CHAPTER I: THEORETICAL BACKGROUND

Introduction:
The law relating to negotiable instruments is not the law of one country or of one
nation, it is the law of the commercial world in general, for, it consists of “certain principles
of equity and usages of trade which general convenience and commonsense of justice had
established to regulate the dealing of merchants and mariners in all the commercial
countries of the civilized world.” Even now the laws of several countries in Europe are, at
least so far as general principles are concerned, similar in many respects. Of course, on
questions of detail, different countries have solved the various problems in different ways,
but the essentials are the same, and this similarity of law is a pre-requisite for the vast
international transactions that are carried on among the different countries. 1
The Negotiable Instruments Act, 1881 was basically introduced to define the law
relating to the various aspects of the different negotiable instruments like Promissory
Notes, Bills of Exchange and Cheques. But the increasing use of these negotiable
instruments necessitated the introduction of a number of amendments in the Negotiable
Instruments Act with the main aim of making the use of the negotiable instruments easy.
Amongst all the amendments made in the Negotiable Instruments Act the amendment
responsible for the insertion of the Chapter XVII into the Act can be considered to be the
most important one as it helped in bringing about a revolutionary change with respect to
the use of cheques. Prior to this amendment the scope of misuse of the power to issue
cheques was on a rise in spite of the available civil remedy and the criminal remedy under
Sec 420 of the Indian Penal Code. And the cheques being a part and parcel of the
commercial transactions people started losing faith in the cheque system at large. So there
was a need to curb down such misuse of the power to issue cheques and the insertion of
the Chapter XVII by the Banking, Public Financial Institutions and Negotiable Instruments
Laws ( Amendment) Act, 1988 (66 of 1988) was blessing in disguise for the payee, the

1 The Negotiable Instrument Act- Bhashya & Adiga, 13th Ed. p. 1

1
people who were the worst affected in case of such misuse. Chapter XVII as a whole deals
with Penalties in case of Dishonour of Certain Cheques for insufficiency of funds in the
accounts of the drawer of the cheques. This chapter consists of a total of ten sections
amongst which Section 138 is of utmost importance. Section 138 speaks of dishonour of
cheques for insufficiency, etc. of funds in the account of the drawer. This section imposes
criminal liability on the person who is responsible for issuing a cheque to another person
for the fulfilment of his liability without having sufficient funds in his account. This section
actually forces a person to think twice before issuing a cheque if he has minimal funds in
his accounts as because such issuance of cheques may land the drawer of the cheque in jail
even if he had no dishonest intention to cheat the payee.

1.1 Concept of cheques and importance in Commercial World:

The word cheque is a very well-known concept and every individual who operates an
account in a bank is familiar with the concept of cheques. It is a very famous negotiable
instrument which is very much essential in world of commerce. In simple words cheque
can be said to be a written order instructing a financial institution which is a bank to pay a
certain sum of money to a particular person on demand. Cheque as a negotiable instrument
is a piece of paper which promises to pay its owner the amount written over it either on
demand or as per the date mentioned on it. So the cheque can be said to be a negotiable
instrument which is negotiable by delivery. It is generally presumed that once the cheque
is delivered to the payee by the drawer of the cheque the payment of money to the payee
will be made in due course of time and so the date on which the cheque is delivered is
considered to be the date on which the payment is made irrespective of the fact as to when
the cheque is presented for payment.
The cheques play a vital role in the commercial world as because it relieves the
businessmen from the burden of carrying currency notes to each and every place they go
to carry on their business. From this public can understand that cheques actually have
undertaken the function of money. Cheques have actually oiled the wheels of commercial

2
transactions by faciliating quick and prompt commercial transactions. In a developing
Country like India cheques have really helped in the development of the economy by
faciliating quick commercial transactions which would not have been possible in case of
absence of cheques. The importance of cheques in the commercial world can be understood
from the fact of introduction of electronic cheques by Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act, 2002. The concept of electronic cheque is defined as a
cheque which contains the exact mirror image of a paper cheque and is generated, written
and signed in a secured system ensuring the minimum safety standards with the use of
digital signature (with or without biometric signature and asymmetric crypto system).The
Electronic Cheques are valid as a paper cheque itself. These cheques are safer and secure
in comparison to the paper cheques and these cheques do not even require the payee to
personally approach the banker to pay the debt of the drawer. These cheques are basically
sent by mail to the person to whom the drawer has an intention to make the payment in
order to fulfill his debt or liability and that person deposits the same with the banker. On
deposition of such cheque with the banker the banker is obliged to make a transfer of
payment from the account of the drawer who actually issued the cheque into the account
of the person to whom the cheque was credited. This process of cheque transfer makes
process of commercial transactions quite easy and feasible. So we can say that the
introduction of cheques is actually a blessing in disguise for the commercial trade.
A Negotiable Instrument is a document guaranteeing the payment of a specific amount
of money, either on demand, or at a set time. According to the Negotiable Instruments Act,
1881 in India there are just three types of negotiable instruments i.e. promissory note, Bill
of exchange and cheque. Cheque also includes Demand Draft.
A cheque drawn by the drawer is presented for payment with the banker by the
payee and the banker refuses to satisfy the claim of the payee then such a process is known
as dishonour of cheques. The dishonour of cheque or refusal to satisfy the claim of the
payee by the banker may be due to varied type of reasons like insufficiency of funds in the
drawers account, closure of the account of the drawer due to any legal reasons etc. This

3
process of dishonour of cheque gives a right to the person in whose name the cheque is
issued to take the issuer of the cheque to the Court of Law for not being able to discharge
his debt or liability either due to insufficiency of funds or due to closure of account.
Prior to the introduction of Section 138 by the Banking, Public Financial Institutions
and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) all the issues
relating to dishonour of cheque and the consequent non-payment of the debt vested a right
to the holder of cheque to approach the civil courts for recovery of the amount which was
due. The legal machinery relating to the dishonour of a cheque comes into motion for the
protection of cheque holder if cheque is dishonoured.
The Code of Criminal Procedure states that every offence shall ordinarily be enquired
into and tried by Court within whose local jurisdiction it was committed. The complaint
can be filed in a Court within the jurisdiction of which the cheque has been drawn or the
place where the cheque is presented for collection and received an endorsement about the
dishonour of the cheque or the place where the cheque is dishonoured.
After the issue of notice to the drawer of the dishonour of his cheque petitioner filed a
civil suit denying his liability to pay and, therefore, contending that Section 138 was not
attracted and obtained an interlocutory injunction retraining the payee of the cheque from
proceeding under Section 138. The grant of the injunction was held to be illegal. Civil and
criminal proceedings are simultaneously possible.
It is settled law that pendency of the criminal matter would not be an impediment to
proceed with the civil suits. The criminal Court would deal with the offence punishable
under the Act. On the other hand, the Courts rarely stay the criminal cases and only when
the compelling circumstances require the exercise of their power.
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial
Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new
Chapter XVII was incorporated for penalties in case of dishonour of cheques due to
insufficiency of funds in the account of the drawer of the cheque. These provisions were
incorporated with a view to encourage the culture of use of cheques and enhancing the

4
credibility of the instrument which have been found deficient in dealing with dishonour of
cheques. Not only the punishment provided in the Act has proved to be inadequate, the
procedure prescribed for the Courts to deal with such matter has been found to be
cumbersome which resulted delay in disposing the cases.
1.2 HISTORICAL DEVELOPMENT IN RESPECT OF A CHEQUE
Origin of the word ‘Cheque’ in England
It is very difficult to trace out the origin of cheque. There is no definite view regarding
the original of the cheque. The different thinkers have different views relating to its origin.
The origin of word Cheque is obscure.
According to J.W.Gilbert2
“The word Cheque is derived from the French ‘Eches’ meaning Chess. The Chequers
placed at the doors of public houses were intended to represent Chess-boards, and
originally denoted that the game of Chess was played in those houses. Similar tables were
employed in reckoning money, and hence came the expression ‘to check an account’; and
the Government office where the public accounts were kept, was called the ‘Exchequer’.
There is also another explanation. It is said that the word `Cheque’ arose from the
consecutive numbers which were placed upon the official forms to act as a check or means
of verification.”
Similarly Dr. Bett 3says:
“This word cheque is the same as ‘check’ and appears to have been at first applied to
the counterfoil which keeps a tally of the amount. This spelling was kept up till
comparatively late period down to and including the 12th edition of Byles on Bills. It is
interesting to note that Dr. Bett is of opinion that cheque or exchequer are all words derived
from the game of chess and go back to the Persian word for a King and that the principal
piece has given its name to the game itself. In this way he says that Cheques do not seem

2
M.S.Parthasarathy – Cheque in law and practice at pp. 1-2
3
Bhashyam and Adiga- The Negotiable Instrument 13rh Ed. p.5

5
to have been introduced in England till the seventeenth century; for, it is really then that
the business of banking was undertaken by goldsmiths in England, who borrowed the
practice from Holland and from the money-dealers of Florence who flourished as early as
the thirteenth century.
In Holden’s History of Negotiable Instruments in English law a cheque dated
14.08.1675 is described at page 210 and is worded4:

Mr. Thomas,
I desire you to pay unto Mr. Samuell Howard or order upon receipt hereof the sum of
nine pounds thirteen shillings and six pence and place it to the account of
14th August, 1675 Yours Servant
£ 9:13:6 EDMOND WARLOPP
On the reverse of the instrument is the payee’s endorsement worded thus: Received in
full of this Bill the sum of nine pounds thirteen shillings and six pence.
Samuell Howard.
It will be noticed that the form of the instrument is very similar to that of a modern
cheque, even though the language employed is somewhat different: modern customers do
not sign themselves `your servant’ when writing to their bank managers.
One view is that the London goldsmiths were the first bankers in England. They
received money from their customers on condition to pay its equivalent when called upon
to do so. When a customer wished to make payment to a third party, it was customary to
write an order addressed to his banker to pay the sum required and these notes or orders
were the earlier forms of cheque currency. The cheque or “dream note” as it was called and
which was used by the customers of the goldsmith banker
Before banking in modern sense of the word originated in England the Goldsmiths
exercised many of the functions of bankers and some of the oldest existing private banks
in England are the direct descendent of these Goldsmiths. They received money on deposit
from their customers subject to the obligation to repay an equivalent sum, when called

4 ibid at p. 5

6
upon to do so. They paid interests on deposits. They discounted bills of exchange and
various types of Treasury Exchequer money orders; they bought and sold bullion; they
circulated their own bank notes and they changed the coins of other countries for English
coins and so on. From about the middle of the seventeenth century, the depositor would
address to his goldsmith a short letter of request authorizing the payment to his creditor of
the sum due. They would take this authority to the goldsmith’s “shop” and there receive
the sum in specie. Before long, the merchant debtor drew his “bill” or “note” in favour of
his creditor “or order” or in favour of him “or bearer”, and the goldsmith duly honoured it
upon presentation. The accounts of those merchants, which nowadays would be called
“current accounts”, were usually known as “running cashes”, and they became popular. By
1677 there were fifty-eight goldsmiths in London, who kept “running cashes”, thirty-eight
of whom lived in Lombard Street. Furthermore, there is clear evidence that the goldsmiths
employed the funds left with them by making loans to others. Thus, they made loans to
Cromwell and also to merchants who were the goldsmiths performed the basic functions
of modern bankers by accepting sums at interest by making loans and by providing their
customers with facilities for making payments to third parties.
The word ‘Cheque’ or ‘check’ as it was spelt at first did not come into use until the
eighteenth century. The modern spelling of the word was adopted about the middle of the
nineteenth century. The 1827 edition of Joseph Chitty’s work on Bills of Exchange used
the old spelling ‘check’. The following year J.W. Gilbert published his ‘Practical Treatise
on Banking’. He used the modern spelling ‘Cheque’, and he explained that he had adopted
that spelling because it was free from ambiguity.

