Therefore, debt created by a cash transaction above ₹20,000/- in violation of the Income-tax Act is not a “legally enforceable debt” unless there is a valid explanation under S.273B; in the absence of such explanation, the doors of the criminal court will be closed to such illegal cash transactions. (Paras 17–21, 23–27, 32, 35)

1. Negotiable Instruments Act, 1881 – Ss. 138, 139 – “Debt or other liability” – Presumption covers “legally enforceable debt” also – Rangappa followed – Krishna Janardhan Bhat partly overruled, partly affirmed

Explanation to S.138 NI Act expressly defines “debt or other liability” as a legally enforceable debt. S.139 NI Act presumes, unless the contrary is proved, that the holder received the cheque “of the nature referred to in S.138 for the discharge…of any debt or other liability”. Held, in view of the wording of S.139 and the three-Judge Bench in Rangappa v. Sri Mohan, the statutory presumption includes the existence of a legally enforceable debt or liability. To that extent, the earlier observation in Krishna Janardhan Bhat v. Dattatraya G. Hegde that S.139 does not cover legally enforceable debt is not good law; but the rest of Krishna Janardhan Bhat stands affirmed. (Paras 10–15, 21)

2. S. 139 NI Act – Nature and standard of rebuttal – “Reverse onus” – Probable defence by preponderance of probabilities

Presumption under S.139 is a reverse-onus device to strengthen cheque credibility. It imposes only an evidentiary burden on the accused. The presumption can be rebutted if the accused raises a probable defence which, on preponderance of probabilities, creates doubt about the existence of a legally enforceable debt. The accused may rely even on the complainant’s own materials; may not always need to adduce defence evidence. Once presumption is rebutted, the complainant must prove the legally enforceable debt. (Rangappa followed.) (Paras 15–16, 28–29)

3. Income-tax Act, 1961 – Ss. 269SS, 269ST, 271D, 273B – Cash loans above ₹20,000/- – Whether debt arising therefrom is “legally enforceable debt” for S.138 NI Act

S.269SS IT Act prohibits taking or accepting any loan, deposit or specified sum of ₹20,000 or more otherwise than by account payee cheque / bank draft / electronic mode (subject to statutory exceptions); S.269ST places a separate cap at ₹2,00,000/- on payments in cash. Contravention attracts penalty under S.271D, subject to reasonable cause under S.273B.

Held:

• A “debt” arising out of a cash transaction in violation of S.269SS (and allied provisions) is prima facie an illegal transaction and such a debt cannot be treated as a “legally enforceable debt” for the purposes of S.138 NI Act, unless the complainant offers a valid explanation amounting to “reasonable cause” under S.273B IT Act.

• If criminal courts routinely treat such cash transactions as legally enforceable, they will indirectly legalise conduct which Parliament has expressly sought to curb (unaccounted cash economy), and thereby undermine the “Digital India” policy direction towards non-cash transactions.

• Therefore, debt created by a cash transaction above ₹20,000/- in violation of the Income-tax Act is not a “legally enforceable debt” unless there is a valid explanation under S.273B; in the absence of such explanation, the doors of the criminal court will be closed to such illegal cash transactions. (Paras 17–21, 23–27, 32, 35)

(Sanjay Mishra v. Kanishka Kapoor, Bom HC – reasoning approved on this point; Division Bench view in Prakash Madhukarrao Desai respectfully dissented from.)

4. NI Act – S.138 – Unaccounted / untaxed cash loans – Effect of Income-tax violation – Role of penalty provisions – Whether mere presence of penalty saves transaction as “legal”

Bombay High Court (DB) in Prakash Madhukarrao Desai held that violation of S.269SS IT Act only attracts civil penalty and does not render the transaction void, hence cheque for such debt still enforces a “legally enforceable” liability under S.138 NI Act. Kerala High Court disagrees.

