Cheque Law In Cash Crisis: How P.C. Hari Rewrites Enforceability At The Cost Of Commercial Certainty

Anup Koushik Karavadi and Kanishk Tiwari

Introduction

The decision of the Kerala High Court in P.C. Hari v. Shine Varghese¹ presents a significant yet contentious development in the law governing dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881. While the Court endeavours to harmonize the NI Act with provisions of the Income Tax Act, particularly Section 269SS, it simultaneously opens a Pandora’s box by unsettling established interpretations on what constitutes a “legally enforceable debt.” The judgment takes a distinct jurisprudential stance within the four corners of law by holding that debts arising from high-value cash transactions, unless validly explained under tax law, fall outside the scope of enforceability under the NI Act. In doing so, it challenges prevailing precedent, injects fiscal legality into private commercial obligations, and rekindles debate on the limits of statutory presumptions, setting the stage for conflicts across jurisdictions.

This article seeks to examine the Kerala High Court’s reasoning in light of the statutory framework, the doctrinal developments under Section 138 and 139 of the NI Act, and conflicting High Court and Supreme Court precedents. It further analyses the applicability of this case in light of Law of Precedents as this dissenting view on the settled understanding of presumptive liability under cheque dishonour cases, while with a pious intent, strikes directly at the so called “parallel cash economy” of the country. In doing so, the article evaluates whether the judgment offers a sustainable interpretative advancement or disrupts the delicate balance between commercial certainty and regulatory compliance.

Exploring the Case

It is pertinent to briefly get a hold of the factual circumstances that laid the foundation of decision in the case in order to subsequently delve into the jurisprudential aspects.

Brief Facts

The complainant alleged that the accused owed him ₹9,00,000 and issued a cheque drawn on South Indian Bank, Pathanamthitta Branch, for repayment. Upon presentation, the cheque was dishonoured for insufficient funds. Statutory notice was issued and received by the accused, who responded denying liability. The above transaction was allegedly made in cash in lieu of which accused had issued cheques that subsequently got dishonoured.

The complainant initiated proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), leading to conviction by the trial and appellate courts. The matter reached the Kerala High Court via a criminal revision petition.

Arguments of the Parties

On behalf of the Petitioner

The accused argued that the alleged loan of ₹9,00,000 was made in cash, contravening Section 269SS of the Income Tax Act, 1961 (IT Act),² which prohibits cash transactions exceeding ₹20,000. Consequently, a penalty payable by the recipient of the cash is to be imposed as per Section 271D of Act in case of violation of S. 269SS. Hence, the debt was not legally enforceable. He denied having the financial capacity to accept such a sum and highlighted that the complainant did not disclose the loan in income tax returns.³

On behalf of the Respondent

The complainant contended that Section 269SS violation, if any, attracted a penalty under Section 271D of the IT Act⁴ but did not render the transaction void. He argued that the presumption under Section 139 of the NI Act still applied.

Reliance was placed on Krishna P. Morajkar v. Joe Ferrao⁵ and Sugunan v. Thulaseedharan,⁶ which held that income tax irregularities did not bar proceedings under the NI Act.

Issues before the Court

Can a criminal court justify cash transaction above an amount of Rs.20,000/- treating it as a “legally enforceable debt” is the important question to be decided in this case?

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”?⁷

Ratio of the Decision

The Court held that while Section 139 of the NI Act presumes a legally enforceable debt, this presumption can be rebutted by preponderance of probability. The cash loan of ₹9,00,000 violated Section 269SS of the IT Act and lacked a valid explanation under Section 273B of the Act. Hence, it was not a legally enforceable debt. The accused successfully rebutted the statutory presumption, and the conviction was set aside.

Reasoning & Analysis of the Court

That the aforementioned issues were taken up by the court separately, but in effect complimented to arrive at the finding concerning the third issue which forms the crux of the decision. Therefore, instead of individually going into the analysis of each issue by the court, it is appropriate to focus holistically on issue 3, clubbing other issues together.

Interplay of NI Act & IT Act Provisions

The crux of the Court’s analysis lay in interpreting Section 139 of the IT Act,⁸ which raises a rebuttable presumption on standard of preponderance of probability in favour of the holder of a cheque that it was issued in discharge of a legally enforceable debt or liability.⁹ It is in the light of Section 139 presumption that the court went into the aspect of whether violation of IT Act provisions viz.

