Debt advanced by an unlicensed moneylender is not legally enforceable under Section 138.

The appellant filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) against Respondent No. 2. The appellant alleged that he had advanced a cash loan of ₹20,00,000 to Respondent No. 2, against which a promissory note dated 26 May 2014 and a security cheque were issued. After repayment of ₹2,00,000, the security cheque was returned and Respondent No. 2 issued four post-dated cheques for the balance amount. Three cheques of ₹5,00,000 each were dishonoured for insufficiency of funds, followed by statutory demand notices and the complaint under Section 138 of the NI Act.

The Metropolitan Magistrate acquitted Respondent No. 2, holding that the appellant had not established his financial capacity to advance the loan, that he was conducting money-lending business without a valid licence under the Bombay Money-Lenders Act, 1946, and that the cash transaction violated Section 269 of the Income Tax Act. The appellant challenged the acquittal before the High Court.

1. Whether the appellant established that the dishonoured cheques were issued towards a legally enforceable debt or liability, having regard to the promissory note and the statutory presumption under Section 139 of the NI Act?

2. Whether advancement of the loan in cash violated Section 269SS of the Income Tax Act so as to render the underlying debt illegal, void, or unenforceable?

3. Whether the appellant was carrying on the business of money-lending without a valid licence under the Bombay Money-Lenders Act, 1946, thereby rendering the debt not legally enforceable under Section 138 of the NI Act?

4. Whether the High Court should interfere with the acquittal when the view taken by the Trial Court was a possible and reasonable view?

Section 138 of the NI Act applies only where the dishonoured cheque relates to a legally enforceable debt or liability, while Section 139 raises a presumption in favour of the holder that the cheque was issued for discharge of such debt or liability.

A breach of Section 269SS of the Income Tax Act attracts penalty under Section 271D but does not, by itself, render the underlying loan transaction illegal, void, or unenforceable, nor does it displace the presumptions under Sections 118 and 139 of the NI Act; the Court relied on Sanjabij Tari v. Kishore S. Borcar, 2025 INSC 1158.

However, a person carrying on the business of money-lending without a valid and operative licence under the Bombay Money-Lenders Act, 1946 cannot enforce the relevant debt as a “legally enforceable debt” for the purposes of Section 138 of the NI Act.

In an appeal against acquittal, interference is unwarranted where the Trial Court’s view is a possible and reasonable view.

The Court also considered Newton v. Pyke, (1908) 25 TLR 127, Saraswati Devi v. Janaklal Thakur, Patna High Court, S.A. No. 1182 of 1954, decided 12 December 1958, and Nanda w/o Dharam Nandanwar v. Nandkishor s/o Talakram Thaokar, 2010 (3) Mh LJ 268.

The High Court found that the appellant’s evidence regarding the loan and the promissory note was not challenged in cross-examination. It therefore held that the Trial Court had erred in rejecting the appellant’s case on the advancement of the loan.

The Court further held that the cash nature of the transaction, even if contrary to Section 269SS of the Income Tax Act, did not by itself extinguish the debt or defeat the statutory presumptions under the NI Act, since the consequence of such breach was penal under Section 271D.

Nevertheless, the appellant admitted that he had advanced loans to persons other than Respondent No. 2. The promissory note also stipulated interest at the substantial rate of 3% per month. These circumstances supported the Trial Court’s conclusion that the appellant was conducting a money-lending business rather than entering into an isolated lending transaction.

Since the appellant did not possess a valid licence under the Bombay Money-Lenders Act, 1946, the debt was not legally enforceable for the purposes of Section 138 of the NI Act. The Trial Court’s view was consequently held to be possible and reasonable, warranting no appellate interference.

Finding no ground to interfere with the acquittal, the Court dismissed the criminal appeal and affirmed the judgment dated 5 January 2019 passed by the Metropolitan Magistrate, Andheri, Mumbai.