Dishonour Of Cheques Given Against Cash/Unaccounted Loans- Complaint U/S 138 Of Negotiable Instruments Act Not Maintainable
The number of cases filed under Negotiable Instruments Act, 1881 is
increasing manifold as dishonour of cheques has become a very common feature.
Over 33 lakh cases are pending in our Courts which contribute to 9% of the total
criminal cases pending in India. The Apex Court has in the last 3 years passed a
number of judgments to set at rest various controversies arising in the
Negotiable Instruments Act.
Broadly speaking the dishonour of cheques relate to either payment for purchase of goods or supply of services or for repayment of loans from Banks/NBFC/private moneylenders/personal loans from friend & relatives or repayment of housing/vehicle/ business loans.
Before deliberating on the subject, it would be relevant to reproduce said Section 138 & 139 of the NI Act which read as under:
Section 138 in The Negotiable Instruments Act, 1881
138 Dishonour of cheque for insufficiency, etc., of funds in the account:
Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless:
139. Presumption in favour of holder:
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.
From the plain reading of the said Section 138, it transpires that the section comes to play only when the dishonoured cheque was issued "for the discharge, in whole or in part, of any debt or other liability". The explanation to this section is of utmost importance wherein it says that "debt or other liability" means 'a legally enforceable debt or other liability'. Thus, section 138 comes to rescue in case of dishonour of cheque issued only in relation to a legally enforceable debt or other liability and not to any other debt or liability.
Section 139 is a very important section in as much as it gives a statutory presumption that the holder of the cheque has received the said cheque for the discharge of part or whole of debt or liability. However, this presumption is rebuttable by the drawer and in order to succeed, the accused has to rebut the presumption with sufficient evidence. Thus, in every case filed u/s 138 of the Negotiable Instruments Act, the success of the accused depends on how he rebuts the 'deemed presumption' with evidence.
In trials under the Negotiable instruments Act the courts are required to consider whether the ingredients of the offence enumerated in Section 138 of the Act have been met and if so, whether the accused was able to rebut the statutory presumption contemplated by Section 139 of the Act.The Apex Court has repeatedly held that Section 139 is a reverse onus clause and requires the accused to prove the non-existence of the presumed fact, i.e., that cheque was not issued in discharge of a debt/liability.
It would be trite to refer to the Apex Court landmark judgment in Basalingappa vs Mudibasappa (2019) 5 SCC 418 which elaborately deals with the presumption contemplated by Section 139 read with Section 118 of the Negotiable Instruments Act. The Court after detailed discussion summed up thus:
8. We having noticed the facts of the case and the evidence on the record, we need to note the legal principles regarding nature of presumptions to be drawn under Section 139 of the Act and the manner in which it can be rebutted by an accused. We need to look into the relevant judgments of this Court, where these aspects have been considered and elaborated. Chapter XIII of the Act, 1881 contains a heading "Special Rules of Evidence". Section 118 provides for presumptions as to negotiable instruments. Section 118 is as follows:
118. Presumptions as to negotiable instruments:
Until the contrary is proved, the following presumptions shall be made:
9. Next provision, which needs to be noticed is Section 139, which provides for presumption in favour of holder. Section 139 lays down:-
139. Presumption in favour of holder.
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability."
10. The complainant being holder of cheque and the signature on the cheque having not been denied by the accused, presumption shall be drawn that cheque was issued for the discharge of any debt or other liability. The presumption under Section 139 is a rebuttable presumption....."
A Three-Judge Bench of the Apex Court in Kali Ram Vs. State of Himachal Pradesh, (1973) 2 SCC 808 laid down that in criminal proceedings the burden of proving the guilt of the accused is upon the prosecution:
23. ……………………One of the cardinal principles which has always to be kept in view in our system of administration of justice for criminal cases is that a person arraigned as an accused is presumed to be innocent unless that presumption is rebutted by the prosecution by production of evidence as may show him to be guilty of the offence with which he is charged. The burden of proving the guilt of the accused is upon the prosecution and unless it relieves itself of that burden, the courts cannot record a finding of the guilt of the accused.
There are certain cases in which statutory presumptions arise regarding the guilt of the accused, but the burden even in those cases is upon the prosecution to prove the existence of facts which have to be present before the presumption can be drawn. Once those facts are shown by the prosecution to exist, the Court can raise the statutory presumption and it would, in such an event, be for the accused to rebut the presumption.
The onus even in such cases upon the accused is not as heavy as is normally upon the prosecution to prove the guilt of the accused. If some material is brought on the record consistent with the innocence of the accused which may reasonably be true, even though it is not positively proved to be true, the accused would be entitled to acquittal.
