Cheque Bounce on Cash Loan Above ₹20,000? Kerala HC Says Case Not Valid Without Clear Reason

Introduction: A Landmark Ruling on Cash Loans and Cheque Bounce

In a groundbreaking judgment, the Kerala High Court has ruled that a cheque issued towards repayment of a cash loan exceeding ₹20,000—in violation of Section 269SS of the Income-Tax Act—does not qualify as a "legally enforceable debt" under Section 138 of the Negotiable Instruments (NI) Act unless a valid explanation is provided.

This decision is not only legally significant but also a major step toward curbing black money and promoting transparency in financial transactions.

Also Read: Cheque Bounce Cases in India: Know Your Legal Rights, Defenses, and Latest Updates

What is Section 138 of the NI Act?

Before diving into the judgment, let’s understand what Section 138 of the Negotiable Instruments Act, 1881 says.

Section 138 deals with dishonour of cheques for insufficiency of funds. If someone issues a cheque that is later dishonoured by the bank due to lack of funds or because it exceeds the amount arranged to be paid, the drawer of the cheque can face criminal liability.

To constitute an offence under Section 138, the following must occur:

• The cheque must be issued for the discharge of a legally enforceable debt or liability.

• It must be returned unpaid by the bank.

• The payee must give a written notice within 30 days.

• The drawer fails to make the payment within 15 days from receipt of the notice.

So, a legally enforceable debt is the cornerstone of a Section 138 case.

Also Read: How to Recover Money You Lent to Someone

What is Section 269SS of the Income-Tax Act?

Section 269SS of the Income-Tax Act, 1961 prohibits a person from accepting a loan or deposit of ₹20,000 or more in cash. Such transactions must be made only through:

• Account payee cheque,

• Account payee bank draft, or

• Use of electronic clearing systems (NEFT/RTGS/IMPS).

If this provision is violated, Section 271D of the same Act provides for a penalty equal to the amount of the loan or deposit taken.

The intent behind this provision is to eliminate cash-based large transactions, thereby reducing tax evasion and money laundering.

Background of the Kerala High Court Case

The case was titled P.C. Hari vs. Shine Varghese. The facts are as follows:

• The complainant, Shine Varghese, alleged that the accused, P.C. Hari, had borrowed ₹9,00,000 in cash and issued a cheque to repay it.

• The cheque was dishonoured due to "insufficient funds."

• The complainant sent a legal notice, and upon non-payment, filed a criminal case under Section 138 of the NI Act.

• Both the Magistrate Court and Sessions Court found the accused guilty.

• Aggrieved, the accused moved the Kerala High Court in a criminal revision petition.

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Arguments by the Petitioner (Accused)

The petitioner’s counsel, Advocate D. Kishore, raised some compelling points:

1. Violation of Section 269SS: The alleged cash loan of ₹9,00,000 was a clear violation of Section 269SS of the Income-Tax Act.

2. Illegality of Transaction: Since the transaction was illegal under tax law, it cannot be considered a legally enforceable debt under the NI Act.

3. Burden of Proof: The accused had challenged the complainant's financial capacity and intent from the beginning.

4. No Income Tax Paid: The complainant admitted to not reporting this large cash transaction for income tax purposes, undermining the legality and credibility of the debt.

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Arguments by the Respondent (Complainant)

Advocate Manu Ramachandran, appearing for the complainant, defended the case by arguing:

1. Presumption under Section 139 NI Act: The law presumes that a cheque was issued for a legally enforceable debt unless the contrary is proved.

2. Penalty Does Not Nullify Debt: A violation of Section 269SS only attracts a penalty, but it does not render the transaction void or illegal.

3. Borrower Cannot Take Advantage: The borrower (accused) cannot take benefit of an illegality (cash loan) that he himself participated in.

4. Reliance on Bombay HC Judgment: He cited the judgment of Krishna P Morajkar v. Joe Ferrao, which held that violations of tax laws do not affect the enforceability of the debt under NI Act.

Legal Issues Before the Court

Justice P.V. Kunhikrishnan of the Kerala High Court framed a crucial legal question:

“Can a criminal court enforce a debt arising out of a cash transaction that violates Section 269SS of the Income-Tax Act?”

