Cash Loan Above ₹20K in Violation of Income Tax Act Not a Legally Enforceable Debt Under NI Act: Kerala High Court Quashes Cheque Bounce Conviction
- REEDLAW
- Jul 30
- 4 min read
Updated: Aug 12
REEDLAW Legal News Network reports that the Kerala High Court has held that a cash loan exceeding ₹20,000 advanced in violation of Section 269SS of the Income Tax Act is not a legally enforceable debt under Section 138 of the Negotiable Instruments Act, and accordingly quashed the cheque bounce conviction.
The Kerala High Court, in a significant ruling, through a Single-Judge Bench comprising Justice P.V. Kunhikrishnan, recently held that a debt arising from a cash transaction in violation of Section 269SS of the Income-tax Act, 1961—without a valid explanation under Section 273B—does not constitute a “legally enforceable debt” under Section 138 of the Negotiable Instruments Act, 1881. Consequently, a cheque dishonour prosecution based on such a transaction is not maintainable where the statutory presumption under Section 139 stands rebutted.
The Kerala High Court, in a significant ruling, while deciding a criminal revision petition under Section 138 of the Negotiable Instruments Act, 1881, examined the legality of a debt arising from a cash transaction exceeding ₹20,000 in violation of Section 269SS of the Income-tax Act, 1961. The central issue was whether such a statutorily prohibited transaction could give rise to a legally enforceable debt. The Court underscored that judicial validation of large-scale cash dealings—contrary to statutory mandates and the government's digital economy policy—would defeat the objective of curbing unaccounted money and the parallel economy. It unequivocally held that a transaction prohibited by law cannot generate a legally enforceable debt for the purpose of prosecution under Section 138 of the NI Act.
While Section 139 of the NI Act provides a presumption in favour of the holder of the cheque, the Court clarified that such a presumption is rebuttable. In the present case, the accused had consistently maintained that the complainant lacked the financial capacity to lend the alleged amount and further argued that the cash transaction lacked legal sanctity. The Court observed that the complainant admitted to having paid ₹9,00,000/- in cash, failed to declare it in his income tax returns, and had no valid explanation under Section 273B of the Income-tax Act. The Court held that the presumption under Section 139 stood rebutted by the accused through the defence raised and evidence adduced, displacing the burden of proof.
The Court examined previous decisions on the subject, including Sanjay Mishra v. Kanishka Kapoor, which held that repayment of unaccounted cash does not constitute a legally enforceable liability, and noted that the Division Bench judgment in Prakash Madhukarrao Desai had taken a contrary view. However, the Court expressly disagreed with the latter, emphasizing that penal consequences under the Income-tax Act serve to discourage cash dealings, and that criminal courts should not legitimise such transactions under the guise of statutory presumptions.
In support of its view, the Court also referred to an article by late Advocate Alex M. Scaria, who had argued that presumptions under Sections 118(a) and 139 of the NI Act could not apply when the underlying transaction violates Section 269SS. While the Court agreed with the principle that debts arising from illegal transactions cannot be enforced, it declined to accept the article’s proposition that the presumption under Section 139 would not arise at all, citing Rangappa v. Sri Mohan, REEDLAW 2010 SC 05001, which held that the presumption does arise but can be rebutted.
The Court held that the complainant's failure to offer a valid explanation for the cash transaction made the alleged liability unenforceable. It clarified that this ruling would apply only in cases where the issue is specifically raised and not retrospectively to concluded cases unless such a question had already been agitated during trial. Ultimately, the High Court allowed the revision petition, set aside the conviction and sentence imposed by the trial and appellate courts, and acquitted the accused. Any amount paid by the accused under court orders was directed to be refunded.
Mr. D. Kishore, Mrs. Meera Gopinath and Mr. R. Muraleerishnan (Malakkara), Advocates, represented the Petitioner.
Mr. Manu Ramachandran, Mr. M. Kiranlal, Mr. T. S. Sarath, Mr. R. Rajesh (VARKALA), Mr. Sameer M. Nair, Mrs. Sailakshmi Menon, Advocate, Mrs. Jothisha K.A. and Mrs. Shifana M., Advocates, appeared for the Respondent.
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