Read S. 68 of IT Act with NI Act: Provisions relating to cheque in the Negotiable Instruments Act, 1881 need to be considered in context of S.68 of Income-tax Act, 1961 – a reading again and reconsideration of some judgments allowing invocation of S. 68 for receipts by cheque is desirable

[CA DEV KUMAR KOTHARI]

Links and references:

Section 68 of the Income- tax Act, 1961.

The Negotiable Instruments Act 1881 (in short NIA)- Provisions of relating to cheque have been  reproduced with highlights added by author.

The crux and summary:

As per heading of S.68 that is ‘CASH CREDITS’, first impression one get is that it is applicable only in respect to sums received in cash and credited  in books of account.  This view get strength and enforcement on reading of provisions of the NIA in relation to cheques.

This is because when a payment is received against cheque held in due course, presented to drawee bank (directly for payment or through bank account for transfer or  clearing)  and is honoured and paid  by the drawee bank, on such presentation and  in due course, then sum credited in books of account of payee should not  be called ‘cash credit’ particularly for allowing wide discretion to the AO to treat sum credited as income of assessee when in fact  it is not income.

In this regard, judgments holding that S.68 is applicable in case of cheques, need to be read again and reviewed in light of provisions of NIA to find out whether counsels have pressed properly provisions of NIA and whether Courts have properly considered the provisions relating to cheques while allowing invocation of S.68 for sums credited on realisation of cheque by the payee.

This has become more important because tax authorities are trying to invoke S.68 in respect of any sum credited in books and then applying section 115BBE to impose higher tax. By this way even disclosed regular  income is also being doubted and attempt is being made to impose higher rate of tax. While doing so they are ignoring ground realities, limitations of person receiving money and human probabilities from the point of view of person receiving money.

 In this regard  popular sayings LIKE   “Beggars and borrowers cannot be  choosers “ , दान की बछिया के दांत नहीं गिने जाते.   /  don't look a gift horse in the mouth  truly reflect position of most of persons who receives money from other persons  and hardly have options to force upon person paying money.

Presumption about person paying and ground realities:

In commercial and social world it is presumption that a person paying money is making payment out of proper source belonging to him – it may be his capital, cash flows from operations, borrowed funds, credits etc.

The payee has no authority in any manner to ask or insist upon the person paying to show or satisfy about source of money. 

In fact the payee should not have botheration and should not doubt about person paying, what is important for him is that he is receiving a payment, in good faith and without any doubt, and that he accepts payment.

If a person receiving payment asks the payer to inform his source of money, it will be misbehaviour, and will not be even a personal or commercial etiquette expected from any person in the society.

It is ground reality that if a person receiving payment ask the payer information about his source of payment, payment  will not be forthcoming, and the receiver may lose chance to get payment.

A receiver has hardly any option to ask payer about source of payment:

Ground reality is that a person who is receiving money from other person cannot ask the person paying to make payment out of proper or particular source. Even a mode of payment cannot be dictated. It is discretion of the person paying money to pay from any of his source or account.

Only due to legal requirement if any particular provision is attracted, the payee can request payer to pay money in particular manner and by particular type of instrument. For example,  when law require that a loan or deposit should be accepted  by way of A/c payee cheque or draft, the person receiving loan or deposit can request the payer/ lender / depositor to pay by way of prescribed mode. If the payer does not want to make payment in such manner, the payee can at best refuse to accept payment but he cannot insist upon the payer to adopt particular mode or particular source to pay. It is prerogative of person paying whether to pay in particular manner or not.

Loan or deposit:

It may be due to above ground reality that in provisions relating to loan or deposit restrictions are imposed on the person receiving loan or deposit to receive and repay in prescribed modes only. Similarly he has to follow prescribed mode even for repayment.

There is no such provision for person making loan or deposit or receiving repayment of loan or deposit. Provisions for penalty are also provided for person receiving loan or deposit or repaying loan or deposit otherwise than prescribed modes.

