SC: Dishonour of post-dated cheques is not an offence under NI Act


Court :
Supreme Court of India

Brief :
The bench comprising of Justice R.M. Lodha and Justice Shiva Kirti Singh held that the post-dated cheques issued by the appellants(purchasers) as an advance payment in respect of purchase orders cannot be considered in discharge of legally enforceable debt or other liability, and the dishonour of such cheques does not amount to an offence under Section 138 of the Negotiable Instruments Act, 1881

Citation :
M/s. Mojj Engineering Systems Limited and others v. M/s. A.B. Sugars Ltd. [154 (2008) Delhi Law Times 579] M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1997 Cri. L.J. 1942 (AP)] Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [2000 Cri. L.J.1988 (Guj.)] M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1999 (1) CTC 6] Supply House, Represented by Managing Partner v. Ullas, Proprietor Bright Agencies and another; [2006 Cri. L.J. 4330 (Kerala)]

                        REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL  APPEAL NO.   830      OF 2014 

(Arising out of SLP (Crl.) No.9752 of 2010)

M/s. Indus Airways Pvt. Ltd. & Ors.       … Appellants

Versus

M/s. Magnum Aviation Pvt. Ltd. & Anr.            … Respondents

JUDGMENT

 

R.M. LODHA, J. 

Leave granted.

2. The  only  question  that  arises  for  consideration  in  this 

appeal  by special  leave is, whether the post-dated cheques issued by 

the appellants (hereinafter referred to as ‘purchasers’) as an advance 

payment  in  respect  of  purchase  orders  could  be  considered  in 

discharge  of  legally  enforceable  debt  or  other  liability,  and,  if  so, 

whether the dishonour of  such cheques amounts to an offence under 

Section 138 of the Negotiable Instruments Act, 1881 (for short, ‘the N.I. 

Act’).  The Delhi High Court in the impugned order has held that to be 

so.

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3. The brief facts are these:  On 19.02.2007 and 26.02.2007, 

the purchasers placed two purchase orders for supply of certain aircraft 

parts with respondent No.1, M/s. Magnum Aviation Pvt. Ltd. (hereinafter 

referred  to  as  ‘supplier’).   In  respect  of  these  purchase  orders,  the 

purchasers also issued two post-dated cheques dated 15.03.2007 for a 

sum of  Rs.34,57,164/-  and 20.03.2007 for  a sum of  Rs.15,91,820/-. 

The said  cheques  were issued by way of  advance payment  for  the 

purchase orders.  One of the terms and conditions of the contract was 

that the entire payment would be given to the supplier in advance.  The 

supplier says that the advance payment  was made by the purchasers 

as it had to procure the parts from abroad.

4. These cheques got dishonoured when they were presented 

on the ground that the purchasers had stopped payment.

5. It  is  not  in dispute that  the supplier  received letter  dated 

22.03.2007 from the purchasers  cancelling the purchase orders  and 

requesting the supplier to return both the cheques.

6. The supplier sent response to the letter dated 22.03.2007 

on 23.03.2007 asking the purchasers as to  when the supplier  could 

collect the payment. Thereafter, on 12.04.2007, the supplier sent a 

notice  to  the  purchasers  and  then  filed  a  complaint  against  the 

purchasers  under  Section  138  of  the  N.I.  Act  before  the  Court  of 

Additional Chief Metropolitan Magistrate, New Delhi.

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7. On  22.05.2007,  the  concerned  Additional  Chief 

Metropolitan  Magistrate  took  cognizance  of  the alleged  offence  and 

issued summons to the purchasers.

8. The purchasers challenged the order issuing summons in a 

revision petition under Section 397 of the Code of Criminal Procedure, 

1973 (for short, ‘Code’).  The Additional Sessions Judge, after hearing 

the parties,  allowed the revision petition  vide order  dated 02.09.2008 

and quashed the process issued by the Additional  Chief  Metropolitan 

Magistrate.

9. The  supplier  challenged  the  order  of  the  Additional 

Sessions Judge in a petition under Section 482 of the Code before the 

High Court.  The High Court allowed the petition, set aside the order of 

the Additional Sessions Judge and restored the order of the Additional  

Chief Metropolitan Magistrate issuing process to the purchasers.

10. The Delhi  High Court  following its earlier decision in  Mojj  

Engineering

1

 held that the issuance of a cheque at the time of signing 

such contract has to be considered against a liability,  as the amount 

written in the cheque is payable by the person on the date mentioned in 

the cheque.

