Mere Denial Cannot Rebut Presumption Of Legally Enforceable Debt In Cheque Dishonour Cases: Supreme Court

The Supreme Court has recently ruled that an accused cannot rebut the statutory presumption arising from a dishonoured cheque by merely denying liability.

Dismissing an appeal against a Karnataka High Court order remanding a cheque dishonour case for fresh consideration, the court observed that an accused must explain the circumstances in which the cheque was issued and how it came into the complainant's possession.

It also noted that proving the complainant lacked the financial capacity to advance the loan may help dislodge the presumption.

A bench of Justices Manoj Misra and Vijay Bishnoi upheld the Karnataka High Court's October 10, 2013, order remanding the case to the trial court.

The bench observed that the complainant appeared to have led evidence to show his capacity to lend. It further noted that the trial court had not properly considered that evidence on record.

"No doubt, the presumption under Section 139 of the N.I. Act is rebuttable but mere denial is not sufficient to rebut the presumption. To rebut such presumption the accused, inter alia, would have to explain the circumstances in which the cheque in question came to be issued and as to how it came to be with the payee thereof. Circumstance that the payee had no funds to create a legally enforceable debt of the amount equivalent to the cheque is a circumstance, if proved, which may help in dislodging the presumption.", the court observed.

The court directed the trial court to dispose of the complaint expeditiously, bearing in mind that it has remained pending since 2006.

According to the complainant, Sri Gopalaiah borrowed ₹8.5 lakh in November 2005 and issued two cheques dated February 13, 2006, one for ₹8 lakh and the other for ₹50,000. Both cheques were dishonoured on February 25, 2006 for insufficient funds.

The trial court acquitted Gopalaiah on February 12, 2009 after concluding that the complainant had failed to establish the existence of a legally enforceable debt. It noted that apart from oral testimony, no documentary evidence had been produced to show the alleged loan.

The trial court also referred to the bar under the Income Tax Act on accepting cash loans above ₹20,000 and observed that the accused already had sufficient funds, leading it to conclude that there was no reason for him to borrow money. The Karnataka High Court later remanded the matter for fresh consideration.

Before the Supreme Court, the accused contended that he had sufficient funds from the sale of land and therefore had no need to borrow money. He also argued that there was no documentary evidence of the alleged loan transaction and relied on the provisions of the Income Tax Act governing cash loans to contend that the statutory presumptions stood rebutted.

The complainant, on the other hand, submitted that the accused had taken inconsistent stands regarding the cheques and that a mere denial could not rebut the presumptions available under the Negotiable Instruments Act.

Since the appeal arose from an order of remand, the Supreme Court declined to examine the evidence on its merits.

The court also rejected the contention that a cash loan exceeding ₹20,000 becomes legally unenforceable merely because it is alleged to be in breach of the Income Tax Act.

Referring to its decision in Sanjabi Tari v. Kishore S. Borcar & Anr., the court held that such a breach only attracts the penalty prescribed under the Income Tax Act and does not render the underlying transaction illegal, invalid, or void.

"Further, any breach of Section 269SS of the Income Tax Act, 1961 is subject to a penalty under the provisions of that Act i.e., Section 271D. Neither Section 269SS nor Section 271 D of the Income Tax Act, states that any transaction in breach thereof will be illegal, invalid or statutorily void."

Finding no error in the Karnataka High Court's order, the Supreme Court dismissed the appeal and directed the trial court to proceed with the complaint expeditiously, bearing in mind that it has remained pending since 2006..

For Petitioner: Senior Advocate Anand Sanjay M Nuli; Advocates Ashritsai Torgal, Abhishekh Singh, Advocates, Nuli & Nuli, AOR

For Respondent: Rahul Sharma, S. Santanam Swaminadhan, Aarthi Rajan, AOR, Abhilasha Shrawat, Kartik Malhotra, Aman Rawat, Advocates