INCOME TAX ACT AND THE NEGOTIABLE INSTRUMENTS ACT - IS THERE A NEXUS?

The Negotiable Instruments Act, 1881 (“NI Act”), specifically Section 138, was enacted to infuse credibility into banking transactions and ensure the sanctity of cheques in commercial life.

- Adv Sherry Samuel Oommen: This article is authored by Adv Sherry Samuel Oommen. He specialises in the Constitution, tax and corporate laws and has also cleared the final exams of the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India and the Institute of Company Secretaries of India. He has also completed his Masters's Degree in Commerce, apart from obtaining a Post Graduate Diploma in Business and Corporate Laws from Symbiosis, Pune. The views expressly are personal and should not be construed as a legal opinion. [e-mail].

Introduction

It operates on the bedrock of a "legally enforceable debt or liability." For decades, the judiciary has navigated a complex path, balancing this civil wrong-turned-criminal offence with other statutory regimes, most notably the Income Tax Act, 1961 (“IT Act”).

The recent judgment of the Kerala High Court in Hari P. C. v. Shine Varghese (2025 (5) KHC 173) marks a seismic shift in this jurisprudential landscape. The said judgment declares that a debt created by a cash transaction exceeding ₹20,000, in violation of Section 269SS of the IT Act, cannot be considered a "legally enforceable debt" unless a valid explanation is offered. This decision effectively closes the doors of the criminal court to complaints arising from such "illegal transactions."

The inherent tension between the Negotiable Instruments Act, 1881, and the Income Tax Act, 1961, presents a complex legal dilemma that strikes at the heart of contract enforcement, statutory interpretation, and public policy. A general analysis of the four core issues reveals deep philosophical and practical conflicts.

This article provides a critical analysis of this landmark judgment, deconstructing its reasoning, examining the profound issues it raises, and evaluating its potential impact on commercial litigation and tax compliance.

1. The Clash of Presumptions: Section 139 of NI Act vs. Section 269SS of IT Act