S.138 NI Act - Cheque Bounce Case Maintainable Even For Cash Loan Above ₹20,000 : Supreme Court Sets Aside Kerala High Court Ruling

The Supreme Court on Thursday (September 25) set aside the judgment of the Kerala High Court which held that a debt created by a cash transaction above Rupees Twenty Thousand in violation of the Income Tax (IT) Act, 1961 cannot be considered as a "legally enforceable debt" under Section 138 of the Negotiable Instruments Act.A bench comprising Justice Manmohan and Justice NV Anjaria, while deciding an appeal against a Bombay High Court Judgment, observed that the Kerala High Court's recent judgment in P.C. Hari v. Shine Varghese and Anr, delivered on June 25, 2025 was wrong.It may be noted that the bench was not deciding an appeal against the Kerala High Court's judgment. The Special Leave Petition filed against the Kerala High Court's judgment, on which the Supreme Court last week issued notice, is pending.The present bench observed that that a violation of Section 269SS of the Income Tax Act, 1961, which restricts cash transactions above ₹20,000, does not render such transactions illegal, void or unenforceable. The Bench observed that breach of Section 269SS merely attracts the statutory penalty prescribed under Section 271D, and cannot by itself invalidate a debt for the purpose of proceedings under Section 138 of the Negotiable Instruments Act, 1881. Holding that the presumptions under Sections 118 and 139 of the NI Act remain unaffected, the Court categorically rejected the view taken in P.C. Hari that cash transactions above ₹20,000 are void and do not qualify as “legally enforceable debts.”Setting aside the High Court's view, the judgment authored by Justice Manmohan observed :"Recently, the Kerala High Court in P.C. Hari vs. Shine Varghese & Anr., 2025 SCC OnLine Ker 5535 has taken the view that a debt created by a cash transaction above Rs. 20,000/- (Rupees Twenty Thousand) in violation of the provisions of Section 269SS of the Income Tax Act, 1961 (for short 'IT Act, 1961') is not a 'legally enforceable debt' unless there is a valid explanation for the same, meaning thereby that the presumption under Section 139 of the Act will not be attracted in cash transactions above Rs. 20,000/- (Rupees Twenty Thousand)."However, this Court is of the view that any breach of Section 269SS of the IT Act, 1961 is subject to a penalty only under Section 271D of the IT Act, 1961. Further neither Section 269SS nor 271D of the IT Act, 1961 state that any transaction in breach thereof will be illegal, invalid or statutorily void. Therefore, any violation of Section 269SS would not render the transaction unenforceable under Section 138 of the NI Act or rebut the presumptions under Sections 118 and 139 of the NI Act because such a person, assuming him/her to be the payee/holder in due course, is liable to be visited by a penalty only as prescribed. Consequently, the view that any transaction above Rs.20,000/- (Rupees Twenty Thousand) is illegal and void and therefore does not fall within the definition of 'legally enforceable debt' cannot be countenanced. Accordingly, the conclusion of law in P.C. Hari (supra) is set aside."The bench was deciding an appeal against acquittal of the cheque drawer in a case under Section 138 of the Negotiable Instruments Act. The dishonoured cheque was issued for an amount of Rs.6,00,000/ and the drawer was convicted concurrently by the trial court and the sessions court.APPROACH OF SOME COURTS BELOW TO NOT GIVE EFFECT TO THE PRESUMPTIONS UNDER SECTIONS 118 AND 139 OF NI ACT IS CONTRARY TO MANDATE OF PARLIAMENTThe Supreme Court, in the judgment, also expressed concerns over the fact that many courts are not giving effect to the presumption under Section 118 and Section 139 of the NI Act."This Court also takes judicial notice of the fact that some District Courts and some High Courts are not giving effect to the presumptions incorporated in Sections 118 and 139 of NI Act and are treating the proceedings under the NI Act as another civil recovery proceedings and are directing the complainant to prove the antecedent debt or liability. This Court is of the view that such an approach is not only prolonging the trial but is also contrary to the mandate of Parliament, namely, that the drawer and the bank must honour the cheque, otherwise, trust in cheques would be irreparably damaged."Coming to the merits of the matter, the Court noted that the accused had not replied to the demand notice, which will give rise to an adverse inference. No evidence was adduced to rebut the presumption under S.139 Act. The defence of the accused that a blank signed cheque was misued was found to be unbelievable. The Court also faulted the High Court for interfering with the concurrent findings of the Courts below in the exercise of its revisional jurisdiction. Accordingly, the appeal was allowed.The Court also issued elaborate guidelines to trial courts to reduce the backlog of cheque bounce cases. Also from the judgment - No Need For Pre-Cognizance Summons To Accused In S.138 NI Act Case : Supreme Court Issues...

S.138 NI Act - Cheque Bounce Case Maintainable Even For Cash Loan Above ₹20,000 : Supreme Court Sets Aside Kerala High Court Ruling

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