FROM CREATIVE INTERPRETATION TO CORRECTIVE INTERVENTION: THE SUPREME COURT RECALIBRATES THE NEXUS BETWEEN TAX VIOLATIONS AND ENFORCEABLE DEBT

A Comparative Analysis of P.C. Hari v. Shine Varghese and Sanjabij Tari v. Kishore S. Borcar & Ors.

- By Adv Sherry Samuel Oommen

Introduction- A Short-Lived Jurisprudential Controversy

The interplay between the Negotiable Instruments Act, 1881 (“NI Act”) and the Income Tax Act, 1961 has long been a fertile ground for legal debate. The core question is simple yet profound: should a debt, otherwise valid in civil law, be rendered unenforceable under the NI Act because its creation violated a fiscal statute? In 2025, the Hon'ble Kerala High Court in P.C. Hari v. Shine Varghese delivered a bold, policy-driven answer in the affirmative, sending ripples through the commercial litigation landscape. Its ruling declared that a cash transaction violating Section 269SS of the Income Tax Act could not form the basis of a "legally enforceable debt" under Section 138 of the NI Act.

However, this seismic shift in jurisprudence was short-lived. The Supreme Court of India, in Sanjabij Tari v. Kishore S. Borcar & Ors., comprehensively analyzed the issue and expressly overruled the Kerala High Court's judgment. This article provides a critical comparative analysis of these two landmark rulings, tracing the journey from a strict, policy-oriented interpretation to a doctrinally pure, purpose-focused one, and establishing the current, settled position of law.

The Kerala High Court's Bold Gambit in P.C. Hari

The judgment of the Hon'ble Kerala High Court was a radical attempt to use the NI Act as a tool for enforcing fiscal discipline. Its reasoning was built on several key pillars, which are summarized below:

The Clash of Presumptions: The Court held that the presumption under Section 139 of the NI Act that a cheque is for the discharge of a legally enforceable debt, could not be used to legitimize a transaction expressly prohibited by Section 269SS of the IT Act. It advocated for a harmonious construction, effectively making tax compliance a precondition for enforceability under the NI Act.