Section 138 Negotiable Instrument Act

A READY REFERENCE
Section 138 of the Negotiable Instruments Act, 1881 (henceforth referred as the Act)
provides for conception of criminal proceedings against a person, whose cheque has been
dishonoured, deeming it to be an act alike cheating. There is a plethora of judgements on the
subject delivered by Supreme Court and various High Courts and is a growing apace and is a
source of considerable perplexity, and we often find ourselves in a quandary.

An attempt has been made here to consolidate the latest judgements on the subject for ready
reference.

I. INGREDIENTS AND REQUIREMENTS OF THE PENAL PROVISIONS:

In 'Harman Electronics (P) Ltd., V. National Panasonic India Ltd., (2008) 16 SCALE 317, the
Court opined that the offence under Section 138 of the Act can be completed only with the
concatenation of a number of acts, namely:

1. Drawing of the cheque;

2. Presentation of the cheque to the bank;
3. Returning of the cheque unpaid by the drawee bank;
4. Giving of notice in writing to the drawer of the cheque demanding payment of the cheque
amount;
5. Failure of the drawer to make payment within 15 days of the receipt of the cheque.

It is not necessary that all the above five acts should have been perpetrated at the same
locality. It is possible that each of those five acts could be done at five different localities. But
a concatenation of all the above five is a sin qua non for the completion of the offence under
Section 138 of the Code…….” (emphasis supplied)i

In section 142 of the Act it has however, provided that such complaint is made within ONE
MONTH (In 'Shivakumar V. Natarajan' - (2009) 27 CLA -BL Supp 62 (SC)) of the date on
which the cause of action i.e., failure by the drawer of cheque in question to make payment of
the said amount to the payee or as the case may be to the holder in due course of a cheque
within 15 days of the receipt of the said notice

Where the Complaint lacks necessary ingredients of the offence under Section 138: Hon‟ble
Supreme Court in JugeshSehgal Vs. Shamsher Singh Gogi 2009(3) CC Cases (SC) 2004. The
Hon‟ble Supreme Court noted that the cheque alleged to have been issued by the petitioners
to the complainant was issued from an account pertaining to some other person. The Hon‟ble
Court also noted that one of the essential ingredients of the offence punishable under Section
138 of Negotiable Instruments Act is that the cheque must have been drawn on an account
maintained by the accused.Since the cheque in the case before the Hon‟ble SupremeCourt
was not issued from the account maintained by the petitioner, it was held that one essential
ingredient of offence under Section 138 of Negotiable Instruments Act was not.

Consideration: Mallavarapu Kasivisweswara Rao v. Thadikonda Ramulu Firm & Ors., 2008
(8) SCALE 680, wherein it was observed:

"Under Section 118(a) of the Negotiable Instruments Act, the court is obliged to presume,
until the contrary is proved, that the promissory note was made for consideration. It is also a
settled position that the initial burden in this regard lies on the defendant to prove the non-
existence of consideration by bringing on record such facts and circumstances which would
lead the Court to believe the non-existence of the consideration either by direct evidence or
by preponderance of probabilities showing that the existence of consideration was
improbable, doubtful or illegal. ..."

This decision then proceeded to cite an extract from the earlier decision in Bharat Barrel &
Drum Manufacturing Company v. Amin Chand Pyarelal, (1993) 3 SCC 35 (Para. 12):

"Upon consideration of various judgments as noted hereinabove, the position of law which
emerges is that once execution of the promissory note is admitted, the presumption under
Section 118(a) would arise that it is supported by a consideration. Such a presumption is
rebuttable. The defendant can prove the non-existence of a consideration by raising a
probable defence. If the defendant is proved to have discharged the initial onus of proof
showing that the existence of consideration was 18 improbably or doubtful or the same was
illegal, the onus would shift to the plaintiff who will be obliged to prove it as a matter of fact
and upon its failure to prove would disentitle him to the grant of relief on the basis of the
negotiable instrument. The burden upon the defendant of proving the non-existence of the
consideration can be either direct or by bringing on record the preponderance of probabilities
by reference to the circumstances upon which he relies. In such an event, the plaintiff is
entitled under law to rely upon all the evidence led in the case including that of the plaintiff
as well. In case, where the defendant fails to discharge the initial onus of proof by showing
the non-existence of the consideration, the plaintiff would invariably be held entitled to the
benefit of presumption arising under Section 118(a) in his favour.

