Debt Created By Cash Transaction Above ₹20k In Violation Of Income Tax Act Is Not “Legally Enforceable Debt”: Kerala High Court

The Kerala High Court held that a debt created by a cash transaction above Rs. 20,000/- in violation of the provisions of the Income Tax Act, 1961 (ITA) is not a “legally enforceable debt” unless there is a valid explanation for the same.

The Court held thus in a Criminal Revision Petition filed by an accused against the Judgment of the Sessions Court by which his conviction under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) was upheld.

A Single Bench of Justice P.V. Kunhikrishnan 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.”

The Bench remarked that when the Government of India aims a goal of complete digital transactions by every citizen of this country instead of cash transactions, a Court of law cannot turn its face and legalise cash transactions.

“The Union Government is aiming for “Digital India”, and the Hon'ble Prime Minister of India is leading the battle for complete digital transactions by every citizen of this country. Nowadays, we can see digital transactions even in small tea shops, paan shops, etc. In Kerala, even coolie workers accept their wages through digital transactions of Unified Payments Interface(UPI) like Google Pay, PhonePe, Paytm etc.”, it also noted.

Advocate D. Kishore appeared on behalf of the Petitioner while Advocate Manu Ramachandran appeared on behalf of the Respondents.

Brief Facts

The Revision Petitioner was an accused against whom the prosecution alleged offences punishable under Section 138 of the NI Act. As per the Respondent-Complainant, the accused owed an amount of Rs. 9 lakhs to him and for discharge of the said legally enforceable debt, the accused issued a cheque drawn on his account. Allegedly, the accused made the Complainant believe that he would keep sufficient funds in his account to honour the said cheque. The Complainant presented the cheque for encashment through his account and the same was dishonoured for the reason “funds insufficient”. The said cheque was returned to the Complainant and hence, he issued a lawyer notice.

The accused received the same and as per the Complainant, he sent a reply by setting up some false allegations. According to him, the accused refused to pay the amount even after getting the statutory notice and hence, it was alleged that the accused committed the offences. The Trial Court found that the accused was guilty under Section 138 NI Act and hence, he was sentenced to undergo simple imprisonment for one year and to pay a compensation of Rs. 9 lakhs to the Complainant. Being aggrieved, the accused filed an Appeal and the Sessions Court confirmed his conviction and dismissed his Appeal. Hence, he was before the High Court.

Issues for Consideration

The following important points arose for consideration before the Court –

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”?

Court’s Observations

In view of the first issue, the High Court noted, “From a reading of Section 139 of the NI Act, it is clear that it shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability. Therefore, the holder of the cheque is presumed that, he received the cheque in discharge, in whole or in part, of any debt or other liability and in the explanation to the section, it is stated that the debt or other liability is a legally enforceable debt. Therefore, there is no doubt to the fact that the presumption under Section 139 of the NI Act covers legally enforceable debt also. Therefore the holder of a cheque is presumed that, he received the cheque in whole or in part of any legally enforceable debt.”

The Court clarified that there is a presumption under Section 139 of the NI Act as far as legally enforceable debt is concerned.

While considering the second issue, the Court said, “… it is clear that the accused can rebut a presumption under Section 139 of the NI Act by a probable defence by preponderance of probability as stated in Rangappa's case (supra).”

The Court further observed that the accused can rebut the presumption under Section 139 of the NI Act by the standard of proof of a probable defence through preponderance of probabilities, which creates doubts about the existence of a legally enforceable debt.

With regard to the third issue, the Court noted, “… no person shall take or accept from any other person, any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, if the amount is above Rs.20,000/-, provided that such transactions will not come within the purview of the exemptions mentioned in the section.”

The Court also held that if anybody pays an amount in excess of Rs. 20,000/ to another person by cash in violation of ITA, 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 and if there is no valid explanation in tune with Section 273B, the doors of the Criminal Court will be closed for such illegal transactions.

Coming to the last issue, the Court observed, “It is a settled position that the ignorance of the law is not an excuse. The accused specifically cross examined about the same when PW1 was in the box, as far as the legally enforceable debt is concerned. He has absolutely no explanation regarding the payment of the amount above Rs.20,000/- by cash. In such circumstances, in the light of the principle laid down by the Apex Court in Rangappa's case (supra), the accused rebutted the presumption. The debt alleged to be due to the complainant cannot be treated as a legally enforceable debt.”

Conclusion

Moreover, the Court said that the debt arising through an illegal transaction cannot be treated as a legally enforceable debt.

“… 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”, it added.

The Court, therefore, concluded that this is a case in which the Complainant fails to prove that there is legally enforceable debt and the accused rebutted the presumption under Section 139 NI Act.

Accordingly, the High Court allowed the Revision Petition, set aside the impugned Judgment, and acquitted the accused.

Cause Title- P.C. Hari v. Shine Varghese & Anr. (Neutral Citation: 2025:KER:54510)

Appearance:

Petitioner: Advocates D. Kishore, Meera Gopinath, and R. Muraleekrishnan.

Respondents: Advocates Manu Ramachandran, M. Kiranlal, T.S. Sarath, R.Rajesh, Sameer M Nair, Sailakshmi Menon, Jothisha K.A., and Shifana M.

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