Cheque Holder's Failure To Record Loan In Books Not Ground To Dismiss Complaint U/S 138 NI Act: Bombay High Court

A division bench of Justice AS Chandurkar and Justice Vrushali V Joshi observed that the existence of a legally enforceable debt/liability in favour of the cheque holder is presumed under Section 139 of the Act, and the accused has the onus to rebut such presumption.

“The complaint which is otherwise maintainable under Section 138 of the Act of 1881 is not liable to be dismissed at the threshold only on the ground that the complainant had failed to disclose the amount mentioned in the cheque in his Income Tax returns. The presumption under Section 139 of the Act of 1881 being in the nature of an initial statutory presumption in favour of the complainant, it will have to be rebutted by the accused as any other legal presumption”, the court held.

The court further held that violation of section 269-SS of the Income Tax Act, 1961 (IT Act) which prohibits the receipt of more than Rs. 20,000/- in cash also would not render the transaction unenforceable under Section 138 of the NI Act.

“…acceptance of an amount exceeding Rupees Twenty Thousand in cash attracts penalty under Section 271-D of the Act of 1961 but such acceptance does not nullify the transaction. Infact, the penalty can be waived on showing reasonable cause. Hence, violation of Section 269-SS by the drawer of the cheque would not render the amount in question non-recoverable”, the court held.

Facts

One Prakash Desai (complainant) had extended a hand loan of Rs. 1.5 lakhs without any interest to Dattatraya Desai (accused), who issued a cheque of that amount to the complainant for repayment. However, the cheque was dishonoured due to insufficient funds, prompting the complainant to issue a statutory notice under Section 138 of the NI Act. The trial court dismissed the complaint on the ground that the amount stated to be loaned to the accused had not been shown in the Income Tax returns of the complainant. Thus, the complainant filed the present appeal.

The Single Judge presiding over the appeal several contrasting decisions of various Single Judge Benches of the Bombay High Court on the enforceability of debt through section 138 NI Act if it’s not recorded in the books.

Thus, he referred for consideration by a larger bench the question of whether unaccounted debts violating Section 269-SS of the IT Act could be recovered under sections 138 to 147 of the NI Act.

Arguments

Advocate Pushkar Deshpande for the complainant argued that Section 139 of the NI Act inherently presumes the existence of a legally enforceable debt or liability. He stressed that the accused must rebut this presumption with a strong defence, emphasizing that the absence of the advanced amount from the complainant's tax returns does not invalidate the enforceability of the liability.

Advocate RS Kurekar for the accused argued that the omission of disclosing the amount in tax returns rebuts the presumption of a legally enforceable debt.

Court's Analysis

The court modified the question framed by the Single Judge, observing that there is a difference between the failure of cheque holder to document a transaction in the Income Tax and violation of Section 269SS of the IT Act. Both can arise either together or independently, the court said. Thus, the final question of law to be decided was:

“Whether, in instances where (a) a transaction is not duly recorded in the books of account and/or the Income Tax returns of the holder of the cheque in due course, and/or (b) the said transaction contravenes the stipulations set forth in Section 269-SS of the Income Tax Act, 1961, it can still be deemed a 'legally enforceable debt'. Furthermore, can such transactions be allowed to be pursued through the initiation of legal proceedings under Section 138 of the Negotiable Instruments Act, 1881?”

The court referred to various Apex Court judgments and held that the presumption outlined in Section 139 of the NI Act inherently includes the presumption of a legally enforceable debt or liability. The court then relied on Asstt. Director of Inspection Investigation v. AB Shanthi and said that the objective of Section 269-SS of the Income Tax Act, 1961 is to curb the practice of falsely explaining unaccounted money. The court underscored that the violation of Section 269-SS does not render the transaction itself unenforceable.

The court emphasized that the presumption under Section 139 of the NI Act, being an initial statutory presumption, can be rebutted by the accused in the same manner as any other legal presumption. The court said that the accused can raise permissible defences, including that the complainant failed to disclose the transaction in Income Tax returns. The court clarified that the presumption mandates that, once the execution of the cheque is admitted, the complainant enjoys a presumption in their favour, and the accused must rebut this presumption based on a preponderance of probabilities.

The court answered the question of law thus –

“a transaction not reflected in the books of accounts 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 Sections 269-SS and/or Section 271-AAD of the Act of 1961 would not render the transaction unenforceable under Section 138 of the Act of 1881”.

The court overruled the stance of a Single Judge Bench in Sanjay Mishra v. Kanishka Kapoor and Anr. that the amount not disclosed in the Income Tax returns by the complainant could not be stated to be an amount due towards a legally enforceable liability.

The court directed the case to be placed before the Single Judge for adjudication on merits.

Case no. – Criminal Appeal No. 795/2018

Case Title – Prakash Madhukarrao Desai v. Dattatraya Sheshrao Desai