It is in the light of Section 139 presumption that the court went into the aspect of whether violation of IT Act provisions viz.

The framework where violation of Section 269SS invites penalty under Section 271D, which imposes a fine equal to the amount received in contravention of Section 269SS; but where Section 273B provides a statutory escape if the person (the one who is advancing the loan) can prove “reasonable cause” for the violation.

The Kerala High Court anchored its reasoning in the legal implication of the aforementioned framework, intending to establish a middle ground for harmoniously construing the relevant mentioned provisions of IT Act & NI Act: holding that, a loan given in cash in contravention of Section 269SS, without a valid explanation under Section 273B, is not “legally enforceable” and cannot form the basis of penal prosecution under Section 138 of the NI Act. Therefore, while the presumption under Section 139 NI Act is in place as and when the transaction is done, however, the same is rebutted in case the concerned creditor is unable to give cogent explanation of why the said amount was advanced in cash per Section 273B of the IT Act. Thus, the debt accrued would be deemed ‘not legally enforceable’ rendering the cheques issued by the debtor pursuant to the whole transaction unenforceable.

Treatment of settled jurisprudence

It is not the case that the current question of Law dealt by the court came up for consideration before a Constitutional court for the first time. In particular the interplay of IT Act provisions under Section 269SS read with Section 271D & 273B and their interplay with NI Act provisions under Section 139 read with 138, for rendering the debt as legally ‘unenforceable’.
The exact question has been dealt by the Bombay High Court in the cases of:

1. Prakash Madhukarrao Desai v. Dattatraya Sheshrao Desai¹⁰
2. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd., v. Kanishka Kapoor @ Nikki¹¹

The former case (a division bench decision) has overruled the latter (a single bench decision).
In summation, the Sanjay Mishra decision supported the present reasoning of the Kerala High Court observing that By no stretch of imagination it can be stated that liability to repay unaccounted cash amount is a legally enPrakash Madhukarrao Desaiforceable liability within the meaning of explanation to S.138 of the said Act. The alleged debt cannot be said to be a legally recoverable debt.
In Prakash Madhukarrao Desai court observed:

“13. In the present case, there is a categorical admission that the amount allegedly advanced by the applicant was entirely a cash amount and that the amount was ‘unaccounted’. He admitted not only that the same was not disclosed in the Income Tax Return at the relevant time but till recording of evidence in the year 2006 it was not disclosed in the Income Tax Return. By no stretch of imagination it can be stated that liability to repay unaccounted cash amount is a legally enforceable liability within the meaning of explanation to S.138 of the said Act. The alleged debt cannot be said to be a legally recoverable debt.”¹²

The above ration of Sanjay Mishra was categorically overruled by the division bench of the Bombay High Court in Prakash Madhukarrao Desai, where the court went into the commercial viability of transaction methods in place and that Tax violation is a civil obligation, observed that (relevant part underlined):

17. It can thus be said that the validity of section 269SS of the Act of 1961 having been upheld in Assistant Director of Inspection (Investigation) v. Kum. A. B. Shanthi (supra), breach thereof being subjected to penalty under section 271D with a further provision for waiving the penalty under section 273B of the Act of 1961, it will have to be held that such transaction in violation of section 269SS of the Act of 1961 at the behest of the drawer of a cheque cannot be treated as null and void. Similar is the case when there is an omission of any entry relevant for computation of total income of such person to evade tax liability under section 271AAD of the Act of 1961. Such person, assuming him to be the payee/holder in due course, is liable to be visited by penalty as prescribed. Such act is not treated to be statutorily void. We may in this context refer to paragraph 4 of the decision in Gujarat Travancore Agency, Cochin (supra) wherein reference has been made to the following statement in Corpus Juris Secundum, Volume 85 page 580, paragraph 1023: “A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal penal laws.” Further, in Atul Mohan Bindal (supra), the penalty referred to in section 271(1)(c) of the Act of 1961 has been referred to as a civil liability and not one which is criminal or quasi- criminal in nature. Thus, in the light of statutory presumption under sections 118 and 13Act and the broader “Digital India” economic vision” 9 of the Act of 1881, it would be for the accused to rebut such presumption in the light of what has been held in Rangappa (supra).

