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Do Proceedings u/s 138 NI Act stand vitiated as loan/ deposit made in cash in violation of Section 269SS of Income Tax Act

It is common knowledge that there is a parallel finance market where cash funds are available for a fixed period at market rate of interest, which is invariably higher than the Bank Rates. The payment upon maturity is made in cash on the due date but as a surety an account payee cheque of the maturity amount is issued in the name of the lender. In case the borrower fails to make the payment on the due date, the lender is constrained to take action under Section 138 of the Negotiable Instruments Act, 1881 for the realization of Debt.

It would be trite to refer to Section 138 of the Negotiable Instruments Act, 1881, which reads as under:
Section 138 in The Negotiable Instruments Act, 1881
138 Dishonour of cheque for insufficiency, etc., of funds in the account.
Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless:
  1. The cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier;
  2. The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
  3. The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation:
For the purposes of this section, "debt or other liability" means a legally enforceable debt or other liability."

From the plain reading of the Section 138 of NI Act, it cannot be doubted that the borrowed amount, whether taken by cheque or in cash is 'a legally enforceable debt' and proceedings under the said section are maintainable against the borrower in the event of failure of the cheque issued for payment of loan.

However, the borrowers/ drawers are invariably taking a plea that the money lended by the lender is in contravention of the provisions of Section 269 SS of the Income Tax Act which specifically puts a bar to accepting loan/deposit above Rs. 20000/- other than by Account Payee cheque and therefore cash advanced to them is per-se illegal and proceedings under section 138 of the NI Act cannot be pressed into action for illegal acts of the lender.

The aforesaid Section 269 SS is reproduced as under:
269SS. Mode of taking or accepting certain loans, deposits and specified sum.óNo 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:
  1. the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
  2. 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
  3. 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:
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:
  1. the Government;
  2. any banking company, post office savings bank or co-operative bank;
  3. any corporation established by a Central, State or Provincial Act;
  4. any Government company as defined in clause (45)of section 2 of the Companies Act, 2013 (18 of 2013);
  5. 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:
  1. "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;
  2. "co-operative bank" shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ;
  3. "loan or deposit" means loan or deposit of money;
  4. "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.'
It is pertinent that Section 269 SS is applicable to borrower and not to the lender. Merely because there is a restriction/ bar on the borrower to accept cash exceeding Rs. 20000/-, the loan/debt or other liability does not become an illegally enforceable debt/liability. The consequences that legally follow with the violation of Section 269 SS is that the borrower who has accepted loan/deposit above Rs. 20000/- in cash shall be penalized as provided under Section 271D of the Income Tax Act. It would be relevant to refer to Section 271D which deals with the penalty for contravention of Section 269 SS of the Income Tax Act. Section 271D reads as under:

271D. (1) If a person takes or accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted.

Thus, if a borrower accepts cash above Rs. 20000/- as loan/deposit, he is likely to be penalized under the aforesaid provision under the Income Tax Act. However, penalty u/s 271D is not levied in case the transaction is genuine and there is a bona-fide reason for accepting the cash amount as provided in Section 273B of the Income Tax Act.

Both the Acts are Independent Acts and operate in different playing fields and have different scope of operations and are not interdependent on each other. From the aforesaid, it is indisputable that the violation of Section 269SS of the Income Tax Act, 1961 does not create any legal hindrance/bar to the proceedings under the Section 138 of Negotiable Instruments Act, 1881.

It is incontrovertible that proceedings u/s 138 of Negotiable Instruments Act, 1881 cannot be dismissed or stalled for non-compliance/violation of Section 269 SS of the Income Tax Act. Such violation may give rise to penal proceedings under the Income Tax Act but the prosecution of the accused for the alleged dishonor of cheque u/s 138 NI Act does not become bad in law on this score.

Thus the prosecution proceedings u/s 138 of NI Act cannot be dismissed or stalled for non-compliance/violation of Section 269 SS of the Income Tax Act. Such violation may give rise to an independent proceedings under the Income Tax Act but on account of violation of the said provision, the prosecution of the accused for the alleged dishonor of cheque u/s 138 NI Act does not become bad in law.

Written By: Inder Chand Jain
Email: [email protected], Ph no: M: 8279945021

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