The court may not insist upon the defendant to disprove the existence of consideration by
leading direct evidence as the existence of negative evidence is neither possible nor
contemplated and even if led, is to be seen with a doubt. The bare denial of the passing of the
consideration apparently does not appear to be any defence. Something which is probable has
to be brought on record for getting the benefit of shifting the onus of proving to the plaintiff.

To disprove the presumption, the defendant has to bring on record such facts and
circumstances upon consideration of which the court may either believe that the consideration
did not exist or its non-existence was so probable that a prudent man would, under the
circumstances of the case, act upon the plea that it did not exist."
Applicability of Section 138 Negotiable Instruments Act to;

A. CAUSE OF ACTION: Presentation of Cheques any number of times:

A cheque may be presented any number of times during the period of validity. The
cause of action, however, arises only once. The cause of action arises, after the issue of
statutory notice and non-compliance with demand. (The Hon'ble Supreme Court in
Sadanandan Bhadran vs. Madhavan Sunil Kumar, JT 1998 (6) SC 48), It was also held that
while the payee was free to present the cheque repeatedly within its validity period, once
notice had been issued and payments not received within 15 days of the receipt of the notice,
the payee has to avail the very cause of action arising thereupon and file the complaint.
Dishonour of the cheque on each re-presentation does not give rise to a fresh cause of action.
This view was reiterated in Prem Chand Vijay Kumar vs. Yashpal Singh & Anr. [(2005) 4
SCC 417]. Also refer Central Bank of India and Anr. Vs. M/s. Saxons Farms & Ors, 1999
Crl.L.J. 4571.

B. NOTICE

Notice - returned unclaimed - again send to another address after 15 days – valid –
complainant sent notice on 29-05-1999 – returned on 09-06-1999 as unclaimed - complainant
on coming to know that accused was available elsewhere sent copy of same notice on 24-06-
1999 – period of limitations start after 15 days from second Notice. 2002 (4) CTC 335.

Communication: Issuance of Notice would not by itself give rise to a cause of action but
communication would (Para 14 of Harman Electronics Private Limited & Anr. Vs. National
Panasonic India (P) Ltd., reported in (2009) 1 SCC (Cri) 610)-While issuance of a notice by
the holder of a negotiable instrument is necessary, service therefof is alo imperative. Only on
service of such notice and failure on the part of the acused to pay the demanded amount with
in the period of 15days thereafter, commission of an offence completes.

Notice to the Company’s MD: The Supreme Court in Rajneesh Agarwal v Amit J Bhalla
(2001 AIR SCW 124) has held that notice for payment under section 138 of the Negotiable
Instruments Act (the Act) to the director who has signed the cheque is notice to the drawer
company and that the notice cannot be construed in a narrow technical way.

Service of Notice: Supreme Court in the State of Madhya Pradesh vs. Hiralal & Ors., JT
1996 (1) S.C. 669, where, postal remarks to the effect "not available in the house," "House
Locked" and "shop closed", were held to be service of notice upon the respondent. In Subodh
S.Salaskar vs. Jayaprakash M. Shah, AIR 2008 SC 3086, the Hon'ble Supreme Court held
that presumption of service under Section 114 of Evidence Act would also arise if the notice
is received back with an endorsement that the party had refused to accept it. In the present
case, this is petitioner's own case in paragraph 5 of the complaint that it had served registered
notice upon the respondent vide postal receipt No.8288. Thus, the petitioner/complainant
itself claims service upon the respondent on account of the endorsement of the postal
department on the registered cover.
What are the requirements of service of a notice is no longer res-integra in view of the recent
decision of this Court in C.C. Alavi Haji Vs. Palapetty Muhammed & Anr. [JT 2007(7) SC
498].

Notice - Cheque issued for part payment of outstanding bills - Cheque dishonoured - By
issuing notice demand made of payment of pending bills and not cheque amount - Held,
notice is not valid. (M/s.Rahul Builders Vs M/s.Arihant Fertilizers & Chemical & Anr.)
2007(3) Apex Court Judgments 554 (S.C.) : 2007(4) Criminal Court Cases 990 (S.C.)