Held, penalty is not a revenue-enrichment device but a deterrent to discourage prohibited conduct. To say that courts can freely enforce such cash debts in cheque cases on the ground that the revenue can recover penalty would treat the State like “Shylock” (extracting its pound of flesh) while courts legitimise the very illegality Parliament intended to curb. A criminal court cannot indirectly validate illegal cash transactions merely because the statutory consequence is “only” a civil penalty. (Paras 24–27)

5. Earlier Kerala view in Sugunan v. Thulaseedharan – Declared per incuriam

In Sugunan v. Thulaseedharan, 2014 (4) KHC 848, it was held that violation of S.269SS IT Act does not make the underlying loan transaction unenforceable and cannot by itself defeat a S.138 complaint. Held, this view is per incuriam, having been rendered without proper consideration of Rangappa and Krishna Janardhan Bhat and the scheme of Ss.269SS, 271D, 273B IT Act. The present judgment clarifies and departs from Sugunan on this point. (Paras 30–31)

6. Scope of application – Prospective operation of new rule on cash-loan illegality

The Court clarifies that the present declaration—that cash loans above ₹20,000/- in violation of IT Act are not “legally enforceable debts” for S.138 NI Act absent a valid S.273B explanation—shall apply prospectively and only in cases where the issue is specifically raised and evidence is led.

• In pending appeals, unless this point has been expressly raised, appellate courts need not reopen concluded trials or remit matters merely to test S.269SS/S.273B compliance.

• In future cases, if the accused specifically challenges the legality of the cash transaction (by cross-examination or defence evidence) and rebuts the presumption on probabilities, the complainant must produce a reasonable cause explanation; failing which the debt cannot be treated as legally enforceable. (Paras 27, 34)

7. Facts applied – Cash loan of ₹9,00,000/- – No I-T compliance – Presumption rebutted – Acquittal

On facts:

• Complainant’s own evidence shows that the alleged loan of ₹9,00,000/- was wholly paid in cash;

• He admitted he was not an income-tax assessee and had not paid income tax or filed returns disclosing such amount;

• Accused, from reply notice stage and in cross-examination, consistently pleaded that complainant had no source to advance ₹9,00,000/-.

Held:

• Accused successfully rebutted the S.139 NI Act presumption by raising a probable defence that the alleged debt was an illegal cash transaction and not a legally enforceable liability.

• Complainant offered no explanation amounting to “reasonable cause” under S.273B IT Act for such a huge cash transaction outside the tax net.

• Consequently, the alleged liability is not a legally enforceable debt; an essential ingredient of S.138 NI Act fails.

Conviction and sentence under S.138 NI Act set aside; revision allowed; accused acquitted; any amount deposited to be refunded to accused. (Paras 28–29, 35, 43 – operative part)

ANALYSIS OF FACTS AND LAW 

I. Factual Matrix

• The complainant alleged a cash loan of ₹9,00,000/- to the accused.

• In purported discharge of this liability, the accused issued a cheque on South Indian Bank, Pathanamthitta.

• Cheque was presented through Federal Bank, Pathanamthitta; returned unpaid for “funds insufficient”.

• Statutory demand notice was issued; reply notice sent by accused specifically contending (i) no such transaction, and (ii) complainant had no source to advance ₹9 lakhs.

• At trial:

  • Complainant (PW1) admitted that he paid the entire ₹9 lakhs in cash.

  • He further admitted he is not an income-tax payer, had not paid income tax and had not filed returns reflecting such amounts.

  • Some evidence was led about withdrawals from another account, but there was no explanation regarding tax compliance or reasonable cause for the cash mode.

Both the Magistrate and Sessions Court convicted the accused under S.138 NI Act, treating the cash transaction as a valid “legally enforceable debt”. The revision before the High Court squarely raised the question: can a criminal court treat such a cash transaction, prima facie violative of S.269SS IT Act, as a “legally enforceable debt”?

II. Presumption Under Ss. 138 & 139 NI Act – Legal Position Re-stated

The Court first clarified the presumption architecture:

1. Section 138 requires:

   • Drawing of a cheque on an account;

   • For discharge of any debt or other liability;

   • Dishonour and non-payment despite notice.

   Explanation expressly defines “debt or other liability” as legally enforceable.

2. Section 139 mandates a presumption that the holder received the cheque of the kind referred to in S.138 for discharge of any debt or other liability.

Reading S.139 with the Explanation to S.138, and following Rangappa, the Court held that the presumption includes the existence of a “legally enforceable debt”. The earlier view in Krishna Janardhan Bhat to the contrary is overruled only on this limited point, while the rest of that judgment (including discussion on S.269SS) remains intact.