In India:
The Cheque was introduced in India by the Bank of Hindustan, the first joint stock
bank established in 1770. In 1881, the Negotiable Instruments Act (NI Act) was enacted in
India, formalizing the usage and characteristics of instruments like the cheque, the bill of
exchange and promissory note. The NI Act provided a legal framework for non-cash paper

7
payment instruments in India. In 1938, the Calcutta Clearing Banks' Association, which
was the largest bankers' association at that time, adopted clearing house.
Until 1 April 2012, cheques in India were valid for a period of six months from the
date of their issue, before the Reserve Bank of India issued a notification reducing their
validity to three months from the date of issue.
In the commonwealth almost all Jurisdictions have codified the law relating to
negotiable instruments in a Bills of Exchange Act 1882 in the UK, Bills of Exchange Act.
1908 in New Zealand. The Negotiable Instrument Act 1881 in India and the Bills of
Exchange Act 1914 in Mauritius. The Bills of Exchange Act Additionally most
commonwealth Jurisdictions have separate cheques Acts providing for additional
protections for bankers collecting unendorsed or irregularly endorsed cheques, providing
that cheques that are crossed and marked ‘not negotiable’ or similar are not transferable,
and providing for electronic presentation of cheques in inter-bank cheque clearing system.

1.3 DEFINITION OF A CHEQUE

As per Section 6 "A cheque is a bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand." After 2002 amendment cheque
includes “the electronic image of a truncated cheque and a cheque in the electronic
form."
In terms of Explanation,
(a) " 'a cheque in the electronic form' means a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system ensuring
the minimum safety standards with the use of digital signature (with or without biometrics
signature) and asymmetric crypto system; (b) “ 'a truncated cheque' means a cheque which
is truncated during the course of a clearing cycle, either by the clearing house or by the
bank whether paying or receiving payment, immediately on generation of an electronic
image for transmission, substituting the further physical movement of the cheque in
writing."

8
 M.I.C.R.Cheques/Drafts5
In MICR (Magnetic Ink Character Recognition) cheques:
1. First six number indicate the cheque number
2. Next three numbers indicate city code
3. Next three numbers indicate Bank code
4. Next three numbers indicate Branch code

A. Statutory Definition –
Section 6 of the Negotiable Instruments Act, 1881 defines the ‘Cheque’ as under:
A ‘cheque’ is a bill of exchange drawn on a specified Banker and not expressed to be
payable otherwise than on demand.”
Substitution of new section for section 6 by the Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act 2002:6
For section 6 of the Negotiable Instruments Act 1881(26 of 1881) (hereinafter referred
to as the principal Act), the following section shall be substituted, namely:
Sec 6. Cheque- A ‘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.
It will be thus seen that cheque is a special kind of bill of exchange in the sense that it
is drawn in the name of a specified Banker.

B. Dictionary Meaning –
Venkataramaiya’s law lexicon Dictionary defines cheque as under7 :

5http://www.caclubindia.com/forum/knowledge-bank-negotiable-instruments-act--

108880.asp#.U5yHK5SSxic
6 (1933) 49 ILR 116.
7 2nd Ed 1978, Vol. 2.

9
 “Cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise then on demand.”

Mitra’s legal and commercial Dictionary8 defines cheque as under:-

“A cheque is a bill of exchange drawn on a banker, payable on demand A bearer
cheque is one expressed to be payable to a particular person or bearer, an order cheque is
one which is expressed to be so payable, or which is expressed to be payable to a particular
person or body and does not contain words prohibiting transfer or indicating an Intention
that it should not be transferable.
A cheque which bears across its face an addition of the name of a banker, either with
or without the words not negotiable is crossed specially to that banker.9

Wharton’s Law Lexicon defines it as10 –

“Cheque- An order addressed to a banker requesting him to pay to (a) the person
therein mentioned, or his order, or (b) the person therein mentioned, or the bearer of the
cheque, the sum of money therein mentioned; defined in the Bill of Exchange Act, 1882,
Sec. 73 by which such provisions of that Act as are applicable to a bill of exchange payable
on demand apply also to a cheque as a bill of exchange drawn on a banker payable on
demand.

K. J. Aiyer’s Judicial Dictionary11 defines cheque as under:

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand (section 6 Negotiable Instruments Act, XXVI of 1881).”
A banker’s cheque is a peculiar sort of instrument, in many respects resembling a bill
of exchange, but in some respect entirely different. A cheque does not require acceptance

8 2nd Ed 1976 by A.R Biwas. At pp. 130-131.

9 3rd Ed Vol. 2 by Halsbury ‘s laws of England, pp 151-152
10 14th Ed. –3rd Indian Reprint 1996, p. 186
11 8th Ed 1980, p.203.

10
in ordinary course, it is never accepted, and it is never intended for 12circulation, it is given
for immediate payment; it is not entitled to days of grace; and though, strictly, speaking,
an order pay to a third person the whole or part of debt, yet in the ordinary understanding
of person it is not so considered. It is more like an appropriation of what is treated as ready
money in the hands of the banker, and in giving the order to appropriate to a creditor, the
person giving the cheque must be considered as the person primarily liable to pay, who
orders his debt to be paid at a particular place, and as being much in the position of a maker
of a promissory note or the acceptor of a bill of exchange payable at a particular place and
not elsewhere who has no right to insist on immediate presentation at that place. [Per Lord
Wensleydale].
A cheque is clearly not an assignment of money in the hands of a banker, The banker
is bound by the contract with his customer to honour the cheque when he has sufficient
assets in his hands; if he does not fulfil his contract he is liable to an action by the drawer,
in which heavy damages may be recovered if the drawer’s credit has been injured. “I do
not understand the expression attributed to Byles, J. in Keane v. Beard13; but I am quite
sure that the learned Judge never meant to lay down that a banker who dishonour a cheque
is liable to a suit in equity by the holder.

The New Encyclopaedia Britannica Micropaedia Ready Referencer –Ceara

Deluc14 defines it as-
“Cheque, also spelled CHEQUE, bill of exchange drawn on a bank and payable on
demand; it has become the chief form of money in the domestic commerce of developed
countries. As a written order to pay money, it may be transferred from one person to another
by endorsement and delivery or in certain cases, by delivery alone Negotiability can be
qualified by appropriate words, as with restrictive endorsements, or by the check form

12
15th Ed (1993) Vol. III, pp. 145-146.
13
8 CB (NS), p. 381.
14
15th Ed (1993) Vol. III, pp. 145-146.

11
itself. Most checks are not paid in currency but by the debiting and crediting of
accomplished either by direct presentation, by correspondent banks, in the United States.
A cashier’s check is issued by a bank against itself and is signed by the cashier or some
other bank officer. It has unquestioned acceptability as exchange. A certified check is a
depositor’s check that has been guaranteed by the bank upon which it is drawn and is so
stamped. Traveller’s checks are cashier’s checks sold to travellers that require two
signatures is placed on the check in the presence of an issuing agent; the purpose of
identification and is placed on the check when it is cashed. Purchasers of traveller’s checks
are guaranteed reimbursement by the issuers of the Checks if the checks are lost or stolen.
New Standard Encyclopaedia15 defines it as –
“Check- a written order to a bank to pay money. It is a convenient and safe means of
transferring money, and provides a permanent record and receipt for each transaction. Any
person or firm having money on deposit in a checking account in a bank may write a check
on that bank. In some cases, money may be transferred from one checking account to
another without writing a check; the transactions accomplished by computer.”
To open a checking account, a person deposits a sum of money in a bank. The bank
gives him a check-book with blank check forms, and provides him with a means of keeping
a record of the checks he writes and the amount of money he still has on deposit. The bank
gives him a receipt for each new deposit and sends him a statement (usually monthly)
showing a complete record of all transactions. All concealed checks (checks that have been
cashed by the bank) are returned with the statement, providing the depositor with proof
that payment was received. The bank usually makes a small service charge on every
account, and perhaps also a charge for each check written. Ordinarily, no interest is paid
on checking accounts.
To make out a check, the depositor writes the date, the name of the payee (the person
or firm who is to receive the money), and the amount. He then signs his name. Before

15 40 Vol.-3 pp. C-234-236

12
cashing the check the payee must endorse it by signing his name on the back. He then either
deposits it in a bank or exchanges it for cash by giving the check to a bank, currency
exchange, business firm, or individual. The new owner can endorse the check to someone
else or can deposit it in a bank. When a check reaches a bank, it is forwarded through a
clearing-house back to the bank on which it was drawn. After making sure the depositor’s
signature is genuine, this bank in turn pays the cashing bank through the clearing- house.
The biggest danger in accepting a check is that the person writing it may not have
enough money (or any money) in the bank to cover it. Forgery is another danger. The best
defence against “bad checks” is to refuse to accept checks from strangers.

Thomson’s Dictionary of Banking,16 defines Cheque as –

CHEQUE (Formerly written “check”) “The word is derived from the French ‘Eches’,
Chess. The Chequers placed at the doors of public houses are intended to represent
Chessboards and originally denoted that the game of Chess was played in those houses.
Similar tables were employed in reckoning money, and hence came the expression “to
check an account”; and the Government office where the public accounts were kept was
called the “Exchequer”. Another explanation is that the word `Cheque’ arose from the
consecutive numbers, which were placed upon the forms to act as a check or means of
verification. In the United States the word “check” is used at the present day. Cheques first
came into use about 1780.
Sir John Paget, in the Gilbert Lectures, 1916 (No.1), said “money on current account
is just like any other debt, it is repayable on demand; if a customer comes and asks for his
money, he is entitled to have it without the formality of drawing a cheque.” In such a case,
however, the customer would have to give a receipt. But the regular and ordinary method
of withdrawing money from a current account is by means of a cheque. A depositor may
withdraw money from his deposit account by signing a form of receipt.

16 12th Ed. 1974.

13
 Part III of the Bills of Exchange Act, 1882, is devoted to provisions regarding each
features of cheques as are not found in connection with a bill –

Section 73 defines a cheque –

“Cheque is a bill of exchange drawn on a banker, payable on demand”.
“Except as otherwise provided in this Part, the provisions of this Act applicable to a
bill of exchange payable on demand apply to a cheque.”
Section 3 defines a bill of exchange. These two sections, taken together, show that a
cheque is an unconditional order in writing, drawn on a banker, signed by the drawer
requiring the banker to pay on demand a sum certain in money to or to the order or a
specified person or to bearer.
A cheque differs from a bill in several points: it does not require acceptance; it is drawn
upon a banker; the banker may be protected if he pays it bearing a forged endorsement; the
drawer is the person liable to pay it and the drawer, as a rule, is not discharged by delay in
presenting it for payment. The intention of a cheque is that it be paid at an early date. The
drawee’s authority to pay is determined by notice of the drawer’s death, and the drawer
may stop payment of the cheque.
Indelible pencils are not desirable articles with which to draw cheques. A cheque
written in ordinary pencil should not be paid without personal reference to the drawer, as
the banker cannot possibly tell whether or not it has been altered. It is much to be desired
that all cheques should be written in ink. Typewritten cheques are too easily altered, and
their use should be discouraged as far as possible.
A cheque written upon a sheet of paper, provided it is in proper form, is sufficient.
Cheques of this description should, however, never be drawn except in cases of extreme
necessity.
“A customer’s cheque must be unambiguous and must be ex facie in such a condition
as not to arouse any reasonable suspicion. But it follows from that it is the duty of the
customer, should his own business or other requirements prevent him from personally

14
presenting it, to take care to frame and fill up his cheque in such a manner that when it
passes out of his (the customer’s) hands it will not be so left that before presentation,
alterations, interpolations, etc., can be readily made upon it without giving reasonable
ground for suspicion to the banker that they did not form part of the original body of the
cheque when signed. To neglect this duty of carefulness is a negligence cognizable by law.
The consequences of such negligence fall alone upon the party guilty of it.
A cheque is drawn in England on an English bank in foreign currency, the method
usually adopted between the collecting and paying bankers is for the cheque to be presented
for payment converted into sterling at the current rate of exchange. If the paying banker is
in agreement with the rate of cheque is paid in sterling. If the customer instructs his banker
to debit the amount for which the cheque has been drawn to a currency account, the paying
banker, having paid sterling, sells the currency at the current rate, thereby reimbursing
himself for the amount paid to the collecting banker. If the paying banker is not in
agreement with the rate of exchange claimed by the collecting banker, he offers a draft in
currency on his foreign correspondent, and this draft is usually taken by the collecting
banker in place of the sterling originally claimed, and the currency account of the customer
is debited with the amount. If the customer wishes to pay in sterling, the equivalent at the
rate agreed upon between the collecting and paying banker is debited to his sterling
account, but should the paying banker refuse to pay at the rate demand, he will issue a
cheque in currency on his foreign correspondent, debiting the sterling account of his
customer at the selling rate for drafts on his foreign correspondent.
The members of the British Bankers Association agreed in June 1946, to standardize
cheque forms. As regards size, the must not exceed 8 inches by 4 inches and must not be
less than 6 inches by 3 inches.
Prior to this time, the amount was usually inserted in figures on the left-hand side; as
from June 1946, the space for the amount in figures has been shown on the right hand side,
immediately above the signature of the drawer.

