Cash loan above ₹20,000 is enforceable debt under Section 138 NI Act: Supreme Court sets aside Kerala HC ruling

The Supreme Court on Thursday ruled that a cash loan above ₹20,000 does not become an unenforceable debt under Section 138 of the Negotiable Instruments Act (NI Act) only because it breaches Section 269SS of the Income Tax (IT) Act that bars any person from accepting loans or deposits of ₹20,000 or more in cash [Sanjabij Tari v Kishore S Borcar & Anr]

The bench of Justice Manmohan and Justice NV Anjaria set aside a recent Kerala High Court view that such a debt was not legally enforceable since it was in violation of Section 269SS of the IT Act.

The top court opined that such a breach only invites a penalty under Section 271D of the IT Act and cannot defeat prosecution under Section 138 of the NI Act.

"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 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," the bench said.

In a related development, the Court also made applicable a Karnataka High Court decision across India. The Karnataka High Court had recently held that since NI Act is a special enactment, there is no need for the Magistrate to issue summons to the accused before taking cognizance (under Section 223 of BNSS) of complaints filed under Section 138 of NI Act.

"This Court is in agreement with the view taken by the High Court of Karnataka. Consequently, this Court directs that there shall be no requirement to issue summons to the accused in terms of Section 223 of BNSS i.e., at the pre-cognizance stage," the Supreme Court ordered.

The top court was hearing an appeal against a Bombay High Court decision which had set aside a conviction in a cheque dishonour case.

In the verdict, the apex court said it was essential to outline the scope and intent of the NI Act.

It expressed concern that some trial courts and High Courts are treating cheque dishonour cases like civil recovery suits by insisting that complainants prove the debt at the threshold.

"This Court is of the view that such an approach is not only prolonging the trial but is also contrary to the mandate of Parliament, namely, that the drawer and the bank must honour the cheque, otherwise, trust in cheques would be irreparably damaged," it said.

Taking judicial notice of "staggeringly high" pendency of cheque bounce cases in district courts of metropolitan cities like Delhi, Mumbai and Calcutta, the Supreme Court said,

"This pendency is putting an unprecedented strain on the judicial system as in some States, cases under Section 138 of the NI Act constitute nearly fifty per cent (50%) of the pendency in Trial Court (in Delhi Section 138 NI Act cases constitute 49.45% of total Trial Court pendency)."

The Court observed that the service of summons on the accused in a complaint filed under Section 138 of the NI Act continues to be one of the main reasons for the delay in disposal of the complaints.

In order to address the situation and promote credibility of cheques as a trustworthy substitute for cash payment, the Supreme Court issued the following directions:

Service of summons

The Court ordered that in all cases filed under Section 138 of the NI Act, service of summons shall not be confined through prescribed usual modes but shall also be issued dasti i.e. summons shall be served upon the accused by the complainant in addition.

This direction is necessary as a large number of Section 138 cases under the NI Act are filed in the metropolitan cities by financial institutions, by virtue of Section 142(2) of the NI Act, against accused who may not be necessarily residing within the territorial jurisdiction of the Court where the complaint has been filed, the Court said

The trial courts shall further resort to service of summons by electronic means in terms of the applicable Notifications/Rules, if any, framed under Bhartiya Nagarik Suraksha Sanhita, 2023 like Delhi BNSS (Service of Summons and Warrants) Rules, 2025, it ordered.

"For this purpose, the complainant shall, at the time of filing the complaint, provide the requisite particulars including e-mail address, mobile number and/or WhatsApp number/messaging application details of the accused, duly supported by an affidavit verifying that the said particulars pertain to the accused/respondent," the Court added.

Mode of Payment

The Court also ordered that in order to facilitate expeditious settlement of cases under Section 138 of the NI Act, the Principal District and Sessions Judge of each District Court shall create and operationalise dedicated online payment facilities through secure QR codes or UPI links.

The summons shall expressly mention that the respondent/accused has the option to make payment of the cheque amount at the initial stage itself, directly through the said online link, it said.