S. 269SS and 269T were challenged for this reason also that only one party to the transaction is imposed with the obligation and not the other party. However, Courts did not find this a valid reason to hold such provisions invalid.

Therefore, as per provisions of the Income-tax Act also it is seen that money lender / depositor has no restrictions.

Person receiving any payment cannot ask much to the person paying:

A very important fact and ground reality of commercial, as well as social world is that a person who receives payment or anything from another has hardly any authority to ask the person paying about from where he has received money or thing.

Even in case of gifts popular Hindi saying is   “Daan ki bachiya ke daant nahin gine jaate / gin sakte”       - दान की बछिया के दांत नहीं गिने जाते.   /  don't look a gift horse in the mouth

It is also said Beggars and borrowers cannot be  choosers. This is also reality for many who borrow money even in a competitive world where bankers and money lender compete against each other, but are not interested to lend money to particular person. When it comes about deal between lender and borrower the lender has his important say in the deal. Only a good borrower can insist some terms and conditions.

When you receive a calf in charity, you do not count it's teeth. It means that beggars are not choosers or have no right to criticize a thing received in charity.

Means a person receiving gift from other cannot ask the donor about source and quality of gift being given.

At most the person receiving can deny to receive gift and say sorry I do not accept your charity / gift.

Same thing apply in case of payment received. A payee cannot ask the person paying / payer to satisfy the payee about source of payment being made. For examples:

(a) A doctor receiving payment from his patient cannot ask his patient from where he has got the money / currency note/ cheque  which he is paying to Doctor.

(b.) A CA cannot ask his client to pay his fees from a particular source. He cannot say his client not to issue cheque against cash deposited in account of client. He cannot deny to receive payment even if cash is paid. If he deny, his payment can be delayed.

Similarly a borrower cannot ask the money lender to show proper source of money from which he is lending money.

Human probabilities about person receiving money:

It is not probable that a person who  received  payment and issued  acknowledgement  thus became liable to repay or otherwise   admit any other commercial  liability will do so without receiving money. A person who on receipt of money issues receipt, and admit liability in any form or manner like doing some work for person paying money, or repaying money received after some time or on demand, or issues promissory note or post-dated cheque for repayment or issues bonds or debenture or issues share to the person paying will not do so without actually having received money.

However, in some circles of income-tax department and in some situations like issue of shares, of bonds, the department is not considering the human probability from the point of view of person receiving money. This is even doubted when payment is received by way of A/c payee cheques.

Receipt by way of a/c payee cheque , cheque even bearer cheque payable in cash:

When a payment is received by way of A/c payee cheque, the cheque is received and held as a holder in due course. The holder who is payee written on cheque is person who can only encash the cheque by depositing the cheque in his bank account. His banker presents cheque through clearing system in vogue and applicable to the drawee bank (on whom cheque is drawn by the drawer). The drawee bank check the cheque in all respect, and if there is adequate balance available in account of drawer of cheque, the cheque is honoured and the banker of payee receives payment from clearing house and it is credited to the account of payee, in the account in which he deposited the cheque.

Therefore, in such circumstances so far payee is concerned, his source of money received is the cheque received from drawer, the nature is the purpose for which cheque has been received and acknowledged by payee ( it can be sale proceed of goods or properties, fees,  advance , loan , share capital,  or gift or any other nature of receipt  as may be  applicable).

The cheque is honoured and paid by drawee bank, as payment in due course and against balance available in account of drawer of cheque.

Therefore, there should not be any doubt about   source of money received on realisation of cheque by the drawee bank.

Even if a cheque payable to bearer or specific payee mentioned on the cheque is payable in cash and the drawee bank has honoured and paid amount of cheque on presentation, in cash, there should not be doubt about source of money received.

