Introduction
In the case of Birmala Projects (P.) Ltd. v. Ashwani Ahluwalia[i], the Delhi High Court examined the judicial interpretation of cash transactions in contractual agreements and their enforceability under Indian tax laws. While adjudicating on the issue of a certain cash payment made in furtherance of a collaborative agreement among the parties, which allegedly violated s. 269ST of the Income-tax Act, 1961 (‘Act’), the High Court, through the present decision, furthered to provide significant clarity on whether such statutory violations nullify agreements and the principles governing restitution claims thereof.
Brief Facts
The Plaintiff, Birmala Projects Pvt. Ltd was a company engaged in the business of real estate development and property redevelopment. Ashwani Ahluwalia (‘Defendant’) was the owner of an immovable property located in Anand Niketan, New Delhi. On 09.12.2019, the Plaintiff and Defendant (‘Parties’) entered into a Collaboration Agreement for the redevelopment of the Defendant’s property.
As part of the agreement, the Plaintiff agreed to undertake construction and redevelopment work, and in return, the property’s ownership and revenue-sharing terms were divided between the Parties.
The financial terms of the agreement required the Plaintiff to make payments amounting to Rs. 4.75 crore to the Defendant, out of which Rs. 1.5 crore was paid in cash. Shortly after the execution of the agreement, the Plaintiff discovered that the defendant had engaged in similar agreements with other parties and had received multiple advance payments. This raised concerns regarding the Defendant’s intent and prompted the Plaintiff to suspect fraudulent conduct.
Consequently, the Plaintiff lodged a police complaint against the Defendant, which resulted in an FIR being registered. Despite several attempts to resolve the dispute amicably and recover the funds, the Defendant refused to refund the cash amount paid.
The Defendant claimed that the cash transaction was illegal under s. 269ST of the Act, as the payment made thereinunder exceeded the prescribed limit. Hence, the agreement was void and unenforceable, warranting the plaintiff’s claim for the recovery to be set aside under Order VII, r. 11(D) of the Code of Civil Procedure, 1908 (‘CPC’).
In the aforementioned factual scenario, the High Court was tasked to determine whether a statutory violation under the Act could be used as a defence to escape liability under a legally valid contract.
Held
The High Court observed that mere receipt of cash and the alleged violation of s. 269ST does not automatically render the agreement void or unenforceable in court. It further observed that the statutory penalty provided for under s. 271DA of the Act is imposed on the recipient of the cash, i.e., the Defendant in the present case, and not on the person who is conferring such cash.
The Defendant’s argument that the violation of s. 269ST of the Act made the agreement null and void, which was also dismissed by the High Court, while clarifying that such statutory provisions are regulatory in nature and do not, by themselves, invalidate contracts unless expressly stated in law. The Defendant could not have used a statutory violation as a defence to unjustly enrich himself and evade repaying the cash payment prima facie made in furtherance of a collaborative agreement.
The High Court, while rejecting the Defendant’s plea, held that the plaintiff’s claim for recovery was maintainable while keeping in mind the principle of unjust enrichment, whereby the Defendant was prevented from taking undue advantage of his own wrongdoing.
Our Analysis
This ruling is a crucial precedent in determining the legal consequences of statutory violations in private contracts. The High Court reaffirmed that fiscal regulations primarily serve a regulatory and penal purpose rather than automatically invalidating transactions. The judgment clarifies that while non-compliance with tax provisions can invite penalties, it does not necessarily render an agreement void or unenforceable.
The High Court’s approach aligns with key legal precedents, such as Sheela Sharma v. Mahendra Pal[ii], which held that violations of fiscal statutes such as s. 269SS of the Act, do not render agreements void unless explicitly stated, similarly, in Asstt. Director of Inspection v. Kum. A.B. Shanthi[iii], the Supreme Court clarified that tax provisions aim to curb tax evasion but do not nullify genuine transactions. Additionally, in Loop Telecom & Trading Ltd. v. Union of India[iv], the Supreme Court ruled that a party who benefits under an agreement cannot unjustly retain such benefits if the contract is later deemed void.
The judgment highlights a crucial distinction between an unlawful contract and a contract where only the mode of transaction is questioned. Here, the collaboration agreement itself was lawful, but the mode of payment violated tax laws. The ruling clarifies that such violations invite fiscal penalties but do not automatically void agreements unless explicitly stated by law. The court’s reasoning ensures that tax laws are not misinterpreted to allow one party to evade contractual obligations at the expense of another.
Additionally, the Court’s emphasis on the doctrine of unjust enrichment further ensures that regulatory provisions cannot be exploited to evade contractual obligations. Allowing the defendant to withhold the amount based on a technical violation would have established an untenable precedent for contractual fairness. The court rightly upheld that legal and contractual principles must be interpreted in a manner that prevents unjust gain.
End Notes
[i] 2025 SCC OnLine Del 1119 dated 18.02.2025.
[ii] 52016 SCC OnLine Del 4696.
[iii] [2002] 6 SCC 259.
[iv] [2022] 6 SCC 762.
Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.