15
 The customary form of cheque should be adhered to as much as possible, though
legally any form which fulfils the requirements of the Bills of Exchange Act would be
sufficient as, for example, where the drawer instead of signing his name at the bottom signs
it at the top, “I, John Brown, direct you to pay to John Jones the sum,” etc. The Bank of
England declines to pay cheques unless drawn upon the forms it supplies.
Some cheques have a notice upon them that they are payable only if presented within
a certain period. Such a condition may possibly exclude the document from being
considered a cheque under the Bills of Exchange Act. In Thairlwall v. Great Northern
Railway Company17 where a dividend warrant had a condition at the bottom of it that “it
will not be honoured after three months from date of issue unless specially indorsed for
payment by the secretary.” It was argued that the document was not a cheque because of
this condition. Mr. Justice Bray said,” I have felt a great deal of doubt on this point because
of this statement. But, on the whole, I am inclined to think that this document is a cheque,
and is within the meaning of Section 73 and 3 of the Bills of Exchange Act, 1882, a cheque
and an unconditional order in writing…. And I think it is none the less a cheque because
of that statement at the bottom of the document. I do not consider that statement makes the
order conditional.”
There are also forms of cheques, or rather document, which make the payment
dependent upon a certain receipt being signed. Conditional documents of this kind are not
cheques as defined by the Bills of Exchange Act. They may, however, be crossed like a
cheque as mentioned in Receipt on Cheque.
The form of cheque (or, more correctly, order for payment) in use by some Local
Authorities is a peculiar one as, being drawn upon the Treasurer, it does not conform with
the requirement of the Bills of Exchange Act that it be drawn upon a banker. It is
considered, however, that, although drawn upon an individual, the order is practically
drawn upon the bank where the Treasurer’s account is kept, and the banker paying such

17 (1910) 2 K.B. 509

16
order is entitled to the protection which is afforded by Section 60 of the Bills of Exchange
Act, 1882, against forged endorsements. If such orders should be held not to come within
the Bills of Exchange Act, then the benefit of Section 60 would not apply, and they would
also be incapable of being validly crossed.
As far as the collecting banker is concerned, it would appear that local authority drafts
now fall within Section 4(2)(b) of the Cheques Act, 1957.
Cheques paid to credit of a customer’s account should be carefully examined before
being remitted for collection, and if not in order should be returned to the customer, or, if
possible, sent out to him to be remedied.
Since the passing of the Cheques Act, 1957 (q.v.), endorsement is necessary for
various reasons only in the following cases –

i) Where cheques are cashed or exchanged across counter;

ii) Where cheques have been negotiated;
iii) Where cheques payable to joint payees are tendered for the credit of an account
to which all are not parties;
iv) Where a cheque acts as a combined cheque and receipt form (these cheques will
bear a bold letter “R” on their face);
v) In the case of bills of exchange other than cheques, and promissory notes.

Some of the categories stem from the Clearing Bankers’ Circular rather than from the
Act and it is not certain that in all cases the courts would insist on endorsement
Westminster Bank Ltd. v. Zang.18
With regard to alterations in cheques and fraudulent alterations as mentioned in
Alterations.

18 (1966) All E.R. 114

17
 If there is a difference between the amount writing and the figures on a cheque, the
cheque may be paid according to the amount in writing, but it is the usual custom, and a
prudent course, to return the cheque unpaid marked “amounts differ.” If the figures have
been omitted and the amount only appears in writing, a banker is justified in paying the
cheque according to the words, though if the words have been omitted and the amount is
given only in figures, the cheque should not be paid. A cheque payable to “John Brown
only” or to “John Brown, not transferable,” must be paid to none other than John Brown.
If the payee himself presents a cheque for payment and declines to indorse it, he has
probably a legal right to do so, and the banker paying the cheque will protected under
section 1(1) Cheques Act, 1957 (q.v.) if the cheque is otherwise in order. However, the
circular dated 23rd September 1957, of the Committee of London Clearing Bankers
included as cheques cashed or exchanged across the counter. It is considered that the public
interest will best be served by continuing existing practice in regard to cheques cashed or
exchanged. The Mocatta Committee set up by the Government to examine the whole
question of endorsement attached importance to endorsement of such cheques as possibly
affording some evidence of identity of the recipient and some measure of protection for the
public.
If the balance of a customer’s account will not allow of the full payment of a cheque,
which is presented, the cheque may be dishonoured. A cheque cannot be paid in part. In
England, if such a cheque is dishonoured and another cheque is presented subsequently for
a smaller amount, which the account will stand, it may be paid. In Scotland, however, when
a cheque is presented for payment and there is not a sufficient balance to meet it, the cheque
attaches such funds as there may be in the banker’s hands belonging to the drawer, and
subsequent cheques, though for a less amount than the balance of the account, will be
returned unpaid.
A banker does not, as a rule, pay a cheque, which has been cut, or torn, into two or
more portions, or torn sufficiently to suggest cancellation. But if a mutilated cheque bears

18
a note upon it signed by a collecting banker, such as “accidentally torn,” it is customary to
pay it.
A cheque is sometimes marked or certified by a banker as being good for the amount
for which it is drawn. It may be marked by the banker on whom it is drawn for another
banker, as a matter of convenience for the purposes of clearing arrangements. Or,
occasionally, it may be marked at the request of the drawer, or even at the request of the
payee or holder,
English bankers do not encourage the marking of cheques as between themselves and
the public, it being much the preferable way to pay the cheque, and, if necessary, give a
draft in exchange. In America, the certification or acceptance of cheques is very common
which may be seen in Certification of Cheque.
Marking a cheque by a banker is not equivalent to acceptance. If it was marked at the
request of a payee or holder it could not be debited to the drawer’s account if, in the
meantime, the drawer has died or has stopped payment of the cheque, or if a receiving order
has been made or notice of the presentation of bankruptcy petition has been received.
A person is liable to be charged under the Theft Act, 1968, if he gives a cheque in
payment of a purchase when he has no account with the baker on whom the cheque is
drawn.

1.4 ESSENTIALS OF A CHEQUE –

‘Cheque’ is one of the important negotiable instruments. It is frequently used by the people
and business community in the course of their personal and business transactions. The
definition of cheque has been given in Section 6 of Negotiable
Instrument Act in these words,” A cheque is a bill of exchange drawn on a specified banker
and is expressed to the payable, otherwise than on demand.” The essential requisites of
cheque are as: -

A) Must be in Writing –

19
 The cheque may be written in hand by using ink or ballpoint pen, typed or even it may
be printed. But the customer should not use pencil to fill up the cheque form. Even
though other columns may be permitted to be written in hand or printed or typed, the
signatures should be made by ink pen or ballpoint pen by the maker.

B) Must be Unconditional –
The order to pay the amount must be unconditional. If there is any condition imposed to
pay the amount to the holder of the cheque then it will not be considered as a cheque. A
cheque made payable on the happening of a contingent event is void ab-initio.

C) Must be Drawn on a Specified Banker –

For the validity of a Cheque it must be drawn on a specified banker. If there is not
mentioned in the cheque about the banker it would not be a valid cheque. In addition to it,
it must contain all the three parties i.e. Drawer, Drawee and Payee.

D) Certain Sum of Money –

It is one of the essential requirement of the Cheque that it must be payable in money and
money only. If is not in term of money then it will be a valid one. The sum mentioned in it
must be certain.

E) Certain Payee –
The parties of the Cheque must be certain. There are three parties of the cheque i.e. Drawer,
Drawer and Payee. In a valid Cheque the name of the must contain in other words they
must be certain. It must contain an order, which must be unconditional. If any condition
were imposed then it would not be a valid cheque.

F) Date –

20
In a valid cheque it must be signed by the drawer with date otherwise it would not be a
valid cheque. It must be written in hand by using ink or ball point pen, typed or even it may
be printed as it becomes conclusive proof i.e. presumption under Section 118(b) unless
contrary is proved.
In accordance with Section 5 and 6 of the Indian Negotiable Instruments Act, 1881,
cheques are regarded as negotiable.

1.5 A study of the cheque, thus, requires a study of the negotiable instrument:

A number of definitions have been given of the Negotiable Instrument, however, some
of them are being discussed below: -
J. M. Rosenbery in his Dictionary of Banking and Finance 19 defines Negotiable
Instrument as under: -
Negotiable Instrument, the Uniform Negotiable Instruments Act states: An
instrument, to be negotiable must conform to the following requirements:

(i) It must be in writing and signed by the maker or drawer;

(ii) It must contain an unconditional promise or order to pay certain sum in money;
(iii) It must be payable on demand; or at a fixed or determinable future time;
(iv)It must be payable to order or to bearer; and
(v) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

On the other hand Wills20 has defined a negotiable instrument as under: -

19 Ed. 1982, p. 57
20 S.N.Gupta- Dishonour of Cheque, Liability Civil and Criminal, 3rd Ed. p. 5

21
 “A negotiable instrument is one the property in which is acquired by anyone who takes
it bonafide and for value, notwithstanding any defect of title in the person from whom he
took it, from which is follows that an instrument cannot be negotiable unless it is such and
in such a state that the true owner could transfer the contract or engagement contained
therein by simple delivery of the instrument.”
Further, it has been held in Sukanraj Khimraja v. Raja Gopalan,21 that an important
fact about negotiability is that by dishonour of a cheque the negotiability of the cheque is
lost.
In this way, the first essential feature of a cheque is that it can be transferred. The transfer
can either be by way of mere delivery or by an endorsement and delivery. Whenever, the
procedure mentioned above is adopted, the ownership of the property in the instrument is
transferred and further no other document is required for this purpose. Whereas on the other
hand the other documents e.g. shares are not negotiable, as the property in the said shares
is not transferred only by means of delivery.
The second important characteristic of a cheque is that a holder in the course gets a
valid title to it despite of any defect in the transferor’s title. Such a bona-fide transferee for
value gets a complete, independent and indefeasible title to the instrument and such person
is known as the ‘holder in due course’ and he gets a title against the whole world i.e. ad-
rem. In case this characteristic is missing then the whole machinery of trade will be upset
as nobody will accept a cheque if the transferee was made liable to make fishing enquiries
about the titles of the transferor.
The third and the last characteristic of a cheque on account of its being a negotiable
instrument is that is has an inherent mechanism built in itself and it has a right of action
infused in itself.
The holder of a cheque has therefore, a right to sue thereon in his own name and he
is not dependent upon another title. According to the negotiable instrument, whenever a
bona-fide holder for value without notice- or, in short a holder in due course – sues on

21 (1989) 1 LW 401.