11. Section 138 of the N.I. Act is as follows:

1

 M/s. Mojj Engineering Systems Limited and others v. M/s. A.B. Sugars Ltd. [154 (2008) Delhi Law 

   Times 579]

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Page 3

“138.  Dishonour  of  cheque  for  insufficiency,

etc.,  of  funds  in  the  account.  -  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 be extended 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.”

12. The interpretation of  the expression ‘for  discharge of  any 

debt  or  other  liability’  occurring  in  Section  138  of  the  N.I.  Act  is 

significant and decisive of the matter. 

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13. The  explanation  appended  to  Section  138  explains  the 

meaning of  the expression ‘debt  or  other  liability’  for  the purpose of 

Section 138. This expression means a legally enforceable debt or other 

liability.   Section 138 treats dishonoured cheque as an offence,  if  the 

cheque has been issued in discharge of any debt or other liability. The 

explanation leaves no manner of doubt that to attract an offence under 

Section 138, there should be legally enforceable debt  or other liability 

subsisting on the date of drawal of the cheque. In other words, drawal of 

the cheque in discharge of existing or past adjudicated liability is  sine 

qua non for bringing an offence under Section 138. If a cheque is issued 

as an advance payment for purchase of the goods and for any reason 

purchase order is not carried to its logical conclusion either because of 

its cancellation or otherwise, and material or goods for which purchase 

order was placed is not  supplied,  in our considered view, the cheque 

cannot be held to have been drawn for an exiting debt or liability. The 

payment by cheque in the nature of advance payment indicates that at 

the time of drawal of cheque, there was no existing liability.

14. In  Swastik  Coaters

2

 ,  the  single  Judge  of  the  Andhra 

Pradesh High Court  while considering the explanation to Section 138 

held:

2

“……..Explanation  to  Section  138  of  the

Negotiable Instruments Act clearly makes it  clear

that  the  cheque  shall  be  relateable  to  an

enforceable liability or debt and as on the date of  

 M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1997 Cri. L.J. 1942 (AP)]

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the issuing of  the cheque there was no existing

liability in the sense that  the title in the property

had not passed on to the accused since the goods

were not delivered. ……..”    

15. The Gujarat High Court in Shanku Concretes

Section 138 of the N.I. Act held that to attract Section 138 of the N.I. 

Act,  there must  be subsisting liability  or  debt  on the date  when the 

cheque was delivered.  The very fact that the payment was agreed to 

some future  date  and there  was  no debt  or  liability  on the date  of 

delivery  of  the cheques  would  take  the  case  out  of  the  purview of 

Section 138 of  the N.I. Act.     While  holding so,  Gujarat  High Court 

followed a decision of the Madras High Court in Balaji Seafoods

16. In Balaji Seafoods

3

4

4

, the Madras High Court held:

“Section  138  of  the  Negotiable  Instruments  Act

makes it clear that where the 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 under Section 138 of

the  Act.  The  explanation  reads  that  for  the

purposes  of  this  section,  ‘debt  or  other  liability’

means a legally enforceable debt or liability.”

 Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [2000 Cri. L.J.1988 (Guj.)]

 M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1999 (1) CTC 6]

3

 dealing with 

4

.

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Page 6

17. The  Kerala  High  Court  in Ullas

5

 had  an  occasion  to 

consider Section 138 of the N.I. Act. In that case, the post-dated cheque 

was issued by the accused along with the order for supply of  goods. 

The supply of goods was not made by the complainant.  The accused 

first instructed the bank to stop payment against the cheque and then 

requested the complainant  not  to present  the cheque as he had not 

supplied the goods. The cheque was dishonoured. The single Judge of 

the Kerala High Court held, “………Ext.P1 cheque cannot be stated to 

be one issued in discharge of  the liability  to the tune of  the amount  

covered by it, which was really issued, as is revealed by Ext. D1, as the 

price amount for 28 numbers of mixies, which the complainant had not 

supplied. …..”

18. The reasoning of  the Delhi  High Court  in  the impugned 

order is as follows:

5

“8. If at the time of entering into a contract it is

one  of  the  conditions  of  the  contract  that  the

purchaser has to pay the amount in advance then

advance  payment  is a liability  of  the purchaser.

The seller of the items would not have entered into

contract unless the advance payment was made to

him. A condition of  advance payment  is normally

put by the seller for the reason that the purchaser

may  not  later  on retract  and refuse to take the

goods either manufactured for him or procured for

him.  Payment  of  cost  of  the  goods  in  advance

being  one  of  the  conditions  of  the  contract

becomes liability of the purchaser. The purchaser

who  had  issued  the  cheque  could  have  been

asked to make payment either by draft or in cash.