C. REPRESENTATIVE/AUTHORISED REPRESENTATIVE
In AIR 2002 SC 182, the Honble Supreme Court made the following observations, “Section
142 of the Negotiable Instruments Act provides that a complaint under Section 138 can be
made by the payee or the holder in due course of the said cheque. The two complaints, in
question, are by the appellant company who is the payee of the two cheques. This Court has
as far back as, in the case of Vishwa Mitter v. O.P.Poddar reported in (1983) 4 SCC 701, held
that it is clear that anyone can set the criminal law in motion by filing a complaint of facts
constituting an offence before a Magistrate entitled to take cognizance.

POWER OF ATTORNEY:

Supreme Court judgment passed in case of Janki Vashdeo Bhojwani and Anr. v. Indusind
Bank Ltd. and Ors. I (2005) BC 399 (SC) : 2004 AIR SCW 7064, has submitted that a
general or special power of attorney holder can appear, plead and act on behalf of the party
but he cannot become a witness on behalf of the party.

In the case of „Shankar Finance Investments V. State of Andhra Pradesh and others‟ (2008)
24 CLA-BL Supp 62 (SC) the appeal was filed against the order passed by the Andhra
Pradesh High Court in a criminal petition holding that the complaint signed by a power of
attorney holder was not maintainable. The payee of the cheque is „Shankar Finance &
Investments, a proprietary concern of Shri Atmakumari Sankara Rao, represented by its
power of attorney holder of Shri Thamada Satyanarayana. The Supreme Court observed the
requirements of Sec. 142 of the Act are that the complaint should be in writing and the
complaint should be made by the payee or holder in due course. The payee in this case is
Shanker & Finance Investments. Once the complaint is in the name of the „payee‟ and is in
writing, the requirements of Sec. 142 are fulfilled.

In Jimmy Jahangir Madan v. Bolly Cariyappa Hindley – 2004(12) SCC 509 the Supreme
Court ruled that the application under Sec. 302 Cr.P.C to continue the prosecution could not
be filed by the power-of-attorney older of the heirs of the deceased complainant in a
prosecution under Sec. 138 of the N.I. Act. It was held that the permission in that regard
should be sought by the heirs of the deceased complainant.
DEATH OF THE COMPLAINANT: S. Reddappa v. M. Vijaya (High Court of Karnataka-
1996). It is held in Reddappa's case, supra, that in a proceeding under Section 138 of the Act,
the death of the complainant does not ipso facto terminate the criminal proceedings.
Not necessary that legal heirs or legal representatives only can continue the proceedings - A
fit and proper person can be permitted to prosecute the petition.

In Ashwin Nanubhai Vyas v. State of Maharashtra and Anr. in which case the Court was
dealing with a case under Section 495 of the Code of Criminal Procedure, 1898, which is
corresponding to Section 302 of the Code. In that case, it was laid down that upon the death
of the complainant, under the provisions of Section 495 of the said Code, mother of the
complainant could be allowed to continue the prosecution. It was further laid down that she
could make the application either herself or through a pleader.

DEATH OF THE ACCUSED: The legal heirs cannot be prosecuted under section 138 of
N.I.Act. If at all any claim is against them by the complainant, he has proceed only under the
civil law for recovery of the amount against the properties in the hands of the legal heirs.

COMPANY/ PARTNERSHIP FIRM:

Authorization afresh valid – authorization -need for substitution to represent company –

filing of complaint - authorised resigning from company – company can be represented by
person authorized afresh. 1997 (2) CTC 675.

