Failure To Prove Financial Capacity And Non-Examination Of Crucial Witness Fatal To Prosecution Under NI Act: Karnataka High Court Acquits Accused In ₹5 Lakh Cheque Bounce Case

“Once financial capacity is disputed, burden shifts back to complainant” — In a significant ruling on the scope of rebuttal under the Negotiable Instruments Act, the High Court of Karnataka setting aside the concurrent conviction of the petitioner under Section 138 of the NI Act. Justice Ravi V. Hosmani held that the complainant had failed to establish a legally enforceable debt and financial capacity, and the accused had successfully rebutted the statutory presumption under Sections 118 and 139 of the NI Act by raising a probable defence on a preponderance of probabilities, not requiring proof beyond reasonable doubt.

This decision underscores the nuanced approach required in cheque dishonour cases where the initial presumption in favour of the holder of the cheque must yield when the accused demonstrates a credible defence, even if not conclusively proved.

Accused Need Not Prove Defence Beyond Reasonable Doubt: Preponderance Of Probabilities Sufficient

Referring to the binding precedents laid down by the Supreme Court, including MS Narayana Menon @ Mani v. State of Kerala (2006) 6 SCC 39, and Basalingappa v. Mudibasappa (2019) 5 SCC 418, the High Court reiterated that:

“The standard of proof to rebut the statutory presumption under Sections 118 and 139 is not beyond reasonable doubt, but on the touchstone of preponderance of probabilities.” [Para 12]

The petitioner-accused, who had been convicted by the Trial Court in 2016 and whose conviction was upheld by the Sessions Court in 2021, had admitted his signature on the dishonoured cheque, but consistently asserted that it had been misused from a set of 16 cheques issued to one R. Venkateshappa for a chit transaction, and not for a loan from the complainant.

Alleged ₹5 Lakh Hand Loan Disputed By Accused The case originated from a private complaint filed under Section 200 of CrPC by the respondent alleging that the petitioner had borrowed ₹5,00,000/- on 10.06.2013, and issued Cheque No. 320409 dated 10.09.2013 for repayment, which bounced due to “insufficient funds.”

However, the accused contended that he had never borrowed money from the complainant directly and that the cheque in question was part of 16 undated cheques handed over to Venkateshappa during participation in a chit fund scheme, some drawn on IDBI Bank and some on Andhra Bank, in the name of his business Padmacharan Enterprises.

High Court Criticises Lower Courts For Ignoring Defence Evidence And Inconsistencies In Complainant’s Testimony

Justice Hosmani found that both the trial and appellate courts had fallen into error by focusing solely on the admission of the signature on the cheque and ignoring material contradictions and omissions in the complainant’s version, especially relating to:

• Financial capacity to lend ₹5 lakh in cash without any documentary evidence;

• Failure to disclose the source of funds in the statutory demand notice;

• Contradictory deposition regarding who requested the loan — the complainant at times claimed it was the accused, and at other times said it was R. Venkateshappa;

• The fact that the complainant admitted not knowing the accused’s residence, phone number, or business location, despite alleging a personal financial transaction;

• Most crucially, the non-examination of R. Venkateshappa, despite being a key intermediary in the transaction and the fact that the same advocate represented both the complainant and Venkateshappa in related proceedings.

The Court observed: “Failure to examine R. Venkateshappa, despite defence specifically alleging misuse of cheque, is a material omission attracting adverse inference and probabilising defence.” [Para 18–19]

Financial Capacity Must Be Proved Once Disputed

One of the central planks of the defence was that the complainant did not have the financial capacity to extend a cash loan of ₹5,00,000/-. The High Court held:

“When complainant claimed to have derived cash from agriculture and business, same not being mentioned in the demand notice and without any documentary proof, would weaken prosecution case.” [Para 19]

Citing APS Forex Services Pvt. Ltd. v. Shakti International Fashion Linkers (2020) 12 SCC 724, the Court noted that the burden shifted back to the complainant once the financial capacity was disputed — a burden that remained unfulfilled in this case.

Findings Declared Perverse For Ignoring Entire Material On Record

In its final analysis, the Court strongly criticised the lower courts for a selective reading of evidence:

“While passing impugned judgments, both Courts proceeded on admission of accused about issuance of Ex.P1 cheque... There is no proper consideration of material on record while examining whether defence was probabilised.” [Para 20]

Justice Hosmani held that such a one-sided appreciation of evidence amounted to perversity, justifying interference in revision jurisdiction under Sections 397 and 401 of CrPC.

Acquittal Ordered; Presumption Rebutted

Allowing the criminal revision, the Court set aside both the conviction dated 06.04.2016 and the appellate affirmation dated 17.04.2021, and acquitted the petitioner of the offence under Section 138 of the NI Act. It also ordered the discharge of bail and surety bonds, thereby closing a decade-long legal battle rooted in a disputed financial transaction and allegations of cheque misuse.

Date of Decision: 06 January 2026