohibited by implication.”
Relying upon these decisions, learned counsel for the plaintiff has submitted that Section 269-SS of the Income Tax Act does not make a declaration of the contract as illegal or void and therefore, the principles laid down in the above case are squarely applicable to the case on hand.
20. In the case of Surasaibalini Debi v. Phanindra Mohan Majumdar, , the real owner brought the suit for declaration of his title and recovery of possession from the owner. The defendant has taken the plea of “in pari delicto”. The facts of the said case are P started certain business with his own funds, and since he was in the employment of the Court of Wards and as the Service Rules governing the employment did not permit to carry on any trade or business, he entered into an agreement with one G and held out G as owner of the business. P submitted the returns for the purposes of income-tax of the profits of the business in the name of G and dealt with the authorities as if he was the Manager and not the owner of the business. After some years, he was required to leave temporarily the city of business on medical advice. At that time, he entrusted the management of the business to G with all its effects and on the understanding that upon his return, G was to hand over to him possession and management of business. After his return, P made demands on G to hand over possession and management of the business which were refused by G. In a suit brought by P for declaration of his title and delivery of possession of the business, it was contended on behalf of G, that the arrangement for holding out G as a
nominal owner was made by P to evade liability to pay income tax and thereby to defeat the provisions of the Income Tax Act, that the agreement under which business was to be held by G was invalid and P was riot entitled to claim possession of the business relying upon his own unlawful conduct. It was further held,
“It was not the object of the parties at the time when the transaction was entered into to circumvent or to defeat the provisions of the Income Tax Act by taking advantage of the fact that the business stood in the name of G, the nominal owner. It was true, that the plaintiff obtained benefit of a lower rate of tax for the business income and his personal income escaped taxation. But, it could not on that account be held that the transaction on which he founded his claim was unlawful. In claiming a decree for possession from the defendant, the plaintiff did not plead any invalidity of the transaction. He merely pleaded his title to the business, entrustment thereof to G and refusal on part of G to deliver possession when demanded and when these things were established, the plaintiff as the owner of the business, was not prevented from enforcing that title against the defendant, there being no taint attaching to the entrustment”.
21. The respondent/plaintiff has also relied upon the case of Fakir Chand Seth v. Dambarudhar Bania, wherein Sections 65 and 70 of the Contract Act were considered. Section 65 of the Act has already been extracted and considered supra. Section 70 of the Contract Act says,
“Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.”
Section 2(e) of the Act defines agreement as every promise and every set of promises forming the consideration for each other, is an agreement. Clause (b) of Section 2 states an agreement enforceable by law is a contract. In paragraph 8 of the judgment, the Court observed,
“Section 70 of the Act enables the Court to do substantial justice where a person lawfully does anything for another person or delivers anything to him, not intending to do so gratuitously and such other person enjoys the benefit thereof, by directing the latter to make compensation to the former in respect of, or to restore, the thing so done or delivered. In order that Section 70 of the Act would apply, the necessary conditions are that: (i) a person should lawfully do something for another person or deliver something to him, (ii) in doing so, he must not act gratuitously, and (iii) the person for whom it is done must have enjoyed the benefit thereof. Section 70 of the Act is not founded on contract but embodies the equitable principles of restitution and prevention of unjust enrichment”.
By observing so, the Court came to the conclusion that the amount of money advanced under Ex. A.2 was evidently was not gratuitous. Acceptance of the said amount by the defendant implies a corresponding liability on the part of the defendant for return of money, in the even the performance of work was not possible because of prohibition by law. It is to meet such situation and to provide remedies, in such case, principles of equity have been embodied in Section 70 of the Act to prevent unjust enrichment or unjust benefit and thereby held that the 2 agreement is void, the person who had advanced is entitled to recover the same as the amount was not advanced for gratuitous purposes.
22. In the case of Sita Ram v. Radha Bai, the Supreme Court had an occasion to consider the maxim “In Pari delicto potior est conditio de fendentis”, and it was held,
“The principle that the courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to an illegality or fraud is expressed in the maxim in pari delicto potiorest conditio defendants. But, as stated in Anson’s principles of the English Law of Contracts, 22nd Ed., page 343, “there are exceptional cases in which a man will be relieved of the consequences of an illegal contract into which he has entered cases to which the maxim does not apply. They fall into three classes: (a) Where the illegal purpose has not yet been substantially carried into effect before it is sought to recover money paid or goods delivered in furtherance of it; (b) where the plaintiff is not in pari delicto with the defendant and (c) where the plaintiff does not have to rely on the illegality to make out his claim.”