18. In view of the aforesaid discussion, it is held that a transaction not reflected in the books of account and/or Income-tax returns of the holder of the cheque in due course can be permitted to be enforced by instituting proceedings under section 138 of the Act of 1881 in view of the presumption under section 139 of the Act of 1881 that such cheque was issued by the drawer for the discharge of any debt or other liability, execution of the cheque being admitted. Violation of section 269SS and/or section 271AAD of the Act of 1961 would not render the transaction unenforceable under section 138 of the Act of 1881. The decisions in Krishna P. Morajkar, Bipin Mathurdas Thakkar and Pushpa Sanchalal Kothari (supra) lay down the correct position and are thus affirmed. The decision in Sanjay Mishra (supra) with utmost respect stands overruled.”

The Kerala High Court expressly dissented from this abovementioned view, observing that judicial tolerance of tax-evading cash loans would defeat the very purpose of the Income Tax Act and the broader “Digital India” economic vision.¹³ The Court rejected the Bombay High Court’s analogy that tax penalties are merely civil liabilities and thus irrelevant to criminal cheque dishonour proceedings. The Kerala HC expressly agreed with the overruled dictum in Sanjay Mishra, holding that permitting recovery through criminal law would indirectly validate illegal transactions.

Another significant reliance by the court was Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd.,(2001) 6 SCC 463, where the Supreme Court emphasized the object of Section 138 as promoting the credibility of commercial instruments and smooth conduct of trade. The Kerala High Court used this authority to argue that the credibility of commercial instruments cannot be stretched to cover transactions that undermine statutory economic policy.

Accordingly, disposed of the case with the holding as discussed, that while the presumption under Section 139 NI Act is in place as and when the transaction is done, however, the same is rebutted in case the concerned creditor is unable to give cogent explanation of why the said amount was advanced in cash per Section 273B of the IT Act. It is for the accused to raise this defence of reasonable explanation at the earliest opportunity i.e., initial burden of proof to rebut the presumption under Section 139 lies on the accused by way raising of this defence.¹⁴

Implication: opening a Pandora’s Box

It is understood that the High Courts are Constitutional entities, in its own right holding superintendence over the states, and are not bound by the decisions of other High Courts except for persuasive value.

This decision of the court presents an apt usage of the constitutional authority of its own right by the Kerala High court, however, the same has led to criticism drawn to the way decision was arrived at, and the treatment afforded to the established legal precedents, though of different High Courts.

Beyond legal formalism, the Kerala High Court infused its judgment with strong public policy narrative. It observed that judicial recognition of high-value cash loans violates the spirit of fiscal legislation and erodes the nation’s anti-black money drive.¹⁵ The Court referenced the national “Digital India” initiative led by the Prime Minister, noting that courts cannot aid the conversion of black money to white under the guise of cheque enforceability.¹⁶

The Court also seemingly satirically invoked the metaphor of “Shylock” to criticize the Bombay HC view that revenue benefit through penalties is a sufficient reason to allow otherwise illegal cash loans to be enforced via criminal proceedings. The judgment thus placed the judiciary as a moral stakeholder in curbing parallel economy and fostering financial transparency.

It is true that Courts works on the desired idealistic aspects holistically, however, the intent behind payment instruments is seamless business efficiency, linked with trust, accessibility and the most important of all legal certainty. However, what is also true is that parallel cash economy forms a substantial chunk of transactions in India, thus, financial money market instrument like Cheques ensures legal certainty and protection to creditors. What is noteworthy to mention, without prejudice to the ill effects of cash transactions on the economy including black money etc., is that it was this parallel economy run in cash that saved the country from going into depression in the economic depression of 2008.¹⁷

The ruling of Prakash Madhukarrao Desai precisely took into consideration the fundamental object of taxation, and how any violation is a civil obligation aligning with the purpose of revenue collection by the authorities. However, there exists alternative efficacious means in case violation of provisions in question (Section 269SS), but interpreting the provision, like done by Kerala HC, to cast a bearing on the legal sanctity of the debt leaves no remedy for the aggrieved creditor who transacted in cash but could not provide adequate explanation.

The cheques being rendered unenforceable for something which a penalty is already prescribed, a fault which is curable, by the way of present interpretation opens a direct challenge to established mechanism that instils confidence in the economic characterized by certainty and security offered by money market instrument like cheques.

The ruling by Kerala HC though pious effectively strikes at the very root of the essential requirement of a money market that is certainty offered by the instruments, though not intentionally. This leaves the creditors in dismay for a civil obligation violation, due to which their remedy to recover rightful amount subject to penalty for basic violations stands completely forfeited.

