Cheque Dishonour Defence: SC Says Raise Financial Capacity Plea in Reply Notice | Kuntegowda v. Thurubaiah (2026)

In a ruling that will reshape how cheque-bounce defences are drafted across India, the Supreme Court has held that silence at the notice stage can be fatal. If an accused does not dispute the complainant’s financial capacity to lend in the reply to the statutory demand notice under Section 138, that defence cannot be revived later at trial. Justices B.V. Nagarathna and Ujjal Bhuyan explain why the reply notice is the real battleground in cheque dishonour litigation. A fifteen-day reply notice rarely feels like the moment a criminal case is won or lost. Yet the Supreme Court has just confirmed that, in cheque dishonour prosecutions, it often is exactly that moment and an accused who stays silent at this stage may find every later defence shut out at trial. Title: Cheque Dishonour and the Doctrine of Early Disclosure — Analysing the Supreme Court’s Ruling on Pleading Financial Capacity in Reply to Statutory Notice Case Name: Kuntegowda v. Thurubaiah Case Number: Criminal Appeal arising out of Special Leave Petition (Criminal) No. 2247 of 2024 Court: Supreme Court of India Judges: Justice B.V. Nagarathna and Justice Ujjal Bhuyan (judgment authored by Nagarathna, J.) Judgment Date: August 4, 2026 Citation: 2026 LiveLaw (SC) 765 Abstract This case analysis examines the Supreme Court’s decision in Kuntegowda v. Thurubaiah, where a two-judge Bench comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan clarified a procedural question that has long troubled trial courts hearing complaints under Section 138 of the Negotiable Instruments Act, 1881: at what stage must an accused challenge the complainant’s financial capacity to advance the loan underlying the dishonoured cheque? Reversing the Karnataka High Court’s acquittal of the respondent, the Supreme Court held that this defence is not a free-floating argument available at any point in the trial. It must be specifically and clearly pleaded in the accused’s reply to the statutory demand notice, failing which the complainant is under no obligation to lead evidence of financial capacity at the threshold. The judgment reinforces the statutory presumptions under Sections 118 and 139 of the NI Act, restates the evidentiary burden-shifting framework laid down in earlier precedents, and sends a clear signal to drafting lawyers that the reply notice is not a formality but a pleading of permanent consequence. This analysis unpacks the facts, the statutory scheme, the Court’s reasoning, the precedents it relied upon, and what the ruling means for practitioners handling cheque dishonour litigation going forward. Table of Contents Introduction: Why a Fifteen-Day Notice Became the Centre of a Supreme Court Appeal Factual Background of the Dispute Procedural History — From the Magistrate’s Court to the Karnataka High Court The Question of Law Before the Supreme Court Statutory Framework: Sections 138, 118 and 139 of the Negotiable Instruments Act The Supreme Court’s Reasoning Precedents Examined — Basalingappa, Rangappa and the Presumption Chain The Final Verdict and Its Ratio Decidendi Practical Implications for Lawyers Drafting Reply Notices Critical Analysis and Concluding Observations Frequently Asked Questions 1. Introduction: Why a Fifteen-Day Notice Became the Centre of a Supreme Court Appeal Cheque dishonour litigation in India is built around a tight procedural clock. Once a cheque bounces for insufficiency of funds, the holder has thirty days to issue a demand notice, and the drawer then has fifteen days to pay or respond. Most accused persons, and even some lawyers, treat the reply to this notice as a routine formality, a brief acknowledgment that buys time before the real fight begins at trial. The Supreme Court’s decision in Kuntegowda v. Thurubaiah dismantles that assumption. The Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan held that a specific category of defence, namely that the complainant never had the financial means to advance the loan in the first place, cannot be raised for the first time during cross-examination or final arguments. It must appear in the reply notice itself. The ruling is significant not because it creates an entirely new rule, but because it tightens a principle that lower courts had been applying inconsistently, and because it directly reversed a High Court acquittal that had rewarded a belated defence. 2. Factual Background of the Dispute The dispute arose out of a cheque issued by the respondent, Thurubaiah, in favour of the appellant, Kuntegowda, towards discharge of a loan. When the cheque was presented for encashment, it was dishonoured. The appellant, following the statutory procedure under Section 138, issued a demand notice calling upon the respondent to pay the cheque amount within the prescribed period. The respondent did not specifically plead, in his reply to that notice, that the appellant lacked the financial capacity to have advanced the loan in question. The complaint proceeded to trial before the XL Additional Chief Metropolitan Magistrate, Bangalore, which convicted the respondent, holding that the statutory presumptions under the Negotiable Instruments Act had not been rebutted. It was only later, during the course of the trial and subsequently before the High Court, that the respondent sought to argue that the complainant had failed to establish his financial capacity to lend the amount claimed. 