Supreme Court Upholds Loan Recovery: Benami Transaction Plea Rejected in Fair Communication Case (20 January 2020)

Introduction

Date of the Judgment: 20 January 2020
Citation: [Not Available in Source]
Judges: Indira Banerjee, J. and S. Ravindra Bhat, J. (authored by S. Ravindra Bhat, J.)

Can a borrower avoid repaying a loan by claiming the transaction is linked to a benami sale? The Supreme Court of India recently addressed this question in a civil appeal concerning a loan recovery suit. The core issue was whether the defendant could use the argument that the loan was related to a benami transaction to avoid repayment. The Supreme Court, in this case, ruled against the defendant, upholding the High Court’s decision to enforce the loan recovery. The bench comprised Justices Indira Banerjee and S. Ravindra Bhat, with the judgment authored by Justice S. Ravindra Bhat.

Case Background

The case involves a dispute between Surendra (the plaintiff/respondent), a resident of Nashik, and his nephew Sanjay (the defendant/appellant), who resided in Indore. Surendra, an engineer, owned property in Indore and appointed Sanjay as his Power of Attorney on 30 September 1989. Sanjay entered into an agreement to sell Surendra’s property on 30 November 1989, receiving ₹50,000 as earnest money. On 29 January 1990, Surendra went to Indore, and a new agreement was made directly with the buyer, Niranjan Singh Nagra. At this time, Sanjay requested a loan of ₹80,000 from Surendra for his business, promising to repay it shortly. Surendra gave the loan, and Sanjay issued three post-dated cheques for ₹16,500, ₹3,500, and ₹60,000, all dated 16 February 1990. Sanjay later asked Surendra not to deposit the cheques, and when the cheques were eventually deposited, they bounced. Consequently, Surendra filed a suit for recovery of ₹80,000 with interest. Sanjay claimed that he returned the money on the same day and that Surendra insisted on keeping the cheques.

Timeline:

Course of Proceedings

The trial court dismissed Surendra’s suit, believing that the deposit of ₹80,000 in Surendra’s bank account on 31 January 1990, supported Sanjay’s claim that the loan was returned immediately. The trial court also noted a discrepancy in the sale consideration amount, casting doubt on Surendra’s claim. Surendra appealed to the High Court, which overturned the trial court’s decision. The High Court considered the evidence, including the initial agreement of sale for ₹2,30,000, and concluded that Surendra had sufficient funds to lend ₹80,000 to Sanjay. The High Court held that the deposit of ₹80,000 in Surendra’s account did not negate the loan transaction. The High Court also noted that Sanjay did not take back the cheques or the receipt for ₹60,000, which further supported Surendra’s claim that the loan was not repaid.

Legal Framework

The primary legal framework in this case is the Benami Transactions (Prohibition) Act, 1988 (hereafter “the Benami Act”). This Act prohibits benami transactions, which are defined as transactions where property is transferred to or held by one person, but the consideration is paid by another, and the property is held for the benefit of the person who provided the consideration. Section 3 of the Benami Act prohibits benami transactions, and Section 4 restricts the right to recover property held benami. Specifically, Section 4(1) states that no suit, claim, or action can enforce any right in respect of property held benami against the person in whose name the property is held or against any other person by or on behalf of a person claiming to be the real owner. Section 4(2) states that no defense based on any right in respect of property held benami shall be allowed in any suit, claim, or action by or on behalf of a person claiming to be the real owner.

The relevant provisions of the Benami Act are:

“3. (1) No person shall enter into any benami transaction.
(2)Whoever enters into any benami transaction shall be punishable
with imprisonment for a term which may extend to three years or
with fine or with both.
(3) Whoever enters into any benami transaction on and after the
date of commencement of the Benami Transactions (Prohibition)
Amendment Act, 2016, shall, notwithstanding anything contained in
sub-section (2), be punishable in accordance with the provisions
contained in Chapter VII.]
(4) [***]
4. (1) No suit, claim or action to enforce any right in respect of any
property held benami against the person in whose name the
property is held or against any other person shall lie by or on
behalf of a person claiming to be the real owner of such property.
(2) No defence based on any right in respect of any property held
benami, whether against the person in whose name the property is
held or against any other person, shall be allowed in any suit,
claim or action by or on behalf of a person claiming to be the real
owner of such property…”

Arguments

Appellant’s Arguments (Sanjay):

• The High Court erred in appreciating the evidence and relied on a new case presented during cross-examination, not backed by pleadings.
• The High Court relied on inadmissible documents, specifically a photocopy of an agreement, to conclude that the sale consideration was ₹2,30,000 and not ₹1,30,000.
• The High Court’s judgment was conjectural, linking a receipt issued by Sanjay with the agreement showing a sale consideration of ₹2,30,000. The original agreement was never produced.
• The claim that the real value of the sale was ₹2,30,000, as opposed to the declared value of ₹1,30,000, was a prohibited transaction and against public policy.
• The Benami Act bars any plea based on benami transactions.
• On 30 January 1990, or soon after, Surendra did not have any amount in his bank account.
• Sanjay consistently maintained that the three cheques were issued at Surendra’s insistence and were not returned despite repeated requests, which the High Court overlooked.

