Section 269SS prohibits acceptance of loan or deposit exceeding Rs 20,000 by any mode other than account payee cheque or draft . Section 269T prohibits repayment of loan exceeding Rs 20,000 by any mode other than account payee cheque or draft.
I dont think you are in any contravention of 269SS or 269T, Since you are advancing in cheque and receiving in cash . - 269SS/T not applicable to you according to me .
However the repayer of the loan is in contravention of 269T , so first its not yr headache . second the AO may not be well within his powers to assume jurisdiction over the repayers locality . Also since the repayer is not filing his returns , its assumed his income is below the taxable limit . It will be too much of a stretch to imagine , that your AO asking your repayer to file his return (outside his jurisdiction) , so that he can levy a penalty u/s 269T