2025 (8) TMI 889 - HC - Indian Laws

Breach of Section 269SS loan doesn't extinguish creditor rights; Section 139 presumption upheld, accused convicted under Section 138 NI Act

DELHI HC set aside the Trial Court's dismissal and held that a cash loan in breach of Section 269SS IT Act does not extinguish a creditor's substantive ... Dishonour of Cheque - legally enforceable debt or liability or not - cash loan - violation of Section 269SS of the IT Act, 1961 - failure to rebut statutory presumption. Whether the alleged cash loan of Rs. 5 lakhs constitutes a ‘legally enforceable debt or liability’ under the NI Act? - HELD THAT:- Section 269SS of the IT Act, 1961, introduced through the Finance Act of 1984, was a legislative measure to combat black money and promote financial transparency. With the rapid expansion of digital payments, the provision was further amended by the Finance Act of 2015 to include modern electronic modes like NEFT, RTGS, UPI, and IMPS as valid means of transaction. It categorically prohibits the acceptance of loans, deposits, or specified sums of Rs. 20,000/- or more in cash. In Sheela Sharma v. Mahendra Pal [2016 (8) TMI 1589 - DELHI HIGH COURT], a co-ordinate bench of this Court, while examining issues analogous to those in the present case, relied on the judgment of the Hon’ble Supreme Court in Asstt. Director of Inspection Investigation v. A.B. Shanthi [2002 (5) TMI 4 - SUPREME COURT], and held that 'The advancement of loan in cash may entail negative consequences for a party especially an Income Tax assessee as his having acted in breach of Section 269SS of Income Tax Act, 1961. Chapter XXB provides for the requirement as to the mode of acceptance, payment or repayment in certain cases to counteract evasion of tax. Section 269SS mandates that no person, after the cut off date shall take or accept from any other person any loan or deposit otherwise than by an account payee cheque or an account payee bank draft if the amount is more than Rs. 10,000/-. Breach of Section 269SS of the Income Tax Act provides penalty to which a person would be subjected to under Section 271D.' Relying on several authoritative decisions, including Sheela Sharma v. Mahendra Pal, the High Court of Karnataka in Gajanan Kallappa Kadolkar vs. Appasaheb Siddamallappa Kaveri [2022 (11) TMI 1564 - KARNATAKA HIGH COURT] emphatically held that Section 269SS of the IT Act is designed to regulate financial transactions and prevent tax evasion, but does not render cash transactions exceeding Rs. 20,000 inherently illegal or unenforceable. The finding of the learned Trial Court is legally untenable and contrary to binding precedents. The learned Trial Court erred in holding that the alleged cash loan of Rs. 5 lakhs, being unaccounted and in breach of Section 269SS of the IT Act, could not constitute a “legally enforceable debt or liability” under Section 138 of the NI Act. A violation of Section 269SS may attract penalties under the IT Act, but it does not extinguish the lender’s substantive rights or render the debt unenforceable. Therefore, the rejection of the Appellant’s complaint on such grounds is erroneous and liable to be set aside. Whether, on merits, Respondent No. 2/Accused is liable under Section 138 of the NI Act? - HELD THAT:- In the plea of defene recorded at the stage of notice under Section 251 CrPC, Respondent No. 2/Accused admitted that the cheque in question bears her signature and correct bank/account particulars. She nevertheless claimed that she had handed over a signed but otherwise incomplete cheque, date and payee name left blank, in October 2012 to Ms. Shamita Sharma, daughter-in-law of the Appellant, as a security cheque for a proposed purchase of Kundan jewellery worth about Rs. 5 lakhs. The moment signature and account particulars stand admitted, the statutory presumption under Section 139 NI Act is triggered. The contention that the cheque was blank when issued does not, by itself, defeat liability. The Hon’ble Supreme Court in Bir Singh v. Mukesh Kumar [2019 (2) TMI 547 - SUPREME COURT] has clarified that a signed blank cheque voluntarily handed over carries an implied authority to fill in the particulars; unless the Accused can show, on a balance of probabilities, that the cheque was misused or not supported by consideration, the presumption operates. Accordingly, the evidentiary burden shifts squarely to the Accused to rebut the presumption and establish that no legally enforceable liability existed. It is also well established that in households, expenses are usually borne in cash and family members regularly contribute to the same in cash. It is conceivable that over a period of time, the Appellant herein had, by exercise of financial diligence, accumulated the amount of five lakhs. It is also noticed that the family of the Appellant is fairly well-to-do and able