Recently, the Kerala High Court held that a loan advanced in violation of Section 269SS of the Income-Tax Act, 1961, cannot be treated as a “legally enforceable debt” for the purpose of prosecuting a cheque bounce case under Section 138 of the Negotiable Instruments Act. The Court was hearing a criminal revision petition arising out of concurrent findings of conviction by the Trial Court and the Appellate Court, based on a dishonoured cheque issued towards repayment of a ₹9,00,000 cash loan. The Court observed that permitting enforcement of such transactions would amount to indirectly legalising high-value cash dealings, which contradicts the legislative intent behind India’s push for digital and accountable financial systems.
Brief Facts:
The case originated from a cheque bounce complaint filed under Section 138 of the Negotiable Instruments Act, 1881. The complainant alleged that the accused had borrowed ₹9,00,000, which was to be repaid via a cheque drawn on South Indian Bank, Pathanamthitta Branch. Believing the cheque would be honoured, the complainant presented it for encashment, but it was returned due to insufficient funds.
Following the dishonour, a statutory legal notice was issued by the complainant, which the accused received but failed to act upon. Instead, the accused replied with disputed claims and refused repayment. This led to criminal proceedings against him. During the trial, both parties presented witnesses and documentary evidence. The trial court found the accused guilty of the offence under Section 138 and sentenced him to one year of simple imprisonment along with a direction to pay ₹9,00,000 as compensation under Section 357(3) CrPC. In case of default, an additional year of simple imprisonment was imposed.
The accused challenged the decision before the Sessions Court, which upheld the trial court’s findings and dismissed the appeal. Thereafter, the matter reached the High Court through a criminal revision petition.
Contentions of the Petitioner:
The accused’s counsel contended that the alleged loan of ₹9,00,000 was made entirely in cash, violating Section 269SS of the Income Tax Act, 1961, which prohibits cash transactions above ₹20,000. It was argued that such a transaction is illegal and cannot form the basis of a “legally enforceable debt” under Section 138 of the Negotiable Instruments Act.
The defence also emphasized that the accused had no financial capacity to lend such an amount and that the complainant neither disclosed any legitimate source nor paid income tax on the alleged loan. Thus, the transaction was illegal and unenforceable in law.
Contentions of the Respondent:
The complainant’s counsel, argued that even if a cash transaction violated Section 269SS of the Income Tax Act, it would only attract a penalty under Section 271D and would not render the transaction null and void. He submitted that such violations are a matter between the revenue authorities and the defaulter and cannot be used by the accused to escape liability under Section 138 of the Negotiable Instruments Act.
Relying on precedents, including Sugunan v. Thulaseedharan and Krishna P. Morajkar v. Joe Ferrao, he emphasized that the statutory presumption under Section 139 of the NI Act stands in favour of the complainant and remains unrebutted by the accused.
Observations of the Court:
The High Court addressed a critical legal question, Can a debt arising out of a cash transaction in violation of Section 269SS of the Income-Tax Act be treated as a “legally enforceable debt ” under Section 138 of the Negotiable Instruments Act?
To answer this, the Court framed four specific questions. Most significantly, “Whether a cash transaction in violation of Section 269SS of the Income Tax Act can be treated as a ‘legally enforceable debt’?” The Court began by reaffirming the law laid down by the Supreme Court in Rangappa v. Sri Mohan, holding that, “Section 139 of the N.I. Act includes a presumption regarding ‘legally enforceable debt or liability’.”
However, the Court emphasized that this presumption is rebuttable and the standard of proof is that of preponderance of probabilities, not beyond reasonable doubt. Turning to the core issue, the Court strongly observed, “A cash transaction of more than Rs.20,000/- violates Section 269SS of the Act 1961. If a person accepts cash more than Rs.20,000/-, violating Section 269SS of the Act 1961, the same cannot be treated as a legally enforceable debt unless the person establishes the exceptional circumstances provided under Section 273B.” The Court noted that the complainant admitted that he had paid ₹9,00,000 in cash and had not filed income tax for the same. It observed, “There is no explanation given by the complainant for the violation of Section 269SS. Therefore, the complainant himself admits that the transaction was in violation of Section 269SS of the Act 1961. The complainant also admitted that he had not paid any income tax for the amount.”
Rejecting the view taken by the Bombay High Court in Prakash Madhukarrao Desai, the Court firmly held, “The reasoning of the Honourable Bombay High Court in Prakash Madhukarrao Desai is legally unsustainable.” The Court added, “The courts in India cannot legalise cash transactions, especially when the Union Government is aiming for a Digital India and is promoting electronic modes of payment, even by tea shops, paan shops and coolie workers.”
Citing Sanjay Mishra v. Kanishka Kapoor, the Court reinforced that, “The amount advanced by the complainant to the accused was unaccounted money and the same cannot be recovered by filing a complaint under Section 138 of the N.I. Act.” The Court also referred to the legal commentary by late Adv. Alex M. Scaria, “No presumption under Sections 118 and 139 of the N.I. Act can be drawn, if the transaction violates Section 269SS of the Income-Tax Act.”
Accordingly, the Court concluded, “The complainant could not prove that the amount paid by him to the accused is a legally enforceable debt. The accused had successfully rebutted the presumption under Section 139 of the N.I. Act.”
The decision of the Court:
On the basis of the above findings, the High Court held, “The concurrent findings of the courts below are set aside. The accused is acquitted. If the accused has deposited any amount during the pendency of the appeal or revision, the same shall be refunded forthwith.” The Criminal Revision Petition was allowed, and the conviction and sentence of the accused under Section 138 of the NI Act were quashed.
Case Title: P.C Hari v. Shine Varghese and Anr.
Case No.: CRL.Rev.Pet No. 408 of 2024
Coram: Justice P.V. Kunhikrishnan
Advocate for Petitioner: Adv. D.Kishore, Meera gopinath, R.Muraleekrishnan (Malakkara)
Advocate for Respondent: Advs. Manu ramachandran, M.Kiranlal, T.S.Sarath, R.Rajesh (Varkala), Sameer M nair, Sailakshmi menon, Jothisha k.A., Shifana M
Picture Source : https://commons.wikimedia.org/wiki/File:Kerala_New_High_Court.jpg
