Why Complainant's Financial Capacity Must Be Challenged in the Reply Notice Under Section 138 of the NI Act

In cheque dishonour prosecutions, one of the most common defences attempted by accused persons is to attack the complainant's financial capacity — arguing that the complainant never had the means to advance the loan in the first place. A recurring question before courts is whether this defence can be raised at any stage of the trial, or whether it must be flagged at the very first opportunity, in the reply to the statutory demand notice. The answer has significant consequences for how the burden of proof operates under the Negotiable Instruments Act, 1881.

The Question Explained

The issue can be framed precisely: under the Negotiable Instruments Act, must the defence concerning the financial capacity of the complainant be raised in the reply to the legal notice, or can it be introduced later during trial?

The short answer is nuanced. There is no absolute statutory bar that renders a late-raised defence invalid. However, courts consistently hold that when no such case is set up in the reply notice, the complainant cannot be expected to lead evidence of financial capacity at the outset, and a belated challenge is likely to be treated as an afterthought — substantially weakening the accused's ability to rebut the statutory presumptions.

The Statutory Framework: Presumptions Under Sections 118 and 139

When a cheque is executed and dishonoured, the law steps in with powerful presumptions in favour of the complainant:

• Section 139 mandates the court to presume that the cheque was issued for the discharge of a legally enforceable debt or liability.
• Section 118 presumes consideration for the negotiable instrument.

These presumptions place the burden squarely on the accused to rebut them. Importantly, the accused does not need to prove the defence beyond reasonable doubt — a probable defence based on a preponderance of probabilities is sufficient 2022 4 Supreme 667. But mere denial is never enough; the rebuttal must rest on credible material 2026 0 Supreme(Mad) 754.

How the Reply Notice Shapes the Burden of Proof

The pivotal principle, repeatedly affirmed by courts, is that proceedings under Section 138 are not civil suits. The complainant need not demonstrate financial capacity in the first instance unless the accused lays a foundation for that challenge. As one judgment explains:

The trial court and the first appellate court have noted that in the case under Section 138 of the NI Act, the complainant need not show in the first instance that he had the capacity... At the time, when the complainant gives his evidence unless a case is set up in the reply notice to the statutory notice sent, that the complainant did not have the wherewithal, it cannot be expected of the complainant to initially lead evidence to show that he had the financial capacity. 2025 0 Supreme(HP) 1860

The logic flows both ways. Once the accused asserts in the reply notice that the complainant lacked the wherewithal, it becomes obligatory on the complainant to demonstrate financial soundness — to show he had the means to lend the amount or to encumber the accused with the liability claimed 2025 0 Supreme(HP) 1860. Without such a foundation, the complainant's initial evidence need not address capacity at all, and the same principle applies when the complainant steps into the witness box 2026 0 Supreme(Guj) 603 and 2026 0 Supreme(Mad) 754.

Consequences of Silence at the Notice Stage

Failing to reply to the statutory demand notice carries its own weight. Courts have held that such silence permits an inference that there is merit in the complainant's version 2025 7 Supreme 171. Where the accused receives the legal notice and remains silent on financial capacity, only to raise the point later, courts have specifically noted that no such defense was taken by the accused at the first instance when he has received the legal notice 2024 Supreme(Online)(Kar) 46089. Judicial thinking goes further: a challenge to the complainant's financial capacity that surfaces for the first time at a later stage of proceedings cannot be permitted to be raised for the first time in that fashion 2024 0 Supreme(Guj) 1049.

When Late Challenges Can Still Succeed

The rule is not an absolute embargo. The accused retains avenues to contest capacity even without an early reply notice:

1. Cross-examination — probing the complainant on the source of funds during testimony.
2. Materials on record — pointing to contradictions or admissions in the complainant's own evidence.
3. Independent defence evidence — producing documents suggesting the complainant could not have advanced the sum.

In one matter, the accused successfully raised a probable defence by highlighting contradictions in the complainant's testimony; the appellate court found the complainant had failed to prove financial capacity, shifted the burden back, and the acquittal was upheld 2025 0 Supreme(Guj) 1803. Similarly, where the accused demonstrated that the complainant lacked capacity at the time of the transaction to lend ₹2.20 lakhs, the presumption under Section 139 was held rebutted and the accused was acquitted 2019 0 Supreme(MP) 210.

Conversely, where an accused offers nothing beyond bare denial, courts have overturned acquittals — holding that mere absence of direct proof of financial capacity does not negate liability unless the accused supplies sufficient evidence to the contrary 2026 0 Supreme(Mad) 754.

The Balancing Exercise Courts Perform

Judges are not mechanical enforcers of the presumption. Courts have emphasised that the presumption of innocence and the reverse burden under Section 139 must be delicately balanced — a court cannot abdicate its judicial function and enter a finding solely resting on the presumption, but must analytically appreciate the materials tendered by both sides 2009 0 Supreme(Ker) 554. If the accused's version is found probable, the burden shifts back to the complainant to satisfactorily prove the transaction underlying the cheque.

Practical Takeaways for Accused Persons

• Respond to the statutory notice, and if financial capacity is genuinely in doubt, say so explicitly in the reply.
• Preserve the challenge early to compel the complainant to come prepared with evidence of means.
• Build a record — collect material undermining the complainant's ability to lend, rather than relying on bare denial.
• Understand the risk: silence at the notice stage invites adverse inference and makes the trial-stage defence considerably harder to sustain.

Key Takeaways

While the Negotiable Instruments Act does not statutorily forbid raising the financial capacity defence after the notice stage, failing to raise it in the reply to the legal notice is a costly omission. It relieves the complainant of any initial obligation to prove capacity, invites adverse inference, and relegates the defence to the status of an afterthought. An accused who raises the point promptly — and backs it with probable material at trial — stands a materially better chance of rebutting the Section 139 presumption. Individual outcomes depend on the facts of each case, and this discussion is general information rather than legal advice for any specific matter.