S.138 NI Act | Supreme Court Sets Aside Kerala HC Ruling That Cheque Dishonor Case Not Maintainable For Unexplained Cash Debt Over Rs.20K

The Supreme Court recently set aside the Kerala High Court judgment in PC Hari v. Shine Varghese, which held that a debt created by a cash transaction above Rs.20,000 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 unless there is a valid explanation for the same.

A bench of Justices PK Mishra and Vipul M Pancholi set aside the High Court judgment in view of a co-ordinate bench's decision in Sanjabij Tari v. Kishore Borcar, which declared that the Kerala High Court's vew as erroneous.

The matter has been remitted back to the High Court to decide afresh on merits in exercise of its revisional jurisdiction.

It may be noted that in Sanjabij Tari, the Supreme Court was dealing with an appeal against Bombay High Court's acquittal of the cheque drawer in a case under Section 138 of NI Act. The dishonored 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. Allowing the appeal on merits, a bench of Justices Manmohan and NV Anjaria observed that a violation of Section 269SS of the IT Act, which restricts cash transactions above Rs.20,000, did not render such transactions illegal, void or unenforceable. It further stated 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 NI Act.

Holding that the presumptions under Sections 118 and 139 of the NI Act remain unaffected, the Court categorically rejected the view taken by the Kerala High Court in PC Hari that cash transactions above Rs.20,000 are void and do not qualify as “legally enforceable debts". Setting aside the conclusion in PC Hari, the bench in Sanjabij Tari said,

"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/- 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 is set aside."

Background

As per claims, the complainant-petitioner paid an amount of Rs. 9 lakhs in cash to the accused-respondent No.2. The accused issued a cheque with the said amount to the complainant. However, later the cheque was dishonored for insufficient funds. Hence, a complaint was preferred by the complainant.

The accused was found guilty by the Magistrate Court after conclusion of trial. Thereafter, an appeal was preferred and the same was also dismissed. Aggrieved, the accused approached the High Court.

In the impugned judgment, the Kerala High Court noted that as per Section 269SS of the IT Act, any transaction above Rs. 20,000/- can only be made through an account transaction or by issuance of a cheque or a draft. It said: "Hereafter, if anybody pays an amount in excess of 20,000/ to another person by cash in violation of Act 1961, and thereafter receives a cheque for that debt, he should take responsibility to get back the amount, unless there is a valid explanation for such cash transactions. If there is no valid explanation in tune with Section 273B of the Act 1961, the doors of the criminal court will be closed for such illegal transactions."

On this ground, the High Court set aside the Section 138 NI Act conviction of the accused.

The complainant, challenging the High Court judgment, contended that the prohibition under Section 269SS is on the person accepting accepting the money, and not on a creditor who is lending the amount. It was argued that the said provision is only prescribing the mode of transaction above a monetary threshold and does not nullify the substantive transaction itself. If there is a violation, a penalty is provided under the IT Act itself. The violation of this provision does not extinguish the liability of the debtor.

"What is already visited with a statutory penalty under the Income Tax Act cannot, by judicial extension, be converted into a substantive extinguishment of rights under the general law of obligations and penal law under Section 138 of the N1 Act. Such a construction would not only trench upon the constitutional guarantee against double jeopardy but would also distort the harmonious interpretation of two special statutes," the complainant submitted.

The complainant also pointed out that different High Courts had given conflicting judgments on the issue and hence, an authoritative pronouncement by the Supreme Court was necessary.

Case Title: SHINE VARGHESE KOIPURATHU v. STATE OF KERALA, Crl.A. No. 5385/2025

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