Kiran Raj

The Supreme Court on Thursday (September 25) set aside the judgment of the Kerala High Court which had held that a debt created by a cash transaction above Rupees Twenty Thousand in violation of the Income Tax Act, 1961, could not be treated as a “legally enforceable debt” under Section 138 of the Negotiable Instruments Act, 1881. A Division Bench of Justice Manmohan and Justice N.V. Anjaria, while restoring the conviction earlier upheld by the Trial Court and Sessions Court in an appeal against a Bombay High Court ruling, held the Kerala High Court’s June 25, 2025 decision in P.C. Hari v. Shine Varghese to be erroneous.

The Supreme Court dealt with an appeal arising from a judgment of the High Court of Bombay at Goa delivered in April 2009. The High Court had acquitted the accused under Section 138 of the Negotiable Instruments Act, 1881, thereby overturning concurrent convictions recorded earlier by the Trial Court and the Sessions Court.

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The complainant alleged that the accused, a close friend, had borrowed ₹6,00,000 as a friendly loan. To raise this sum, the complainant partly relied on funds from his father, a cloth merchant operating two shops, and partly on money borrowed from a financial institution. Towards repayment, the accused issued a cheque. When presented, the cheque was dishonoured for insufficiency of funds. Despite receipt of statutory notice, no repayment was made.

The complainant relied on his sworn testimony, detailing the source of funds. He also pointed out that during sentencing arguments before the Trial Court, the accused requested leniency on the ground that he was willing to repay the cheque amount within a reasonable time. The complainant treated this as an implicit acknowledgment of liability.

The Trial Court convicted the accused, holding that his admitted signature on the cheque raised statutory presumptions that he failed to rebut. The Sessions Court confirmed this finding, ruling that the complainant’s testimony sufficiently established the loan transaction.

Before the High Court, the accused argued that the complainant, with a salary of only ₹2,300 and existing debts, lacked the capacity to extend such a loan. He contended further that the cheque had been issued blank, only to assist the complainant in obtaining a bank loan. The High Court accepted this defence and acquitted him.

The complainant then approached the Supreme Court, contending that the High Court wrongly interfered in revisional jurisdiction without perversity in findings and overlooked statutory presumptions under Sections 118 and 139 of the NI Act.

The appeal also raised a larger question of law: whether a cash loan exceeding ₹20,000, advanced in contravention of Section 269SS of the Income Tax Act, 1961, could nonetheless constitute a “legally enforceable debt” under Section 138 of the NI Act. This issue gained prominence after a recent Kerala High Court ruling in P.C. Hari v. Shine Varghese and Another (June 2025), which held that such debts were unenforceable.

The Supreme Court underlined the purpose of Chapter XVII of the NI Act: “to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficiency of funds in the accounts… with adequate safeguards to prevent harassment of honest drawers.”

It held: “once the execution of the cheque is admitted, the presumption under Section 118 of the NI Act that the cheque in question was drawn for consideration and the presumption under Section 139 of the NI Act that the holder of the cheque received the said cheque in discharge of a legally enforceable debt or liability arises against the accused.”

On the burden of proof, the Court clarified: “the presumption contemplated under Section 139 of the NI Act, is a rebuttable presumption. However, the initial onus of proving that the cheque is not in discharge of any debt or other liability is on the accused/drawer of the cheque.”

Addressing precedents, it noted: “This judgment [APS Forex Services] nowhere states… that in cases of dishonour of cheques, in lieu of cash loans, the presumption under Section 139 of the NI Act does not arise.”

The Court gave decisive findings on the Kerala High Court ruling: “any violation of Section 269SS would not render the transaction unenforceable under Section 138 of the NI Act or rebut the presumptions under Sections 118 and 139 of the NI Act… Consequently, the view that any transaction above Rs.20,000/- 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.”

