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Critical Analysis of Section-138 of Negotiable Instruments Act

According to section 6 of the NEGOTIABLE INSTRUMENT ACT,1881(herein after called as NI ACT), 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. DISHONOR OF CHEQUE means it is a condition in which bank refuses to pay the amount of cheque to the payee due to insufficiency of funds etc.

Whenever the cheque is dishonored, the drawee bank instantly issues a Cheque Return Memo to the payee banker specifying the reasons for dishonor. The marginal note of Section 138 of the NI ACT explicitly defines the offence as being the dishonor of cheques for insufficiency, etc., of funds in the account.

According to this section clearly point to the contrary, the offence is concerned with the dishonor of a cheque; and in the confusion before us, the body of this provision speaks in the same character since it refers to a cheque being returned by the bank unpaid. None of the provisions of the Indian Penal Code have given significance to dishonor of cheque, so Section 138 of the NI Act operate on their own. It is trite that mens rea is the essential thing of every crime.

The objective of Parliament was to strengthen the use of cheques, distinct from other negotiable instruments, as mercantile tender and therefore it became essential for the Section 138 NI Act offence to be freed from the requirement of proving mens rea.

This has been achieved by deeming the commission of an offence de hors mens rea not only Under Section 138 but also by virtue of the succeeding two Sections. Section 139 carves out the presumption that the holder of a cheque has received it for the discharge of any liability. Section 140 clarifies that it will not be available as a defense to the drawer that he had no reason to believe, when he issued the cheque, that it would be dishonored. Section 138 unequivocally states that the offence is committed no sooner the drawee bank returns the cheque unpaid.

Objective of Section-138 of Negotiable Instrument Act,1881:

The objective of sec 138 of NI Act is To promote the efficiency of banking operations and to ensure credibility in transacting business through cheques is mentioned in the case law Modi Cements Ltd. v. Kuchil Kumar Nandi[1]. And this Act was enacted and Section 138 of NI Act thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned. The law relating to negotiable instrument is the law of commercial world legislated to simplify the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another.

The negotiable instruments are in fact the instruments of credit being convertible on account of legality of being negotiated and are easily transferable from one person to another. To attain the objectives of the Act, the legislature has, in its wisdom thought it proper to make such provisions in the Act for conferring such privileges to the mercantile instruments considered under it and provide special penalties and procedure in case the obligations under the instruments are not discharged.

It is mentioned in the case law M/s. Dalmia Cement (Bharat) Ltd. V. M/s. Galaxy Traders and Agencies Ltd. and Others[2]. Section 138 of the NI Act is not to protect unscrupulous drawers who never intended to honour the cheques issued by them, it being a part of their modus operandi to punish the unscrupulous person. It was mentioned in the case law Vinod Shivappa v. Nanda Belliappa[3].

Scope of Section 138 of Negotiable Instrument Act,1881:

Section 138 creates statutory offence in the matter of dishonor of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker and exceeds the amount arranged to be paid from that account by an agreement made with that bank as mentioned in the act.

But there are many reasons for dishonor of cheque i.e., signature doesn’t match, Payment stopped by the drawer, Account closed by the drawer etc., whenever any cheque for discharge of any legally enforceable debt or other liability is dishonored by the bank for want of funds and the payment is not made by the drawer in spite of a legal notice of demand, it shall be considered to be a criminal offence. Act considers the dishonor of cheque as a criminal offence but it is in a summary mode of enforcing a civil right.

Generally, in a criminal law mens rea is an essential component of a crime but dishonor of cheque is a criminal offence but here no need of proving a mens rea and it is not an essential thing. Construction of the strict liability in this section is an effective measure to prevent usual careless or change of attitude of the drawers in discharge of debts.

Essential Ingredients To Constitute An offence Under Sec 138 of Negotiable Instrument Act,1881:

  1. A person (will be drawer of the cheque) should have a legally enforceable debt or other liability towards another person (will be payee or holder of the cheque, as the case may be) and a cheque is drawn to discharge the debt or liability.
     
  2. Cheque is returned due to insufficient funds or exceeds the amount agreed upon to be paid by the bank.
     
  3. Cheque is to be presented within six months from date of its drawn or till its validity, whichever being earlier.
    Ø Note:
    As per RBI guidelines, with effect from April 1, 2012, the validity period of Cheques, Demand Drafts, Pay Orders and Banker's Cheques will be reduced from six (6) months to three (3) months, from the date of mentioned in the instrument.
     
  4. A written notice within 30 days is sent to the drawer along with the receipt of information from bank about failure of payment of cheque.
     
  5. The payee or holder doesn’t receive the payment within 15 days of the receipt of send written notice to the drawer.
These ingredients mentioned in the case law Kusum Ignots and Alloys ltd. V. Pennar Peterson Securities Ltd[4].

Liabilities on Dishonor of Cheques:

  1. Civil Liability: As per section 138 of the NI Act provides the civil liability by imposing a fine twice the amount of dishonored cheque. But if the payee files a suit under Order 37 of Code of Civil Procedure, 1908, then the judgement is in favor of the payee, then the drawer should pay the amount mentioned in the court order.

