The Supreme Court has clarified that a cheque bounce case under Section 138 of the Negotiable Instruments Act (NI Act) remains maintainable even if the underlying loan above ₹20,000 was advanced in cash in breach of Section 269SS of the Income-tax Act (IT Act). Such a breach may attract tax penalty, but it does not make the debt “illegal”, “void” or “non-enforceable” for purposes of Sections 118 and 139 NI Act.
Background: The Controversy Around Cash Loans
Section 269SS IT Act bars acceptance of loans or deposits of ₹20,000 or more in cash, prescribing that such amounts must be routed through banking channels. Some High Courts, notably Kerala in P.C. Hari v. Shine Varghese, had held that a cash loan above ₹20,000 in violation of Section 269SS cannot create a “legally enforceable debt” for Section 138 NI Act unless a satisfactory explanation is offered.
This position created serious uncertainty for complainants in cheque bounce cases where the original advance was a friendly cash loan, a common reality in small businesses, traders, landlords and informal credit in India. Accused persons began routinely taking a technical defence that since the loan violated tax law, no prosecution under Section 138 could lie.The Shine Varghese Case: Kerala HC View Set Aside
In Shine Varghese Koipurathu v. State of Kerala & Anr., the complainant had advanced ₹9,00,000 in cash to the accused, who later issued a cheque which was dishonoured. The Trial Court convicted the accused under Section 138 NI Act and ordered compensation, but the Kerala High Court, following its earlier view in P.C. Hari, acquitted the accused on the ground that the cash loan, being in breach of Section 269SS, was not a “legally enforceable debt”.
Background and Facts
The dispute originated from a loan of Rs 9,00,000 extended by the complainant (appellant Shine Varghese) to the accused (respondent No. 2) via cash, which violated Section 269SS of the IT Act. A cheque issued by the accused to repay the loan was dishonoured, leading to a complaint under Section 138 of the NI Act.
The Trial Court convicted the accused, sentencing them to one year of simple imprisonment and directing payment of Rs 9,00,000 as compensation under Section 357 (3) of the Code of Criminal Procedure , 1973 (CrPC). In default, an additional year of imprisonment was ordered. The Sessions Court upheld this conviction, but the Kerala High Court, in its impugned judgment ( P.C. Hari Vs. Shine Varghese & Anr. , 2025 SCC OnLine Ker 5535), acquitted the accused. The High Court reasoned that the cash transaction’s illegality under the IT Act meant no “legally enforceable debt” existed, thus rebutting the presumption under Section 139 of the NI Act.
Key Arguments
The appellant argued that the High Court’s reliance on Section 269SS was misplaced, as breaches of the IT Act do not nullify transactions under the NI Act or affect the enforceability of debts. The State of Kerala and the accused defended the High Court’s view, contending that illegal cash loans lack legal validity, precluding liability under Section 138.
The Supreme Court focused on the legal validity of such transactions, emphasizing that penalties under the IT Act do not render them void.
Precedents and Legal Principles Applied
The Supreme Court directly overruled the Kerala High Court’s stance by referencing its own prior decision in Sanjabij Tari Vs. Kishore S. Borcar & Anr. (Criminal Appeal No. 1755 of 2010). In that case, the apex court clarified that violations of Section 269SS attract only a penalty under Section 271D of the IT Act and do not make the transaction illegal or unenforceable.
Key excerpts from Sanjabij Tari (paragraphs 19 and 20), reproduced in the judgment, underscore this: > “19. Recently, the Kerala High Court in P.C. Hari vs. Shine Varghese & Anr., 2025 SCC OnLine Ker 5535 has taken the view that a debt created by a cash transaction above Rs. 20,000/- … is not a ‘legally enforceable debt’ unless there is a valid explanation for the same, meaning thereby that the presumption under Section 139 of the Act will not be attracted in cash transactions above Rs. 20,000/-. > 20. However, this Court is of the view that any breach of Section 269SS of the IT Act, 1961 is subject to a penalty only under Section 271D of the IT Act, 1961. Further neither Section 269SS nor 271D of the IT Act, 1961 state that any transaction in breach thereof will be illegal, invalid or statutorily void. Therefore, any violation of Section 269SS would not render the transaction unenforceable under Section 138 of the NI Act or rebut the presumptions under Sections 118 and 139 of the NI Act… Accordingly, the conclusion of law in P.C. Hari (supra) is set aside.”
This precedent distinguishes between tax penalties and criminal liability under the NI Act, affirming that presumptions under Sections 118 and 139 remain intact unless rebutted on other grounds. The ruling rejects any blanket invalidation of cash loans, focusing instead on the NI Act’s objective to ensure cheque credibility and financial discipline.
Court’s Decision and Implications
Granting leave in the SLP, the Supreme Court set aside the High Court’s judgment, noting that its foundation—the interpretation of Section 269SS —had been overturned. The matter was remanded to the Kerala High Court for fresh consideration on merits under revisional jurisdiction. Parties are directed to appear before the High Court on February 17, 2026.
This decision reinforces the robustness of Section 138 proceedings, clarifying that IT Act breaches alone cannot derail cheque bounce cases. It provides much-needed certainty for lenders relying on cash transactions, potentially impacting numerous pending cases where tax violations are invoked as defenses. For legal professionals, it underscores the limited scope of Section 269SS in criminal enforcement contexts, prioritizing the NI Act’s presumptions.
The appeal was disposed of accordingly, with any pending applications also resolved.
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FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.