The Kerala High Court, in a significant ruling, addressed the question of whether a criminal court can enforce a debt that originated from a cash transaction prohibited by the Income-Tax Act, 1961. The court declared that a debt created through a cash loan of over ₹20,000 is not a “legally enforceable debt” for the purpose of a prosecution under Section 138 of the Negotiable Instruments (NI) Act, thereby acquitting an individual convicted by two lower courts.
Background of the Case
The revision petitioner, P.C. Hari (accused), was prosecuted by the first respondent, Shine Varghese (complainant), for the offence of cheque dishonour under Section 138 of the NI Act. The complainant alleged that the accused owed him ₹9,00,000 and had issued a cheque for the said amount to discharge this legally enforceable debt. The cheque, when presented, was dishonoured for “funds insufficient”.
After the complainant issued a statutory notice which the accused received, the accused sent a reply denying the liability. The Judicial First Class Magistrate Court-II, Pathanamthitta, found the accused guilty, sentenced him to one year of simple imprisonment, and ordered him to pay ₹9,00,000 as compensation to the complainant. This decision was subsequently upheld by the Additional District & Sessions Court-III, Pathanamthitta, in an appeal filed by the accused. Aggrieved by the concurrent findings of the lower courts, the accused filed the present criminal revision petition before the Kerala High Court.
Arguments of the Parties
For the Petitioner (Accused):
Advocate D. Kishore, representing the petitioner, argued that the alleged transaction of ₹9,00,000 was admittedly made in cash. This, he contended, was in direct violation of Section 269SS of the Income-Tax Act, 1961, which prohibits any person from accepting a loan or deposit of more than ₹20,000 otherwise than by an account payee cheque or draft. The counsel submitted that a debt arising from such an illegal transaction cannot be construed as a “legally enforceable debt”. He further pointed out that the complainant had admitted to not paying income tax for the amount in question, and the accused had, from the very beginning (in his reply notice), contested the complainant’s financial capacity to advance such a large sum.
For the Respondent (Complainant):
Advocate Manu Ramachandran, appearing for the complainant, countered that a violation of Section 269SS of the IT Act does not render the transaction null and void but merely attracts a penalty under Section 271D of the Act. He argued that the penalty is imposed on the person who receives the cash (the accused), not the person who gives it. Relying on a decision of the Bombay High Court in Krishna P. Morajkar v. Joe Ferrao, he submitted that any infraction of the Income-Tax Act is a matter between the revenue authorities and the defaulter, and the borrower cannot take advantage of it. He asserted that the presumption under Section 139 of the NI Act in favour of a legally enforceable debt was not rebutted by the accused.
Court’s Analysis and Observations
Justice P.V. Kunhikrishnan framed the central question as whether a court could justify a cash transaction above the statutory limit and treat it as a “legally enforceable debt”. The Court observed that with the Union Government’s push for “Digital India,” legal sanction should not be given to such cash transactions. The Court stated, “when the government of India aims a goal of complete digital transactions by every citizen of this country instead of cash transactions, a court of law cannot turn its face and legalise cash transactions.”
The Court first confirmed that the presumption under Section 139 of the NI Act indeed covers the existence of a “legally enforceable debt,” citing the three-judge bench decision of the Supreme Court in Rangappa v. Sri Mohan which had overruled Krishna Janardhan Bhat v. Dattatraya G. Hegde on this point.
The Court then analysed the core issue regarding Section 269SS of the Income-Tax Act. While acknowledging a Bombay High Court Division Bench judgment in Prakash Madhukarrao Desai v. Dattatraya Sheshrao Desai which held that such a violation does not render the transaction unenforceable, Justice Kunhikrishnan expressed his respectful disagreement.
The judge reasoned that the purpose of a penalty is to discourage violations, not to enrich the revenue. He made a poignant observation: “If the criminal court legalises such violations relying on Section 139 NI Act presumptions, stating that the revenue will get the penalty amount, revenue will be treated like a ‘shylock’ who is a Shakespeare’s character.” He further added that legalising such transactions would undermine the national objective of curbing the parallel economy and could lead to “black money” being “converted into white money through the criminal courts.”
The Court declared: “...debt created by a cash transaction above Rs.20,000/- in violation of the provisions of Act 1961 is not a ‘legally enforceable debt’ unless there is a valid explanation for the same.” However, it clarified that the accused must rebut the presumption by raising this challenge, and if no challenge is made, a valid explanation for the cash transaction is presumed.
Applying this principle to the facts, the Court noted that the complainant had unequivocally admitted in his testimony that he had not paid income tax and was unaware of the requirement. The Court found that he had no explanation for making a payment of ₹9,00,000 in cash. Since the accused had challenged the complainant’s financial capacity from the outset and the complainant failed to provide a valid reason for the cash transaction, the Court concluded that the accused had successfully rebutted the presumption under Section 139 by a preponderance of probabilities.
The Court also held that a previous single-bench decision of the Kerala High Court in Sugunan’s case, which took a contrary view, was per incuriam as it had not considered the relevant Supreme Court precedents in Rangappa’s case and Krishna Janardhan Bhat’s case.
Finally, the Court clarified that this ruling would apply prospectively and would not affect trials already concluded where this specific point was not raised.
Decision of the Court
Based on the analysis, the High Court allowed the criminal revision petition. The conviction and sentence handed down by the trial court and confirmed by the appellate court were set aside. The petitioner, P.C. Hari, was acquitted of the charges under Section 138 of the NI Act. Any amount paid by the petitioner during the proceedings was ordered to be refunded to him.