Whether S.68 should be applicable in case of sums received / credited  on realisation of cheque when honoured by drawee bank:

As per heading of S.68 that is ‘CASH CREDIT’, first impression one get is that it is applicable only in respect to sums received in cash that is it relates to credit entries made in books of account for cash received.

On reading of provisions of the NIA in relation to cheques, also the above first impression get enforcement because when a payment is received against cheque held in due course, presented to drawee bank (directly for payment or through bank account for transfer or  clearing)  and is honoured and paid  by the drawee bank, on such presentation and  in due course, then sum credited in books of account of payee cannot be called ‘cash credit’.

In this regard, judgments holding that S.68 is applicable in case of cheques, need to be read again and reviewed in light of provisions of NIA to find out whether Courts have properly considered the provisions relating to cheques while allowing invocation of S.68 for sums credited on realisation of cheque by the payee.

Cheque:

Cheque is a very important mode of payment in commercial world. A draft issued by banker whether called demand draft, manager’s cheque, pay order etc. is also a cheque subject of suitable changes about drawer of such cheque and drawee.

Cheque can be physical cheque, electronic cheque, and truncated cheque.

Provisions of the Income-tax Act, 1961 prescribes some situations in which cheque or particular type of cheque is to be used for making payment or receiving payment.

Payment and receipts by cheque are governed by law namely the Negotiable Instruments Act, 1881  (in short NIA)  governs provisions about definition, types, manner and usages of cheques and legal implications are provided including provisions about honour of cheque, dishonour of cheque  and consequences and penalties in case of dishonour of cheque.

In view of provisions of NIA, it is generally beyond doubt and payee  can say  that when a payment is made to him  by other party who paid by a cheque, the source of money received on realisation of cheque received  by him is balance available in account of drawer of cheque. 

In case of cheques, consideration is presumed. The drawer of cheque has legal, commercial and moral obligations. The drawee bank also has some legal and commercial obligations in respect to payment of cheque properly drawn and for which funds are available in account of the drawer of cheque.

In case cheque is dishonoured for insufficient funds, the drawer of cheque has liability to pay amount of cheque and in case of further failure can be penalized if proceeded by payee / holder of cheque.

In view of provisions of NIA it can be said that the person receiving cheque has the cheque as source of credit in his books of account and the source of  drawer of cheque is proved when it is honoured by the drawee bank.

Therefore, there on part of payee of cheque there  is no further need to prove source of credit, capacity  of the  creditor / drawer of cheque.

Discussions to this article

[DEV KUMAR KOTHARI]

Some of important provisions of the NIA are reproduced below with highlights added by author by underlining, colouring or making bold or italic.

The Negotiable Instruments Act, 1881

xxx

Interpretation clause.

3. In this Act-

"Banker".

"Banker" includes any person acting as a banker and any post office saving bank.

"Cheque".

6. A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Explanation I.-For the purposes of this section, the expressions-

¹[ (a) "a cheque in the electronic form" means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be; ]

(b) "a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immedi­ately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Explanation II.-For the purposes of this section, the expression "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Re­serve Bank of India.

²[Explanation III.-For the purposes of this section, the expressions "asymmetric crypto system", "computer resource", "digital signature", "electronic form" and "electronic signature" shall have the same meanings respectively assigned to them in the Information Technology Act, 2000.'. (21 of 2000.)]

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Notes:

1. Substituted vide Negotiable Instruments (Amendment) Act, 2015, before it was read as, "(a) "a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is gener­ated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;"

2. Inserted vide Negotiable Instruments (Amendment) Act, 2015

Drawer", "Drawee".

7. The maker of a bill of exchange or cheque is called the "drawer"; the person thereby directed to pay is called the "drawee".

"Payee".

The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "payee".

"Holder".

8.The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruc­tion.

"Holder in due course".

9. "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

"Payment in due course".

10. "Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negli­gence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

Instruments payable on demand.

19. A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.

Capacity to make, etc., the promissory notes, etc.

26. Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

Minor A minor may draw, indorse, deliver and negotiate such instruments so as to bind all parties except himself.

Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.

Liability of drawer.

30. The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided.

Liability of drawee of cheque.

31. The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.

Maker, drawer and acceptor principals.

37. The maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, respectively liable there­on as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor, as the case may be.

Presentment for payment.

64. [(1)] Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter pro­vided. In default of such presentment, the other parties thereto are not liable thereon to such holder.

Where authorized by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.

Exception - Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary in order to charge the maker thereof.

[(2) Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncat­ed cheque in case of any reasonable suspicion about the genuine­ness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:

Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.]

Presentment of cheque to charge drawer.

72. Subject to the provisions of section 84 a cheque must, in order to charge the drawer, be presented at the bank upon which it is drawn before the relation between the drawer and his banker has been altered to the prejudice of the drawer.

Presentment of cheque to charge any other person.

73. A cheque must, in order to charge any person except the drawer, be presented within a reasonable time after delivery thereof by such person.

Presentment of instrument payable on demand.

74. Subject to the provisions of section 31, a negotiable instru­ment payable on demand must be presented for payment within a reasonable time after it is received by the holder.

Cheque payable to order.

85. (1) Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.

(2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.

Dishonour by non-payment.

92. A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.

Rules as to compensation.

117. The compensation payable in case of dishonour of a promisso­ry note, bill of exchange or cheque, by any party liable to the holder or any indorsee, shall be determined by the following rules :-

(a) The holder is entitled to the amount due upon the in­strument, together with the expenses properly incurred in pre­senting, noting and protesting it;

(b) When the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;

(c) An indorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at [eighteen] per centum per annum from the date of payment until tender or realization thereof, together with all expenses caused by the dishonour and payment;

(d) When the person charged and such indorser reside at different places, the indorser is entitled to receive such sum at the current rate of exchange between the two places;

(e) The party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on de­mand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.

Special Rules of Evidence

Presumptions as to negotiable instruments.

118. Until the contrary is proved, the following presumptions shall be made :-

of consideration.

(a) that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration;

as to date.

(b) that every negotiable instrument bearing a date was made or drawn on such date;

as to time of acceptance.

(c) that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity;

as to time of transfer.

(d) that every transfer of a negotiable instrument was made before its maturity;

as to order of indorsements.

(e) that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;

as to stamps.

(f) that a lost promissory note, bill of exchange or cheque was duly stamped;

that holder is a holder in due course.

(g) that the holder of a negotiable instrument is a holder in due course : provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an of­fence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him.

Estoppel against denying original validity of instrument.

120. No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn.

[Chapter xvii Of Penalties in case of dishonour of certain cheques for Insuffi­ciency of funds in the Accounts

Dishonour of cheque for insufficiency, etc., of funds in the account.

138. Where any cheque drawn by a person on an account main­tained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to [two years], or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless-

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within [thirty] days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purposes of this section, "debt or other liability" means a legally enforceable debt or other liability.

Presumption in favour of holder.

139. It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.

Defence which may not be allowed in any prosecution under section 138.

140. It shall not be a defence in a prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section.

Offences by companies.

141. (1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was commit­ted, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the compa­ny, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence :

[Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corpo­ration owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prose­cution under this Chapter.]

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation : For the purposes of this section,-

(a) "company" means any body corporate and includes a firm or other association of individuals; and

(b) "director", in relation to a firm, means a partner in the firm.

Cognizance of offences.

142. (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),- (a) no court shall take cognizance of any offence punisha­ble under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque;

(b) such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138:

[Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period;]

(c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.

¹ [(2) The offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction,-

(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or

(b) if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

Explanation.- For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.]

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Notes:

1. Inserted vide Negotiable Instruments (Amendment) Act, 2015

[Power of Court to try cases summarily.

143. (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:

Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees:

Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code.

(2) The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.

(3) Every trial under this section shall be conducted as expedi­tiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the com­plaint.