Offences by company - Expression, 'in-charge of, and was responsible to the company for
the business of the company' -K. K. Ahuja vs V. K. Vora and Another [SUPREME COURT
OF INDIA, 06 Jul 2009] Whether DGM comes within the expression? - Held, No-Apart from
the company two kinds of persons are deemed to be guilty of the offence and shall be liable
to be proceeded against and punished, they are, one, who was in charge of and was
responsible to the company for the conduct of the business of the company, two, any director,
manager, secretary or other officer of the company with whose consent and connivance, the
offence u/s. 138 has been committed, or whose negligence resulted in such offence being
committed by the company - First category person is vicariously liable by reason only of his
fulfilling the requirements of sub/s. (1) of s. 141 - Court observed that if the person
responsible to the company for the conduct of business of the company, was not in charge of
the conduct of the business of the company, then he can be made liable only if the offence
was committed with his consent or connivance or as a result of his negligence - Second
category persons as mentioned in sub/s. (2) of s. 141, are liable not on account of any legal
fiction but on account of the specific part played i.e. consent and connivance or negligence -
Court pointed that if a person is to be made liable u/sub-s. (2) of s. 141, then it is necessary to
aver consent and connivance, or negligence on his part - (ii) Who are the persons who are
responsible to the company for the conduct of the business of the company, and who could be
said to be in charge and was responsible to the company for the conduct of the business of the
company?- Settled position, a MD is prima facie in charge of and responsible for the
company's business and affairs and can be prosecuted for offences by the company; but
insofar as other directors are concerned, they can be prosecuted only if they were in charge of
and responsible for the conduct of the company's business.

Proprietorship concern - An employee of a proprietorship concern cannot be proceeded

against u/s 138 of the Act. (Raghu Lakshminarayanan Vs M/s Fine Tubes) 2007(2) Apex
Court Judgments 001 (S.C.) : 2007(2) Civil Court Cases 641 (S.C.) : 2007(2) Criminal Court
Cases 709 (S.C.)

DISMISSAL OF COMPLAINT for default and restoration : The order of dismissal of a

complaint by a criminal court due to the absence of the complainant is a proper order (AIR
1986 SC 1440). A second complaint is permissible in law if it could be brought within the
limitation imposed by the Supreme Court in the case reported in AIR 1962 SC 876.

Dismissal of complaint and appeal thereof : Dismissing complaint due to non-appearance

of complainant resulting in acquittal of accused. Revison is not maintainable and only appeal
lies to High Court u/s.378 (4) of Cr. P.C. ( II 2003 CCR 387 HP).

In the Associated Cement Co. Ltd vs Keshvanand (1998) 1 SCC 687. Justice K.T. Thomas
(as he then was) speaking for the court has observed that the purpose of conferring power on
the Magistrate under Section 256 of the Cr.P.C. is to deter dilatory tactics on the part of the
complainant once he sets in motion criminal proceeding by instituting a complaint. The
purpose being that accused is perforce required to attend court proceedings on dates fixed by
the court and is thus, put to harassment if the complainant does not turn up in the court on
dates when his presence is necessary. This provision affords protection to the accused against
such tactics being adopted by the complainant. This, however, does not mean that if the
complainant is absent the court is duty bound to acquit the accused. If the situation mandates
the Magistrate has the power to adjourn the hearing. On the other hand, if the Magistrate
considers that the personal appearance of the complainant is not necessary it has the power to
dispense with his attendance and proceed with the case. It is for the court to consider whether
the presence of the complainant is necessary for the progress of the case on the day when the
complainant is absent or the situation is such that the case be adjourned to another date. If the
situation mandates that there is no reason to adjourn the case, the Magistrate is free to dismiss
the complaint and acquit the accused. The ratio of Associated Cement (supra) has been
followed in a later judgment of the Supreme Court in the case entitled S. Anand Vs.
Vasumathi Chandrasekar (2008) 4 SCC 67.

CIVIL & CRIMINAL LIABILITY:

JURISDICTION: Territorial jurisdiction: Musaraf Hossain Khan Vs. Bhagheeratha Engg.

Ltd. & Ors. (SC) Smt. Shamshad Begum Vs. B. Mohammed, reported in AIR 2009 SC
1355,( Court followed the earlier view of the Hon'ble Supreme Court in the case of K.
Bhaskaran Vs. Sankaran Vaidhyan Balan & Anr.). In the case of K. Bhaskaran Vs. Sankaran
Vaidhyan Balan & Anr. (supra), a Division Bench of the Apex Court in paragraph 14 held the
following of the Acts which are the components of the offence punishable under Section 138
of the Negotiable Instruments Act;
(a) Drawing of the cheque.
(b) Presentation of the cheque to the bank.
(c) Returning the cheque unpaid by the drawee bank.
(d) Giving notice in writing to the drawer of the cheque demanding payment of the cheque
amount.
(e) Failure of the drawer to make payment within 15 days of the receipt of the notice.