It would be apposite to refer to Kumar Exports Vs. Sharma Carpets, (2009) 2 SCC 513, wherein the Apex Court examined as to when complainant discharges the burden to prove that instrument was executed and when the burden shall be shifted. The Court in para 18, 19 & 20 of the said judgment observed thus:
18. Applying the definition of the word "proved" in Section 3 of the Evidence Act to the provisions of Sections 118 and 139 of the Act, it becomes evident that in a trial under Section 138 of the Act a presumption will have to be made that every negotiable instrument was made or drawn for consideration and that it was executed for discharge of debt or liability once the execution of negotiable instrument is either proved or admitted.
As soon as the complainant discharges the burden to prove that the instrument, say a note, was executed by the accused, the rules of presumptions under Sections 118 and 139 of the Act help him shift the burden on the accused. The presumptions will live, exist and survive and shall end only when the contrary is proved by the accused, that is, the cheque was not issued for consideration and in discharge of any debt or liability. A presumption is not in itself evidence, but only makes a prima facie case for a party for whose benefit it exists.
19. The use of the phrase "until the contrary is proved" in Section 118 of the Act and use of the words "unless the contrary is proved" in Section 139 of the Act read with definitions of "may presume" and "shall presume" as given in Section 4 of the Evidence Act, makes it at once clear that presumptions to be raised under both the provisions are rebuttable. When a presumption is rebuttable, it only points out that the party on whom lies the duty of going forward with evidence, on the fact presumed and when that party has produced evidence fairly and reasonably tending to show that the real fact is not as presumed, the purpose of the presumption is over.
20. ……………………The accused may adduce direct evidence to prove that the note in question was not supported by consideration and that there was no debt or liability to be discharged by him. However, the court need not insist in every case that the accused should disprove the non-existence of consideration and debt by leading direct evidence because the existence of negative evidence is neither possible nor contemplated. At the same time, it is clear that bare denial of the passing of the consideration and existence of debt, apparently would not serve the purpose of the accused. Something which is probable has to be brought on record for getting the burden of proof shifted to the complainant.
To disprove the presumptions, the accused should bring on record such facts and circumstances, upon consideration of which, the court may either believe that the consideration and debt did not exist or their non-existence was so probable that a prudent man would under the circumstances of the case, act upon the plea that they did not exist……………"
It would be relevant that the Apex Court in the case of M.S. Narayana Menon Alias Mani Vs. State of Kerala and Another, (2006) 6 SCC 39 considered Sections 118(a), 138 and 139 of the Negotiable Instruments Act, 1881 and categorically held that presumptions both under Sections 118(a) and 139 are rebuttable in nature.It also held that once the accused is found to discharge his initial burden, it shifts to the complainant.
It would be germane to refer to Apex Court judgment in Bharat Barrel & Drum Manufacturing Company Vs. Amin Chand Pyarelal, (1999) 3 SCC 35 wherein the Court dealt with the presumption of S 118 of the Negotiable Instruments Act and held thus:
"Though the evidential burden is initially placed on the defendant by virtue of S.118 it can be rebutted by the defendant by showing a preponderance of probabilities that such consideration as stated in the pronote, or in the suit notice or in the plaint does not exist and once the presumption is so rebutted, the said presumption 'disappears'. For the purpose of rebutting the initial evidential burden, the defendant can rely on direct evidence or circumstantial evidence or on presumptions of law or fact.
Once such convincing rebuttal evidence is adduced and accepted by the Court, having regard to all the circumstances of the case and the preponderance of probabilities, the evidential burden shifts back to the plaintiff who has also the legal burden. Thereafter, the presumption under S.118 does not again come to the plaintiff's rescue. Once both parties have adduced evidence, the Court has to consider the same and the burden of proof loses all its importance."
It is indisputable that a parallel economy is running in our country and inspite of coersive measures legislated in Income Tax Act and Benami Transactions (Prohibition) Amendment Act, 2016 the volume of cash transactions is unabated. A parallel private loan market exists and is thriving in every town & city.
The modus operandi of the private cash market is that cash loans are readily available on an agreed rate of interest. The lender gives cash amount to the loanee, who gives a signed cheque mentioning the amount of loan and the date of repayment just as a surety & as a proof of the transaction. In case of refusal to pay back the loan on the agreed time, the lender has no option but to deposit the cheque in his bank account and upon dishonour prosecutes the loanee/ drawer of the cheque under Section 138 of the Negotiable Act.
Before deliberating on the maintainability of proceedings in respect of cash/unaccounted money, it is relevant to reproduce Section 269SS & Section 269ST of the Income Tax Act, which read as under:
269SS. Mode of taking or accepting certain loans, deposits and specified sum.—No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if:
Explanation: For the purposes of this section,
Explanation..For the purposes of this section,
Penalty for failure to comply with the provisions of section 269SS
271D.
