Mere Issuance of Cheque Does Not Establish Legally Enforceable Debt: Supreme Court Restores Acquittal in Dishonour Case Under Section 138 NI Act

“Rebuttable Presumption Under Sections 118 and 139 NI Act Cannot Override Proof of Probability” – Supreme Court of India overturned a Karnataka High Court judgment convicting the appellant under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), and restored the trial court’s acquittal. The Court held that the statutory presumption under Sections 118 and 139 NI Act had been successfully rebutted by the accused, and the complainant failed to prove the existence of a legally enforceable debt.

Reiterating the settled principle that presumption of liability under the NI Act is rebuttable by probable defence, the Court emphasized that conviction under Section 138 must rest not merely on the issuance of a cheque, but on solid and credible proof of debt or liability.

The appellant and the respondent, known to each other for over a decade, had a personal relationship. The complainant alleged that he advanced a hand loan of ₹20 lakhs for a Kannada film titled Indian Police History, and in discharge, a cheque was issued on October 14, 2008, which bounced on presentation with the remark “Refer to Drawer.”

The accused, in reply to the statutory notice and later in defence, claimed that the cheque was issued merely as security for a much smaller loan of ₹3.5 lakhs taken years ago, which had already been settled via a written Memorandum of Understanding dated March 29, 2008. It was further stated that the cheque was misused after a police complaint regarding its misplacement was already lodged.

The trial court acquitted the accused, holding that he had successfully rebutted the statutory presumption. However, on appeal, the High Court convicted him and imposed a sentence of simple imprisonment for one year with a direction to pay ₹22 lakhs. The matter reached the Supreme Court.

The central legal issue was whether the presumption of consideration under Sections 118(a) and 139 of the NI Act had been rebutted and whether the High Court was justified in reversing the acquittal.

The Supreme Court extensively discussed the legal standard: “The presumptions under Sections 118(a) and 139 are rebuttable… and once rebutted, the burden shifts to the complainant to establish his case beyond reasonable doubt.”

Citing Kumar Exports v. Sharma Carpets, (2009) 2 SCC 513, and Rangappa v. Sri Mohan, (2010) 11 SCC 441, the Court noted that once the accused discharges the initial burden by showing a probable defence, the complainant must then prove the existence of a debt as a matter of fact.

The Court held: “The accused has been able to establish probable defence. The burden, therefore, shifted back to the complainant who has failed to discharge it.”

The documentary evidence – including the MoU recording full settlement, the prior police complaint about misplacement of cheques, and inconsistencies in witness testimony – created sufficient doubt.

“There are material contradictions in the evidence of DWs.1 to 3… even the document Ex.D2 came into existence under suspicious circumstances.”

The Court found that the complainant failed to produce any books of account, official records, or reliable witnesses to support his claim of advancing ₹20 lakhs. No income tax filings substantiated such a substantial cash loan.

The Court restated a crucial principle: “The presumption under Section 139 is not conclusive proof. Once rebutted, it is for the complainant to prove liability — and not merely rely on the cheque’s existence.”

It also noted: “Conviction under Section 138 entails criminal consequence; hence, the standard is not mere suspicion but proof beyond reasonable doubt once presumption is displaced.”

The trial court had rightly held: “A doubt has arisen… about the alleged loan amount of ₹20 lakhs… the accused has rebutted the presumption under Sections 118 and 139.”

The Supreme Court ultimately found the High Court erred in interfering with an acquittal without satisfying the high threshold required for reversal of a finding of innocence.

The Supreme Court allowed the appeal, set aside the conviction, and restored the trial court’s acquittal, directing that the sum deposited during the pendency of the appeal be released back to the appellant with accrued interest.

This judgment reaffirms that Section 138 proceedings cannot become instruments of coercion based on doubtful liabilities, and that mere possession of a cheque is not synonymous with a proven debt.

“The complainant failed to discharge the burden once it had shifted back… The reversal of acquittal was unjustified.”

Date of Decision: April 22, 2025