It was further observed that in the absence of any plea that the contract was for illegal purposes, the party, who had the advantage under the agreement or contract cannot deny the repayment on the basis of in pari delicto.
23. In the case of M.N. Roy v. N.V.P. Parutian, 1984 (II) M.LJ. 303 a suit was laid with the following averments. The defendant was a building contractor known to the plaintiff who appeared to be a widow. The plaintiff was making efforts to have her son admitted in the Madras Medical College. The defendant came forward to help her if she would lend him some money. Accordingly, the plaintiff parted with Rs. 15,000 in all. Seat in the Medical College was not secured. The defendant executed an agreement undertaking to pay the money. Since he failed to act as per that agreement the plaintiff instituted a suit for the refund of the money. The trial Court decreed the suit and, the appellate Court reversed the decree. On appeal to this Court, it was observed, that
“The phrase in pari delicto suggests two things. First, there should be an act of delinquency, an act repugnant to law, on illegal act. Secondly, both the parties should be delinquent and that too, equally, with the same decree of guilt. The word “Possidentis” indicates the fact of possession as owner. It excludes those whose possession is precarious, terminable at will by another person, like the possession of a lessee, an agent or a borrower.”
It was further observed that, influence, not even an attempt thereof and therefore no illegality, the question of parity in the act of illegality does not arise”.
24. From the decisions relied upon by either side and the discussions made above, it is made clear that maxim “in pari delicto” cannot be made applicable in the following circumstances:
(i) Section 269-SS of the Income Tax, which falls under Chapter XX-B, opens with the caption “Requirement as to Mode of acceptance, payment or repayment in certain cases to counteract evasion of Tax.” As such, this chapter and the Section are introduced with main object to prevent the evasion of tax. In the absence of any evasion of tax, the borrower (the defendant) in the case cannot take shelter under the Section and he is liable to repay the amount.
(ii) As Section 269-SS is visited with penalty under Section 271 D of the Income Tax Act, the object of imposing penalty is merely to the protection to the Revenue, and then the contract will not be regarded as prohibited by implication.
(iii) If it was not the object of the parties at the time when the transaction was entered into to circumvent or to defeat the provisions of the Income Tax, the contract is not void.
(iv) The consideration or object of an agreement is lawful unless it is declared by law that it is unlawful.
(v) When an agreement is discovered to be void, the person, who has received any advantage under such agreement is bound to restore it to the person from whom he received it.
(vi) At the time of entering into the agreement, the same was originally enforceable and was therefore a contract, becomes void due to subsequent happenings, in such case, the person who has received any advantage under such agreement or contract is bound to restore such advantage, or to make compensation for it to the person from whom he received it.
(vii) Section 70 of the Contract Act enables the Court to do substantial justice when a person lawfully does anything for another person.
(viii) In the absence of any plea that the contract was for illegal purposes, the party who had the advantage under the agreement or contract cannot deny the payment on the basis of “in pari delicto”.
(ix) Even in an illegal transaction, the maxim “in pari delicto” could be made applicable only when the illegal purpose for which the contract was entered into achieved and not otherwise.
25. The above said criteria and the principles laid down, are not
available in the instant case, which would enable the defendant to set up a
defence that the contract entered into between the plaintiff and the defendant
is illegal and therefore, the appellant is not entitled to benefit of the maxim in
pari delicto .
26. The Full Bench decision of Madhya Pradesh High Court, in my opinion, is more appropriate and applicable to the case on hand and by following the principles enunciated in the said case, I come to the conclusion that there was no illegality or impropriety in the contract between the plaintiff and the defendant, therefore, the defendant is liable to pay the suit claim. The said view of mine also derives support from the case of M.N. Roy v. N.V.P. Pandian, 1984 (II) M.LJ. 303. In fact, the defendant neither pleaded nor had chosen to make such a submission before the trial Court. Even otherwise, the defendant is not entitled to the benefit of the above said maxim nor he is entitled to have the benefit of Section 269-SS of the Income Tax Act.
27. In the result, the appeal is dismissed.