3. Procedural History — From the Magistrate’s Court to the Karnataka High Court The trial court’s conviction was challenged by the respondent before the Karnataka High Court, which took a view favourable to the accused and set aside the conviction, effectively acquitting him on the ground that the complainant had not sufficiently established his financial capacity to advance the loan. This acquittal was what brought the appellant to the Supreme Court. The appellant’s grievance was straightforward: the respondent had never raised the financial capacity defence at the earliest available opportunity, that is, in the reply to the statutory notice, and allowing it to succeed at the appellate stage effectively permitted an ambush defence that deprived the complainant of any chance to meet it with evidence when it mattered most. The Supreme Court agreed with this grievance and set aside the High Court’s judgment, restoring the trial court’s conviction. 4. The Question of Law Before the Supreme Court The central legal question the Bench had to resolve was this: does a complainant under Section 138 carry an independent, free-standing burden to prove financial capacity to advance a loan at the threshold of the complaint, irrespective of whether the accused ever disputed that capacity, or does this burden arise only once the accused has specifically put the complainant on notice that financial capacity is in issue? The answer mattered enormously for how cheque dishonour trials are conducted across the country, because thousands of pending Section 138 complaints hinge on exactly this evidentiary sequencing. 5. Statutory Framework: Sections 138, 118 and 139 of the Negotiable Instruments Act Section 138 of the Negotiable Instruments Act, 1881 criminalises the dishonour of a cheque drawn for the discharge, in whole or in part, of a legally enforceable debt or liability, where the cheque is returned unpaid for insufficiency of funds and the drawer fails to make payment within fifteen days of receiving the statutory demand notice. The provision is supported by two powerful presumptions. Section 118 presumes that every negotiable instrument was made or drawn for consideration. Section 139 goes further and presumes, until the contrary is proved, that the holder of a cheque received it for the discharge, in whole or in part, of a debt or liability. Together, these provisions place the initial evidentiary advantage squarely with the complainant, and it is the accused who bears the burden of rebutting these presumptions on a preponderance of probabilities, not beyond reasonable doubt. The Supreme Court’s ruling in Kuntegowda must be read against this statutory architecture: the question of financial capacity is not a standalone requirement imposed on the complainant by the statute, but a fact that becomes relevant only once the accused specifically disputes it. 6. The Supreme Court’s Reasoning Writing for the Bench, Justice Nagarathna reasoned that showing financial capacity on the part of the complainant is not a sine qua non for invoking Section 138. A legally valid demand notice accompanied by the cheque return memo, coupled with the statutory presumptions, is sufficient for the complainant to set the prosecution in motion. The initial burden to raise a defence disputing the complainant’s financial capacity rests upon the accused, and this defence ought to be specifically pleaded in the reply to the demand notice. The Court explained that the statutory notice and reply mechanism under Section 138 is not a mere procedural courtesy. It performs a crystallising function: it fixes the issues between the parties at the earliest stage and puts the complainant on clear notice of the specific defences the accused intends to raise, so that the complainant can gather and lead evidence to meet those defences during the trial. Where an accused fails to raise the financial capacity defence in the reply notice, the complainant cannot be expected to pre-emptively lead evidence on a point that was never put in issue, and a court cannot later fault the complainant for that evidentiary silence. 7. Precedents Examined — Basalingappa, Rangappa and the Presumption Chain The judgment situates itself within a well-established line of Negotiable Instruments Act jurisprudence. In Basalingappa v. Mudibasappa, (2019) 5 SCC 418, the Supreme Court had earlier held that the accused can rely on materials submitted by the complainant himself to rebut the presumption under Section 139, and that the standard of proof for rebuttal is preponderance of probabilities, not proof beyond reasonable doubt. In Rangappa v. Sri Mohan, (2010) 11 SCC 441, a Constitution Bench had clarified that the presumption under Section 139 includes a presumption that the cheque was issued for a legally enforceable debt, though this presumption is rebuttable. Kuntegowda builds on this chain by addressing a narrower but practically vital question that those earlier decisions had not resolved with the same clarity: not whether the presumption can be rebutted, but at what procedural stage the accused must signal the specific ground on which he intends to rebut it. By tying the financial capacity defence to the reply notice stage, the Court has effectively read a disclosure obligation into the existing presumption framework, ensuring that the accused cannot keep a rebuttal argument in reserve and spring it only when the complainant’s evidence has already closed. 