22
the instrument, it is for the defendant to prove that the plaintiff is not entitled on the cheque
on which the case is being filed. It should be remembered that a cheque, which is
negotiable, can be made not negotiable if the negotiation is prohibited. In case a cheque is
crossed “not negotiable” or made payable only to the payee named therein “and not to his
order or to bearer” this cheque is not negotiable.
Cheque or a Bill marked “pay cash or order does not come within the meaning of the Act
and is not a negotiable instrument.
Generally speaking, the term Cheque is simply an ordinary slip of paper containing a
written order, addressed to the banker by his customer, which is frequently used in
connection with transactions of banking business i.e. in other words it is a negotiable
instrument. The term `Cheque’ has been defined in Section 6 of the Negotiable Instruments
Act, 1881 although there were certain principles of equity and usages of trade which
general convenience and commonsense of justice had established to regulate the dealings
of merchants and mariners in all the commercial countries of the civilized world.
As it has been stated above, a piece of paper, in the form of ‘cheque’, promissory note’
or ‘bill of exchange’ which authorise a person or party to get the sum of money mentioned
therein, is known as Negotiable Instrument. The main categories of Negotiable Instruments
are ‘Promissory Note’, ‘Bill of Exchange’ and ‘Cheques.’ Not only India but also all the
countries of world make use of the negotiable instruments in some of other form in the
course of personal as well as business transactions. The result is the law relating to
Negotiable Instruments is mainly based on the common customs and usage of the business
community of the world as a whole. The general outline of this law is, therefore, almost
one and the same in all countries.
1.6 PARTIES TO THE CHEQUE –
The maker of a cheque is called the ‘Drawer’, the person thereby directed to pay is called
‘Drawee’ and the person named in the instruments, to whom or to whose order the money
is by the instrument direct to be paid, is called the “Payee.”22

22 Section 7 of the Negotiable Instruments Act, 1881

23
 The person entitled in his own name to the possession of the cheque and to receive or
recover the amount due is called the “Holder of the cheque.”23 The person who for
consideration becomes the possessor of the cheque if payable to bearer, or the payee or
endorsee thereof, if payable to order, before the amount mentioned in it became payable
and without having sufficient cause to believe that any defect existed in the title of the
person from whom he derived his title is called the “Holder in due course.”
The maker or the holder of the cheque signs his name (endorse) on the back of the
cheque for the purpose of negotiable and he is said to be the ‘Endorser.’
The endorser who signs his name and directs to pay the amount mentioned in the cheque
to, or the order of, a specified person, and the person so specified is called the “Endorsee”
of the cheque.

1.7 HOLDER AND HOLDER IN DUE COURSE

A. Holder
Every instrument initially belongs to the payee and he is entitled to its possession. The
payee can transfer it to any person in payment of his own debt. This transfer is known as
‘negotiation’. Negotiation takes place in two ways. A bearer instrument passes by simple
delivery and the person to whom it is delivered becomes the holder. An order instruments,
on the other hand, can be negotiated only by endorsement and delivery and the endorsee
becomes the holder. Hence the holder means either the bearer of endorsee of an instrument.
Accordingly Section 2 of the English Bills of Exchange Act, 1882, provides that “holder
means the payee or endorsee of a bill or note who is in possession of it or the bearer
thereof”. The definition contained in Section 8 of the Indian Act is to the same effect,
although expressed in different words. It says that holder “means any person entitled in his
own name to the possession” of an instrument “and to receive and recover the amount”.

23 Section 8 of the Negotiable Instruments Act, 1881

24
Now, no one can be entitled to the possession of a bill or note unless he becomes either the
bearer or endorsee thereof.24 Section 8 says:
“The ‘holder’ of a promissory note, bill of exchange or cheque means any person entitled
in his own name to the possession thereof and to receive or recover the amount due thereon
from the parties thereto.”
In Section 139 the words used are the ‘holder of a cheque received the cheque.’ The word
‘Holder’ has been defined in Section of the 8 of the Negotiable Instruments Act as well as
in Section 2 of English Bills of Exchange Act, 1882 as mentioned above. Reading these
definitions with section 78 of the Negotiable Instruments Act it means that a person to
whom the payment should be made in order to discharge the maker or acceptor from all
liabilities under the instrument is the holder of the instrument or he is accredited agent such
as Banker, acting as an agent for collection. A person who cannot claim and does not have
right to recover the amount due on the instrument, is not the holder. Thus, a person who
can sue in his name is a holder. He may be the payee or one who becomes entitled to it as
endorsee or becomes the bearer of an instrument payable to the bearer. The most significant
words in the section are ‘entitled in his own name’. Thus, the term ‘holder does not include
a person who, though in possession of the instrument, has no right to recover the amount
due thereon from the parties thereto. However, the assignee of such person is entitled to
sue in his own name.25

B. Holder in Due Course –

Section 9 of the Negotiable Instruments Act, 1881 defines ‘Holder in Due Course’
which reads as under: -
“ ‘Holder in due course’ means any person who for consideration became the possessor
of the a promissory note, bill of exchange or cheque if payable to bearer, or the payee of

24 Dr. Avtar Singh’s Negotiable Instruments, 3rd Ed. p. 39

25 S.N.Gupta’s Dishonour of Cheque, 3rd Ed. 1996

25
endorsee thereof, if payable to order, before the amount mentioned in it became payable,
and without having sufficient cause to believe that any defect existed in the title of the
person from whom he derived his title.”
In order that a person can be called a holder in due course, he must show: (a) that he is the
holder of the negotiable instrument, (b) he has obtained it for consideration, (c) he has
obtained it before the maturity of the negotiable instrument, and (d) that he has obtained
the negotiable instrument in good faith. Until contrary is proved the holder of a negotiable
instrument is presumed to be a holder in due course.26
In India it has been seen above the payee can also be a holder in due course but in
England the payee of a negotiable instrument cannot be holder in due course as was decided
by the house of Lords in Jones v. Waring and Gillow.27 If a person gets an instrument
under a forged endorsement, he cannot be called a holder in due course.
Section 9 requires that to be a holder in due course a person must take the negotiable
instrument before the amount due thereon became payable.” Section 59 of the Negotiable
Instruments Act also provides that a person taking a negotiable instrument after its maturity
has the rights thereon of a transferor. It means that a person taking an instrument after
maturity will not be a holder in due course and will not be capable of having a better title
than that of the transferor.
Holder in due course must take the negotiable instrument “without having sufficient
cause to believe that any defect existed in the title of the person from whom he delivers his
title.” The condition requires that he should act in good faith and with reasonable caution.
In the case of Mathew George v. Jacob28 the Kerala High Court held that complainant
need not prove identity of accused: A reading of section 138 would clearly indicate that as
and when cheque signed in discharge of a legally enforceable debt is dishonoured, the
offence under section 138 of the Act comes into existence. Further, as per section 139 of
the act, there is a presumption in favour of the holder of the cheque. It is the burden of the

26 Section 118(g).
27 1926 AC 670; Lewis v. Clay, 14 T.L.R. 149.
28 III (2006) B.C. 21 (Ker): (2006)1 KLT 126.

26
complainant to prove that the cheque was signed by the drawer in discharge of a legally
enforceable debt. If such burden is proved, the presumption under section 139 of the Act
comes into force in favour of the complainant. In such circumstances, the identity of the
signatory of a negotiable instrument does not arise. Further, as per section 9 of the Act, a
complaint can be filed by a person who is holder in due course of a negotiable instrument
like the cheque.
That apart, in the decision reported in Venugopalan v. Prakasan, the Kerala High
Court had taken the view that when a private complaint is filed before the court, the court
is expected to make an enquiry under section 202, Cr.P.C. only with regard to the offence
alleged and not with regard to the identity of the accused who committed the offence. In
the above circumstances, identity of the signatory of a cheque is not a question to be
considered by the Trial Court.
In case of Sardar Jasvir Singh v. State of Uttar Pradesh in the Hon’ble Allahabad High
Court held that a person in possession of cheque and cheque is payable to bearer would be
deemed to be holder in due course of cheque and would have locus to file complaint of
dishonour of cheque.29

Rights of a Holder30

1. An endorsement in blank may be converted by him into an endorsement in full. 2. He is

entitled to cross a cheque either generally or specially with the words Not Negotiable.
3. He can negotiate a cheque to a third person.
4. He can obtain a duplicate of the lost instrument.

1.9 Necessary Ingredients which attract Section 138:

29 AIR 2007 (NOC) 1617 (All): 2007 (3) ALJ 553.

30http://www.caclubindia.com/forum/knowledge-bank-negotiable-instruments-act--108880.asp#.U5yHK5SSxic

27
Section 138 of the NI Act, 1881 was mainly enacted by the Legislature to restore back the
faith of the mercantile community with respect to the mechanism of the cheques as awhole.
This section was mainly enacted to protect the holder of cheque from the dishonest
attitude of the drawer of the cheque. But in order to attract liability under Sec 138 certain
provisions of the section are to be complied with as specified in case of Anchor Capital of
India v. State of Gujarat. These provisions are as follows: The cheque must be issued in
favour of a payee for the discharge either in full or in part of a legally enforceable debt.
Then the same cheque must be presented for payment within six months from the date of
issue of the cheque or the date of validity whichever is earlier and the cheque should be
returned back by the banker as unpaid as because the funds available in the account of the
drawer are insufficient for the debt to be paid. After receiving such an information from
the banker with regards to the insufficiency of funds the payee must sent a notice intimating
the same to the drawer within thirty days of receiving such notice, Then it is the duty of
the drawer that within fifteen days of receiving such notice from the payee it has a duty of
taking any action to make good the loss suffered by the payee. But if under any
circumstances the drawer fails to take any action with regards to the dishonour of cheque
then the drawer is considered to be responsible for the loss suffered by the payee without
even he having an intention to cheat the payee. So under Sec 138 the concept of criminal
liability begins from the point where the drawer even after receiving the notice from the
payee fails to take any action in order to prevent such loss suffered by the payee. So a
detailed analysis of the Section 138 helps us to understand that the section does not make
the drawer criminally liable from the very starting point when the cheque is dishonoured.
It gives a chance to the honest drawers to prevent any type of harassment at the hands of
law by way of taking any action to make good the loss suffered by the payee after receiving
a notice from the payee intimating him about the dishonour of the cheque. So this means
that the cause of action with respect to the dishonour of a cheque necessary to make a
person criminally liable arises only after the drawer fails to take any action within fifteen

28
days of receipt of the notice from the payee informing him about the dishonour of the
cheque to make good the loss suffered by him.
In the case of Raman B v. Shasun Chemicals and Drugs Ltd., (2006) 4 CTC 529: (2006) 2
LW (Cri) 775(Mad). It was held that the cause of action for prosecution under the Section
138 does not arise from mere presentment or dishonour of the cheque. It arises only when
the drawer defaults in paying up the cheque amount due within fifteen days of receipt of
the notice informing him about the dishonour of the cheque. The legislative mandate is that
the Drawer should not be prosecuted immediately with the dishonour of cheque but rather
he should be given a chance by the payee to rectify his mistake.

SUM UP:

In India, prior to the enforcement of the present Negotiable Instrument Act, English Acts
and Statutes dealing with this subject were in force. The frequent use of negotiable
instruments in personal as well as business transaction in India was also not a totally new
practice during the British regime. The reason was that since olden days, the use of such
instruments like Hundies, was prevalent in India. In Mughal period too, there was same
position. When British regime established in India three fold system in this regard was
enforced and Muslims were governed by their respective personal law. The Europeans
were governed for that purpose by English laws, whenever there was any conflict between
personal laws, i.e. Hindu Law or Muslim law with English Bill of Exchange and there was
no proof of any specific usage, the English law had to prevail. Thereafter, various English
Acts and statutes were enforced in India to deal with the matters relating to negotiable
instruments. Those acts and Statues were enforced in India to deal with the matters relating
to negotiable instruments. Those Acts and statues were English Bill of Exchange Act. The
law reliant to promissory notes [Statutes of William III, C, 17 and 3 and 4 Ann(8)] and
Governor General in Council Act ( Act V of 1866). In 1866 Law Commission drafted a
Bill of regulating the use and transactions through Negotiable instruments. On the basis of

29
it Indian Negotiable Instruments Act, 1881 (Act No. XXVI of 1881) was passed and
enforced in the whole territory of India except the state of Jammu and Kashmir. This Act
was mainly based on the principles laid down in English Law merchant. The main object
of this Act was to do away with the inconsistencies existing prior to its enforcement
especially with regard to applicability of law of Negotiation to persons belonging to
different communities.