  2. Criminal liability: Sec 138 provides the punishment of imprisonment of two years or fine or both and the drawer of the cheque will be prosecuted under sections of 417 and 420 of Indian Penal Code (IPC),1860.

Penalty:
There are two remedies as penalty for dishonor of a cheque:
In civil- Payee/Drawee may initiate recovery procedure under Order 37 of the Code of Civil Procedure,1908 in a jurisdictional court apart from criminal proceedings. The payee/drawer recovers the amount by the court order.

In criminal- Dishonor of Cheque attracts section 138 of Negotiable Instruments Act,1881 which provides imprisonment which may extend up to two (2) years or fine which may extend up to twice of the cheque amount or both. This offence is bailable, compoundable and non-cognizable offence (a case in which a police officer cannot arrest the accused without an arrest warrant).

Jurisdictional Development Under Section 138 of Negotiable Instruments Act:

The Act is silent on the matter relating to the appropriate jurisdiction with respect to filing of criminal complaint under Section 138. Since the Criminal courts are approached, the issue needs to be examined from the point of view of the Criminal Procedure Code, 1973, Section 177 and 178(d) of Code of Criminal Procedure (herein after called as Cr.P.C).

In Gautham T. V. Centre vs Apex Agencies[5] held in the year 1993, the High Court of Andhra Pradesh held that the Court within whose jurisdiction the cheque is given, or where the information of dishonor is received or where the office of the payee is situating, will have jurisdiction to try the offence.

After that, K.Bhaskaran v. Sankaran Vaidhyan Balan and Another[6] held in the year 1999, the apex court was held that in the paragraph no. 12, 13, 14, 15, 16 of the judgement explains where to file a criminal complaint in case the offence of Dishonor of the Cheque is committed under Section 138. The rule that every offence shall be tried by a Court within whose jurisdiction it was committed is not an unexceptional or unchangeable principle. Section 177 itself has been framed by the legislature thoughtfully by using the precautionary word ordinarily to indicate that the rule is not invariable in all cases.

Section 178 of the Code suggests that if there is uncertainty as to where, among different localities, the offence would have been committed the trial can be had in a Court having jurisdiction over any of those localities. The provision has further widened the scope by stating that in case where the offence was committed partly in one local area and partly in another local area the Court in either of the localities can exercise jurisdiction to try the case. Further again, Section 179 of the Code stretches its scope to a still wider horizon.

It reads thus Offence triable where act is done or consequence ensues.- When an act is an offence by reason of anything which has been done and of a consequence which has ensued, the offence may be inquired into or tried by a Court within whose local jurisdiction such thing has been done or such consequence has ensued.

The locality where the bank (which dishonored the cheque) is situated cannot be regarded as the sole criteria to determine the place of offence. Considering the constituents of section 138 of NI Act and section 178(d) of the Code, held:
  1. Drawing of the cheque,
  2. Presentation of the cheque to the bank,
  3. Returning the cheque unpaid by the drawee bank,
  4. Giving 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 notice.
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 5 different localities. But concatenation (series) of all the above five is a sine qua non (an essential condition) for the completion of the offence under Section 138 of the Code. In this context a reference to Section 178(d) of the Code is useful. Where the offence consists of several acts done in different local areas, it may be inquired into or tried by a Court having jurisdiction over any of such local areas.

Thus, it is clear, if the five different acts were done in five different localities any one of the courts exercising jurisdiction in one of the five local areas can become the place of trial for the offence under Section 138 of the Act. In other words, the complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done. In this case, court considers the sec 177, sec 178(d), sec 179 of Cr.P.C and it has a wide range of jurisdiction.

After the Baskaran’s case, slight changes in Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.[7] Held in the year 2009, decreases the scope of the jurisdiction. The Hon'ble Supreme Court held that:
A cause of action will not be triggered by issue of statutory notice but only receipt/acceptance of notice does. Solely, the specific provisions of Section 138 will make or build an offence and the proviso is merely a condition required for taking cognizance. A sole issue of notice or presentation of cheque can't give or provide the court with territorial jurisdiction to try offences under section 138 or it will unreasonably harass the drawer.

In Harman electronics case the scope of the jurisdiction is narrow as compare with Baskaran’s case.

After this in 2014, various changes in the territorial jurisdiction by the Dashrath Roopsingh Rathod Vs. State of Maharashtra & Another[8]. The SC held that there is a discernibly defined difference between the commission of an offence and cognizance of offence. Cognizance leads to cause of action. For section 138 complaints, the cause of action arises only when the drawer fails to pay the defaulted payment. The complaints can be filed only in the courts within whose jurisdiction the cheque is presented for encashment.