The Second plea taken by the accused is that Section 138 of the Negotiable Instruments Act, does not include within its purview the liability to pay an unaccounted cash amount. It is accordingly pleaded that in case of a loan given in the form of unaccounted cash, then it is not legally enforceable to repay it. Lastly it is contended that these cash transactions do not constitute 'a legally enforceable debt or other liability' as contemplated in explanation to Section 138 of the Negotiable Instruments Act and therefore prosecution u/s 138 is not legally maintainable.
The matter has been considered by the Apex Court & almost all High Courts on several occasions. It would be appropriate to refer to the Apex Court judgment in the case of Krishna Janardhan Bhat vs Dattatraya G. Hegde (2008) 4 SCC 54. The Court held that in order to invoke section 138 of NI Act, the guilt of the accused must be proved beyond all reasonable doubt. The Court at para 25 of the judgement categorically held thus:
25. Furthermore, whereas prosecution must prove the guilt of an accused beyond all reasonable doubt, the standard of proof so as to prove a defence on the part of an accused is preponderance of probabilities. Inference of preponderance of probabilities can be drawn not only from the materials brought on records by the parties but also by reference to the circumstances upon which he relies."
The Apex Court in the aforesaid case, while reversing the judgment of the High Court, considered the legal implications of Section 269SS & Section 271D of the Income Tax Act and observed at para 19, thus:
19. The courts below failed to notice that ordinarily in terms of Section 269SS of the Income Tax Act, any advance taken by way of any loan of more than Rs. 20,000/- was to be made by way of an account payee cheque only.
It would be apposite to refer to the recent Apex Court judgment in Rajaram S/O Sriramulu Naidu vs Maruthachalam 2023 LiveLaw (SC) 46 decided recently on 18 January, 2023 wherein the Court dealt with the issue of cash loan, which were not disclosed/reflected in the Income Tax Returns filed by the complainant.
The Court after detailed discussion of the facts, particularly the evidence brought in by the accused that the amount purported to be lent by the complainant was neither shown nor reflected in the Income Tax Returns for the relevant Assessment Years lead to the conclusion that the complainant did not have the financial capacity to lend the purported amount and held that in the Court's considered opinion the defence raised by the appellant satisfies the standard of "preponderance of probability" & acquitted the accused.
The following paragraphs which concern the issue in hand are reproduced as under:
8. The learned counsel submitted that the Respondents herein did not have the financial capacity to lend an amount of Rs.3,00,000/ each as on 20th October 1998 and 25th October 1998, when the promissory notes were said to have been executed. It is further submitted that although it was the Respondents' case that they had given the amounts out of their agricultural income, since they had not declared the same in their Income Tax Returns from 1992-1999, thus, there was no material to show that they could have lent money.
10. The learned counsel submitted that there arose no occasion for the Appellant Raja Ram to issue a blank cheque in the year 1992 for a chit to be subscribed much later in the year 1995. It is further submitted that even if certain amounts are not accounted for in the Income Tax Returns, this is a matter concerning only the defaulter and Revenue Authority. Thus, a borrower cannot be allowed to take advantage of the same solely on the ground that such an amount does not reflect in the Income Tax Returns. The learned counsel relied on the judgments of this Court in the cases of Bir Singh v. Mukesh Kumar2, Rohitbhai Jivanlal Patel v. State of Gujarat and Anr3, Kalamani Tex and Anr v. P. Balasubramanian4 to buttress his submissions.
13. It can thus be seen that this Court has held that once the execution of cheque is admitted, Section 139 of the N.I. Act mandates a presumption that the cheque was for the discharge of any debt or other liability. It has however been held that the presumption under Section 139 is a rebuttable presumption and the onus is on the accused to raise the probable defence. The standard of proof for rebutting the presumption is that of preponderance of probabilities. It has further been held that to rebut the presumption, it is open for the accused to rely on evidence led by him or the accused can also rely on the materials submitted by the complainant in order to raise a probable defence. It has been held that inference of preponderance of probabilities can be drawn not only from the materials brought on record by the parties but also by reference to the circumstances upon which they rely.
15. In the present case, the accused appellant had examined Mr. Sarsaiyyn, Income Tax Officer, Ward No.18, Circle (II) (5), who produced certified copies of the Income Tax Returns of the complainant for the financial year 1995-96, 1996-97, 1997-98 and 1998-99. The certified copies of the Income Tax Returns established that the complainant had not declared that he had lent Rs.3 lakh to the accused. It further established that the agricultural income also was not declared in the Income Tax Returns.
16. The learned Trial Court further found that from the income which was shown in the Income Tax Return, which was duly exhibited, it was clear that the complainant(s) did not have financial capacity to lend money as alleged.
