Madurai Bench Reverses Dismissal of Money Suit, Says Trial Court Cannot Silently Reject Plaintiff's Capacity to Lend Without Posing Court Questions

The Madurai Bench of the Madras High Court set aside a trial court decree dismissing a Rs 25 lakh money suit, holding that adverse findings on unchallenged facts without court questions are perverse and that a cash loan above Rs 20,000 in breach of Section 269SS of the Income Tax Act does not render the debt unenforceable.

A Division Bench of the Madurai Bench of the Madras High Court, comprising Justice G.R. Swaminathan and Justice R. Poornima, on 4 June 2026 allowed an appeal suit filed by P. Palanikumar against R. Selvi, reversing the dismissal of a money suit for recovery of Rs 31,54,167 (principal of Rs 25,00,000 with interest at 12% per annum). The IV Additional District Judge, Madurai had dismissed the suit on 28 June 2018, holding that the plaintiff had not proved his financial capacity to advance such a large sum and had not established due execution of the promissory note. The Division Bench found that the trial court's adverse finding on the plaintiff's wherewithal was perverse because the court had not posed a single question to the plaintiff under Section 165 of the Indian Evidence Act, 1872, and the defendant had neither filed a written statement nor cross-examined the plaintiff. The suit was decreed as prayed for.

The Dispute Before the Court

Palanikumar's case was that R. Selvi approached him for a loan to meet family expenses and discharge sundry debts. He advanced Rs 25,00,000 in cash on 5 June 2015. Selvi executed a promissory note (Ex.A1) on the same date, agreeing to repay with interest at 12% per annum. She also deposited the original sale deed of her property dated 10 February 2006 with the plaintiff as security.

When Selvi neither repaid the principal nor paid any interest, Palanikumar sent a legal notice on 19 June 2017 (Ex.A3). Selvi received it and replied on 3 July 2017 (Ex.A4). She did not comply with the demand. The plaintiff then filed O.S. No.143 of 2017 before the IV Additional District Judge, Madurai.

Selvi did not file a written statement. She did not cross-examine the plaintiff when he examined himself as P.W.1 and marked Exhibits A1 to A4. Despite this, the trial court framed three issues — whether the plaintiff proved his sources of income to lend the amount, whether he proved the mode of payment, and whether he proved execution of the promissory note with the best available evidence — and answered all three against the plaintiff. The suit was dismissed.

The Legal Issues on Appeal

The Division Bench identified two questions for determination: whether the trial court was justified in holding that the plaintiff had not proved due execution of the promissory note, and whether it was justified in dismissing the suit on the ground that the plaintiff had not proved his financial wherewithal.

The appellant's counsel argued that dismissing the suit when the defendant had not filed a written statement or cross-examined the plaintiff was without justification. He contended that undue importance was attached to the plaintiff's financial capacity when there was no dispute about it, and that the trial court had failed to appreciate the admissions in the defendant's reply notice.

The respondent's counsel defended the trial court, relying on the Supreme Court's decision in Maya Devi v. Lalta Prasad (2015) 5 SCC 588, which holds that the absence of a defendant does not absolve the trial court of its obligation to satisfy itself of the factual and legal veracity of the plaintiff's claim, and that no automatic decree can be passed merely because the defendant remained ex-parte.

How the Bench Reasoned

The Division Bench accepted the principle from Maya Devi but held that the trial court had misapplied it. The court's obligation to scrutinise the plaintiff's claim does not permit it to render an adverse finding on a point that was never challenged, without first putting the plaintiff on notice through court questions.

On the wherewithal issue, the bench noted that the plaintiff had not marked his income tax returns. However, it relied on R. Singaravadivelan v. Durai Senthil, 2024 SCC OnLine Mad 12874, to hold that the mere absence of a transaction in a party's IT returns cannot lead to the conclusion that the transaction did not take place.

The bench then addressed the trial court's failure to use its powers under Section 165 of the Indian Evidence Act, 1872, which enables a judge to ask any question, in any form, at any time, of any witness or party about any fact relevant or irrelevant. The bench observed that when the trial court had doubts about the plaintiff's capacity to lend Rs 25,00,000, it was obliged to pose questions to the witness. Not having done so, it could not render an adverse finding on that point.

The bench was pointed in its criticism: “The Judge should not sit like a sphinx.” It held that the adjudicatory system requires all cards to be laid on the table, and that if a judgment rests on an adverse element, the litigant must have been put on notice during the proceedings. A finding that emerges without any prior indication to the party concerned violates the principles of natural justice.