to afford a fairly comfortable life and being a joint household, permitted the various members to contribute towards the joint expenses - The Respondent No. 2/Accused has also moved an application under Section 340 CrPC and also alleged during the hearing of the Appeal that the Appellant forged or interpolated the date in her pre-summoning evidence, changing “October 2013” to “October 2012” in the copy filed with the Appeal. On scrutiny, the variation is at best a minor clerical correction. The substantive record otherwise shows that the relevant transaction occurred in October 2012; no prejudice has been demonstrated; and the correction yields no tactical advantage to the Appellant. The imputation of forgery is therefore devoid of merit and stands rejected. Respondent No. 2 has failed to rebut the statutory presumption arising under Section 139 of the NI Act. The ingredients of the offence under Section 138 of the NI Act stand satisfied, and Respondent No. 2/Accused is liable to be convicted. The impugned judgment dated 30.08.2016 passed by the learned Trial Court is set aside. Respondent No. 2 is held guilty of the offence punishable under Section 138 of the NI Act - List the matter for hearing on the quantum of sentence on 19.09.2025. Respondent No. 2 shall remain personally present in Court on the next date. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the alleged cash loan of Rs. 5 lakhs constitutes a 'legally enforceable debt or liability' under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), particularly in light of alleged violation of Section 269SS of the Income Tax Act, 1961 (IT Act). 2. Whether the Respondent/Accused is liable for the offence under Section 138 of the NI Act on merits, considering the evidence and statutory presumptions. 3. The scope and applicability of statutory presumptions under Sections 118 and 139 of the NI Act and the burden of proof in proceedings under Section 138. 4. The relevance and impact of alleged non-disclosure of the loan transaction in income tax returns on the enforceability of the debt under the NI Act. 5. The evidentiary value and effect of admissions regarding the cheque's signature and issuance, including the defence of a blank signed cheque given as security. 6. The appellate court's jurisdiction and standard of review in appeals against acquittal under Section 378 CrPC in the context of Section 138 NI Act cases. 2. ISSUE-WISE DETAILED ANALYSIS (a) Whether the alleged cash loan of Rs. 5 lakhs constitutes a 'legally enforceable debt or liability' under the NI Act Relevant legal framework and precedents: - Section 269SS of the IT Act prohibits acceptance of loans or deposits of Rs. 20,000 or more in cash, prescribing payment by account-payee cheque or bank draft to curb tax evasion. - Section 271D of the IT Act imposes penalty for contravention of Section 269SS but does not declare such transactions null and void. - The NI Act requires the cheque to be issued for discharge of a 'legally enforceable debt or liability' for conviction under Section 138. - Judgments from various High Courts and the Supreme Court (including Sheela Sharma v. Mahendra Pal, Asstt. Director of Inspection Investigation v. A.B. Shanthi, and Rangappa v. Sri Mohan) clarify that breach of Section 269SS attracts penalty but does not invalidate the underlying transaction or extinguish the lender's rights. Court's interpretation and reasoning: - The Court held that Section 269SS is a regulatory provision aimed at financial transparency and tax compliance, not a provision to invalidate debts or loans. - Violation of Section 269SS results in penalty under Section 271D but does not render the loan illegal or unenforceable. - The Court rejected the Trial Court's view that the loan was unenforceable merely because it was unaccounted or not disclosed in income tax returns. - The Court distinguished the present facts from cases involving professional moneylenders or chit-fund transactions where statutory record-keeping obligations apply. - The Court emphasized that non-disclosure in income tax returns cannot be used by a borrower to evade repayment or defeat the presumption of enforceable debt under Section 138 NI Act. Key evidence and findings: - The Appellant/Complainant asserted a loan of Rs. 5 lakhs given in cash, supported by the cheque issued by Respondent No. 2. - The Trial Court's reliance on absence of income tax disclosure and the source of funds was found insufficient to negate the enforceability of the debt. Application of law to facts: - The Court applied the binding precedents to conclude that the loan, though given in cash and possibly violating Section 269SS, remains legally enforceable. - The penalty provisions of the IT Act do not affect the substantive right to recover the loan. Treatment of competing arguments: - The Trial Court's reliance on IT Act