Registered Sale Agreement Can Be a Mask for Loan Security, Not a Binding Promise of Sale: Madras High Court Declares Oral Evidence Admissible to Expose Real Intention

“Bar under Sections 91 & 92 Evidence Act does not apply when the very nature of a document is in question, not its terms” — In a reportable judgment Madras High Court held that a registered sale agreement can be declared a sham document when the evidence clearly reveals that it was executed as security for a loan, and not for an actual sale. While denying the plaintiff’s prayer for specific performance, the Court granted the alternate relief of refund of ₹10 lakhs, which had been acknowledged as an advance under the agreement, along with 7.5% interest per annum, and created a charge on the property to secure recovery.

The Court categorically observed: “Sections 91 and 92 of the Indian Evidence Act bar oral evidence to contradict the terms of a written contract, but not to expose the transaction itself as a sham. When a party claims that a document was never intended to be acted upon as it reads, oral and circumstantial evidence is admissible.”

“When a Contract Is a Cloak and Not a Commitment, Courts Will Pierce Its Form to Discover Its Soul”: High Court Discards Registered Sale Agreement as Loan Security

The Court held that execution of a registered sale agreement is not conclusive proof of intent to sell property. In this case, the agreement was signed immediately after a police complaint and panchayat compromise, raising strong doubts about its genuineness as a sale document.

Justice R. Sakthivel remarked: “Would a person voluntarily execute a sale agreement one day after being accused in a police complaint by the same person? Such conduct is contrary to common sense and human behaviour. It strongly suggests that the agreement was not intended for sale.”

The Court found that the plaintiff lodged a police complaint on July 1, 2014, claiming the defendant’s husband owed him money. A panchayat was held the same night, and the next day, on July 2, 2014, the sale agreement was executed. Relying on documents obtained under the RTI Act and testimonies of multiple witnesses, the Court concluded that the agreement was a compromise tool, not a genuine transaction.

“Passing of Consideration Must Be Proved Like Any Other Fact — Recitals Alone Do Not Create Debt”: No Evidence of ₹10 Lakh Advance Weakens Claim of Sale

The plaintiff contended that ₹10 lakhs was paid in cash on the date of agreement. But the Court found no document, no bank statement, no acknowledgment, and no consistent testimony to support this.

Justice R. Sakthivel noted:

“There is no clear and sufficient evidence to show that the plaintiff had ₹10,00,000 with him in cash or that it was paid as advance under the agreement. The testimonies of plaintiff's witnesses contradict each other, and no attesting witness witnessed the alleged payment.”

Even the document writer testified that the defendant merely stated that she had received the money, but he did not witness any transaction. The Court held that such recitals are not proof of actual consideration, especially when oral and documentary evidence disproves intent to sell.

“Specific Performance Is a Discretionary Remedy — Plaintiff Must Come With Clean Hands and Prove Readiness”: Plaintiff failed to show financial ability or deposit money

Reiterating the well-established principle that specific performance is not automatic, the Court said that readiness and willingness must be affirmatively demonstrated.

“It is settled law that even in absence of any challenge from the defendant, the plaintiff must independently prove readiness to perform the contract. Mere assertions in pleadings are insufficient — documentary evidence like bank statements or other proof of funds must be shown.”

The Court referred to J.P. Builders v. A. Ramadas Rao, (2011) 1 SCC 429, and found that the plaintiff had neither deposited the balance consideration in court nor produced any credible evidence to show financial ability.

Moreover, the agreement itself was found not to be for sale, making the question of specific performance moot.

“When a Sham Agreement Records a Debt, Recovery Must Follow — Equity Demands Refund with Interest”: High Court grants restitution despite dismissal of specific relief

Though the suit for specific performance was rightly dismissed, the Court held that the plaintiff was entitled to recover ₹10 lakhs, as recorded in the agreement.

“The defendant cannot approbate and reprobate. If the agreement was a security for a loan — and that is now proved — then the money acknowledged in it must be repaid. The defendant cannot be unjustly enriched at the expense of the plaintiff.”

The Court noted that the defendant contradicted herself in different stages — claiming in her reply notice that only ₹3 lakhs was owed, later stating it was ₹6 lakhs, and suggesting repayment of ₹5.5 lakhs — none of which were proved with evidence.

Accordingly, the Court granted a decree of ₹10,00,000 with 7.5% simple interest from the date of suit till realisation, and created a charge on the suit property under Section 58 of the Transfer of Property Act, 1882.

“Nature of Document Can Be Challenged; Its Terms Cannot Be Distorted Without Proof”: High Court applies Supreme Court rulings on Sections 91 and 92 of the Evidence Act

The plaintiff’s counsel argued that under Sections 91 and 92, oral evidence was inadmissible to contradict a registered agreement. The Court rejected this argument, citing landmark rulings:

In R. Janakiraman v. State, (2006) 1 SCC 697, the Supreme Court held:

“Section 92 does not apply when a party asserts that the transaction itself was different from what it purports to be. Oral evidence is admissible to show that a document was a sham or executed for a collateral purpose.”

Similarly, in Vimal Chand Ghevarchand Jain v. Ramakant Eknath Jadoo, (2009) 5 SCC 713, it was held:

“When the true character of a document is questioned, extrinsic evidence is admissible. Section 91 read with 92 does not bar oral evidence to prove that the document was never intended to be acted upon.”

Applying these principles, the Madras High Court found that the registered agreement was not executed with intent to sell, but as a debt security, and thus oral and surrounding evidence were rightly admitted and acted upon.

Justice R. Sakthivel concluded with a balanced order, stating: “The trial court was correct in dismissing the suit for specific performance. However, it erred in not granting the alternate relief of refund. Once it is found that the document is a loan security, the plaintiff is entitled to recover what he advanced under it.”

The Appeal was partly allowed, the decree modified to grant:

• ₹10 lakhs refund with

• 7.5% interest per annum, and

• A charge on the property to secure enforcement.

The judgment is a significant reaffirmation that form cannot defeat substance and that courts are empowered to unmask sham transactions, ensure restitution, and deny equitable remedies when parties fail to meet legal thresholds.

Date of Decision: 29 October 2025