In Harman Electronics Private Limited & Anr. Vs. National Panasonic India (P) Ltd.,
reported in (2009) 1 SCC (Cri) 610 (State of Punjab vs. Amar singh Harika AIR (1996) SC
1313 followed) sending of notice from a particular place would not give rise to cause of
action but communication of notice would. Therefore, no Court has the territorial jurisdiction
to hold a trial of an offence punishable under Section 138 of the Negotiable Instruments Act
merely because the notice was sent from a place situated within its territorial limit.
Belated Complaint: Nataraj @ T. Natarajan Vs. P. Venkatachalam (2008) 1 CTC 503-
Practice and Procedure – Dishonour of Cheque case – Necessity to file condone delay
Application with affidavit in case of belated Complaint – Proper procedure to be followed –
If there is any delay in filing Complaint complainant should file condone delay Petition that
on such filing Magistrate should issue notice to accused – After giving opportunity of hearing
to accused, cause shown for delay to be considered – Magistrate should satisfy himself first
and pass appropriate order by accepting or rejecting condone delay Petition – Failure to
follow such procedure affects valuable right of accused.

APPEARANCE: Either admitted to bail on furnishing a personal bond and the surety of a
like amount. Or file an application for exemption from personal appearance

COMPOUNDING OF OFFENCE: Damodar S. Prabhu Versus Sayed Babalal H. SC 2010

(Crl Appeal No. 963 OF 2010: Compounding of the offense is possible u/s 147 of the NI Act.
In January 2010 the Supreme Court held that the offence of issuing cheque, which is
dishonoured for want of funds can be compromised between the parties. The Supreme Court
stated that under Section 147 of the Negotiable Instruments Act, the parties can compromise
as the offence is listed as „compoundable‟.

II. NEXT- CITATION IN RELATION TO THE NUMEROUS REASONS FOR

DISHONOUR OF CHEQUES.

ACCOUNT CLOSED: When the cheque is returned by a bank with an endorsement

'account closed', it would amount to returning the cheque unpaid because "the amount of
money standing to the credit of that account is insufficient to honour the cheque" as
envisaged in Section 138 of the Act. (NEPC Micon Ltd. & Ors. Vs Magma Leasing Ltd.)
1999(2) CIVIL COURT CASES 471 (S.C.)
Cheque issued when account had already been closed - Provision of Section 138 will apply.
(N.A.Issac Vs Jeemon P.Abraham & Anr.) 2005(1) CIVIL COURT CASES 690 (S.C.) :
2005(1) CRIMINAL COURT CASES 119 (S.C.)

STOP PAYMENT: Many a times the drawer, to escape his debt or liability has used it (stop
Payment) as an instrument of deception. "the object of the provision cannot be allowed to be
defeated by such ingenious action". Observed Kerala High Court in Calcutta Sanitary Wares
v. C. T. Jacob

M.M.T.C. Ltd. and Anr. v. Medchl Chemicals & Pharma (P) Ltd., (2002) 1 SCC 234 (Para.
19):

"... The authority shows that even when the cheque is dishonoured by reason of stop payment
instruction, by virtue of Section 139 the Court has to presume that the cheque was received
by the holder for the discharge in whole or in part, of any debt or liability. Of course this is a
rebuttable presumption. The accused can thus show that the `stop payment' instructions were
not issued because of insufficiency or paucity of funds. If the accused shows that in his
account there was sufficient funds to clear the amount of the cheque at the time of
presentation of the cheque for encashment at the drawer bank and that the stop payment
notice had been issued because of other valid causes including that there was no existing debt
or liability at the time of presentation of cheque for encashment, then offence under Section
138 would not be made out. The important thing is that the burden of so proving would be on
the accused. ..."

The Supreme Court observed.

``Even when the cheque is dishonoured by reason of `stop payment' instructions, by virtue of
Section 139 of the Act, the court has to presume that the cheque was received by `the holder'
for the discharge, in whole or in part, of any debt or liability,'' a Bench said.

``Of course, this is a rebuttable presumption and the accused (the drawer) can thus show that
the `stop payment' instructions were not issued because of insufficiency or paucity of funds,''
the Bench added.