provisions to deny enforceability was overruled as contrary to binding case law. - The Appellant's submissions that the loan was genuine and enforceable despite tax implications were accepted. Conclusions: - The alleged cash loan of Rs. 5 lakhs constitutes a legally enforceable debt or liability under the NI Act. - Violation of Section 269SS of the IT Act does not render the transaction illegal or unenforceable for the purpose of Section 138 NI Act. (b) Whether, on merits, Respondent No. 2/Accused is liable under Section 138 of the NI Act Relevant legal framework and precedents: - Sections 118 and 139 of the NI Act create rebuttable presumptions that a cheque is issued for discharge of a legally enforceable debt or liability. - The Supreme Court in Rajesh Jain v. Ajay Singh clarified the nature of burden of proof and evidential presumptions under the Evidence Act and NI Act. - The accused must rebut the presumption on a preponderance of probabilities, not beyond reasonable doubt. - Bir Singh v. Mukesh Kumar held that admission of signature on a cheque, even if blank at the time of signing, triggers the presumption under Section 139. Court's interpretation and reasoning: - The Respondent/Accused admitted signature on the cheque and bank/account particulars, triggering the statutory presumption. - The defence that the cheque was a blank signed security cheque for a proposed jewellery transaction was examined. - The Court found the defence unsubstantiated due to lack of documentary evidence, contemporaneous records, or credible corroboration. - The testimony of the defence witness (DW-2) contradicted the defence version, denying any business dealings with the Respondent and affirming the Appellant's loan claim. - The Court held that the Respondent failed to rebut the presumption under Section 139 on a preponderance of probabilities. Key evidence and findings: - Admission of signature and cheque details by Respondent No. 2. - Defence witness's testimony affirming loan and denying jewellery transaction. - Lack of documentary proof supporting defence claim of cheque as security. - Close familial relationship supporting naturalness of loan transaction. - Appellant's financial capacity established through rental income and family business. Application of law to facts: - The Court applied the statutory presumptions and evidential burden shifting principles. - The Respondent's defence was held to be a mere plausible explanation insufficient to dislodge the presumption. - The Appellant's claim of loan and dishonour of cheque satisfied the ingredients of Section 138. Treatment of competing arguments: - The Respondent's plea of cheque as security and incomplete was rejected due to lack of credible evidence and contradictory witness testimony. - The argument of forgery or interpolation of dates was dismissed as minor clerical correction without prejudice. - The absence of intra-family disclosure was held irrelevant to the enforceability of the loan. Conclusions: - Respondent No. 2 failed to rebut the statutory presumption under Section 139 NI Act. - The offence under Section 138 NI Act is established on merits. - Respondent No. 2 is liable and guilty under Section 138 NI Act. (c) The scope and applicability of statutory presumptions under Sections 118 and 139 of the NI Act and burden of proof Relevant legal framework and precedents: - Section 118 presumes every negotiable instrument is made for consideration. - Section 139 mandates presumption that cheque was issued for discharge of debt or liability upon proof of signature and issuance. - The legal burden remains on the complainant to prove the case beyond reasonable doubt, but evidential burden shifts to accused to rebut presumption on preponderance of probabilities. - The accused need not prove non-existence of debt beyond reasonable doubt but must raise a probable defence. - The evidentiary burden shifting principle is well-established in Rajesh Jain v. Ajay Singh and Rangappa v. Sri Mohan. Court's interpretation and reasoning: - The Court emphasized that admission of signature on cheque triggers mandatory presumption under Section 139. - The accused's defence must be credible and supported by evidence to rebut the presumption. - Mere plausible or uncorroborated explanations do not suffice to discharge the burden. - Once rebuttal succeeds, burden shifts back to complainant to prove existence of debt. Key evidence and findings: - Respondent admitted signature but denied debt. - Defence witness testimony contradicted defence version. Application of law to facts: - The Respondent failed to meet the evidentiary burden to rebut the presumption. - The statutory presumptions operated in favour of the Appellant. Treatment of competing arguments: - Respondent's defence of blank cheque and security was treated as insufficient rebuttal. Conclusions: - Statutory