The decision has opened a Pandora’s box of ‘uncertainty’ looming over the trusted Money Market instrument (Cheque).¹⁸ It is only time will tell how implication of the decision turns out in real world money market practice, but the said implication for the time being are limited to State of Kerala with the decision holding only persuasive value for other states in light of direct dissenting decision of Prakash Madhukarrao Desai (supra).

Law of Precedence

The NI Act and IT Act both are Central Statutes. Thus, the question of a particular interpretation by the High Courts albeit under Criminal Review Petition, and not directly under the exercise of writ powers where dissenting view prominently exists leads to a confusion as to the applicability and bindingness of the laid law or interpretation.

In the given case as well, while deviating from conventional practice to an extent encapsulated in the doctrine of stare decisis, of giving weightage to division bench decision of a separate high court by a single judge bench, the court has exercised its superintendence powers under 227 of the Constitution, well summarized by the Supreme Court in the case of East India Commercial Co. Ltd. v. Collector of Customs¹⁹, holding that

“We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it.”

It is infact now the case that two separate views on the same subject matter in issue exists viz. the division bench decision of Bombay HC in Prakash Madhukarrao Desai (supra), and the single bench decision of Kerala HC in P.C. Hari.

Individually, the Bombay High Court decision is binding in the State of Maharashtra & Goa, whereas, Kerala HC decision is binding in the state of Kerala.

The decision of Kusum Ingots and Alloys Ltd. v. Union of India²⁰ settled the position with respect to power of High Court over Central Statutes holding that

“An order passed on writ petition questioning the constitutionality of a Parliamentary Act whether interim or final keeping in view the provisions contained in Clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act”.

However, in case of conflicting interpretation, the only remedy remains is referring the matter to the Supreme Court for final adjudication binding on all courts under Article 141 of the Constitution.²¹ In the meanwhile, it can be stated that the conflicting views are applicable in the respective states, and it is left to the discretion of relevant authorities and Hon’ble High Courts to apply their judicial mind in determining the correct position in regard to the issues in consideration.

Conclusion

What started as a pious attempt to bring accountability to the Tax administration, citing idealistic values of Government of India and its vision of Digital India, the Kerala HC ruling has inadvertently opened the Pandoras Box of ‘uncertainty’ with regard to the most trusted and used Money Market instrument of Cheque, completely stripping the creditors of remedy to recover money for a civil obligation violation, thus, disrupting the sanctity of such instruments. The damage though only in anticipatory stage and limited to the State of Kerala in light of divergent decision of Bombay HC, may be immense, driving away the trust reposed by the creditors in the financial certainty offered by the robust mechanism for money recovery. It is apt to revisit the decision by the Supreme Court and finally put an end to the conflict in line with Commercial realities of the Indian economy.

References

1. Crl. Rev. Pet. No.408 of 2024.
2. Income Tax Act, No. 43 of 1961, § 269SS (India).
3. See para 7 of the judgement text.
4. Income Tax Act, No. 43 of 1961, § 271D (India).
5. [Cr. Appeal No.6/2012].
6. [2014 (4) KHC 848].
7. See para 9 of the judgement text.
8. See Negotiable Instruments Act, No. 26 of 1881, § 138, Explanation (India).
9. Rangappa v. Sri Mohan, [2010 KHC 4325].
10. [2023 SCC OnLine Bom 1708].
11. [2009 (2) KLD 825].
12. See id at para 13.
13. See para 24 of the judgement text.
14. See para 27 of the judgement text.
15. See para 27 of the judgement text.
16. See id.
17. Justin Rowlatt, How ‘black money’ saved the Indian economy, BBC (February 22, 2016), available at: https://www.bbc.com/news/world-asia-india-35610332
18. Yelahanka Lokesh, Indian Financial System: Money Market And Monetary Policy in INDIAN ECONOMIC POLICY AND DEVELOPMENT 1, 79 (Yelahanka Lokesh & Dr. Mounica Vallabhaneni, 1st ed. Alexis Press USA 2022).
19. 1962 taxmann.com 5 (SC).
20. 2004 (6) SCC 254.
21. Sanchita Kadam, High Court striking down Central law: Impact on Jurisprudence, Citizens for Justice and Peace (CJP) (November 20, 2020), available at: https://cjp.org.in/high-court-striking-down-central-law-impact-on-jurisprudence/.