Respondent’s Arguments (Surendra):

• The trial court wrongly concluded that the ₹80,000 was part of the sale consideration of ₹1,30,000 and was returned immediately.
• The deposit of ₹80,000 in Surendra’s bank account on 31 January 1990, was not related to the loan, as the entire transaction was for ₹2,30,000.
• The original agreement dated 3 July 1989, was for ₹2,30,000, and Sanjay admitted his signature on this document during cross-examination.
• The original agreement was with the buyer, and a photocopy was produced due to this reason.
• The document was relevant only to show that Surendra had the funds to advance the loan to Sanjay.

The innovativeness of the respondent’s argument lies in the fact that he was able to use the initial agreement for ₹2,30,000 to show that he had sufficient funds and that the deposit of ₹80,000 in his account was not related to the loan given to Sanjay.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was correct in decreeing the suit for recovery of ₹80,000?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Valliammal (D.) by L.Rs v Subramaniam & Ors. (2004) 7 SCC 233 – Supreme Court of India: The Court referred to this case to reiterate that the burden of proving a benami transaction lies on the person asserting it. The court also highlighted the key factors to determine a benami transaction, including the source of funds and the intention of the parties.
• Binapani Paul vs. Pratima Ghosh & Ors. 2007 (6) SCC 100 – Supreme Court of India: The Court reiterated the observations made in Valliammal (D.) by L.Rs v Subramaniam & Ors. regarding the burden of proof in benami transactions.
• Jaydayal Poddar v. Bibi Hazra – Supreme Court of India: This case was cited in Valliammal (D.) by L.Rs v Subramaniam & Ors. to lay down the circumstances to determine the nature of a benami transaction.
• Krishnanand Agnihotri v. State of M. P. – Supreme Court of India: This case was cited in Valliammal (D.) by L.Rs v Subramaniam & Ors. to lay down the circumstances to determine the nature of a benami transaction.
• Thakur Bhim Singh v. Thakur Kan Singh – Supreme Court of India: This case was cited in Valliammal (D.) by L.Rs v Subramaniam & Ors. to lay down the circumstances to determine the nature of a benami transaction.
• Pratap Singh v. Sarojini Devi – Supreme Court of India: This case was cited in Valliammal (D.) by L.Rs v Subramaniam & Ors. to lay down the circumstances to determine the nature of a benami transaction.
• Heirs of Vrajlal J. Ganatra v. Heirs of Parshottam S. Shah – Supreme Court of India: This case was cited in Valliammal (D.) by L.Rs v Subramaniam & Ors. to lay down the circumstances to determine the nature of a benami transaction.

Legal Provisions:

• Section 3 of the Benami Transactions (Prohibition) Act, 1988: Prohibits benami transactions.
• Section 4 of the Benami Transactions (Prohibition) Act, 1988: Restricts the right to recover property held benami.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Valliammal (D.) by L.Rs v Subramaniam & Ors. (2004) 7 SCC 233 – Supreme Court of India: The court followed this authority to emphasize that the burden of proving a benami transaction lies on the person asserting it.
• Binapani Paul vs. Pratima Ghosh & Ors. 2007 (6) SCC 100 – Supreme Court of India: The court reiterated the observations made in Valliammal (D.) by L.Rs v Subramaniam & Ors. regarding the burden of proof in benami transactions.
• Section 3 of the Benami Transactions (Prohibition) Act, 1988: The court explained that this provision prohibits benami transactions.
• Section 4 of the Benami Transactions (Prohibition) Act, 1988: The court explained that this provision restricts the right to recover property held benami.

The Supreme Court analyzed the evidence and arguments presented by both sides. The court held that the High Court was correct in its assessment that the loan was given and not repaid by Sanjay. The court also held that the appellant’s argument that the transaction was a benami transaction was unmerited. The court reasoned that the plaintiff did not claim return of any amount from the buyer, nor was the suit based on any plea involving examination of a benami transaction. The court also noted that the plaintiff was not asserting any claim as a benami owner. The court stated that the defendant/appellants never said that the plaintiff or someone other than the purchaser was the real owner, nor was the interest in the property the subject matter of the recovery suit.