20. After analyzing all these pieces of evidence, the learned Trial Court found that the Income Tax Returns of the complainant did not disclose that he lent amount to the accused, and that the declared income was not sufficient to give loan of Rs.3 lakh. Therefore, the case of the complainant that he had given a loan to the accused from his agricultural income was found to be unbelievable by the learned Trial Court. The learned Trial Court found that it was highly doubtful as to whether the complainant had lent an amount of Rs.3 lakh to the accused. The learned Trial Court also found that the complaint had failed to produce the promissory note alleged to have been executed by the accused on 25 th October 1998. After taking into consideration the defence witnesses and the attending circumstances, the learned Trial Court found that the defence was a possible defence and as such, the accused was entitled to benefit of doubt. The standard of proof for rebutting the presumption is that of preponderance of probabilities. Applying this principle, the learned Trial Court had found that the accused had rebutted the presumption on the basis of the evidence of the defence witnesses and attending circumstances.
25. In the present case, we are of the considered opinion that the defence raised by the appellant satisfies the standard of "preponderance of probability".
27. In that view of the matter, we are further of the considered view that the High Court was not justified in reversing the order of acquittal of the appellant."
Before the authoritative pronouncement by the Apex Court, there were conflicting judgments of various High Courts on this issue but they are of no consequence now."
From the discussions above, there are broadly 2 broad arguments in cases of cash/unaccounted loans, which have neither been accounted for in the accounts of the complainant nor disclosed in the Income Tax Returns filed by the complainant in the relevant assessment year.
Firstly, whether a loan in unaccounted/cash is a 'Legally Enforceable Debt' because cash loan above the limit of Rs. 20,000/- and Rs. 2,00,000/- respectively are impermissible u/s 269 SS & 269 ST of the Income Tax Act entailing penalties u/s 271D & 271DA respectively. Thus, loans above the said limits are 'Illegal' being in contravention to the statute.
Various High Courts have deliberated on the issue particularly in relation section 269 SS & 271D and expressed divergent views but the Courts are yet to consider the impact of the more stringent Section 269ST & 271DA which were introduced w.e.f. 01 April 2017. The Courts have clearly held that the explanation to section 138 of the said Act clearly provides that a debt or other liability referred to in section means a legally enforceable debt or other liability.
The alleged liability to repay an unaccounted cash amount admittedly not disclosed in the Income Tax Return cannot be a legally recoverable liability. If such liability is held to be a legally recoverable debt, it will render the explanation to section 138 of the said Act nugatory. It will defeat the very object of section 138 of the Act of ensuring that the commercial and mercantile activities are conducted in a healthy manner.
The provision of section 138 cannot be resorted to for recovery of an unaccounted issued in discharge of alleged liability of repaying "unaccounted" cash amount cannot be said to be a cheque issued in discharge of a legally enforceable debt or liability within the meaning of explanation of section 138 of the said Act. The Courts have held that such an effort to misuse the provision of section 138 of the said Act has to be discouraged.
Secondly, since in cash/unaccounted loans, there is no documentary evidence of the transactions as the loans are not through the banking channels. The accused may produce evidence by summoning Income Tax Officials to prove that the alleged loan is not reflected in the regular books of account or the Income Tax Returns filed by the complainant.
Thus, in the absence of documentary evidence, banking transactions & regular accounting entries, the loans become doubtful and the presumption u/s 139 stands rebutted & as a result thereof the accused satisfies the standard of "preponderance of probability" and is liable to be acquitted. As discussed above, the standard of proof on the part of the accused and that of prosecution in a criminal case is different.
The prosecution has to prove the guilt of an accused beyond reasonable doubt, but the standard of proof so as to prove a defence is "preponderance of probability". Inference of preponderance of probabilities can be drawn even by reference to circumstances. Cash/unaccounted loans without any banking, accounting & statutory disclosure evidence undisputingly create reasonable doubt and bring the accused out of the clutches of criminal liability envisaged in Section 138 of the Negotiable Instruments Act.
There is no iota of doubt that such a cash transaction, without any banking, accounting & statutory disclosure evidence does create reasonable doubt and the accused cannot be prosecuted in such cases u/s 138 of the Negotiable Instruments Act as has been held in the case of Rajaram S/O Sriramulu Naidu vs Maruthachalam 2023 LiveLaw (SC) 46 (supra) by the Apex Court.
Written By: Inder Chand Jain
Email: [email protected], Ph no: 8279945021
Broadly speaking the dishonour of cheques relate to either payment for purchase of goods or supply of services or for repayment of loans from Banks/NBFC/private moneylenders/personal loans from friend & relatives or repayment of housing/vehicle/ business loans.
Before deliberating on the subject, it would be relevant to reproduce said Section 138 & 139 of the NI Act which read as under:
Section 138 in The Negotiable Instruments Act, 1881
138 Dishonour of cheque for insufficiency, etc., of funds in the account:
Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless:
- the cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier;
- the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
- the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
139. Presumption in favour of holder:
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.