8. The Final Verdict and Its Ratio Decidendi The Supreme Court allowed the appeal, set aside the Karnataka High Court’s judgment of acquittal, and restored the conviction recorded by the trial Magistrate. The ratio decidendi of the case can be stated plainly: the defence that a complainant lacked the financial capacity to advance a loan underlying a dishonoured cheque must ordinarily be raised specifically in the accused’s reply to the statutory demand notice under Section 138 of the Negotiable Instruments Act, and an accused who fails to do so cannot successfully raise that defence for the first time later in the proceedings, nor can a court fault the complainant for not having led evidence to rebut a defence that was never disclosed in time. The Court was careful to note that in the facts before it, the respondent’s reply notice contained no such plea, and this omission was decisive in the appeal failing before the trial court and succeeding wrongly before the High Court. 9. Practical Implications for Lawyers Drafting Reply Notices For practitioners, the message from this ruling is unambiguous and operationally urgent. A reply to a Section 138 demand notice can no longer be treated as a holding document drafted hastily to buy fifteen more days. Every defence the accused genuinely intends to pursue at trial, including disputes over the existence of a legally enforceable debt, the authenticity of the signature, the circumstances of the cheque’s issuance, or the complainant’s financial capacity to advance the sum in question, should be specifically and clearly articulated at the reply stage. Advocates representing accused persons in cheque bounce matters should now treat the reply notice with the same drafting rigour as a written statement in a civil suit, because the Supreme Court has effectively converted it into a pleading with evidentiary consequences. Complainants’ counsel, in turn, can rely on this ruling to resist belated defences raised for the first time during cross-examination or in appeal, strengthening the position of genuine creditors against delay tactics that have historically clogged the Section 138 docket. 10. Critical Analysis and Concluding Observations The decision in Kuntegowda v. Thurubaiah deserves to be read as part of the Supreme Court’s broader, sustained effort to streamline cheque dishonour litigation, a category of cases that continues to occupy a disproportionate share of pending criminal dockets across Indian trial courts. By insisting that the financial capacity defence be disclosed at the notice stage, the Court has struck a reasonable balance: it has not foreclosed the defence altogether, nor has it shifted the burden of proving financial capacity onto the complainant from the outset, which would have made every genuine cheque bounce prosecution needlessly difficult to sustain. Instead, it has conditioned the availability of the defence on timely disclosure, consistent with the broader evidentiary principle that a party cannot ambush its opponent with an undisclosed case theory at the final stage of proceedings. At the same time, the ruling places a corresponding burden on accused persons and their counsel to engage seriously and promptly with demand notices rather than treating them as paperwork, which may, in some cases, disadvantage accused persons who receive poor legal advice at the critical fifteen-day window. On balance, the judgment is a welcome clarification that brings predictability to an area of law that affects an enormous volume of commercial and personal transactions across the country, and it will likely be cited extensively in trial courts and High Courts dealing with similar disputes over complainants’ financial capacity under Section 138. 11. Frequently Asked Questions What did the Supreme Court decide in Kuntegowda v. Thurubaiah? The Court held that an accused must specifically plead, in the reply to the Section 138 demand notice, any defence disputing the complainant’s financial capacity to advance the loan underlying the dishonoured cheque, failing which the defence cannot succeed at a later stage. Does the complainant have to prove financial capacity at the outset in every cheque bounce case? No. The Court clarified that proving financial capacity is not a sine qua non for invoking Section 138, and the complainant is only required to meet this issue once the accused has specifically disputed it in the reply notice. Which Bench delivered this judgment? The judgment was delivered by a Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan of the Supreme Court of India, with the opinion authored by Justice Nagarathna. Why does the reply to the demand notice matter so much under Section 138? Because it crystallises the dispute between the parties at the earliest stage, giving the complainant fair notice of the specific defences the accused intends to raise so that appropriate evidence can be led during trial.