138 NI Act | Supreme Court Rejects Borrower's 'Financial Incapacity' Defence

"The High Court gravely erred in upsetting the concurrent findings of conviction of the trial court and the Appellate Court by substituting its own conclusions and reasoning on the merits of the case and thereby erred in setting aside the well-reasoned and correct judgement and orders of the trial and appellate courts." Supreme Court of India, in a significant ruling dated August 04, 2026, unequivocally restored a conviction under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), holding that the Karnataka High Court "gravely erred" in exercising its revisional jurisdiction to acquit the accused by re-appreciating evidence, particularly the complainant's financial capacity to extend the loan.

A bench of Justices B.V. Nagarathna and Ujjal Bhuyan emphasized that revisional courts must not substitute their own conclusions on merits unless there is perversity or gross miscarriage of justice.

The case originated from a hand loan of Rs. 4,50,000/- extended by the complainant (appellant) to the accused (respondent) in December 2010 for purchasing a house site. A cheque issued by the accused for this amount was dishonoured due to "funds insufficient." After legal notice and non-payment, the complainant filed a case under Section 138 of the NI Act. Both the Trial Court and the First Appellate Court convicted the accused, though the fine was reduced by the Appellate Court. However, the High Court, in revision, acquitted the accused, questioning the complainant's financial capacity and the lack of specific details regarding the loan's origin.

The primary question before the Supreme Court was whether the High Court was justified in exercising its revisional jurisdiction to overturn concurrent findings of conviction by re-evaluating the complainant's financial capacity and other factual aspects. The court was also called upon to determine the correct application of presumptions under Sections 118 and 139 of the NI Act.

Statutory Presumptions Under NI Act Explained

The Supreme Court reiterated the aims and objectives of Chapter XVII of the NI Act, noting its intent to enhance the acceptability of cheques and prevent dishonesty. It detailed the ingredients of an offence under Section 138, as well as the statutory and mandatory presumptions under Section 118 (of consideration, date, etc.) and Section 139 (that the holder received the cheque for discharge of debt or liability).

Burden of Proof Shifts to Accused to Rebut Presumption

The Court highlighted that once the execution of a cheque is admitted or proved, the presumptions under Sections 118 and 139 of the NI Act are invoked, shifting the burden onto the accused to prove that the cheque was not issued for a legally enforceable debt. A mere denial is insufficient; the accused must bring on record facts and circumstances to make the non-existence of debt probable.

High Court Erred in Re-appreciating Complainant's Financial Capacity

The High Court had acquitted the accused primarily by observing that the complainant failed to explain how he mobilized Rs. 3,00,000/- while having a monthly income of Rs. 20,000-25,000, and by questioning the advancement of a loan without interest. The Supreme Court found this reasoning flawed, particularly in the context of revisional jurisdiction.

Complainant's Financial Capacity Adequately Established

The Supreme Court observed that the complainant's testimony as PW-1, along with the testimonies of PW-2 and PW-3, clearly established his financial capacity. PW-1 had stated he routinely invested in other business ventures like chit funds, suggesting he had the means. Furthermore, the loan was bolstered by financial assistance from PW-2 (Rs. 1,00,000/-) and PW-3 (Rs. 50,000/-), which was corroborated by their consistent statements under cross-examination.

Accused Failed to Discharge Onus of Proof

The Court found the accused's defence, alleging misuse of a blank cheque given as security for a Rs. 40,000/- loan from PW-2, to be "frivolous and feeble." There was no documentary evidence to support the Rs. 40,000/- loan or its repayment, nor any steps taken by the accused to recover the allegedly misplaced cheques. The legal notice sent by the accused after the complaint was filed was dismissed as an "ex post facto creation of evidence, an afterthought and an attempt to create artificial defence."

Initial Burden to Raise Financial Incapacity Defence Rests on Accused

Crucially, the Court emphasized that the initial burden of raising a defence regarding the complainant's lack of financial capacity rests upon the accused and should ideally be specifically pleaded in the reply to the demand notice. In the absence of such a plea, the complainant cannot be expected to proactively adduce evidence establishing financial capacity while leading his evidence. The accused failed to place any "contra material" on record to substantiate his defence.

Revisional Jurisdiction Cannot Be Equated with Appellate Power

The Supreme Court extensively discussed the limited scope of revisional jurisdiction under Section 397 of CrPC (now Section 438 of Bharatiya Nagarik Suraksha Sanhita, 2023). Citing precedents like State of Maharashtra vs. Jagmohan Singh Kuldip Singh Anand and State of Kerala vs. Puttumana Illath Jathavedan Namboodiri, the Court reaffirmed that a revisional court cannot re-appreciate evidence to substitute its own conclusions unless the lower court's findings are perverse, grossly erroneous, or lead to gross miscarriage of justice.

High Court Overstepped its Jurisdictional Limits

The Court concluded that the High Court, in the present case, acted as an appellate court by going into great detail into the testimonies and merits, which is generally impermissible. No glaring contradiction or perversity was apparent on the face of the record to justify such an extensive exercise of revisional powers, especially when faced with concurrent findings of conviction by two lower courts.

No sufficient ground has been mentioned by the High Court in its judgment to enable it to exercise its revisional jurisdiction for setting aside the conviction.

The Supreme Court, finding no merit in the accused's defence regarding the complainant's financial capacity and observing that the High Court exceeded its revisional jurisdiction, set aside the impugned order. The judgments and orders of conviction passed by the Trial Court and the First Appellate Court were restored, reinstating the accused's liability under Section 138 of the NI Act.

Date of Decision: August 04, 2026