``If the accused shows that there were sufficient funds in his account to clear the amount of
the cheque at the time of its presentation for encashment and that the stop payment notice had
been issued because of other valid causes, including that there was no existing debt or
liability, then offence under Section 138 would not be made out,'' the Bench said citing an
early apex court ruling in the `Modi cements case' (1998).

In M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s.
Indian Technologists & Engineers (Electronics) Pvt. Ltd. Hon‟ble Supreme Court that:
“It would thus be clear that when a cheque is drawn by a person on an account maintained
by him with the banker for payment of any amount of money to another person out of the
amount for the discharge of the debt in whole or in part or other liability is returned by the
bank with the endorsement like (1) in this case, "I refer to the drawer" (2) "instructions for
stoppage of payment" and (3) "stamp exceeds arrangement", it amounts to dishonour within
the meaning of Section 138 of the Act. On issuance of the notice by the payee or the holder in
due course after dishonour, to the drawer demanding payment within 15 days from the date
of the receipt of such a notice, if he does not pay the same, the statutory presumption of
dishonest intention, subject to any other liability, stands satisfied".

Hon‟ble Supreme Court in JugeshSehgal Vs. Shamsher Singh Gogi 2009(3) CC Cases (SC)
2004-The Hon‟ble Supreme Court noted that the cheque alleged to have been issued by the
petitioners to the complainant was issued from an account pertaining to some other person.
The Hon‟ble Court also noted that one of the essential ingredients of the offence punishable
under Section 138 of Negotiable Instruments Act is that the cheque must have been drawn on
an account maintained by the accused. Since the cheque in the case before the Hon‟ble
Supreme Court was not issued from the account maintained by the petitioner, it was held that
one essential ingredient of offence under Section 138 of Negotiable Instruments Act was not
satisfied

SECURITY CHEQUE:
Cheque was issued in terms of a compromise agreement : The Supreme Court has ruled
that criminal proceedings for issuing a cheque without sufficient balance in the account
would be valid only if it is drawn for discharging a debt or liability. If it is issued to satisfy
the terms of a compromise or settlement, Section 138 of the Negotiable Instruments Act
could not be used to proceed against the drawer of the cheque.
Search .

Loan - No instrument executed though a huge loan was advanced - Even no interest thereon
charged - Earlier accused did not pay instalments in respect of the prized amount of chitties -
Loan advanced inspite of the fact that three civil suits for recovery of money against accused
were pending - Complainant not approaching Court with clean hands and his conduct not that
of a prudent man - Held, accused has discharged his burden to rebut the presumption
available u/s 139 of the Act - Order of acquittal, upheld. (John K.John Vs Tom Varghese &
Anr.) 2007(3) Apex Court Judgments 655 (S.C.) : 2007(4) Civil Court Cases 690 (S.C.) :
2007(4) Criminal Court Cases 974 (S.C.)

EXPERTS OPINION: Disputed cheque, to be sent for comparison Ms. Kalyani Baskar,
(2007) 1 MLJ (Crl) 1020 (SC),

What if the Cheque is forged

Negotiable Instruments Act, 1881 - Section 138 -Criminal Procedure Code, 1973 - Section
195 - Section 195(1)(b)(ii) - Dishonour of cheque - Cheque alleged to be forged before filing
complaint - Held, if offence is committed pertaining to document prior to its production in
Court and when it was not in custody of Court then bar u/s 195(1)(b)(ii) of Cr.P.C. does not
arise and complainant is at liberty to file complaint and take action as per law.

Negotiable Instruments Act, 1881 - Section 138 - Dishonour of cheque - Complaint under
section 138 of the Act - Cheque alleged to be forged before filing complaint - Accused
lodged complaint under sections 464, 468, 389, 420 r/w section 511 IPC - Bar under Section
195(1)(b)(ii) is not applicable - In the interest of justice both matters ordered to be heard and
disposed by same Court together and at the same time..........(Bombay HC Court Ramanand
Vs. Kailasnath & Anr.)

Last Updated in May, 2010.

i
Hon‟ble Supreme Court in „K. Bhaskaran v. Sankaran Vaidhyan Balan & Anr.‟ (1999) 7
SCC 510