Breaking- S.138 NI Act | Cheque Dishonour Case Not Sustainable For Cash Debt Above Rs 20,000 Without Valid Explanation : Kerala High Court
K. Salma Jennath
26 July 2025 10:56 AM IST
The High Court clarified that this ruling is applicable prospectively unless this point has already been raised in pending trials.
The Kerala High Court recently passed a judgment declaring that 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 unless there is a valid explanation for the same.
Justice P.V. Kunhikrishnan clarified that even so, a person accused of offence under Section 138 of the Negotiable Instruments (NI) Act must challenge such transactions in evidence and has to rebut the presumption under Section 139 NI Act.
The learned judge observed:
"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. But the accused should challenge such transactions in evidence, and he has to rebut the presumption under section 139 of NI Act, of course, through preponderance of probability. If there is no challenge, it is presumed, in the light of Section 139 of the NI Act that, there is a valid explanation to the complainant under Section 273B of the Act 1961. 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."
Reliance was placed on the Bombay High Court's judgment in Prakash Madhukarrao Desai v Dattatraya Sheshrao Desai.
Ruling to apply only prospectively; not to apply in trials where this point not raised earlier
At the same time, the Court clarified that the dictum will apply only prospectively.
"Before concluding, I also clarify that the dictum laid down in this judgment is applicable only in cases in which this question is specifically raised and there is no explanation to the complainant in tune with Section 273B of Act 1961. In other words, in cases in which the trial is already concluded and the matter is pending before the appellate court, unless the above point is specifically raised, the appellate court need not consider this and need not remand the case for giving any opportunity to adduce further evidence. In other words, I make it clear that the dictum is applicable only prospectively, and in a concluded trial in which no such point is raised need not be reopened based on the decision in this case."
The Court was considering a plea of the accused, who 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 has approached the High Court.
As per the complainant, he had paid an amount of Rs. 9 lakhs in cash to the accused and the accused had issued a cheque with the said amount to the complainant. However, later the cheque was dishonoured for insufficient funds. Hence, a complaint was preferred by the complainant.
The counsel for the accused urged 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 and therefore, the alleged transaction is in violation of the provision. Thus, the accused is bound to pay a penalty under Section 271D of IT Act. Since the accused had not paid any income tax, alleged transaction itself is illegal and therefore, a debt created by an illegal transaction cannot be treated as a legally enforceable debt.
The counsel for the accused also relied on an article co-written by late Adv. Alex M. Scaria and his wife Saritha Thomas to state that a presumption under Sections 118 and 139 of the NI Act would not arise when the transaction was in violation of Section 269SS IT Act. In the article, it was also stated that debt which arose through an illegal transaction cannot be termed a legally enforceable debt for the purposes of the NI Act.
Considering the points made out in the aforesaid article, the Court observed:
"I agree with the conclusion of the above article that the debt arising through an illegal transaction cannot be treated as a legally enforceable debt. But I am not in a position to accept the above conclusion in the article of our friend lawyer, Alex, about the non-applicability of presumption under Section 139 of the NI Act for legally enforceable debt because of the dictum laid down by the Apex Court in Rangappa's case (supra)."
The Court considered four main issues, i.e.,
"1. Whether the presumption under Section 139 of the NI Act cover the “legally enforceable debt”?
2. How can a presumption under Section 139 of the NI Act be rebutted by an accused?
3. Whether debt created by a cash transaction above Rs. 20,000/- in violation of the provisions of the Act 1961 can be treated as a “legally enforceable debt”?
4. Whether the presumption under Section 139 of the NI Act is rebutted in the facts and circumstances of the case, and whether the complainant established that there is any “legally enforceable debt”?"
The Court observed that the presumption under Section 139 NI Act covers legally enforceable debts and this presumption can be rebutted by the accused through preponderance of probabilities, which creates doubts about the existence of a legally enforceable debt.
Rejecting the contention that cash transactions above Rs. 20000/- would come within the purview of legally enforceable debt, the Court further observed:
"In other words, if the criminal court indirectly legalises such illegal transactions in violation of Act 1961, the same will be against the aim of our country to discourage cash transactions above twenty thousand rupees, which is also a part of the “digital India” dream of our country, which is propounded by our Prime Minister to save our economy and to curb a parallel economy in our country...If the debt arises through an illegal transaction, that debt cannot be treated as a legally enforceable debt. If the court regularises such transactions, that will encourage illegal transactions by the citizens.Even black money will be converted into white money through the criminal courts."
The Court opined that in such circumstances the receiver of the cheque for the debt amount exceeding Rs. 20000 should take responsibility to get back the amount, unless there is a valid explanation for such cash transactions in tune with Section 273B of the IT Act. If there is no valid explanation, the doors of the criminal court will be closed for such illegal transactions.
To decide the question whether the accused in the present case rebutted the presumption under Section 139 NI Act, the Court referred to the deposition made by the complainant. Since the complainant had admitted to not paying income tax and had not given any explanation for payment of the amount in cash during cross examination, the Court was of the opinion that the presumption was rebutted.
Thus, the Court allowed the petition and set aside the order of conviction against the accused.
Case Title: P.C. Hari v. Shine Varghese and Anr.
Case No: Crl. Rev. Pet. No. 408/2024
Citation: 2025 LiveLaw (Ker) 451
Counsel for the petitioner: D. Kishore, Meera Gopinath, R. Muraleekrishnan (Malakkara)
Counsel for the respondent: Manu Ramachandran, M. Kiranlal, T.S. Sarath, R. Rajesh (Varkala), Sameer M. Nair, Sailakshmi Menon, Jothisha K.A., Shifana M.
Click To Read/Download Judgment