From the plain reading of the said Section 138, it transpires that the section comes to play only when the dishonoured cheque was issued "for the discharge, in whole or in part, of any debt or other liability". The explanation to this section is of utmost importance wherein it says that "debt or other liability" means 'a legally enforceable debt or other liability'. Thus, section 138 comes to rescue in case of dishonour of cheque issued only in relation to a legally enforceable debt or other liability and not to any other debt or liability.
Section 139 is a very important section in as much as it gives a statutory presumption that the holder of the cheque has received the said cheque for the discharge of part or whole of debt or liability. However, this presumption is rebuttable by the drawer and in order to succeed, the accused has to rebut the presumption with sufficient evidence. Thus, in every case filed u/s 138 of the Negotiable Instruments Act, the success of the accused depends on how he rebuts the 'deemed presumption' with evidence.
In trials under the Negotiable instruments Act the courts are required to consider whether the ingredients of the offence enumerated in Section 138 of the Act have been met and if so, whether the accused was able to rebut the statutory presumption contemplated by Section 139 of the Act.The Apex Court has repeatedly held that Section 139 is a reverse onus clause and requires the accused to prove the non-existence of the presumed fact, i.e., that cheque was not issued in discharge of a debt/liability.
It would be trite to refer to the Apex Court landmark judgment in Basalingappa vs Mudibasappa (2019) 5 SCC 418 which elaborately deals with the presumption contemplated by Section 139 read with Section 118 of the Negotiable Instruments Act. The Court after detailed discussion summed up thus:
8. We having noticed the facts of the case and the evidence on the record, we need to note the legal principles regarding nature of presumptions to be drawn under Section 139 of the Act and the manner in which it can be rebutted by an accused. We need to look into the relevant judgments of this Court, where these aspects have been considered and elaborated. Chapter XIII of the Act, 1881 contains a heading "Special Rules of Evidence". Section 118 provides for presumptions as to negotiable instruments. Section 118 is as follows:
118. Presumptions as to negotiable instruments:
Until the contrary is proved, the following presumptions shall be made:
- Of consideration:
that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration; - As to date: that every negotiable instrument bearing a date was made or drawn on such date;
9. Next provision, which needs to be noticed is Section 139, which provides for presumption in favour of holder. Section 139 lays down:-
139. Presumption in favour of holder.
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability."
10. The complainant being holder of cheque and the signature on the cheque having not been denied by the accused, presumption shall be drawn that cheque was issued for the discharge of any debt or other liability. The presumption under Section 139 is a rebuttable presumption....."
A Three-Judge Bench of the Apex Court in Kali Ram Vs. State of Himachal Pradesh, (1973) 2 SCC 808 laid down that in criminal proceedings the burden of proving the guilt of the accused is upon the prosecution:
23. ……………………One of the cardinal principles which has always to be kept in view in our system of administration of justice for criminal cases is that a person arraigned as an accused is presumed to be innocent unless that presumption is rebutted by the prosecution by production of evidence as may show him to be guilty of the offence with which he is charged. The burden of proving the guilt of the accused is upon the prosecution and unless it relieves itself of that burden, the courts cannot record a finding of the guilt of the accused.
There are certain cases in which statutory presumptions arise regarding the guilt of the accused, but the burden even in those cases is upon the prosecution to prove the existence of facts which have to be present before the presumption can be drawn. Once those facts are shown by the prosecution to exist, the Court can raise the statutory presumption and it would, in such an event, be for the accused to rebut the presumption.
The onus even in such cases upon the accused is not as heavy as is normally upon the prosecution to prove the guilt of the accused. If some material is brought on the record consistent with the innocence of the accused which may reasonably be true, even though it is not positively proved to be true, the accused would be entitled to acquittal.
It would be apposite to refer to Kumar Exports Vs. Sharma Carpets, (2009) 2 SCC 513, wherein the Apex Court examined as to when complainant discharges the burden to prove that instrument was executed and when the burden shall be shifted. The Court in para 18, 19 & 20 of the said judgment observed thus:
18. Applying the definition of the word "proved" in Section 3 of the Evidence Act to the provisions of Sections 118 and 139 of the Act, it becomes evident that in a trial under Section 138 of the Act a presumption will have to be made that every negotiable instrument was made or drawn for consideration and that it was executed for discharge of debt or liability once the execution of negotiable instrument is either proved or admitted.
As soon as the complainant discharges the burden to prove that the instrument, say a note, was executed by the accused, the rules of presumptions under Sections 118 and 139 of the Act help him shift the burden on the accused. The presumptions will live, exist and survive and shall end only when the contrary is proved by the accused, that is, the cheque was not issued for consideration and in discharge of any debt or liability. A presumption is not in itself evidence, but only makes a prima facie case for a party for whose benefit it exists.