Since giving cheque is a mode of payment like any

other mode of payment, it is normally accepted as 

 Supply House, Represented by Managing Partner v. Ullas, Proprietor Bright Agencies and another;

   [2006 Cri. L.J. 4330 (Kerala)]

7

Page 7

a payment. The issuance of a cheque at the time

of  signing  such  contract  has  to  be  considered

against  a  liability  as  the  amount  written  in  the

cheque  is  payable  by  the  person  on  the  date

mentioned  in  the  cheque.  Where  the  seller  or

manufacturer,  on  the  basis  of  cheques  issued,

manufactures  the  goods  or  procures  the  goods

from outside, and has acted upon the contract, the

liability  of  the  purchaser  gets  fastened,  the

moment the seller or manufacturer acts upon the

contract and procures the goods. If for any reason,

the seller fails to manufacture the goods or procure

the goods it is only under those circumstances that

no liability is created.  However,  where the goods

or  raw  material  has  been  procured  for  the

purchaser  by  seller  or  goods  have  been

manufactured by the seller, it cannot be said that

the cheques were not issued against the liability. I

consider that if the liability is not construed in this

manner, the sole purpose of making dishonour of

the cheque as an offence stands defeated.  The

purpose of making or enacting Section 138 of the

N.I.  Act  was  to  enhance  the  acceptability  of

cheque in settlement  of  commercial  transactions,

to infuse trust into commercial transactions and to

make a cheque as a reliable negotiable instrument

and  to  see  that  the  cheques  of  business

transactions are not dishonoured. The purpose of

Negotiable Instrument  Act is to make an orderly

statement  of  rules  of  law relating  to  negotiable

instruments  and  to  ensure  that  mercantile

instruments should be equated with goods passing

from one hand to other. The sole purpose of  the

Act  would stand defeated if  after  placing orders

and giving advance payments, the stop payments

are issued and orders are cancelled on the ground

of pricing of the goods as was done in this case.” 

19. The  above  reasoning  of  the Delhi  High Court  is  clearly 

flawed inasmuch as it failed to keep in mind the fine distinction between 

civil liability and criminal liability under Section 138 of the N.I. Act.  If at 

the time of  entering into a contract,  it  is  one of  the conditions of  the 

contract that the purchaser has to pay the amount in advance and there 

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Page 8

is breach of such condition then purchaser may have to make good the 

loss that might have occasioned to the seller but that does not create a 

criminal  liability  under Section 138.  For a criminal  liability  to be made 

out under Section 138, there should be legally enforceable debt or other 

liability subsisting on the date of drawal of the cheque. We are unable to 

accept  the view of  the Delhi  High Court  that  the issuance of  cheque 

towards advance payment at the time of signing such contract has to be 

considered  as  subsisting  liability  and  dishonour  of  such  cheque 

amounts to an offence under  Section 138 of  the N.I. Act.  The Delhi 

High Court has traveled beyond the scope of Section 138 of the N.I. Act 

by holding that  the purpose of  enacting Section 138 of  the N.I.  Act 

would  stand  defeated  if  after  placing  orders  and  giving  advance 

payments, the instructions for stop payments are issued and orders are 

cancelled.  In what we have discussed above, if a cheque is issued as 

an advance payment  for  purchase of  the goods and for  any reason 

purchase order is not carried to its logical conclusion either because of 

its cancellation or otherwise and material  or goods for which purchase 

order was placed is not supplied by the supplier, in our considered view, 

the cheque cannot be said to have been drawn for an existing debt or 

liability.          

20. In  our  opinion,  the view taken by Andhra Pradesh High 

Court  in  Swastik  Coaters

2

,  Madras  High  Court  in  Balaji  Seafoods

Gujarat  High Court  in  Shanku Concretes

3

 and Kerala  High Court  in 

4

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Ullas

5

 is the correct view and accords with the scheme of Section 138 of 

the N.I. Act.  

21. The view taken by Delhi  High Court  is plainly  wrong and 

does not deserve acceptance.

22. Criminal  Appeal  is,  accordingly,  allowed;  the  impugned 

judgment of Delhi High Court is set aside; and the order of the Sessions 

Judge is restored.

New Delhi,

April 7, 2014.

         …..………………………….J.

         (R.M. Lodha)

  …..………………………….J.

(Shiva Kirti Singh)

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Vineet Kumar
on 15 April 2014
Published in Corporate Law
Views : 4458


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