In simpler terms: If a person gives a loan above ₹20,000 in cash (which is prohibited), and the borrower gives a cheque which then bounces, can the lender prosecute the borrower under Section 138 of the NI Act?

Court’s Observations: Upholding Public Policy and Digital India

Justice Kunhikrishnan delivered an insightful judgment, observing the following:

1. Digital India and Cash Transactions

The judge emphasized that the Union Government is promoting digital transactions and reducing cash-based dealings.

“A court of law cannot turn its face and legalise cash transactions when the Government of India aims for complete digital transactions.”

2. Rebutting Section 139 NI Act Presumption

While Section 139 creates a presumption in favour of the holder of a cheque, this is rebuttable. If the accused can raise a probable defence, the presumption can fall.

Here, the accused:

• Challenged the financial capacity of the complainant.

• Pointed to the admitted violation of Section 269SS.

• Highlighted that the complainant did not pay income tax or provide any valid explanation for giving ₹9 lakh in cash.

Thus, the accused rebutted the presumption under Section 139 by a preponderance of probabilities.

3. Illegality Cannot Be Legalised

The court respectfully disagreed with the Bombay High Court’s view in the Prakash Madhukarrao Desai case, stating:

“Legalising such transactions would convert black money into white money through criminal courts.”

The court compared this to the ‘Shylock’ approach—a reference to the greedy moneylender from Shakespeare’s The Merchant of Venice—suggesting that collecting penalties does not justify the original illegal transaction.

4. Need for a Valid Explanation

If a person gives a cash loan above ₹20,000 in violation of the Income-Tax Act, the court said it could only be treated as legally enforceable if the lender gives a reasonable and valid explanation.

For instance:

• Emergency medical needs

• Lack of banking facilities in remote areas

• Documentary proof of urgency

In this case, no such justification was provided.

Also Read: SARFAESI Act, 2002 Explained: Working, Provisions, Objectives, and Applicability

Final Judgment: Conviction Set Aside

Based on its analysis, the Kerala High Court:

1. Allowed the criminal revision petition filed by P.C. Hari.

2. Set aside the conviction and one-year sentence imposed by the lower courts.

3. Ordered that any amount deposited by the petitioner during the proceedings should be refunded.

However, the judgment clarified that the ruling would apply prospectively and not to cases where this specific legal issue was not raised earlier.

What This Means for Cheque Bounce Cases on Cash Loans

This ruling has far-reaching implications:

Cash Loans Over ₹20,000 Not Automatically Legally Enforceable

Unless a valid reason is shown, a cheque issued for such a loan cannot result in successful prosecution under Section 138.

Burden of Proof on Accused

The accused must raise the defence that the transaction violated Section 269SS. If not raised, courts can presume legality.

Boost for Digital Transactions

The judgment aligns with the government’s push for digital economy and discourages large unaccounted cash deals.

Income Tax Compliance

Lenders who advance large cash loans may face tax penalties and also fail to recover their money legally through criminal prosecution.

Important Supreme Court Precedents Referenced

1. Rangappa v. Sri Mohan (2010)

Held that the presumption under Section 139 includes the existence of a legally enforceable debt, but this is rebuttable.

2. Krishna Janardhan Bhat v. Dattatraya G. Hegde (2008)

Held that mere issuance of a cheque does not by itself prove a legally enforceable debt.

However, Rangappa’s decision (by a larger bench) overruled Krishna Janardhan Bhat in parts, stating that Section 139 creates a strong presumption that must be disproved by the accused. 

Conclusion: A Wake-Up Call for Cash Lenders

The Kerala High Court’s judgment is a stern reminder that legal recourse requires legal conduct. Giving large loans in cash may feel convenient, but it violates tax law, and worse, you may lose the right to recover it through criminal proceedings.

With this ruling, courts are making it clear: Illegal transactions cannot form the basis of legal enforcement.

If you're engaging in financial transactions, make sure they are:

1. Digitally documented,

2. Within legal limits,

3. And tax compliant.

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