Cheque Credibility And Legal Consequences
“A cheque is as good as cash, but only if it’s backed by the credibility of the issuer.”
This saying highlights the importance of ensuring that cheques are issued with sufficient funds and genuine intent, as dishonour can lead to proceedings under Section 138 Ni Act, 1881.
Cash Transactions And Tax Compliance
As regards Section 269ss of Income Tax Act, 1961 it’s often said, “Cash is king, but only if it’s accounted for.”
This emphasizes the importance of complying with tax laws and regulations when dealing with cash transactions.
Link Between Section 269ss And Section 138 Ni Act
Section 269ss of the Income Tax Act and Section 138 of the Ni Act are connected because they both deal with cash transactions and aim to prevent misuse of cash.
- Section 269ss prohibits taking or accepting loans or deposits of Rs. 20,000 or more in cash, aiming to curb black money and promote digital transactions.
- Section 138 Ni Act deals with cheque dishonour, making it an offence if a cheque is dishonoured due to insufficient funds or other reasons.
The connection lies in the fact that if a loan or deposit is taken or repaid in cash (in violation of Section 269ss), and a cheque is issued for such a transaction, it may lead to proceedings under Section 138 Ni Act if the cheque is dishonoured.
This is because the transaction underlying the cheque may be considered invalid or illegal under Section 269ss, affecting the enforceability of the cheque.
Section 269ss: Statutory Provision
The provision referred to is to explain it correctly :
Section 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:
Exceptions To Section 269ss
Provided that the provisions of this section shall not apply to any loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by,—
- 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:
Provided further that the provisions of this section shall not apply to any loan or deposit or specified sum, where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income and neither of them has any income chargeable to tax under this Act.
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;
- “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.
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Object
The primary object of Section 269S of the Income Tax Act is to prevent tax evasion by curbing black money, promoting transparency, tracking financial transactions, reducing cash dependency, and preventing money laundering, ultimately enhancing tax compliance and promoting a more transparent financial system.
Basic Prohibition Under Section 269SS
In simple words, Section 269SS prohibits any person from accepting a loan, deposit, or advance of E20,000 or more in cash. Such transactions must be carried out only through:
- Account Payee Cheque
- Account Payee Bank Draft
- Electronic Modes (NEFT, RTGS, UPI, IMPS, Net Banking, etc.)
Example
Suppose Mr. Sharma takes a loan of 25,000 in cash from his friend, Mr. Gupta. This transaction violates Section 269SS of the IT Act, 1961 because the amount exceeds ₹20,000 and is not through an account payee cheque, account payee bank draft, or electronic clearing system.
If Section 269SS is violated, the borrower (Mr. Sharma) will be subject to a penalty under Section 271D, equal to the amount of the loan taken.
Additional Example Illustrating Section 269SS
- XYZ Enterprises takes a ₹30,000 loan in cash from a private lender, violating Section 269SS. Penalty under Section 271D may apply.
- Rohan borrows f ₹25,000 in cash from a friend for personal use. This transaction also violates Section 269SS.
- Even loans between family members exceeding ₹20,000 in cash might attract scrutiny under Section 269SS unless specific exemptions apply.
Applicability To Proceedings Under Section 138 Of The NI Act
Now the key Question is arise weather the Provision mentioned under section 269ss of IT Act, 1961 is applicable on the Proceedings under section 138 of NI act?
Judicial View: Supreme Court And High Court
The Supreme Court has affirmed this in SANJABIJ TARI v. KISHORE S. BORCAR & ANR 2025 LiveLaw (SC) 952, Case. 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/- (Rupees Twenty Thousand) in violation of the provisions of Section 269SS of the Income Tax Act, 1961 (for short ‘IT Act, 1961’) 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/- (Rupees Twenty Thousand).
Setting aside the High Court’s view, the judgment authored by Justice Manmohan observed;
Court’s View on Breach of Section 269SS of the IT Act, 1961
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, 1881 or rebut the presumptions under Sections 118 and 139 of the NI Act because such a person, assuming him/her to be the payee/holder in due course, is liable to be visited by a penalty only as prescribed.
Consequently, the view that any transaction above Rs.20,000/- (Rupees Twenty Thousand) is illegal and void and therefore does not fall within the definition of “legally enforceable debt” cannot be countenanced. Accordingly, the conclusion of law in P.C. Hari (supra) is set aside.
Implications on Proceedings Under Section 138 of the NI Act
Here’s a summary –
| Issue | Legal Position |
|---|---|
| Cash Transactions Above ₹20,000 | Breach of Section 269SS attracts a penalty under Section 271D of the same Act but does not render the transaction illegal or unenforceable. |
| Legally Enforceable Debt | Cash loans above ₹20,000 can still form the basis of a legally enforceable debt under Section 138 of the NI Act. |
| Revisional Jurisdiction | High Courts cannot reappreciate evidence in revisional jurisdiction without finding perversity in the lower court’s judgment. |
| Probation Benefit | Accused persons in cheque bounce cases are entitled to seek the benefit of probation under the Probation of Offenders Act. |
Legal Position in a Nutshell
- Provision under Section 269SS attracts penalty under Section 271D but does not render the transaction illegal or unenforceable.
- Does not affect proceedings under Section 138 of the NI Act or presumptions under Sections 118 and 139 of the NI Act.
- Transactions violating Section 269SS can still constitute a legally enforceable debt under the NI Act.
Illustrative Example
Suppose – Suppose Mr. Sharma takes a loan of 25,000 in cash from his friend, Mr. Gupta. This transaction violates Section 26955 because the amount exceeds ₹20,000 and is not through an account payee cheque, account payee bank draft, or electronic clearing system.
Consequences
If Section 269SS is violated, the borrower (Mr. Sharma) will be subject to a penalty under Section 271D, equal to the amount of y the loan taken.
Conclusion
The judgment emphasizes that breaching Section 269SS attracts a penalty, but does not invalidate the underlying transaction or the cheque. This means lenders and borrowers should focus on complying with tax laws, while also ensuring cheque transactions are secure and enforceable.
It provides clarity on the interplay between tax laws and negotiable instruments, helping parties navigate complex transactions with more confidence.
Note
Note : The views are personal