The court observed that the appellant had admitted to the photocopy of the initial agreement, and therefore, the High Court was correct in considering it. The court also noted that the plaintiff had sufficient funds to lend the amount, as shown by the initial agreement for ₹2,30,000. The court concluded that the High Court was correct in decreeing the suit for recovery of the loan amount.

The Supreme Court quoted from the High Court judgment:

“Since it is not disputed by the respondents that the loan amount of Rs 80,000/- was given by the appellant on 30/01/90 and the dispute is only whether the amount was returned by the respondent no. 2 to the appellant on that very day on not, the important documents are Ex. P/1 to P/3, the cheques and the receipt of Rs 60,000/- Ex. P/9, which was issued by the respondent no. 2 in favour of appellant. When the amount was given back by the respondent no. 2 to the appellant on that very day then it is surprising why the receipt Ex. P/9 and the cheques Ex. P/1 to P/3 were not taken back by the respondent no. 2 from the appellant and why the receipt of refund of the amount was not taken. Apart from this there is nothing on record to show that why the cheque of Rs. 30,000/- Ex. P/8 was given by the respondent no. 2 to the appellant. These all documents goes to show beyond doubt that the appellant who is maternal-uncle of the respondent no. 1 lent a sum of Rs 80,000 to the Respondent no. 2, in lieu of which the cheques EX. P/1 to P/3 were not taken back by the respondent no. 2 as proprietor of respondent no. 1 and the amount was returned by the respondents to the appellant.”

The court also observed:

“In the opinion of this court, the argument that the plaintiff’s plea regarding the real consideration being barred, has no merit. The plaintiff did not claim return of any amount from the buyer; the suit is not based on any plea involving examination of a benami transaction. Besides, the plaintiff is not asserting any claim as benami owner, nor urging a defense that any property or the amount claimed by him is a benami transaction.”

“The defendant/appellants never said that the plaintiff or someone other than the purchaser was the real owner; nor was the interest in the property, the subject matter of the recovery suit.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Evidence of the Loan: The court found that the evidence clearly showed that a loan of ₹80,000 was given by Surendra to Sanjay. The issuance of post-dated cheques and the receipt for ₹60,000 were critical pieces of evidence.
• Lack of Evidence of Repayment: The court noted that Sanjay failed to provide any evidence that the loan was repaid. The fact that the cheques and the receipt were not taken back by Sanjay was a significant factor.
• Initial Agreement for ₹2,30,000: The court considered the initial agreement for ₹2,30,000, which showed that Surendra had sufficient funds to lend the amount. This negated the trial court’s finding that the deposit of ₹80,000 in Surendra’s account was related to the loan.
• Rejection of Benami Plea: The court held that the suit was not based on a benami transaction. The plaintiff was not asserting any claim as a benami owner, and therefore, the provisions of the Benami Act were not applicable.
• Admission of the Photocopy: The court noted that Sanjay had admitted to the photocopy of the initial agreement, which further strengthened Surendra’s case.

The sentiment analysis of the reasons given by the Supreme Court is as follows:

Fact:Law Ratio

The court’s reasoning was a mix of factual analysis and legal interpretation. The factual aspects, such as the evidence of the loan and the lack of evidence of repayment, weighed more heavily in the court’s decision. The legal aspects, such as the interpretation of the Benami Act, were also considered, but the factual analysis played a more dominant role.

Logical Reasoning:

Key Takeaways

• A plea of benami transaction cannot be used to avoid repayment of a loan if the suit is not based on a benami transaction.
• The burden of proving a benami transaction lies on the person asserting it.
• Courts will consider all evidence, including photocopies of documents if the original is not available and the party admits the photocopy.
• The lack of evidence of repayment, such as not taking back cheques or receipts, can be detrimental to the borrower’s case.
• The initial agreement of sale can be used to prove that the lender had sufficient funds to advance the loan.

Potential Future Impact: This judgment reinforces the principle that parties cannot use the Benami Act to avoid genuine debt obligations. It also highlights the importance of maintaining proper records of financial transactions and the need to present clear and consistent defenses in court.

Directions

There were no specific directions given by the Supreme Court in this judgment.

Specific Amendments Analysis

There was no specific amendment discussed in this judgment.

Development of Law

The ratio decidendi of this case is that a plea of benami transaction cannot be used to avoid repayment of a loan if the suit is not based on a benami transaction. This case does not introduce any new legal principles but reinforces the existing provisions of the Benami Transactions (Prohibition) Act, 1988, and the principles of evidence.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision to decree the suit for recovery of ₹80,000. The court found that the appellant’s claim thatthe loan was related to a benami transaction was unmerited and that the evidence supported the respondent’s claim that the loan was given and not repaid. This case underscores the importance of clear evidence and consistent defenses in legal proceedings and reinforces that the Benami Act cannot be used to avoid genuine debt obligations.