The bench also invoked Order 10 Rule 2 of the CPC, which enables the court to orally examine any party on material questions relating to the suit, and Order 10 Rule 3, which mandates that the substance of such examination be reduced to writing by the judge and form part of the record. The bench noted that while Rule 2 uses the word “may”, Rule 3 uses “shall” twice, making contemporaneous recording mandatory once the power is exercised. The record showed no such exercise had been undertaken. The finding on wherewithal was therefore held to be perverse, being based on no evidence.

On the question of the defendant's procedural position, the bench reiterated settled law: a defendant who has not filed a written statement cannot lead evidence, because evidence must have a foundation in pleadings. The bench cited Siddik Mahomed Shah v. Saran, 1929 SCC OnLine PC 79, and the Supreme Court's recent restatement in Manjusha v. United India Assurance Co. Ltd., 2025 SCC OnLine SC 1512. However, such a defendant can still participate by cross-examining the plaintiff's witnesses, as held in Modula India v. Kamakshya Singh Deo (1988) 4 SCC 619. Selvi did not even cross-examine P.W.1.

On the rule of non-traverse, the bench applied Order 8 Rule 5 CPC, which provides that every allegation of fact in the plaint, if not specifically denied or stated to be not admitted, shall be taken to be admitted. Since Selvi had not filed a written statement, the plaintiff's claim that he advanced the amount and that she executed the promissory note was deemed admitted. The bench drew support from the Karnataka High Court's decision in M. Jeetendar Gandhi v. Huthappa, 1999 SCC OnLine Kar 225, which dealt with an identical fact pattern.

On the promissory note, the bench held that the presumption under Section 118 of the Negotiable Instruments Act, 1881 applied. That provision raises a presumption that every negotiable instrument was made for consideration. The burden was on Selvi to rebut this presumption. She failed to do so. The trial court erred in not applying this presumption in the plaintiff's favour.

The bench also addressed Selvi's reply notice (Ex.A4). She had not denied receiving the money. Her defence was that the plaintiff had been set up by a third party named Santhanakrishnan, and that she was ready to repay Rs 75,00,000 to him. The bench held that this admission — that money was received — further supported the plaintiff's case. If Selvi's defence was that the plaintiff was a front for Santhanakrishnan, she was required to substantiate that by entering the witness box. She did not.

The bench also addressed the cash transaction issue under Section 269SS of the Income Tax Act, 1961, which requires transactions above Rs 20,000 to be made through a banking instrument. The plaintiff had advanced Rs 25,00,000 in cash, plainly in breach of that provision. The bench held that this breach exposed the plaintiff to a penalty under Section 271D of the Income Tax Act, and the Income Tax authorities were free to act. But the breach did not render the transaction illegal, invalid, or void, and did not disentitle the plaintiff from seeking recovery. The bench relied on the Supreme Court's decision in Sanjabij Tari v. Kishore S. Borcar, 2025 SCC OnLine SC 2069, which held that a violation of Section 269SS does not rebut the presumptions under Sections 118 and 139 of the Negotiable Instruments Act or render the debt legally unenforceable.

Two further points reinforced the plaintiff's case. First, the plaintiff had produced the original title deed of the defendant's property (Ex.A2). The plaintiff had referred to this document in his legal notice. Selvi never explained how her title documents came to be in the plaintiff's possession. The trial court made no reference to Ex.A2 in its judgment, nor did it refer to Ex.A4, the reply notice. This omission was a further infirmity in the impugned judgment.

Second, the plaintiff had not examined any attestor to the promissory note. The bench held that this was not fatal. A promissory note need not be attested, relying on Eswari Ammal v. Vallimayil, 2021 SCC OnLine Mad 1739. Non-examination of an attestor cannot be held against the plaintiff when the defendant has not disputed the passing of consideration and has not disputed her signature on the pro-note.

Outcome

The Division Bench set aside the judgment and decree of the IV Additional District Judge, Madurai dated 28 June 2018. The appeal suit was allowed and O.S. No.143 of 2017 was decreed as prayed for, entitling Palanikumar to recover Rs 31,54,167 with subsequent interest at 12% per annum from the date of the plaint till realisation. The bench directed that after Selvi satisfies the decree, she may apply to the trial court to take back the original title document (Ex.A2). No costs were awarded.