19. The use of the phrase "until the contrary is proved" in Section 118 of the Act and use of the words "unless the contrary is proved" in Section 139 of the Act read with definitions of "may presume" and "shall presume" as given in Section 4 of the Evidence Act, makes it at once clear that presumptions to be raised under both the provisions are rebuttable. When a presumption is rebuttable, it only points out that the party on whom lies the duty of going forward with evidence, on the fact presumed and when that party has produced evidence fairly and reasonably tending to show that the real fact is not as presumed, the purpose of the presumption is over.
20. ……………………The accused may adduce direct evidence to prove that the note in question was not supported by consideration and that there was no debt or liability to be discharged by him. However, the court need not insist in every case that the accused should disprove the non-existence of consideration and debt by leading direct evidence because the existence of negative evidence is neither possible nor contemplated. At the same time, it is clear that bare denial of the passing of the consideration and existence of debt, apparently would not serve the purpose of the accused. Something which is probable has to be brought on record for getting the burden of proof shifted to the complainant.
To disprove the presumptions, the accused should bring on record such facts and circumstances, upon consideration of which, the court may either believe that the consideration and debt did not exist or their non-existence was so probable that a prudent man would under the circumstances of the case, act upon the plea that they did not exist……………"
It would be relevant that the Apex Court in the case of M.S. Narayana Menon Alias Mani Vs. State of Kerala and Another, (2006) 6 SCC 39 considered Sections 118(a), 138 and 139 of the Negotiable Instruments Act, 1881 and categorically held that presumptions both under Sections 118(a) and 139 are rebuttable in nature.It also held that once the accused is found to discharge his initial burden, it shifts to the complainant.
It would be germane to refer to Apex Court judgment in Bharat Barrel & Drum Manufacturing Company Vs. Amin Chand Pyarelal, (1999) 3 SCC 35 wherein the Court dealt with the presumption of S 118 of the Negotiable Instruments Act and held thus:
"Though the evidential burden is initially placed on the defendant by virtue of S.118 it can be rebutted by the defendant by showing a preponderance of probabilities that such consideration as stated in the pronote, or in the suit notice or in the plaint does not exist and once the presumption is so rebutted, the said presumption 'disappears'. For the purpose of rebutting the initial evidential burden, the defendant can rely on direct evidence or circumstantial evidence or on presumptions of law or fact.
Once such convincing rebuttal evidence is adduced and accepted by the Court, having regard to all the circumstances of the case and the preponderance of probabilities, the evidential burden shifts back to the plaintiff who has also the legal burden. Thereafter, the presumption under S.118 does not again come to the plaintiff's rescue. Once both parties have adduced evidence, the Court has to consider the same and the burden of proof loses all its importance."
It is indisputable that a parallel economy is running in our country and inspite of coersive measures legislated in Income Tax Act and Benami Transactions (Prohibition) Amendment Act, 2016 the volume of cash transactions is unabated. A parallel private loan market exists and is thriving in every town & city.
The modus operandi of the private cash market is that cash loans are readily available on an agreed rate of interest. The lender gives cash amount to the loanee, who gives a signed cheque mentioning the amount of loan and the date of repayment just as a surety & as a proof of the transaction. In case of refusal to pay back the loan on the agreed time, the lender has no option but to deposit the cheque in his bank account and upon dishonour prosecutes the loanee/ drawer of the cheque under Section 138 of the Negotiable Act.
Before deliberating on the maintainability of proceedings in respect of cash/unaccounted money, it is relevant to reproduce Section 269SS & Section 269ST of the Income Tax Act, which read as under:
269SS. Mode of taking or accepting certain loans, deposits and specified sum.—No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if:
- the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
- on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
- the amount or the aggregate amount referred to in clause (a) together
with the amount or the aggregate amount referred to in clause (b), is twenty
thousand rupees or more:
- The Government;
- Any banking company, post office savings bank or co-operative bank;
- Any corporation established by a Central, State or Provincial Act;
- Any Government company as defined in clause (45)of section 2 of the Companies Act, 2013 (18 of 2013);
- Such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette:
Explanation: For the purposes of this section,
- "Banking company" means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;(ii) "co-operative bank" shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);
- loan or deposit" means loan or deposit of money;
- specified sum" means any sum of money receivable, whether as advance or
otherwise, in relation to transfer of an immovable property, whether or not
the transfer takes place.
- in aggregate from a person in a day; or(b) in respect of a single transaction; or(c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:
- any receipt by:
- Government;
- any banking company, post office savings bank or co-operative bank;
- transactions of the nature referred to in section 269SS;
- such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.
Explanation..For the purposes of this section,
- "banking company" shall have the same meaning as assigned to it in clause (i) of the Explanation to section 269SS;
- co-operative bank" shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.
Penalty for failure to comply with the provisions of section 269SS
271D.