30
 CHAPTER II: RESEARCH METHODOLOGY:

It is an important part of social legal survey/research that is research methodology for

which we have to go through in a following manner.
"There is no shortcut to prove, no way to gain knowledge of universal science, except
through the scientific method" — Karl Pearson'. Methodology is an important part of any
research work. Method is the way of doing something. Methodology is science to study of
particular subject. Research Methodology is a systematic investigation to gain new
knowledge about the phenomena or problem but in its wider sense methodology includes
the philosophy and practice of whole research process. It provides standard which the
researcher used for integrating data and reaching the conclusion. Thus research
methodology is the method which the researcher applies for the said research. The present
study well based on doctrinal method. The study will be completed on the study of various
law books. For the purpose of data collection the researcher will visit law libraries, refer
various law journals like, All India Reporter, All Supreme Court cases, Maharashtra Law
Journal, Maharashtra Law Report, Internet Service etc.
As mentioned earlier, a scholar of law, interested in legal research, may adopt any of
the following courses in doing his research:
1. Doctrinal method
2. Non doctrinal method
Doctrinal legal research endeavors to develop theories, and non-doctrinal legal
research endeavors to see as to whether the theories, the doctrines, that we have assumed
are appropriate to apply in society at a given time, are still valid and relevant. Non-doctrinal
legal research helps to test whether the theories assumed (in chilot.wordpress.com these
broad five options available to a legal scholar can be divided into two broad categories of
legal research: (1) doctrinal legal research, and (2) non-doctrinal regal research. Doctrinal
legal research is defined as research into legal doctrines through analysis of statutory
provisions and cases by the application of power of reasoning. It gives emphasis on analysis

31
of legal rules, principles or doctrines. While non-doctrinal legal research is defined as
research into relationship of law with other behavioral sciences. It gives prominence to
relationship of law with people, social values and social institutions. It endeavors to
highlight the relationship between law and other behavioral sciences and social facts. It
involves empirical inquiry into the operation of law. Here inquiry is directed to some
manifestation of human behavior as law affects it or as it affects law. The researcher wants
to know to what extent certain legal rules work or have worked. Law) work in the way
they should. Doctrinal legal research is, therefore, ‘research in law’ while non-doctrinal
legal research is ‘research about law’. It involves a systematic exposition, analysis and
critical evaluation of legal rules, doctrines or concepts, their conceptual bases, and inter-
relationship. To put it in a different way, a doctrinal legal researcher indulges into analysis
of ‘black-letter’ of law. He therefore sticks pretty close to the primary source materials, to
the Constitution (where legal system have one), to legislation (statutes, statutory
instruments) and to the leading judicial decisions (the precedents). While a non-doctrinal
legal researcher is interested in knowing ‘law-in-action’ through empiricism.
As the place and source of data, namely, substantive legal rules, doctrines, or concepts
and judicial decisions thereon, required for doctrinal legal research is law library, doctrinal
legal research is nicknamed as ‘arm-chair research’, or ‘basic or fundamental research’.
While, non-doctrinal legal research, which gets its data primarily from sources other than
law [i.e. society] and focuses on ‘social reality of law’ rather than on ‘law’ itself, is also
known as ‘empirical research’, ‘socio-legal research’, ‘sociology of law’ or ‘non-library
research’.

2.1 Title of the study:

The title of the study must be precise and unambiguous. That means the title must give
full idea of topic at the first instance which is about to discuss. Hence the title of the study
is Legal analysis of protection available to holder of cheque under the Negotiable
Instruments Act, 1881 with decided case laws.

32
 2.2 Problem of the study:
The major problem of the study is that the existing law had proved inadequate with the
problem which has arisen in recent years.
Those people who are holder of cheque in due course have no knowledge in respect of
limitation for presentation of cheque for encashment and they have also no knowledge
regarding issue of legal notice with in stipulated period. They have also no knowledge
regarding filing of complain in the court of law and its limitation. By keeping in this fact
the legislature with the help of negotiable instrument act 1881 has amended penal
provisions and provisions for limitation and jurisdiction. By going through this provision
a common public can get some knowledge of penal provision under negotiable instrument
act 1881 and its limitations.
That though there is existing provision in Negotiable Instrument Act for dishonor of
cheque, still there deficient in dealing with cheque bouncing cases relating to the post-dated
cheques legal liability and limitation for it and not only the punishment provided in the act
has found to be inadequate and the procedure for filing the complaint has been found to be
cumbersome including conflicting opinions for judiciary. This growing problem of
dishonor of cheques in today’s century attracted me to the research on the main following
two points:

1. Whether the presumption enacted by the N.I. act in favour of the holder of
cheques under the various provisions is adequate in order to obtain the full justice
in his favour.
2. Whether the Apex court has provide the full protection of presumption in favour
of the holder of cheque from all other angles of the act by its various landmark
judgments.

33
 2.3 Rational of study:
The intention of the legislature is to see that in the event of amount not being paid on
presenting the cheque due to insufficiency of funds or if it exceeds the arrangement made
by the bank by an agreement such as obtaining the facility of overdraft etc. the person is
liable for prosecution.
The safeguard that has been made to present hasty action is that the payee or holder in
due course of the cheque shall make demand for the payment of amount covered by the
cheque by giving notice, in writing, to the drawer with in thirty days of the receipt of
information by him from bank.
The rationale behind the study is to know the provisions under Negotiable Instrument
Act 1881 and consequences if the limitation provided for presentation of cheque bounce
notice and the complaint is not filed within limitation.

2.4 Objective of the Study:

The objectives of project aims at studying the various aspects related to dishonour of
cheques and liability arising for the protection of holder of cheques. It begins by defining
the concept of dishonour of cheques and then proceeds to the liability arising out of such
dishonour and the laws related thereto. The ultimate objective is to understand the liability
and the penal provisions for dishonour of cheques and then to understand its application in
the protection for the cheque holder.
While going through the research topic that means Legal analysis of protection
available to holder of cheque under the Negotiable Instruments Act, 1881 with
decided case laws following are the objectives of the research.
1. To find out ways and means for effective implementation of the relevant
provisions of law so that the cases relating to dishonour of cheque can be
disposed of within the time frame prescribed by law
2. To study the provision for the dishonour of cheques.

34
 3. To study the procedure of complaint as provided under Negotiable Instrument
Act 1881.
4. To study the offence and penalties in case of dishonor of cheques.
5. To study the role of Supreme Court in respect of dishonor of postdated cheque
under Negotiable Instrument Act.
6. To study Law Relating to Negotiable Instruments with Special reference to the
protection of holder of cheques.
2.5 Hypothesis:
Hypothesis means an idea formed beforehand which has less value that the generally
considered as the principal instrument in research. Its main function is to suggest a new
experiment and observation.
According to ‘Good’s’ and Hatt’ “ Hypothesis is proposition which can be put to test
or determine its validity” The present study proceed on the following hypothesis they are,
the provision under Negotiable Instrument Act 1881 is in corporate with a view to
encourage the culture of us for cheques and enhancing the credibility of the instrument.
1. The punishment provide in the act has proved to be inadequate.

2. The procedure prescribed for the courts to deal with such matter has been

cumbersome.

3. The disputes under section 138 of the Negotiable Instrument Act are not nearly

involving the interest’s commercial circle/economy of globe.

4. Large population, more litigation and lack of adequate infrastructure are the

major factors that hamper our justice system.

5. The procedure as required u/s 138 of Negotiable Instrument Act 1881 is not

followed properly and the complaint becomes absurd.

35
 2.6 Review of Literature:
While finalizing to the topic, the researcher has to review the existing literature.
In this present research the researcher has gone through the books of eminent
authors related to these topics. In addition to this the researcher has also review Law
journals, AIR, Supreme Court cases, articles from newspaper reports on Dishonor
of cheque.
Thus, after reviewing the literature, the researcher has able to understand the
exact nature of the problem of dishonor of cheque u/s 138 of Negotiable Instrument
Act 1881.

2.7 Research Design:

The research design refers to the entire process and carrying out the research study.
The idealized research design is concerned with specifying the optimum research
procedure that could be followed where there are no practical restrictions. The research
design for this study is Doctrinal. The data for this study was collected from the books,
commentaries, journals and websites.
After defining a research problem or formulating a hypothesis, as the case may be, the
researcher has to work out a design for the study. Research design is the conceptual
structure within which research is conducted. It is a logical systematic planning of research.
The term research design refers to the entire process of planning and carrying out a research
study. It is the process of visualization of the entire process of conducting empirical
research before its commencement. Research design is a blue print of the proposed
research. However, the blue print is tentative as the researcher may not be able to foresee
all the contingencies before he starts his investigation. He is allowed to meet these
contingencies when he encounters them in his research journey.
Research design helps the researcher to identify in advance the kind of data he requires,
the means to collect them, the methods to be used for analysis and interpretation of the
data, and presentation of his findings with more accuracy. Research design, thus, helps him

36
in minimizing the uncertainties, confusion and practical hazards associated with the
research problem. It helps in enhancing efficiency and reliability of his findings
a) Nature of study :
The present study is Doctrinal or Non empirical legal research. The nature of study
is doctrinal legal propositions by analyzing the existing statutory provisions, and
available secondary sources of data. One of the reasons for doctrinal research is to
ascertain a rule for the purpose of shoving a problem. In the present topic Law Relating
to Negotiable Instruments with Special reference to cheques. The researcher had made
an attempt to analyze the provisions under Negotiable Instruments act 1881 for
dishonor of cheque for this purpose the researcher had gone through various secondary
sources of data. The research design refers to the entire process and carrying out the
research study. The idealized research design is concerned with specifying the optimum
research procedure that could be followed where there are no practical restrictions. The
research design for this study is Doctrinal. The data for this study was collected from
the books, commentaries, journals and websites.
b) Type of study
The present study is basically explanatory as it explains in details the various aspects
of the topic in detail. To explain various aspects and dimensions of the topic, the researcher
had segregated the topic in six different chapters; each chapter explains in details the
important aspect of the topic.
The present study on the topic Legal analysis of protection available to holder of
cheque under the Negotiable Instruments Act, 1881 with decided case laws is also
analytical in nature as it analyzes different aspects of the topic and after analyzing
significant issues and aspects of the topic, the researcher had made various conclusions and
have suggested various point to solve the problem.

37
 2.8 Method of Data Collection.
The method of data collection followed under the present study are secondary method
of data collection, because the present researcher doctrinal researcher. Therefore the
researcher had gone through various secondary sources of data by adopting secondary
method of data collection. The researcher had gone through various books in relation to
provisions for the protection of holder of cheque, referred to articles, searched on internet
for collecting matters in relation to the topic.

 Sources of data collection

The present dissertation on the topic Legal analysis of protection available to holder
of cheque under the Negotiable Instruments Act, 1881 with decided case laws. is
doctrinal in nature therefore the sources of data collection is secondary in nature the
researcher had gone through various books pertaining to negotiable instrument act, the
details of which are given in the bibliography. The researcher had also gone through
various cases related with the topic, thereafter the research had done intensive search on
the internet for collecting and downloading matter pertaining to the present topic.
 Analysis and interpretation of data
In order to include best matter in the present dissertation, the researcher at the first
instance had collected every possible information related to the topic from books, Journals,
websites etc, thereafter the researcher and analyzed the complete data and had kept the
relevant text with him and had left the unnecessary materials. For better analysis also
classified the data and segregated the data in various categories, having done so, the
researcher had then interpreted the relevant data. Interpretation is a special aspect of
analysis. Interpretation includes the cause and effect relationship interpretation of data is
very important aspect as it is the soul of any research.

38
 2.9 Possible contribution of the study:
As the researcher uses the Doctrinal (Non –Empirial Method) to complete the research
work, will be really helpful for the researcher to collect the data from various available
sources and complete the dissertation work. The researcher took every possible efforts to
complete the dissertation.
The present topic of Legal analysis of protection available to holder of cheque
under the Negotiable Instruments Act, 1881 with decided case laws would help in
providing solutions to combat with the controversial issues of cheque bounce.

2.10 Limitations of the study:

Every research has its own limitation. No research can be conducted completely in all
aspects within limited period of time.
The present topic Legal analysis of protection available to holder of cheque under
the Negotiable Instruments Act, 1881 with decided case laws has lot of dimensions and
perspectives It was not possible to cover all the dimensions and prospective taking into
consideration within the time limit of the study, so the researcher had mainly emphasized
on the provisions for the protection of holder of cheque i.e dishonor of cheque in NI act.
The other difficulties faced by the researcher was cost involved in coaching the research
some books were of very high prices which the researcher could not afford to buy or have
access to it.

2.11 Time Schedule:

The researcher is doing doctrinal research and it needs sufficient time to complete the
research work within stipulated time as mention in the syllabus.