But the courts can take cognizance of the offence only when:
  1. The cheque is presented to the bank within 3 months from the date on which it is drawn;
  2. Notice has been issued to the drawer demanding the defaulted payment within 30 days from the date of dishonour by the bank;
  3. The drawer fails to pay the defaulted payment within 15 days from the receipt of the notice.
Judgement would apply retrospective effect. The Supreme Court had directed that only in those cases where post the summoning and appearance of the alleged accused, the recording of evidence has commenced as envisaged in section 145(2) of the Negotiable Instruments Act, 1881, proceeding will continue at that place. All other complaints (including those where the accused / respondent has not been properly served) shall be returned to the complainant for filing in the proper court, in consonance with exposition of the law, as determined by the Supreme Court.

After the amendment in 2015, The Gujarat High Court in its judgment in Brijendra Enterprise v. State of Gujarat and Another[9] has explained the law relating to territorial jurisdiction for filing a complaint for dishonor of cheques.

As per the Negotiable Instruments (Amendment) Act, 2015 a complaint can be filed under Section 138 for dishonor of cheque at a court within whose local jurisdiction:
  • The branch of the bank is located.
  • The payee or the holder maintains an account.

Limitation:
According to sec 138 and 142 of NI act, the drawee has to send a legal notice within 30 days from the date of return (dishonor) of cheque and asking the amount mentioned in the cheque to pay within the 15 days. On expiry of fifteen days from the service of notice, you have to file a complaint before the First Class Judicial Magistrate within 1 month of the said expiry. Once a cause of action has arisen, the limitation will begin to run and it could not be stopped by presenting the cheque again so as to have a fresh cause of action and fresh limitation.

Compoundable offence:

It is a compoundable as per section 147 of the NI ACT and the procedure followed as per the conditions mentioned case law Damodar S Prabhu Vs Sayed Babalal H[10] The court observed that Section 147 does not carry any guidance as to how to proceed with compounding of offences. Further provisions of Section 320 of Cr.P.C also cannot be applied.

The Hon’ble Apex Court by exercising its power under Article 142 of the constitution laid down guidelines for encouraging compounding at the earliest stage. As per these guidelines, payment of costs as per laid down scale has been made a pre-condition for allowing compounding of the offence.

The scale laid down is as follows:
  1. If application is made before the Magistrate at the first or second hearing of the case, compounding may be allowed without fine. But if application is made at a later stage, compounding may be permitted by imposing costs up to 10% of the cheque amount.
     
  2. 15% of cheque amount if compounding is preferred in appeal either before sessions court or high court.
     
  3. 20% of the cheque amount if compounding is sought before the Supreme court for wasting the precious time of the courts.
It has been clarified by the Hon’ble Supreme court in this case that the above scale is indicative and discretion is vested in the court dealing with the matter. In other words, the court dealing with the matter has to take into account facts of each case before it, for imposing costs which will be deposited with appropriate Legal services authority.

Then the compounding requires the consent of both parties, even in absence of such consent, the court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused is mentioned in the case M/s Meters and Instruments Private Limited & Another. v. Kanchan Mehta[11].

After conviction also, parties can make a compromise and that one is a valid and the accused is ready to pay the amount as per the settlement then the compounding of offence is allowed and accused will be acquitted. It was mentioned in the case law Vinay Devanna Nayak v. Ryot Seva Sahakari Bank Ltd[12].

The object of section 320 of the Cr.P.C would not strictly apply because NI Act being a special statute, provisions of section 147 of NI Act will have an overriding effect over provisions of Cr.P.C relating to compounding of offences. Before the judgement court allows the person to compound a case under section 147 of NI act, then the court pronounced the judgement as a conviction along with fine, then also accused can settle the dispute as per section 147, if the parties ready to settle the dispute as per section 147 then the section 138 should be set aside.

And the accused will get the acquittal. It was mentioned in the case law K.M.Ibrahim v. K.P.Mohammed and Another[13].

Conclusion:
Section 138 will protect the payee from any illegal part of the drawer. The expression account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account appearing in Section 138 of the Act is a genus and dishonor for reasons such as account closed, payment stopped, referred to the drawer are only species of that genus.

Just as dishonor of a cheque on the ground that the account has been closed is a dishonor falling in the first contingency referred to in Section 138, so also dishonor on the ground that the signatures do not match would constitute a dishonor within the meaning of Section 138. It not only aims to protect the interest of the payee but also to bring a sanctity to the drawers who issues the cheques.

Jurisdiction is changing from Baskaran’s case to Harman Electronics case then Dasarth Roopsingh Rathod case by narrowing and changing the scope of the jurisdiction, after that now a days we are filing a cheque bounce case as per the 2015 amendment. It is a non-cognizable, compoundable and bailable offence.


End-Notes:
  1. (1998) 3 SCC 249
  2. AIR 2001 SC 676
  3. AIR 2006 SC 2179
  4. (2000) 2 SCC 745.
  5. (1993) 1 Crimes 723 (Andhra Pradesh)
  6. (1999) 7 SCC 510
  7. (2009) 1 SCC 720
  8. (2014) 9 SCC 129
  9. Criminal Misc. Application No. 13062 of 2011.
  10. 2010(5) SCC 663
  11. 2018 (1) SCC 560
  12. AIR 2008 SC 716
  13. AIR 2010SC 276

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