- If a person takes or accepts any loan or deposit or specified sum] in contravention of the provisions of section 269 SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted.
- Any penalty imposable under sub-section (1) shall be imposed by the
Joint Commissioner.
- If a person receives any sum in contravention of the provisions of
section 269ST, he shall be liable to pay, by way of penalty, a sum equal
to the amount of such receipt:
Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.
- Any penalty imposable under sub-section (1) shall be imposed by the
Joint Commissioner.
The Second plea taken by the accused is that Section 138 of the Negotiable Instruments Act, does not include within its purview the liability to pay an unaccounted cash amount. It is accordingly pleaded that in case of a loan given in the form of unaccounted cash, then it is not legally enforceable to repay it. Lastly it is contended that these cash transactions do not constitute 'a legally enforceable debt or other liability' as contemplated in explanation to Section 138 of the Negotiable Instruments Act and therefore prosecution u/s 138 is not legally maintainable.
The matter has been considered by the Apex Court & almost all High Courts on several occasions. It would be appropriate to refer to the Apex Court judgment in the case of Krishna Janardhan Bhat vs Dattatraya G. Hegde (2008) 4 SCC 54. The Court held that in order to invoke section 138 of NI Act, the guilt of the accused must be proved beyond all reasonable doubt. The Court at para 25 of the judgement categorically held thus:
25. Furthermore, whereas prosecution must prove the guilt of an accused beyond all reasonable doubt, the standard of proof so as to prove a defence on the part of an accused is preponderance of probabilities. Inference of preponderance of probabilities can be drawn not only from the materials brought on records by the parties but also by reference to the circumstances upon which he relies."
The Apex Court in the aforesaid case, while reversing the judgment of the High Court, considered the legal implications of Section 269SS & Section 271D of the Income Tax Act and observed at para 19, thus:
19. The courts below failed to notice that ordinarily in terms of Section 269SS of the Income Tax Act, any advance taken by way of any loan of more than Rs. 20,000/- was to be made by way of an account payee cheque only.
It would be apposite to refer to the recent Apex Court judgment in Rajaram S/O Sriramulu Naidu vs Maruthachalam 2023 LiveLaw (SC) 46 decided recently on 18 January, 2023 wherein the Court dealt with the issue of cash loan, which were not disclosed/reflected in the Income Tax Returns filed by the complainant.
The Court after detailed discussion of the facts, particularly the evidence brought in by the accused that the amount purported to be lent by the complainant was neither shown nor reflected in the Income Tax Returns for the relevant Assessment Years lead to the conclusion that the complainant did not have the financial capacity to lend the purported amount and held that in the Court's considered opinion the defence raised by the appellant satisfies the standard of "preponderance of probability" & acquitted the accused.
The following paragraphs which concern the issue in hand are reproduced as under:
8. The learned counsel submitted that the Respondents herein did not have the financial capacity to lend an amount of Rs.3,00,000/ each as on 20th October 1998 and 25th October 1998, when the promissory notes were said to have been executed. It is further submitted that although it was the Respondents' case that they had given the amounts out of their agricultural income, since they had not declared the same in their Income Tax Returns from 1992-1999, thus, there was no material to show that they could have lent money.
10. The learned counsel submitted that there arose no occasion for the Appellant Raja Ram to issue a blank cheque in the year 1992 for a chit to be subscribed much later in the year 1995. It is further submitted that even if certain amounts are not accounted for in the Income Tax Returns, this is a matter concerning only the defaulter and Revenue Authority. Thus, a borrower cannot be allowed to take advantage of the same solely on the ground that such an amount does not reflect in the Income Tax Returns. The learned counsel relied on the judgments of this Court in the cases of Bir Singh v. Mukesh Kumar2, Rohitbhai Jivanlal Patel v. State of Gujarat and Anr3, Kalamani Tex and Anr v. P. Balasubramanian4 to buttress his submissions.
13. It can thus be seen that this Court has held that once the execution of cheque is admitted, Section 139 of the N.I. Act mandates a presumption that the cheque was for the discharge of any debt or other liability. It has however been held that the presumption under Section 139 is a rebuttable presumption and the onus is on the accused to raise the probable defence. The standard of proof for rebutting the presumption is that of preponderance of probabilities. It has further been held that to rebut the presumption, it is open for the accused to rely on evidence led by him or the accused can also rely on the materials submitted by the complainant in order to raise a probable defence. It has been held that inference of preponderance of probabilities can be drawn not only from the materials brought on record by the parties but also by reference to the circumstances upon which they rely.
15. In the present case, the accused appellant had examined Mr. Sarsaiyyn, Income Tax Officer, Ward No.18, Circle (II) (5), who produced certified copies of the Income Tax Returns of the complainant for the financial year 1995-96, 1996-97, 1997-98 and 1998-99. The certified copies of the Income Tax Returns established that the complainant had not declared that he had lent Rs.3 lakh to the accused. It further established that the agricultural income also was not declared in the Income Tax Returns.
