Cash Loan Above Income Tax Act Limit Doesn't Defeat Cheque Bounce Case: Supreme Court

The Supreme Court has held that violation of cash transaction limits under the Income Tax Act does not automatically make a debt unenforceable in cheque dishonour cases under Section 138 of the Negotiable Instruments (NI) Act.

A Bench of Justices Manoj Misra and Vijay Bishnoi said a breach of Section 269SS of the Income Tax Act, which regulates cash receipts, attracts the penalty prescribed under Section 271D. However, it does not make the underlying transaction illegal, invalid or statutorily void. Therefore, such a violation by itself cannot rebut the statutory presumptions available under the NI Act.

Cash loan above the legal limit

Court held that merely because a loan was allegedly advanced in cash beyond the limit prescribed under Section 269SS of the Income Tax Act, it cannot be said that the debt is not legally enforceable.

The Bench observed that once the execution of a cheque is admitted, the statutory presumptions under Sections 118(a) and 139 of the NI Act come into play against the accused. It said the trial court must analyse the evidence to determine whether the ingredients of the offence are made out, instead of wrongly placing the burden on the complainant to prove the debt solely due to lack of documentary evidence.

Court also reiterated that the presumption under Section 139 is rebuttable, but a mere denial by the accused is not enough.

"The accused must explain the circumstances surrounding the issuance of the cheque and its possession by the payee, and the presumption cannot be discarded without cogent evidence," the Bench said.

Court further clarified that the NI Act does not require a complainant to specifically plead or prove financial capacity in the complaint itself for the statutory presumption of debt to arise.

Why did the Supreme Court uphold the high court's order?

Court held that the Karnataka High Court rightly remanded the matter to the trial court after finding that it had failed to properly appreciate the evidence and had incorrectly shifted the burden of proving the existence of a legally enforceable debt onto the complainant.

The criminal appeal was filed by Sri Gopalaiah against the Karnataka High Court's October 10, 2013 judgment.

The case arose from the dishonour of two cheques drawn on Vijaya Bank, Vidyanagar Branch, one for Rs 8 lakh and another for Rs 50,000. Both cheques were returned unpaid due to "insufficient funds". After serving the statutory demand notice and receiving no payment, the complainant initiated proceedings under Section 138 of the NI Act.

The accused admitted his signatures on the cheques but claimed they had been handed over to one Srinivas. According to him, one was a blank security cheque for a loan of Rs 50,000 taken from Srinivas, while the other was issued to repay that amount. He alleged that Srinivas later passed the cheques to the complainant, who misused them.

The trial court acquitted the accused, holding that apart from oral testimony, there was no documentary evidence to show that the complainant had advanced Rs 8.5 lakh in cash. It relied on Section 269SS of the Income Tax Act, which prohibits acceptance of cash loans above the prescribed limit, and concluded that the complainant had failed to establish a legally enforceable debt. It also noted that the accused already had sufficient funds and therefore had no need to borrow money.

On appeal, the high court held that the presumption under Section 139 of the NI Act includes the existence of a legally enforceable debt or liability. It also observed that the Act does not require a complainant to plead or prove financial capacity at the threshold, and that Section 269SS applies to the recipient of money and not the lender. The matter was therefore remanded to the trial court for fresh consideration of the evidence.

Challenging the remand order, the appellant argued before the Supreme Court that he had sufficient funds after selling a parcel of land and therefore had no reason to borrow money. He also contended that since no documentary proof of the alleged loan was produced, the statutory presumption stood rebutted and the trial court's acquittal should not have been disturbed.

The complainant, however, pointed out that the accused had taken inconsistent stands. Before the trial court, he claimed the signed cheques had been given to Srinivas as security for a hand loan of Rs 50,000 and were not returned after repayment. In his reply to the statutory notice, however, he claimed that unsigned blank cheques had been handed over to Srinivas in connection with a property transaction. The complainant argued that such inconsistent defences, without cogent evidence, were insufficient to rebut the statutory presumption.

Agreeing with the high court, the Supreme Court held that once execution of the cheque is admitted, the presumptions under Sections 118(a) and 139 of the NI Act arise in favour of the holder.

The Bench rejected the argument that a cash transaction exceeding Rs 20,000 automatically becomes illegal and void, observing that such a view "cannot be countenanced".

Court reiterated that while the presumption under Section 139 is rebuttable, it cannot be displaced by a bare denial. The accused must offer a credible explanation for the issuance of the cheque and how it came into the possession of the payee. It added that lack of financial capacity on the part of the complainant, if established through evidence, may help rebut the presumption.

The Bench noted that the complainant had led evidence regarding his financial capacity, but the trial court failed to properly appreciate that material.

"In such circumstances, we are of the view that the high court committed no error in remanding the matter to the trial court. The appeal is, therefore, dismissed," the Bench said.

The Supreme Court also directed the trial court to dispose of the matter expeditiously, noting that the complaint had been pending since 2006.

Case Title: Sri Gopalaiah Vs K Manjunath 

Bench: Justices Manoj Misra and Vijay Bishnoi 

Date of Judgment: July 16, 2020