"The complainant shall also be informed of such payment and upon confirmation of receipt, appropriate orders regarding release of such money and compounding/closure of proceedings under Section 147 of the NI Act and/or Section 255 of Cr.P.C./278 BNSS, 2023 may be passed by the Court in accordance with law. This measure shall promote settlement at the threshold stage and/or ensure speedy disposal of cases," it added.

Other guidelines

The Court also ordered that complainant shall file an affidavit of service before the Court. In the event such affidavit is found to be false, the Court shall be at liberty to take appropriate action against the complainant in accordance with law, it said.

Further, the Court issued a synopsis that it said must be filed immediately by each and every complainant under Section 138 of the NI Act after the index (at the top of the file) i.e. prior to the formal complaint.

The Court also reiterated that trial courts shall record cogent and sufficient reasons before converting a summary trial to summons trial. To facilitate the process, the Court ordered that trial court shall be at liberty to ask the following questions at the initial post cognizance stage:

(i) Do you admit that the cheque belongs to your account? Yes/No

(ii) Do you admit that the signature on the cheque is yours? Yes/No

(iii) Did you issue/deliver this cheque to the complainant? Yes/No

(iv) Do you admit that you owed liability to the complainant at the time of issuance? Yes/No

(v) If you deny liability, state clearly the defence: (a) Security cheque only; (b)Loan repaid already; (c) Cheque altered/misused; (d)Other (specify).

(vi) Do you wish to compound the case at this stage? Yes/No

It said that the court shall record the responses to the questions in the order sheet in the presence of the accused and his/her counsel and thereafter, determine whether the case is fit to be tried summarily.

Wherever the trial court deems it appropriate, it shall use its power to order payment of interim deposit as early as possible under Section 143A of the NI Act, the Court further ordered.

The Court also tweaked the guidelines issued by it earlier for compounding offences under the NI Act.

"This Court is of the view that if the Accused is willing to pay in accordance with the aforesaid guidelines, the Court may suggest to the parties to go for compounding. If for any reason, the financial institutions/complainant asks for payment other than the cheque amount or settlement of entire loan or other outstanding dues, then the Magistrate may suggest to the Accused to plead guilty and exercise the power under Section 255(2) and/or 255(3) of the Cr.P.C. or 278 of the BNSS, 2023 and/or give the benefit under the Probation of Offenders Act, 1958 to the Accused," the Court ordered.

Directions to High Courts

The Court also opined that since physical courtrooms create a conducive environment for direct and informal interactions encouraging early resolution, the High Courts shall ensure that after service of summons, the matters are placed before the physical courts.

"Exemptions from personal appearances should be granted only when facts so warrant. It is clarified that prior to the service of summons the matters may be listed before the digital Courts," it directed.

Wherever cases under Section 138 of the NI Act are permitted to be heard and disposed of by evening courts, the High Courts should ensure that pecuniary limit of the cheque amount is realistic, the apex court further said.

"For instance, in Delhi, the jurisdiction of the evening courts to hear and decide cases of cheque amount is not exceeding Rs.25,000/-. In the opinion of this Court, the said limit is too low. The High Courts should forthwith issue practice directions and set up realistic pecuniary benchmarks for evening Courts," the Court added.

Directions for Delhi, Bombay and Calcutta

Each District and Sessions Judge in Delhi, Mumbai and Calcutta shall maintain a dedicated dashboard reflecting the pendency and progress of cases under Section 138 of the NI Act, the Court ordered.

"The dashboard shall include, inter alia, details regarding total pendency, monthly disposal rates, percentage of cases settled/compounded, average number of adjournments per case and the stage-wise breakup of pending matters. The District and Sessions Judges in aforesaid jurisdictions shall conduct monthly reviews of the functioning of Magistrates handling NI Act matters. A consolidated quarterly report shall be forwarded to the High Court," it said.

The Court also requested that the Chief Justices of Delhi, Bombay and Calcutta to form a committee on the administrative side to monitor pendency and to ensure expeditious disposal of Section 138 of the NI Act cases.

These Committees should meet at least once a month and explore the option of appointing experienced Magistrates to deal with Section 138 of the NI Act cases as well as promoting mediation, holding of Lok Adalats and other alternative dispute resolution mechanisms in Section 138 NI Act cases, it ordered.

[Read Judgment]