The Sanctity Of Cheque: Supreme Court Rules Cash Loan Limit Does Not Void Negotiable Instruments Act Liability

The judgment, delivered in Sanjabij Tari v. Kishore S. Borcar, categorically determines that contravening the cash transaction restrictions prescribed by the Income Tax Act, 1961 (IT Act) does not make the original debt unlawful for purposes of a case of cheque dishonour. This ruling makes it clearer what are the boundaries of statutory interpretation, confirming that a regulatory breach attracting a penalty is fundamentally different from a transaction being void ab initio.

The Legal Conflict Explained: A Debt Dilemma

The dispute primarily concerned the interpretation of two statutory provisions. On one side stands Section 138 of the NI Act , a central provision in maintaining commercial certainty, which criminalizes the dishonour of a cheque issued in discharge of a “legally enforceable debt or other liability.” On the other side is Section 269SS of the IT Act, a regulatory measure intended to curb the circulation of black money by prohibiting the acceptance of any loan or deposit of ₹20,000 or more in cash, requiring such transactions to be conducted only through account payee instruments or electronic clearing systems. The essential question courts faced was whether a loan admittedly paid in cash, thus violating the IT Act, could still be considered a “legally enforceable debt” under the NI Act.

Prior to the Supreme Court's intervention, several High Courts and District Courts had adopted a restrictive, policy, driven interpretation, effectively allowing debtors to exploit the creditor's tax compliance failure to evade criminal liability for cheque dishonour. This judicial trend was most explicitly set forth by the Kerala High Court in P.C. Hari v. Shine Varghese , a case involving a cheque issued against a substantial cash loan. The High Court analysed the issue through the lens of national economic policy, particularly focusing on the Union Government's goal of "Digital India" and the urgent need to discourage large cash movements to curb the "parallel economy." (Para 1)

The Kerala High Court took the view that if criminal courts sanctioned large cash transactions by enforcing the underlying debt, they would be indirectly "legalising such illegal transactions" and facilitating the conversion of "Even black money will be converted into white money through the criminal courts." (Para 24) This made the High Court to conclude that the purpose of the IT Act would be defeated if the courts accepted such transactions as proof of a legally enforceable debt. Based on this reasoning, the Kerala High Court issued a sweeping declaration: "Accordingly, it is declared that debt created by a cash transaction above Rs. 20,000/− in violation of the provisions of Act, 1961 is not a 'legally enforceable debt' unless there is a valid explanation for the same." (Para 27)

The Supreme Court, however, disagreed with this interpretation, claiming that the lower courts were conflating two distinct legal concepts: commercial liability and fiscal penalty. The Apex Court emphasized that the legislative intent behind the NI Act, which is "to restore the credibility of cheques as a trustworthy substitute for cash payment" (Para 14) , must be protected. The Court lamented that some judicial approaches were treating S. 138 proceedings as mere "civil recovery proceedings," contrary to the Parliament's quasi, criminal mandate, thereby prolonging trials and damaging public trust in cheques. (Para 21)

In delivering its decisive ratio decidendi, the Supreme Court drew a sharp distinction between a breach that incurs a statutory penalty and one that results in the transaction being null and void. The provisions of the IT Act concerning cash limits are penal in nature, specifically prescribing a consequence a 100% penalty under Section 271D but they do not, crucially, declare the underlying loan contract void or illegal. The bench noted: "Further neither Section 269SS nor 271D of the IT Act, 1961 say that any transaction by violation thereof shall be illegal, invalid or void by statute." (Para 20) Such clear nullification by statute did not occur, and hence, the debt being a civil liability, did not become void and enforceable.