The Bench also recorded systemic concerns: “This Court also takes judicial notice of the fact that some District Courts and some High Courts are not giving effect to the presumptions incorporated in Sections 118 and 139 of NI Act and are treating the proceedings under the NI Act as another civil recovery proceedings and are directing the complainant to prove the antecedent debt or liability. This Court is of the view that such an approach is not only prolonging the trial but is also contrary to the mandate of Parliament, namely, that the drawer and the bank must honour the cheque, otherwise, trust in cheques would be irreparably damaged.”

On the facts, the Court observed: “the Respondent No.1-Accused has filed no documents and/or examined any independent witness or led any evidence with regard to the financial incapacity of the Appellant-Complainant to advance the loans in question.”

It criticised the High Court’s interference: “it is not for the Revisional Court to re-analyse and re-interpret the evidence on record… in the absence of perversity, it was not open to the High Court in the present case, in revisional jurisdiction, to upset the concurrent findings of the Trial Court and the Sessions Court.”

On the statutory notice, it stated: “the fact that the accused has failed to reply to the statutory notice under Section 138 of the NI Act leads to an inference that there is merit in the Appellant-Complainant’s version.” It dismissed the blank cheque defence as “unbelievable and absurd.”

The Court allowed the appeal: “the impugned order passed by the High Court dated 16th April, 2009 is set aside and the judgment as well as the orders of Trial Court and Sessions Court are restored with a direction to the Respondent No.1-Accused to pay Rs.7,50,000/- (Rupees Seven Lakhs Fifty Thousand) in 15 (fifteen) equated monthly instalment of Rs.50,000/- (Rupees Fifty Thousand) each.”

The Court noted: “Since a very large number of cheque bouncing cases are still pending and interest rates have fallen in the last few years, this Court is of the view that it is time to ‘revisit and tweak the guidelines’.”

It modified the compounding framework as follows:

“(a) If the accused pays the cheque amount before recording of his evidence (namely defence evidence), then the Trial Court may allow compounding of the offence without imposing any cost or penalty on the accused.”

“(b) If the accused makes the payment of the cheque amount post the recording of his evidence but prior to the pronouncement of judgment by the Trial Court, the Magistrate may allow compounding of the offence on payment of additional 5% of the cheque amount with the Legal Services Authority or such other authority as deemed fit.”

“(c) If the application for compounding is made before the Sessions Court or the High Court, compounding may be permitted on payment of 7.5% of the cheque amount.”

“(d) If the application is made before the Supreme Court, compounding may be permitted on payment of 10% of the cheque amount.”

The Court also mandated systemic reforms to improve the disposal of Section 138 cases. It directed: “in all cases filed under Section 138 of the NI Act, service of summons shall not be confined through prescribed usual modes but shall also be issued dasti. The Trial Courts shall further resort to service of summons by electronic means in terms of the applicable Notifications/Rules.”

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“The Principal District and Sessions Judge of each District Court shall create and operationalise dedicated online payment facilities through secure QR codes or UPI links. The summons shall expressly mention that the Respondent/Accused has the option to make payment of the cheque amount at the initial stage itself. This measure shall promote settlement at the threshold stage and/or ensure speedy disposal of cases.”

“Each and every complaint under Section 138 of the NI Act shall contain a synopsis in the following format which shall be filed immediately after the index (at the top of the file) i.e. prior to the formal complaint.”

It stated: “there shall be no requirement to issue summons to the accused in terms of Section 223 of BNSS i.e., at the pre-cognizance stage. The Trial Courts shall record cogent and sufficient reasons before converting a summary trial to summons trial.”

 “The High Courts and District Courts shall implement the aforesaid guidelines not later than 01st November, 2025.”

Advocates Representing the Parties

For the Petitioner: Mr. Amarjit Singh Bedi, Advocate
For the Respondent: Mr. Ankit Yadav, Advocate

Case Title: Sanjabij Tari v. Kishore S. Borcar & Anr.
Neutral Citation: 2025 INSC 1158
Case Number: Criminal Appeal No. 1755 of 2010
Bench: Justice Manmohan, Justice N.V. Anjaria