Cheque Dishonour | Defence That Complainant Lacks Financial Capacity Ought To Be Raised In Accused's Reply Notice : Supreme Court

The Supreme Court has held that the initial burden of raising a defence that the complainant lacked the financial capacity to advance a loan rests on the accused and must ordinarily be taken in the reply to the statutory demand notice issued under Section 138 of the Negotiable Instruments Act. If no such plea is raised at that stage, the complainant cannot later be expected to lead evidence proving his financial capacity while presenting his case.

The Supreme Court on Tuesday (August 4) held that a complainant's financial incapacity to extend the loan ought to be specifically pleaded in a reply to a statutory notice under Section 138 of the Negotiable Instruments Act, 1881.

“…the failure of the accused to respond to the statutory notice issued under Section 138 of the NI Act gives rise to an inference that the complainant's version carries merit. The initial burden of raising a defence that the complainant lacked the financial capacity to advance the loan rests upon the accused and ought to have been specifically pleaded in the reply to the demand notice.”, observed a bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan, while setting aside the Karnataka High Court's decision to acquit the Respondent in a cheque dishonour case.

The case arose from a complaint alleging that the accused had borrowed Rs.4.5 lakh as a hand loan and later issued a cheque towards repayment. The cheque was dishonoured due to insufficient funds. While the trial court convicted the accused under Section 138 of the Negotiable Instruments Act and the appellate court affirmed the conviction with a modification of sentence, the Karnataka High Court acquitted him in revision, holding that the complainant had failed to establish his financial capacity to lend such an amount.

Reversing the High Court's decision, the Supreme Court held that the defence relating to the complainant's financial incapacity must first be raised by the accused.

The judgment authored by Justice Nagarathna said that for invoking the provision of Section 138 of the NI Act, showing the financial capacity by the complainant is not a sine qua non; rather, the legal demand notice with a cheque return memo by a bank is sufficient to set the cheque dishonour proceedings in motion.

“…to constitute an offence under Section 138 of the NI Act, the complainant has to put forth evidence on record to fulfil the ingredients constituted under the said section. Such evidence would include documents such as legal notice of demand owing to non-payment of cheque issued by the accused, cheque return memo from the bank. If the court finds that the complaint was filed within the period of limitation and the other requirements such as the presentment of cheque within six months from the date on which it was drawn, demand of the said amount through legal notice within thirty days and non-repayment of the cheque amount within a period of fifteen days thereafter are fulfilled, the court has to set in motion the wheel of criminal machinery as envisaged under Section 138 of the NI Act.”, the Court observed.

The Court said that in the absence of a plea by the accused disputing the financial incapacity of the complainant, “the complainant cannot be expected, to adduce evidence establishing his financial capacity to pay the loan to the accused while leading his evidence.”

The Bench explained that the accused may discharge this burden by producing independent witnesses or documentary evidence, or by relying on the complainant's own evidence and conducting an effective cross-examination. However, in the present case, no material was placed on record to establish that the complainant lacked the financial means to extend the loan.

“In the facts of the present case, no such contra material has been placed on record before us to further the case of the accused that the complainant did not have any means to extend the hand loan and therefore the argument and defence of the accused on this aspect falls flat.”, the Court said, while allowing the appeal, and restoring the conviction of the Respondent-accused.

The Court noted that once the accused admitted his signature on the cheque, the statutory presumptions under Sections 118 and 139 of the Negotiable Instruments Act came into operation. These presumptions shift the burden to the accused to rebut the existence of a legally enforceable debt.

Examining the evidence, the Bench found that the complainant had consistently stated that he arranged the loan amount with financial assistance from relatives and acquaintances. This version was corroborated by prosecution witnesses who testified that they had lent money to the complainant to enable him to advance the loan. Their testimonies remained unshaken during cross-examination.

The Court also rejected the accused's defence that the cheque had been issued as a blank security cheque in connection with a separate loan transaction of Rs.40,000. It observed that the accused had produced no documentary evidence to support that claim and had not taken any timely legal steps to recover the allegedly misused cheque. The legal notice demanding return of the cheque was issued only after the cheque bounce prosecution had commenced, making it an afterthought.

Apart from the merits, the Supreme Court faulted the Karnataka High Court for exceeding the limits of its revisional jurisdiction. It held that a revisional court cannot re-appreciate evidence and substitute its own conclusions merely because another view is possible, particularly when both the trial court and the appellate court have returned concurrent findings of guilt.

Holding that no perversity or miscarriage of justice had been demonstrated to justify interference in revision, the Supreme Court restored the conviction and sentence imposed by the trial court, as modified by the appellate court.

Cause Title: KUNTEGOWDA VERSUS THURUBAIAH

Citation : 2026 LiveLaw (SC) 765

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Appearance:

For Petitioner(s) : Ms. Aparna Bhat, Sr. Adv. Ms. Rajkumari Banju, AOR Ms. Karishma Maria, Adv. Ms. Saumya, Adv. Mr. Saransh Khandelwal, Adv.

For Respondent(s) : M/S. Nuli & Nuli, AOR Mr. Anand Sanjay M Nuli, Sr. Adv. Mr. Abhishek Kanyalur, Adv. Mr. Shiva Swaroop, Adv. Mr. Dharam Singh, Adv.