39
 CHAPTER III: DISHONOUR OF CHEQUE AND ITS PROCEDURE

3.1 DISHONOUR OF CHEQUE-

The legal machinery relating to the dishonour of a cheque comes into motion for the
protection of holder of cheque if cheque is dishonoured. The concept of dishonour has first
to be considered and for this purpose refer sections 92 and 93of the Negotiable Instruments
Act, 1881. Section 92 reads under as
“Dishonour by non-payment.-A promissory note, bill of exchange or cheque is
said to be dishonoured by non-payment when the maker of the note, acceptor of the
bill or drawee of the cheque makes default in payment upon being duly required to
pay the same.”31
The advancement and progress of society and the increase of commerce and various
activities of trade, the transaction of money between human beings became complex and
the ancient law giver were also forced by the circumstances to evolve new rules and
regulations to regulate the transaction of money. The present day economies of the world
which are functioning beyond the international boundaries are relying to a very great extent
on the mechanism of the Negotiable Instruments such as cheques and bank drafts and also
the oriental bill of exchange prevalent in India and known as Hundies. Since business
activities have increased, the attempt to commit crimes and indulge in activities for making
easy money has also increased. Thus besides civil law, an important development both, in
internal and external trade is the growth of crimes and we find that banking transactions
and banking business is every day being confronted with criminal actions and this has led
to an increase in the number of criminal cases relating to or concerned with the Banking
transactions.

Section 138 of the Negotiable Instruments Act, 1881 and its Significance:

31The Negotiable instrument act 1881

40
 Section 138 of the Negotiable Instruments Act is a pragmatic legislative step to reach
justice to the aggrieved. This section was introduced by the legislature to protect the holder
of cheque who were victims of dishonour of cheques. This section basically provides for
Dishonour of cheques for insufficiency etc., of funds in the account. As per Sec 138 if
under any circumstance the cheque issued by the drawer of the cheque is dishonoured or it
bounces back due to lack of funds in the account of the drawer or for the reason that it
exceeds the arrangements made by the drawer with the bank then the drawer of cheque is
liable for such dishonour. The signifance of Section 138 can be proved from the fact that
it not only provides justice to the payee in case of dishonour of cheques but it also gives a
chance to the honest drawers to rectify their actions in case of negligent behaviour so as to
protect them from the clutches of law and to prevent their harassment at the hands of law.
It can be said that Section 138 is a provision which clothes a civil dispute with the garment
of criminality.

3.2 CAUSES OF DISHONOUR OF A CHEQUE

There are some reasons of dishonour of cheques, which are being discussed below:
A. Refer to Drawer –
In Thomson’s Dictionary of Banking it is stated that the answer put upon a cheque by
the drawee banker when dishonouring a cheque in certain circumstances. The most usual
circumstance is where the drawer has no available funds for payment or has exceeded any
arrangement for accommodation. The use of the phrase is not confined to this case,
however, it is the proper answer to put on a cheque which is being returned on account of
service of a garnishee order; it is likewise properly used where a cheque is returned on
account of the drawer being involved in bankruptcy proceedings.
It generally means to convey to the holder that he should refer to the drawer for
payment that is the bank has not sufficient funds at drawer’s disposal to honour the cheque.

41
 According to A Dictionary of International Banking by Dr. S. Ramalingam the
drawee bank uses the words when it returns a cheque because the drawer has insufficient
funds in his account to meet it.
If a cheque is retuned with an endorsement “refer to drawer” it cannot be safely
interpreted to mean any of the two reasons contemplated under the Act. This question was
raised in V.S. Krishnan v. Narayanan32, bringing the decision of the King’s Bench in
Plunkett v. Barclays Bank Ltd33, to the notice of the court it was said –
“The offence under section 138 of the Negotiable Instruments Act will be attracted
only if the cheque 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 for from the account by an agreement made with the bank.
Sometimes it is also suggested that the reasons, “Exceeds Arrangement” or “Not
arranged for” may lead to an unwarranted disclosure of the customer’s account and may
amount to a libel. For this reason the term “Refer to Drawer” should be preferred.
In other case Jaya Lakshmi v. Rashida,34 the Court held that the endorsement refer
to drawer is a euphemistic way of informing the payee that the drawer of the cheque has
got no amount to his credit to honour the cheque. Similarly in Manohar v. Mahalingam,35
Justice Padmini Jesudurai has held that the answer “Refer to Drawer” after adopted by the
bankers’ could mean anything from shortage of funds to death or insolvency of the drawer
and could also include insufficiency of funds. It is seen therefore, that the nomenclature of
the return by itself would not be decisive of the cause of return. Reference may also be
made to M.M.Malik v. Prem Kumar Goyal,36 decided by Punjab and Haryana High court.

32 1990 (1) MWN (Cr) Mad 75: 1990 LW (Cr) 66.

33 (1936) 2 KB 107: (1936) 1 All ER 653: 154 LT 465.

34 I (1992) BC 259: (Vol. 74) Comp Cas (Mad) 841: 1992(2) Crimes 5: 1993 Bank J 378: (1991) (2)
MWN (CN) 202.
35 (1992) LW Cri 367
36 II (1991) BC 484: 1991 Cri L.J. 2594

42
 In this case M.Shreemulu Reddy v. N.C. Ramasamy,37 in which it was held that
whether endorsement “Refer to Drawer” made out an offence was a question of fact to be
established on evidence and to establish that return of the cheque implied insufficiency of
funds in the account. There had to be the appreciation of evidence. We can also refer to the
case V.S.Krishnan v. Narayanan,38 where it was held that in banking parlance the reasons
“Refer to Drawer” when cheques are returned unpaid is used generally for returning the
cheque for want of funds in the drawer’s account or because of service of a garnishee order.
This again is a matter of evidence. The bank would be able to justify before the Court the
reasons for which the cheque was returned. Reference can also be made to a number of
other cases such as
39
In A.D. Circle Pvt. Ltd. v. Shri Shanker, before the Delhi High Court held that
where the cheque had been returned with the remarks “Refer to Drawer” complaint was
dismissed. However, the High Court held that close scrutiny of record and evidence shows
that the cheque was dishonoured for insufficient of funds and the offence was committed.
A Division Bench of the Kerala High Court has held that such endorsements as “Refer
to Drawer”, “Account Closed” and “Payment has been stopped” etc. have the effect of
proving that the cheque has been bounced and if the bouncing was on account of
insufficiency of funds, then an offence under Section 138 of the Negotiable Instruments
Act has been made out40.
There are a number of other cases as well to which a reference can be made and which
clearly establish that “Refer to Drawer” means insufficiency of funds. “Refer to Drawer”
is only a courteous way normally adopted by Banker to show its inability to honour the
cheque for want of funds. If the Petitioner Company had the arrangement or credit in its

37 79 CC (1994) 540: I (1993) BC 8

38 (1990) LW Cri 66: 1991 Cri J. 609

39 II (1992) BC 525: 76 Comp Cas Delhi 764

40 Thomas Verghese v. Jerome, (1992) BC 224(DB): 1992 Cri. LJ 308: 76 Comp Cas (Kerala) 684

43
account with the bank, he can show this fact to the Trial Court, in the absence of which
“Refer to Drawer” means “Insufficiency of funds”.
Refer to Drawer in their ordinary meaning amounted to a statement by the Bank- “We
are not paying, go back to the drawer and ask him why”.41
Refer to Drawer means cheque has been returned for want of funds.42
Similarly the Trial Court had dismissed the complaint on the ground that the term
“Refer to Drawer” is vague and does not disclose insufficiency of funds. The High Court
held that the Learned Magistrate should have given the Petitioner to lead pre-charge
evidence to prove that cheque was returned for paucity of funds.43 In Dada Silk Mils and
others v. Indian Overseas Bank and another44, it has been held by the Gujarat High
Court that the endorsement refer to drawer, necessarily in banking parlance means that “the
cheque has been returned for want of funds in the account of the drawer of the cheque.”

B. Exceeds arrangement –
It is generally meant to convey that the drawer has credit limit but the amount exceeds
the drawing power. Not arranged means no overdraft facility exceeding the limit already
sanctioned or overdraft facility not sanctioned.

C. Effects not cleared –

According to Thomson’s Dictionary of Banking, owing to the exigencies of business,
the bankers usually credit articles paid in for collection to a customer’s account, before
clearance thereof. In some cases items are entered in the ledger and statement as “Cash”;
in other cases they are indicated by symbols.

41 M.M.Malik v. Prem Kumar Goyal, II (1991) BC 484: 1991 Cri L.J. 2594
42 Syed Rasool & Sons v. Aildas & Co., 1992 Cri L.J. 4048: 1993(II) Crimes 550: (1993) 78 Comp Cas.
738
43 29 Prof. Veda Vyasa v. Satija Builders & Financiers Ltd., II (1992) BC 146
44 30 (1995) 82 Comp. Cas 35

44
 If there is an agreement express or implied such as would arise out of a course of
business to pay against uncleared effects, a banker would be bound to honour cheques
drawn against such effects and he cannot arbitrarily and without notice withdraw such
facilities.
It is generally meant to convey that the drawer has paid the cheques or bills, which are
in course of collection but their proceeds are not available for meeting the cheque.
According to A Dictionary of Bank by F.E. Perry, the total of cheques collected for
a customer, which is credited to his account on the day he pays them in. The proceeds
remain uncleared for three days, or five if a week end intervenes. During this time the bank
is presenting the cheques to the paying banks through the clearinghouse. If they are unpaid
they should be received back through the post on the morning of the forth (or sixth) day.
(Town clearing cheques are cleared more quickly.) Whether or not the customer is allowed
to draw against the proceeds of these cheques before they are cleared is a question of fact
in each case, but the banker does not have to pay against uncleared effects unless he so
wishes. If he does so, however, he may encourage the customer to think that similar
concessions may be made on future occasions, and an implied permission may be
construed.

D. Full Cover not Received –

It is generally meant to convey adequate funds to honour the cheque or has not given
adequate security to cover the overdraft which might be created by paying the cheque.

E. Not Provided for –

An answer sometimes written by a banker on a cheque, which is being returned unpaid
for the reason that the drawer has failed to provide funds to meet it. A better answer in
these circumstances is “Refer to Drawer”.

45
 F. Not Sufficient-
When the funds in a customer’s account are insufficient to meet a cheque, which has
been presented to the banker through the clearing or otherwise, the cheque, on being
returned unpaid, is sometimes marked with the words “not sufficient”, or “not sufficient
funds”. The answer “Refer to drawer” is preferable.

G. Present Again –
According to Thomson’s Dictionary of Banking, these words are sometimes written
by a banker upon a cheque, which is returned unpaid because of insufficient funds in the
customer’s account to meet it. It is not, however, by itself a correct answer to give, as it
does not afford any explanation why the cheque has been returned. The best answer to
write upon a dishonoured cheque is “Refer to Drawer”.
Sometimes the words are joined with another answer, as “Refer to Drawer – Present
again”, “Not sufficient- Present again”. No doubt the words “Present again” are used with
the idea of minimising the risk of injury to the drawer’s credit by returning the cheque, but
it is perhaps questionable whether they are altogether prudent words to use.
The banker to whom a cheque is returned with a request “Present again” advises his
customer of the dishonour of the cheque and arranges for it to be represented.