Applying the principle straight away, it was held by the Supreme Court categorically to set aside the conclusion of the Kerala High Court, giving its ruling that a contravention of Section 269SS "would not render the transaction unenforceable under Section 138 of the NI Act or disprove the presumptions under Sections 118 and 139 of the NI Act because such a person. is subject to be called down by a penalty only as prescribed."(Para 20) The SC's final word on the matter was definitive: “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." (Para 20)

The ruling effectively reinstated the enforcement of statutory presumptions under NI Act . Upon the drawer's acceptance of the execution the cheque, the presumptions under Section 118 (of consideration) and Section 139 (of a legally enforceable debt) arise against them. (Para 15) The onus is then squarely on the accused to rebut this presumption on the standard of "preponderance of probabilities." The mere reliance on the complainant's breach of a fiscal statute (S. 269SS) is no longer sufficient to meet this burden; the defense must produce material evidence demonstrating the non, existence of the debt or financial incapacity. The Court did, however, specifically reinstating the conviction, reverse the Bombay High Court at Goa's prior acquittal and stressing that concurrent factual determinations of a loan's existence by factual finders cannot readily be overthrown by revisional courts absent perversity determination.

This ruling establishes the notion of dual liability, ensuring that the state's interest in budgetary compliance is not compromised. Although the debt is recoverable under the NI Act, the party who "takes or accepts" the cash loan, usually the borrower/accused (the drawer of the cheque), is vulnerable to significant repercussions under tax law. Section 271D of the IT Act mandates a penalty equal to 100% of the loan amount accepted in cash. The sole potential relief from this fiscal penalty lies in successfully invoking Section 273B of the IT Act, which necessiates the penalized party to prove that "there was reasonable cause for the said failure" to comply with Section 269SS. (Para 19)

Therefore, both tax compliance and commercial honor are strictly administered, even if by differing bodies of jurisdiction. Beyond resolving the immediate statutory conflict, the Supreme Court recognized the immense, crippling strain placed on the judiciary by the "staggeringly high" pendency of Section 138 cases, which in some jurisdictions constitutes nearly fifty per cent of the total trial court backlog. (Para 33) . Exercising its powers of Article 142 for rendering justice, the Court made a thorough, mandatory set of directions, to begin on November 1, 2025, for systemic judicial reform for proceedings under NI Act.

These procedural directives are aimed at hastening disposal and promoting early settlement, uplifting its management of the offense, which it described as a "civil sheep in a criminal wolf's clothing." (Para 34) Principal reforms are requiring intensified service of summons, including dasti (by litigious party) and by electronic modes (WhatsApp/Email), according to the Bhartiya Nagarik Suraksha Sanhita, 2023 (BNSS, 2023). (Para 36A). Important, Principal District and Sessions Judges were directed to set up dedicated online payment systems (safe QR codes or UPI links) to enable the accused to pay the cheque amount straight away on receipt of summon, encouraging settling at the threshold stage of cases. (Para 36C). Additionally, to curb the avalanche of cases, graded costs for settling offenses by compounding were lessened, encouraging settling at an early date. For example, settling before defense evidence is payable by zero cost, settling before the Supreme Court by a maximum of 10% of cheque value. For instance, payment before defense evidence is now subject to no cost, while payment before the Supreme Court is capped at 10% of the cheque amount. (Para 38)

The case of P.C. Hari v. Shine Varghese is presently under appeal before the Hon'ble Supreme Court. However, the Kerala High Court ruling in this case has been overruled by the Supreme Court in Sanjabij Tari v. Kishore S. Borcar. The Sanjabij Tari verdict is a profound restatement of commercial law principles. It asserts the supremacy of the Negotiable Instruments Act in preserving commercial integrity against technical fiscal defenses. The decision makes it clear to borrowers that promise to pay written on check is legally binding and cannot be broken by the lender for non- compliance. For lenders, although the enforceability of the debt is assured, the simultaneous possibility of paying a 100% tax penalty for engaging in substantial cash transactions persists as a significant discouragement, so assuring the relentless progression towards digital compliance. The ruling exemplifies the court's dedication to expeditious justice and the fundamental tenets of commercial integrity.

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