Section 269SS Income Tax Act Breach Does Not Bar Section 138 NI Act Case: J&K High Court

The High Court of Jammu & Kashmir and Ladakh on 18 August held that violation of Section 269SS of the Income Tax Act does not render a transaction unenforceable under Section 138 of the Negotiable Instruments Act (NI Act), and attracts only the penalty prescribed under the Income Tax Act. Section 269SS of the Income Tax Act restricts the acceptance of certain loans, deposits and specified sums in cash.

A Bench of Justice Shahzad Azeem dismissed two petitions filed by Manzoor Ahmad Khan under Section 482 of the Code of Criminal Procedure (CrPC), seeking quashing of complaints under Section 138 of the NI Act arising from dishonour of ten cheques issued in connection with a Rs. 45.50 lakh land transaction. It observed:

“Mere non-reflection of the transaction in the complainant's Income Tax returns does not, by itself, destroy the presumption under Section 139 of the NI Act.”

The dispute arose from a land transaction in which Javaid Ahmad Malik allegedly paid Rs. 45.50 lakh to Khan for purchase of land at Srinagar. After Khan failed to execute the sale deed, ten cheques issued towards repayment were dishonoured, leading to two complaints under Section 138 of the NI Act.

Khan claimed that the cheques were security cheques, that only Rs. 32 lakh had actually been received and that the transaction was not reflected in Malik's Income Tax returns. He also challenged the maintainability of the complaints and contended that the statutory presumption under Section 139 of the NI Act could not arise in view of the Income Tax Act. 

His petitions also challenged the consequential cognizance and production-warrant orders passed by the Trial Magistrate. Malik opposed the petitions, maintaining that the statutory requirements had been fulfilled and that the presumption under Section 139 remained applicable.

The Court noted that Malik's evidence was complete and two defence witnesses had already been examined by the time it considered the petitions.

It held that once a prima facie case under Section 138 of the NI Act is disclosed, the High Court cannot conduct a mini-trial or determine disputed questions such as whether the cheques were security cheques, whether a legally enforceable debt existed, whether notice was served or what effect the alleged settlement had. These questions were for the Trial Court to determine in light of the statutory presumption under Section 139.

The Bench observed that “when defence evidence has commenced and is almost complete, interference under Section 482 CrPC is ordinarily uncalled for. The trial court is the proper forum to appreciate the evidence.” It also deprecated repeated invocation of Section 482 jurisdiction at the fag end of the trial.

On the ten cheques, the Court held that two separate complaints were maintainable because two demand notices had been issued. Relying on Fayaz Ahmad Rather v. Tariq Ahmad Wani, it noted that a complaint concerning dishonour of more than three cheques is maintainable where a consolidated demand notice is served.

It rejected Khan's contention that violation of Section 269SS could defeat the proceedings under Section 138 of the NI Act. Relying on the Supreme Court's decision in Sanjabij Tari v. Kishore S. Borcar, it held that breach of Section 269SS attracts only the penalty prescribed under Section 271D of the Income Tax Act.

Further, the Bench held that Section 269SS could not, by itself, rebut the statutory presumptions under Sections 118 and 139 of the NI Act. It observed that such violation “would not render the transaction unenforceable under Section 138 of the NI Act, nor would it rebut the presumptions under Sections 118 and 139 of the NI Act.”

It also held that reliance on Section 269-B of the Income Tax Act was misplaced, as the provision concerns acquisition of immovable property transferred for understated or undervalued consideration and had no relevance to the cheque-bounce proceedings.

Since the complaints prima facie disclosed the ingredients of Section 138 and the trial had substantially progressed, the Bench held that the proceedings could not be quashed by examining Khan's defence. It reiterated that Section 482 CrPC could not be used to short-circuit an advanced trial.

Accordingly, the High Court dismissed both petitions and declined to quash the complaints under Section 138 of the NI Act. It directed the Trial Court to conduct the remaining evidence on a day-to-day basis and dispose of both complaints expeditiously, preferably within one month.

For Petitioner: S. T. Hussain, Sr. Advocate with Nida Nazir, Advocate

For Respondent: M. Y. Bhat, Sr. Advocate with Sajad Ahmad Bhat, Advocate