H. Payment Stopped by Drawer –

One of the reasons on account of which the Banker can refuse to make the payment of
a cheque is that the drawer has stopped the payment. The customer has the right to give
notice his Bankers to stop payment of a cheque which he has issued. The notice should be
in writing and should give accurate particulars of the cheque and should be signed by the
drawer. According to Thomson Dictionary of Banking, in case a Bank passes a cheque after
a ‘Stop Order’ has been received, he shall be liable for so doing. It is necessary, therefore,
to warn each Branch where the cheque may be presented, of the notice, which has been
received. A notice should be placed in the Customer Account in the ledger, so that any one

46
referring to the account may at once observed particulars of the ‘Stop Order’. A red colour
slip may be inserted in the ledger, so that there is no mistake. As for different branches of
a bank, in case notice is given to one branch, it shall not be deemed a notice to the other
branches as well.
The discussion relating to stop payment has assumed importance in view of the
amendment to the Negotiable Instruments Law (Amendment) Act, 1988 (66 of 1988) and
the Negotiable Instruments (Amendment and Miscellaneous Provisions Bill, 2002(Bill No.
55 of 2002). We have already seen that by the fact that the dishonour of the cheque can
result in penal consequences in case the cheque is returned on account of the reasons that
it exceeds arrangement made by the drawer with the Bank. Section 138 of the Amended
Act deals with such cases. In Abdul Samod v. Satya Narayana Mahavir,45 a complaint
had been filed under Section 138 and the case of the respondent was that he had stopped
the payment of the cheque on account of civil litigation pending between the parties.
Hon’ble Mr. Justice A.P. Chowdhry analysed Section 138 of the Negotiable Instruments
Act and he stated that there were 5 ingredients of the section which must be fulfilled, which
are as under: -

1. The cheque is drawn on a bank for the discharge of any legally enforceable debt
or other liability;
2. The cheque is returned by the bank unpaid;
3. The cheque is returned unpaid because the amount available in that account is
insufficient for making the payment of the cheque;
4. The payee gives a notice to the drawer claiming the amount within 15 days
(now 30 days as per Amendment 2002) of the receipt of the information by the
bank; and
5. The drawer fails to make payment within 15 days (now 30 days as per
Amendment 2002) of the receipt of notice.

45 35 PLR 1990(2) 269: II (1990) BC 380

47
 In this particular case, the contention of the respondent was that the cheque had been
returned on account of stop payment instructions and not on account of insufficiency of
funds and thus all the ingredients of the section were not available. According to Section
138 it was only when the cheque had bounced on account of inadequate balance in the
account that a complaint was maintainable if the said ground was not available, then the
complaint was not maintainable and the Hon’ble High Court held that there was no
justification to let the proceedings continue.
After the passing of the Banking, the Negotiable Instruments Law (Amendment) Act,
1988 (66 of 1988) and the Negotiable Instruments (Amendment and Miscellaneous
Provisions Bill, 2002 (Bill No. 55 of 2002) the people who issue cheques knowingly well
that cheque is not going to be honoured on presentation, try to create circumstances in
which the banks return the cheque with such endorsements as “Stop payment”, “Refer to
Drawer” and “A/c closed”. This is with a view to escape from the criminal liability. The
question arises whether the offence under the Act shall be committed in case the cheque
issued by a person bounces on account of such reasons. There have been decisions of the
various High Courts and the preponderance of the view of the said judicial decisions in that
in case a cheque is retuned dishonoured with such remarks and if it can be proved that there
was also the insufficiency of funds in the account or that the amount of the cheque issued
by drawer of the cheque had exceeded the arrangement made, then irrespective of such
action of the drawer, it would constitute an offence under the Amended Act. The necessary
condition, however, is that there must be an averment in the petitioner to the effect that the
cheque had bounced on account of insufficiency of funds and on account of the amount of
the cheque having exceeded the arrangement made by the drawer. The Kerala High Court
in Calcutta Sanitary Waters v. Jacob46 has held that in case the payment was
countermanded, then it was without an offence.

46 I (1991) BC 512: 1991(1) KLT 269 109

48
 All these judgments have been examined in judgment of the High Court of Judicature
of Bombay at Aurangabad in Criminal Application No. 1073 to 1076 of 1992 in Shri Prithvi
Raj S/o Amba Lal Patel v. Sh. Bhupendra S/o Shri Jasu Bahi Patel. In these four appeals
Hon’ble Mr. Justice M.S. Vaidya in his judgement dated 06.01.94 examined all the
important judgements relating to the stop payment instructions and also referred to the
Division Bench Judgement of the Bombay High Court.47
A reference also made to the judgement48 in which it was held that the offence under
the section cannot depend on the endorsement made by the banker while returning the
cheque. Irrespective of the endorsement made by the banker, if it is established that in fact
the cheque was returned unpaid either because of the account of the money to honour the
cheque or that it exceeds the amount arranged to be paid from that account by an agreement
made with the bank, the offence will be established. The endorsement made by the banker
while returning the cheque cannot be the decisive factor.
In both the judgments it was contended that what was relevant for the purpose of
determining whether or not an offence under Section 138 of the Negotiable Instruments
Act was disclosed and whether or not the drawer of the cheque had arranged for payment
or had made the payment of the amount covered by the cheque within the period of 15 days
prescribed under the said section and not the reason for which the cheques were
dishonoured by the Bank. The Bombay High Court held that judgement given by the single
in the judgement of Om Parkash Bhojraj Maniyar v. Swati Girish Bhide,49 in which the
case of G.F. Hunasi Katti Math v. State of Karnataka,50 and the decision in case of Mrs.
R. Jayalakshmi v. Mrs. Rashida,51 provided to honour an interpretation which was
narrow and deserved to be set aside. It was a construction of the section where the judges
had failed to take into accounts the objects and reasons behind the amendment. The

47 Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar, 1993 Cri L.J.

48 Thomas Varghese v. P. Jerome, 1992 Cri L.J. 308
49 1992 Mah. L.J. 302:1992(3) Crimes 306
50 I (1991) BC 438: 1991(1) Crimes 227
51 I (1992) BC 259: 1991(1) Crimes 5.

49
decision of division bench of the Kerala High Court52 was specific in observing that where
the cheque issued by the drawer was dishonoured by the bank and returned to the drawer
with the endorsement that “Payment stopped” by the drawer and in the complaint the
complainant had specifically stated that the accused had no amount in his account with the
bank for honouring cheque and that mischievously and maliciously issued an instruction
to the bankers to stop the payment, the complaint for an offence under section 138 of the
Negotiable Instruments Act cannot be quashed on the ground that the amount of money
standing to the credit of the account of the drawer was insufficient to honour the cheque or
that it exceeds the account arranged to be paid from that account by an agreement made
with the bank. This is in fact the correct view of the matter. Since there has been conflicting
opinions by the different High Courts and also because the fact that divergent opinions
have been given by the different High Court the matter was finally decided by the Hon’ble
Supreme Court of India in Bhupendra v. Prithvi Raj.
It is worthwhile to refer to report judgement on the subject by the Gujarat High Court
namely the judgements in Dada Silk Mills and others,53 (Supra) where the Gujarat High
Court has held that in the light of Specific Scheme of Section 138 of the Negotiable
Instruments ACT, 1881 the return of the cheque by the banker with any of the
endorsements, “Refer to Drawer”, “Insufficiency of funds”, “Funds not arranged” or
“Account closed” ultimately connotes dishonour of the cheque on account of fault on the
part of the person who has issued the cheque in not providing sufficient funds or in not
arranging for the funds or in closing the Account. We should keep in mind the fact that in
the scheme of the Act the legislature has provided an opportunity to the drawer to explain
the endorsement made by the banker, and it is always open to the drawer of the cheque to
explain and establish that dishonouring of the cheque was not referable to insufficiency of
funds or his not making provision of necessary funds. The object of the legislature while
introducing Chapter XVII in the Act cannot be allowed to be frustrated.

52 Thomas Varghese v. Jerome, 1992 Cri L.J. 308 111

53 (1995) 82 Comp Cas. 35 Guj.

50
 I. Account closed-
It is an offence under section 138 of the Act – Closure of account would be an
eventuality after the entire amount in the account is withdrawn – It means that there was
no amount in the credit of ‘that account’ on the relevant date when the cheque was
presented for honouring the same.
An account that has been deactivated at the request of the account holder or by the
action of the provider in which no additional adjustments may be made. It represents
the final, detailed statement of account activities between the two parties.
In Om Parkash Maniyar v. Swati Girish Bhide54 held that the endorsement
‘Account Closed’ cannot afford a ground for taking penal action under the Act. Except the
two ground i.e. the insufficiency of the funds or, because the cheque exceeds the amount
arranged to be paid there is no third eventuality contemplated under the Act. The maxim
‘Expresum Facit Sessari Licitum’ means that express mention of one thing implies the
exclusion of the other.
Hon’ble Mr. Justice K.T. Thomas of Kerala High Court observed in Japahari v.
Priya,55 held that the contention for attracting penal liability for the offence under Section
138 of the Act the account must have been alive at the time of presentation of the cheque
is unsound. If the contention gains acceptance it could open a safe escape route for those
who fraudulently issue cheques and close the account immediately thereafter to deprive the
payees of the cheque proceeds. It would thus defeat the very object of innovation made
through Act No. 66 of 1988 by which Section 138 and its allied provisions were inserted
in the Act. Closing the account is one the modes by which a drawer can render his account
inadequate to honour the cheque issued by him. I am of the view that the drawer of the
cheque who closes his account with the bank before the cheque reaches the bank for
presentation, is actually causing insufficiency of money ‘standing to the credit of that
account’.

54 1992 Mah. LJ 302: 1992(3) Crimes 306

55 1(1994) BC 642

51
 3.3 CONSEQUENCES OF DISHONOUR -
There are two points relating to the consequences of the dishonour of the cheques. The
first is that by dishonour of the cheque the negotiability of a cheque is lost. In Sukanraja
Khimraja, a firm of Merchants, Bombay v. N. Rajagopalan,56 and the facts were that
after the dishonouring of a cheque, the payee (M) endorsed it to (R) for valuable
consideration. (R) Demanded payment of the amount as per the cheque from defendants,(
namely the firm which issued the cheque and its partners), and they having neglected to
pay, the suit was filed. The Trial Court decreed the suit and it was affirmed on appeal. In
the Letter Patent Appeal it was contended for the appellants- defendants 1 and 2 ,that the
crucial point involved was, whether the alleged cheque was negotiable after being
dishonoured, and whether the endorsee (M) who filed the suit could be a holder in due
course as defined in Section 9 of the Negotiable Instruments Act.
It was held that the plaintiff as the brother of (M), was fully aware that the cheque had
been dishonoured, and the endorsement in his favour was only after the Bank returned it.
Therefore, Ex. A-1 had lost its negotiability. Hence, he cannot be a holder in due course.
This essential characteristics having not been comprehended and more so, when the cheque
had never been thereafter presented to the Bank for encashment, the suit as laid, could not
have been decreed at all.
The second aspect is relating to the question of limitation. In the case it was held that
in the event of a postdated cheque given on the date of loan in repayment of debt, being
dishonoured, there is no payment at all either on the part of the debt or the whole of it with
the result that the debt in question continues to exist and hence, limitation could not be
counted from the date when the cheque was dishonoured but from the date of the loan.57

56 1989 1 LW 401
57 Arjuna Lal Dhanji Rathod v. Dayaram Premji Padhiar, AIR 1971 Pat. 278

52
 The Supreme Court58 and Bombay High Court59 have observed as follows:-
“The object of Section 138 to inculcate faith in the efficacy of banking operations and
credibility in transacting business on negotiable instruments. Despite civil remedy, Section
138 intended to prevent dishonesty on the part of the drawer of negotiable instrument to
draw a cheque without sufficient funds in his account maintained by him in a bank and
induces the payee or holder in due course to act upon it. Section 138 draws presumption
that one commits the offence if the issues the cheque dishonestly. Once such a cheque
against insufficient funds has been drawn and issued to the payee and the payee has
presented the cheque and cheque is returned to the payee with such an endorsement, it
amounts to dishonour of cheque and it comes within the meaning of Section 138. If, after
the cheque is issued to the payee or to the holder in due course presents the cheque to the
bank for payment and when it is returned on instructions, Section 138 does not attract.”

3.4 INGREDIENTS OF LIABILITY UNDER SECTION 138 OF NEGOTIABLE

INSTRUMENTS ACT, 1881
The ingredients of liability under the section have been stated in terms of the following
points:
A) The cheque is drawn on a bank for the discharge of any legally enforceable debt or
other liability.
B) The cheque is returned by the bank unpaid.
C) The cheque is returned unpaid because the amount available in the drawer’s account
is insufficient for paying the cheque.
D) The payee has given a notice to the drawer claiming the amount within 15 days of
the receipt of the information by the bank.
E) The drawer has failed to pay within 15 days from the date of receipt of notice.

58 Electronics Trade & Technology Development Corpn Ltd. v. Indian Technologists & Engineers
Electronics Pvt. Ltd.
59 Mayri Pulse Mills v. Union of India, (1996) 86 Comp Cas 121 Bom.