16. The learned Trial Court further found that from the income which was shown in the Income Tax Return, which was duly exhibited, it was clear that the complainant(s) did not have financial capacity to lend money as alleged.
20. After analyzing all these pieces of evidence, the learned Trial Court found that the Income Tax Returns of the complainant did not disclose that he lent amount to the accused, and that the declared income was not sufficient to give loan of Rs.3 lakh. Therefore, the case of the complainant that he had given a loan to the accused from his agricultural income was found to be unbelievable by the learned Trial Court. The learned Trial Court found that it was highly doubtful as to whether the complainant had lent an amount of Rs.3 lakh to the accused. The learned Trial Court also found that the complaint had failed to produce the promissory note alleged to have been executed by the accused on 25 th October 1998. After taking into consideration the defence witnesses and the attending circumstances, the learned Trial Court found that the defence was a possible defence and as such, the accused was entitled to benefit of doubt. The standard of proof for rebutting the presumption is that of preponderance of probabilities. Applying this principle, the learned Trial Court had found that the accused had rebutted the presumption on the basis of the evidence of the defence witnesses and attending circumstances.
25. In the present case, we are of the considered opinion that the defence raised by the appellant satisfies the standard of "preponderance of probability".
27. In that view of the matter, we are further of the considered view that the High Court was not justified in reversing the order of acquittal of the appellant."
Before the authoritative pronouncement by the Apex Court, there were conflicting judgments of various High Courts on this issue but they are of no consequence now."
From the discussions above, there are broadly 2 broad arguments in cases of cash/unaccounted loans, which have neither been accounted for in the accounts of the complainant nor disclosed in the Income Tax Returns filed by the complainant in the relevant assessment year.
Firstly, whether a loan in unaccounted/cash is a 'Legally Enforceable Debt' because cash loan above the limit of Rs. 20,000/- and Rs. 2,00,000/- respectively are impermissible u/s 269 SS & 269 ST of the Income Tax Act entailing penalties u/s 271D & 271DA respectively. Thus, loans above the said limits are 'Illegal' being in contravention to the statute.
Various High Courts have deliberated on the issue particularly in relation section 269 SS & 271D and expressed divergent views but the Courts are yet to consider the impact of the more stringent Section 269ST & 271DA which were introduced w.e.f. 01 April 2017. The Courts have clearly held that the explanation to section 138 of the said Act clearly provides that a debt or other liability referred to in section means a legally enforceable debt or other liability.
The alleged liability to repay an unaccounted cash amount admittedly not disclosed in the Income Tax Return cannot be a legally recoverable liability. If such liability is held to be a legally recoverable debt, it will render the explanation to section 138 of the said Act nugatory. It will defeat the very object of section 138 of the Act of ensuring that the commercial and mercantile activities are conducted in a healthy manner.
The provision of section 138 cannot be resorted to for recovery of an unaccounted issued in discharge of alleged liability of repaying "unaccounted" cash amount cannot be said to be a cheque issued in discharge of a legally enforceable debt or liability within the meaning of explanation of section 138 of the said Act. The Courts have held that such an effort to misuse the provision of section 138 of the said Act has to be discouraged.
Secondly, since in cash/unaccounted loans, there is no documentary evidence of the transactions as the loans are not through the banking channels. The accused may produce evidence by summoning Income Tax Officials to prove that the alleged loan is not reflected in the regular books of account or the Income Tax Returns filed by the complainant.
Thus, in the absence of documentary evidence, banking transactions & regular accounting entries, the loans become doubtful and the presumption u/s 139 stands rebutted & as a result thereof the accused satisfies the standard of "preponderance of probability" and is liable to be acquitted. As discussed above, the standard of proof on the part of the accused and that of prosecution in a criminal case is different.
The prosecution has to prove the guilt of an accused beyond reasonable doubt, but the standard of proof so as to prove a defence is "preponderance of probability". Inference of preponderance of probabilities can be drawn even by reference to circumstances. Cash/unaccounted loans without any banking, accounting & statutory disclosure evidence undisputingly create reasonable doubt and bring the accused out of the clutches of criminal liability envisaged in Section 138 of the Negotiable Instruments Act.
There is no iota of doubt that such a cash transaction, without any banking, accounting & statutory disclosure evidence does create reasonable doubt and the accused cannot be prosecuted in such cases u/s 138 of the Negotiable Instruments Act as has been held in the case of Rajaram S/O Sriramulu Naidu vs Maruthachalam 2023 LiveLaw (SC) 46 (supra) by the Apex Court.
Written By: Inder Chand Jain
Email: [email protected], Ph no: 8279945021
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