Cash Transactions above ₹20,000 in Violation of Income Tax S. 269SS Not Legally Enforceable Debt Under NI Act: Kerala HC [Read Order]

In a landmark decision, the Kerala High Court held that any debt arising out of a cash transaction exceeding ₹20,000, in violation of Section 269SS of the Income Tax Act, 1961, cannot be treated as a "legally enforceable debt" for the purpose of prosecuting under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The matter arose when the accused/revision petitioner, PC Hari was prosecuted under Section 138 of the NI Act based on a dishonoured cheque issued for ₹9,00,000, allegedly towards repayment of a cash loan received from the complainant.

The trial court convicted the accused and sentenced him to one year simple imprisonment and compensation equal to the cheque amount. The conviction was upheld by the appellate court. Aggrieved, the accused filed a revision petition before the High Court.

The key issue before the Court was whether a loan advanced in cash, in contravention of Section 269SS of the Income Tax Act, can be construed as a "legally enforceable debt" within the meaning of the explanation to Section 138 of the NI Act.

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Section 269SS prohibits accepting loans or deposits above ₹20,000 in cash, requiring such transactions to be made through account payee cheques, bank drafts, or electronic transfers.

Justice P.V. Kunhikrishnan, referring to the government’s vision of promoting a digital economy and curbing cash transactions, stated that legitimizing such large cash dealings through judicial pronouncements would defeat the legislative intent behind the Income Tax provisions.

The Court noted that permitting criminal prosecution of such cash-based transactions will jeopardize attempts to eliminate parallel economies and black money, which digital India seeks to bring to an end.

The bench further rejected the argument that only the receiver of the cash (the accused) is penalized under the Income Tax Act and that the complainant can still enforce the transaction under the NI Act.

It clarified that the burden lies on the complainant to demonstrate that the transaction was legal and explain any cash payment under the exceptions provided in Section 273B of the Income Tax Act. In the absence of such a justification, the Court held that the debt cannot be treated as legally enforceable.

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It was also clarified that this principle will apply only in cases where the issue is specifically raised, and there is no valid explanation provided by the complainant for such cash transactions. It said that this decision will have only prospective applicability and will not impact cases where the trial is concluded and no such issue has been raised.

Accordingly, while allowing the criminal revision petition, the High Court set aside the conviction and sentence of the accused, holding that a cheque issued in discharge of a debt arising out of a cash transaction violating the Income Tax Act cannot be the basis for criminal liability under the NI Act.

“The bail bond, if any, executed by him is cancelled. If any amount is paid by the accused as per the orders of the appellate court or this Court, the same should be disbursed to the revision petitioner/accused forthwith” said the court.

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