3. Rebuttal of presumption:

   • Reverse onus is evidentiary, not absolute.

   • Standard is preponderance of probabilities.

   • Accused may rebut by a probable defence that creates doubt about the existence of a legally enforceable debt, relying even on complainant’s evidence.

This framework is then used to test the legality of a cash debt under Income-tax law.

III. Effect of S.269SS / S.269ST / S.271D / S.273B IT Act on “Legally Enforceable Debt”

The Court then carefully analysed:

• S.269SS: prohibits taking or accepting any loan, deposit, or specified sum of ₹20,000/- or more otherwise than by banking channel, subject to specific exceptions.

• S.269ST: additional bar on receiving ₹2,00,000/- or more in cash in defined circumstances.

• S.271D: prescribes penalty equal to the amount of loan/deposit/specifed sum taken/accepted in violation of S.269SS.

• S.273B: no penalty if the person proves “reasonable cause” for such failure.

Key reasoning:

1. A transaction in direct contravention of S.269SS is prohibited by statute and attracts statutory penalty.

2. Such prohibition is not merely procedural; it is part of a larger policy to curb unaccounted cash and parallel economy, further intensified by the country’s move to “Digital India”.

3. Therefore, a debt created through such illegal cash transaction cannot automatically be treated as “legally enforceable”; if courts enforce such debts via S.138 NI Act, they effectively validate an illegal structure and frustrate the legislative intent.

The Court thus formulated the core rule:

“Debt created by a cash transaction above ₹20,000/- in violation of the provisions of the Income-tax Act is not a ‘legally enforceable debt’ under S.138 NI Act, unless there is a valid explanation in terms of S.273B showing reasonable cause. If no such explanation exists and the accused specifically challenges the transaction, the criminal court will not extend its jurisdiction to enforce such an illegal cash debt.”

IV. Divergence from Bombay DB and Treatment of Earlier Kerala Precedent

1. Bombay DB in Prakash Madhukarrao Desai

   • Held that breach of S.269SS is only a civil penalty issue and does not render the transaction void or unenforceable under S.138 NI Act.

   • Kerala High Court explicitly disagrees, stressing that the purpose of penalty is regulatory and deterrent, not to legitimise the prohibited transaction for all other purposes.

2. Sanjay Mishra v. Kanishka Kapoor (Bom, Single Judge)

   • Had held that liability to repay unaccounted cash, not disclosed in I-T returns, is not a “legally enforceable debt”.

   • Kerala High Court agrees with this substantive reasoning on illegality of unaccounted cash debt, though notes that Sanjay Mishra was overruled in Bombay only on the presumption point due to Rangappa.

3. Sugunan v. Thulaseedharan (Ker HC)

   • Had taken a lenient approach, saying violation of S.269SS may be relevant to credibility but does not affect legal enforceability of the debt.

   • Current judgment calls Sugunan per incuriam, as it did not properly consider the Supreme Court’s scheme of NI Act presumptions read with Income-tax prohibitions and subsequent apex court law.

V. Application to Present Case – Rebuttal of Presumption and Acquittal

On the factual plane:

• Admitted position:
  Entire sum of ₹9,00,000/- allegedly advanced by complainant was paid in cash.

• Evidence from complainant (PW1):

  • Not an income-tax payer.

  • No I-T returns disclosing such income or transaction.

  • No explanation for bypassing banking channels for such a high-value transaction.

• Accused’s defence:

  • Right from Ext.P7 reply notice, consistent case that complainant had no capacity or source to lend ₹9,00,000/-.

  • Cross-examination pressed on I-T non-compliance and lack of source.

The Court held:

1. Once illegal cash payment of such magnitude is admitted, and the complainant fails to show any “reasonable cause” akin to S.273B, the transaction is prima facie illegal under S.269SS.

2. The accused’s defence (no source, no I-T compliance, huge cash, unaccounted) constitutes a probable defence on preponderance of probabilities, sufficient to rebut the S.139 presumption.

3. With presumption gone, the complainant had to affirmatively prove a legally enforceable debt; his own admission of being outside the tax net, and absence of any plausible explanation, meant he failed to establish legal enforceability.