presumptions under Sections 118 and 139 apply and remain unrebutted. - Burden of proof remains with Respondent to rebut, which was not discharged. (d) Relevance and impact of alleged non-disclosure of the loan transaction in income tax returns Relevant legal framework and precedents: - Income tax laws require reporting of financial transactions but non-disclosure attracts penalties, not invalidation of debts. - Judgments including Krishna P. Morajkar v. Joe Ferrao and Satyaveer Singh v. Suraj clarify that non-disclosure or unaccounted money does not render debt unenforceable under NI Act. - The Income Tax Act's penalty provisions operate independently and do not affect substantive recovery rights. Court's interpretation and reasoning: - The Court rejected the Trial Court's reliance on non-disclosure in income tax returns to deny enforceability. - The Court held that failure to disclose loan in returns is a matter for tax authorities and cannot be used by borrower to evade repayment. Key evidence and findings: - Appellant's admitted non-disclosure in income tax returns. Application of law to facts: - Non-disclosure did not affect the existence or enforceability of the loan. Treatment of competing arguments: - The defence's reliance on IT Act violations was rejected as legally untenable. Conclusions: - Non-disclosure in income tax returns does not render the debt unenforceable under Section 138 NI Act. (e) Evidentiary value and effect of admissions regarding the cheque's signature and issuance, including defence of blank signed cheque given as security Relevant legal framework and precedents: - Admission of signature on cheque triggers presumption under Section 139 NI Act. - Bir Singh v. Mukesh Kumar held that signed blank cheques voluntarily handed over carry implied authority to fill particulars and trigger presumption. - Defence must rebut presumption by credible evidence. Court's interpretation and reasoning: - Respondent admitted signature and account details but claimed cheque was blank and given as security. - The Court held that this defence is insufficient without credible evidence. - Defence witness testimony contradicted the defence narrative. Key evidence and findings: - Admission of signature and cheque particulars. - Defence witness denying jewellery transaction and confirming loan. Application of law to facts: - Presumption under Section 139 was properly triggered and not rebutted. Treatment of competing arguments: - Defence of blank cheque as security rejected for lack of corroboration. Conclusions: - Admission of signature and issuance triggers presumption; defence failed to rebut. (f) Appellate court's jurisdiction and standard of review in appeals against acquittal under Section 378 CrPC in Section 138 NI Act cases Relevant legal framework and precedents: - Section 378 CrPC permits appeal against acquittal. - Supreme Court in Mohan v. State of Karnataka and Rohitbhai Jivanlal Patel v. State of Gujarat emphasized appellate restraint in overturning acquittals. - Appellate court must satisfy itself that trial court's view is perverse or wholly unsustainable before reversing acquittal. - In NI Act cases, appellate court may scrutinize evidence to assess if accused raised probable defence to rebut presumption. Court's interpretation and reasoning: - The Court acknowledged the double presumption of innocence after acquittal. - The Court found the Trial Court's acquittal based on erroneous legal premise (invalidity of loan due to IT Act violation) unsustainable. - The Court exercised appellate jurisdiction to correct legal error and assess evidence on merits. Key evidence and findings: - Trial Court's acquittal based on misapplication of law regarding Section 269SS. Application of law to facts: - The Court found the Trial Court's judgment perverse and set it aside. Treatment of competing arguments: - The Court balanced appellate restraint with need to correct legal errors affecting justice. Conclusions: - Appellate Court can interfere with acquittal under Section 378 CrPC where Trial Court's decision is legally untenable or unsupported by evidence. 3. FINAL CONCLUSIONS - The alleged cash loan of Rs. 5 lakhs is a legally enforceable debt under Section 138 NI Act despite alleged violation of Section 269SS IT Act. - The Respondent/Accused is liable under Section 138 NI Act as the statutory presumption triggered by admitted signature on cheque remains unrebutted. - The defence of cheque as blank security instrument is unsubstantiated and contradicted by defence witness testimony. - Non-disclosure of loan in income tax returns does not affect enforceability of debt or trigger acquittal. - The Trial Court's acquittal based on IT Act violation was legally erroneous and set aside. - Respondent/Accused is held guilty of offence under Section 138 NI Act and matter remanded for sentencing.