Cash Loan Violating Income Tax Provisions Still Enforceable Under Cheque Bounce Law: Bombay High Court

The Bombay High Court on 30 September held that a cash loan does not become unenforceable under Section 138 of the Negotiable Instruments Act, 1881, merely because it violates income tax provisions.

Justice M.M. Sathaye dismissed Manoj Oswal's revision application challenging his conviction in a cheque dishonour case filed by businessman Vijay Gandhi over a Rs. 8.5 lakh loan. Referring to an earlier Division Bench ruling, he observed:

“Violation of section 269SS and/or section 271AAD of the Act of 1961 would not render the transaction unenforceable under section 138 of the Act of 1881.”

The case arose from a cash loan of Rs. 8.5 lakh that Gandhi allegedly advanced to Oswal in November 2001. Oswal issued a cheque towards repayment, but the bank dishonoured it. Gandhi subsequently filed a complaint under Section 138 of the Negotiable Instruments Act.

The trial court convicted Oswal and sentenced him to 18 months of simple imprisonment, along with compensation of Rs. 10 lakh. The appellate court dismissed his appeal, prompting him to approach the High Court.

Oswal argued that the loan was an illegal cash transaction under income tax law and could not be treated as a legally recoverable debt. He also questioned Gandhi's financial capacity and claimed that his signed cheque had been lost or stolen and misused.

The Bench rejected these arguments. It noted that Oswal had admitted his signature on the cheque but had failed to establish a convincing defence. Gandhi had explained the source of the loan amount through his savings, money received from his brother and bank withdrawals.

It also rejected the challenge to Gandhi's financial capacity based on an earlier cheque dishonour complaint involving Rs. 1 lakh, which had subsequently been withdrawn.

Accordingly, the High Court upheld Oswal's conviction and granted him three weeks to surrender.

For Applicants: Advocate R.N. Sanghavi.

For Complainant: Advocate Shubhankar Kulkarni

For State: APP Rashmi Tendulka.