53
 3.5 CONSTITUTIONAL VALIDITY OF SECTION 138 OF N.I.ACT, 1881
The validity of section of 138 of the Negotiable Instruments was challenged before the
Maharashtra High Court60 contending therein that the provisions of this section are
violative of Article of 14 of the Constitution of India. The Court examined the matter in
detail taking into consideration the facts of the case and various articles of the Indian
Constitution and observed that the importance of banking section in the developing
economy could not be under-rated. It is not necessary for the purpose of this case to peep
into the history of the development of law, whether it is the Bills of Exchange Act of
England of the year 1882, the Cheque Act, 1957, and various other statutory exercises.
It is the larger public interest that commercial transaction maintain the speed and
tempo and that a swift sale or a prompt purpose, is not unduly impeded by suspicions
always hovering round that part of promise to be performed in future. The issue of a cheque
carries with it assumptions which could regulate the normal functioning of an honest
citizen. At a period of time when multitudinous persons and institutions press into services,
devices and facilities available under the Negotiable Instruments Act, it may be necessary
to ensure that those who issue such vital documents, do not adopt a casual or careless
attitude which could block the free flow of trade. It is in the light of the experience, which
the State had, that the enactment has been attempted. Court is unable to detect any legal
infirmity or constitutional incompetence.
The attempt has not been made out as to show how Article 20 of the Constitution can
be attracted to such a situation. The statute, therefore, cannot be struck down, merely
because the petitioners desire to see its collapse. Entry Nos 45 and 46 respectively, refer to
banking. Bills of Exchange, Promissory Notes and other instruments. The impugned
provisions, would come well within the larger ambit of the entries. It is connected with
negotiable instrument, which clearly come with the aforesaid entries dealing with
legislative power.

60 Narayanadas Bhagwandas Partani v. Union of India, 1993 Mah LJ 1229

54
 Court is unable to see any provision in arbitrariness or infraction of Article 14 of the
Constitution. Those who deal in negotiable instruments are not to resort to sharp practices.
A time consuming civil litigation may not give immediate or adequate remedy to the
victims of an illegal act or a dishonest move. The Parliament could then make a provision
with sufficient teeth, as to strongly deal with the ruffians in the trading area, or the
unscrupulous elements who play foul with negotiable instrument.
Following this, the Bombay High Court held subsequently in Mayri Pulse Mills v.
Union of India61 and Tarun Kumar Bose v. Union of India as follows :-
“We have no hesitation in holding that Parliament had power and competence to enact
Chapter XVI under Entries 45 and 46 of List I in the 7th Schedule of the Constitution.”
The court also observed that the mere fact that the new sections impose absolute liability
dispensing with the doctrine of mens rea does not render the provisions invalid. The
provision in Section 140 that it would not be a defence to show that the drawer had no
reason to believe when he issued the cheque that it would be dishonoured was held to be
valid.
The raising of the presumption that the drawer of the cheque is guilty till he proves the
contrary is also not arbitrary because the presumption arises only after the basic
requirements for the presumption to arise are proved.
Burden of Proof & Criminal Liability under Sec 138:
In cases of criminal liability under dishonour of cheques the burden of proof lies on
the accused who has to prove with the help of the required evidence that the cheque issued
were not for the discharge of the existing debt or liability incurred by the drawer during the
due course of time . No burden of proof lies on the complainant to prove with the help of
evidence that the said cheque was issued with respect to the discharge of any existing debt
or liability incurred by the accused. In complaints under Section 138the Courts have to

61 56 ibid

55
presume that the cheque or cheques issued were merely for discharging the liability of the
drawer and such a presumption made by the Court is rebuttable.
The drawer is considered to be criminally liable for dishonour of cheques when he fails
to make payment of the amount which is due to the payee within fifteen days of receipt of
notice from the payee intimating him regarding the dishonour of cheque and demanding
payment of the said amount. In such a case it is considered that as the chance given to the
drawer to pay up the amount due after the receipt of the notice was misused by the drawer
and so this makes the Courts presume that even if there was no dishonest intention on part
of the drawer then also he is considered to be criminally liable for the dishonour of the
cheque. Under such circumstances the drawer may subjected to imprisonment for a term
of two years or with fine which may exceed twice the amount of the cheque or with both.
But assumption of criminal liability varies from case to case. The option either to prosecute
the accused or to lay a suit for recovery lies with the payee or the complainant. The payee
is even entitled to pursue both the civil as well as the criminal remedies together. The
initiation of criminal proceedings does not bar the payee from initiating the civil
proceedings against the accused for recovery of the amount due. In Act. G.N. Raju v. B.S.
Jaiprakash & Anr., 2006 Cr LJ 820 (Kant) it was held that if the complainant was successful
in getting the fruits of the decree in civil court, it would be helpful only as a mitigating
circumstance while imposing sentence under Section 138 of NI Act.
But such a criminal liability will not be attached on the drawer if the cheque issued
was not with respect to the discharge of the legally enforceable debt on the part of the
drawer, if the cheque issued was a gift without any consideration, if the cheque was
returned by due to some technical problems like signature being not clear, or date not
mentioned properly, if the complaint made is not within the time limit prescribed by
Section 138 and 142 etc.

NATURE OF OFFENCE UNDER SECTION 138 OF N.I. ACT, 1881

56
 The offence is not the drawing of the cheque. The offence takes places when a cheque
is returned unpaid on the twin grounds as contained in Section 138 of the Negotiable
Instruments Act, 1881. Thus, there is a retrospective operation. The Madras High Court
has held that laws made justly and for the benefit of individuals and for the community as
a whole may relate to time antecedent to their commencement. The conclusion would be
that such prosecution is not hit by Article 20 (1) of the Constitution which provides that
“no person shall be convicted of any offence except for violation of the law in force at the
time of the commission of act charged as an offence, nor be subjected to a penalty greater
than that which might have been inflicted under the law in force at the time of the
commission of the offence.62
The amendment had been introduced to enhance the acceptability of cheques in
settlement of liabilities by making the drawer liable for penalties in case of bouncing of
cheques due to insufficiency of funds in the accounts or for the reason that it exceeds the
arrangements made by the drawer, with adequate safeguards to prevent harassment of
honest drawers.
The offence under Section 138 of the Act is a non-cognizable offence by virtue of
Section 142 of the Act on account of the non obstante clause as comprised in Section 142
of the Act, the Magistrate receiving the complaint has to proceed straightway to take
cognizance of the offence of a complaint being made to him in writing and that he cannot
sent the same for investigation to the police.63 It was held by the Court that in a complaint
case alleging commission of a non cognisable offence made in writing to a Magistrate or
received in his Court, under Section 192 of the Code, it is incumbent upon him to
immediately take cognizance and proceed to examine upon oath the complainant and his
witnesses, if any, and a Magistrate cannot straightaway such a procedure is not warranted
by law. In the present case, therefore, it has to be held that the concerned Magistrate erred

62 V.S. Krishnan v. V.S. Narayanan, 1990(1) MWN (Cri) Mad 75: 1990 LW (Cri) 66
63 58 Cucusan Foils Private Co. Ltd. v. State (Delhi Administration), 1990(2) Recent Criminal Reports, 518

57
in sending the copy of the complaint to the SHO for further investigation or enquiry and in
not straightaway taking cognizance of the complaint and his witnesses.

3.6 PROCEDURE FOR DISHONOUR OF CHEQUES

I. DISHONOUR OF CHEQUE
A promissory note, bill of exchange or cheque is said to be dishonoured by non-
payment when the maker of the note, acceptor of the bill or drawee of the cheque makes
default in payment upon being duly required to pay the same. As against section 91, section
92 applies to all the three types of instruments, namely, promissory notes, bills of exchange
and cheques. When the maker of a note, or an acceptor of a bill of exchange, or a drawee
in case of need, or an acceptor of a bill (supra) protest or a banker to whom a cheque is
drawn fails and neglects to pay the amount against the instrument according to the apparent
tenor thereof when presented to him on the due date, the dishonour is complete.64
II. OBJECT OF NOTICE OF DISHONOUR
The object of notice of dishonour to endorser is not to demand payment but clearly to
indicate to the party notified that the contract arising on the negotiable instrument has been
broken by the principal debtor and that the former being a surety, will now be liable for the
payment. This is the principle embodied in section 93 of the Negotiable Instruments Act.65
The object of giving notice of dishonour is not to demand payment for the party giving
notice but to warn the party of his liability and in the case of drawer, to enable him to
protect him as against the drawee or acceptor who was dishonoured the draft. Generally,
where the drawer has no funds belonging to himself in the drawee’s hands neither the
presentment of cheque for payment nor notice of dishonour is necessary to charge the
drawer.
III. NECESSITY FOR NOTICE

64 1 Kanneganti Venkatasubbayya v. PR Rao Tobacco Co. AIR 1972 AP 72.

65 2 Kanhaya Lal v. Ram Kumar, AIR 1956 Raj 129: 1958 Raj LW 317: (1956) 6 Raj 612 (DB).

58
 In Halsbury’s laws of England, it has been stated that as in the case of dishonour by
non-acceptance, so also in that of dishonour by non-payment, notice of dishonour must be
given to the drawer and each endorser; otherwise the drawer of any to endorser to whom
such notice it not given is discharged. But where a bill has been dishonoured by non-
acceptance, and due notice of dishonour has been given it is unnecessary to give notice of
a subsequent dishonour by non-payment unless the bill has in the meantime been accepted.
The rules for giving due notice of dishonour are the same whether the dishonour has been
by non-acceptance or non-payment.66
The rules relating to the notice of dishonour to be given can be summarized as
follows:-
(A) Notice must be given by or on behalf of the holder, or by on behalf, of an endorser
who, at the time of giving the notice, is himself liable on the bill. Thus the holder, on
dishonour, may give notice of it to any previous endorser or endorsers who, in their turn
may serve notice to those, whom they would like to hold responsible. Notice may be given
by the agent either in his own name, or in the name of any party entitled to give notice.

(B) Where the notice is given by or on behalf of the holder, it ensures for the benefit
of all subsequent holders and all prior endorsers, who have a right of recourse against all
parties to whom it is given. Thus A, B, C, D and E are endorsers. F is the holder; if F give
a notice to A of the dishonour, it ensures for the benefit of B,C,D and E as they have
themselves a right of recourse against A.

(C) When notice is given by or on behalf of the endorser, it ensures for the benefit of
the holder and all endorsers subsequent to the party to whom notice is given.
Notice may be given to the party himself or his agent in that behalf. If the drawer of
endorser is dead, and the party giving notice knows it, it must be given to his legal

66 3 Halsbury’s Laws of England, 4th Edn. Vol. 4(1), Para 422.

59
representative if he could be reasonably found. If the drawer or endorser is a bankrupt,
notice may be given to him or his official assignee. If there are two or drawers or endorsers
who are not partners notice must be given to each of them, unless one of them has authority
to receive such notice for the others.

IV PARTICULARS TO BE STATED IN NOTICE

The plaintiff is a suit based on a negotiable instrument where he is the endorsee must
state clearly in his plaint that a notice of dishonour was sent to the endorser and must give
the particulars thereof or where he considers that he is exempt from giving this notice, he
should allege the facts which exempt him from giving such notice. The notice may be oral
or written but it is necessary that it must have been given within a reasonable time. The
notice must also clearly estimate that payment was demanded from the drawee but refused
and that the holder holds the person notified liable on the instruments. The importance of
this requirement lies in the consideration that the giving of a notice of dishonour is a part
of plaintiff’s cause of action and is a condition precedent for making the endorsee liable
and in the absence of such a notice, his liability to the endorsee must stand extinguished.67
Where the endorsee of a pronote seeks to make the endorser liable, the fact of presentment
and issue of notice of dishonour should be made clear in the plaint itself, as notice of
dishonour has been held to be a material part of the cause of action where there is no such
allegation in the plaint, nor is there any proof of the same, the endorsee of a simple on
demand pronote will not be entitled to a decree against an endorser.68
Section 94 of the Negotiable Instruments Act speaks of the modes in which notice has
to be given and notice by post is a perfectly legal method by which notice can be given. 69
Proviso (b) to section 138 of the Act insists that the said notice should be in writing; and
the liability under section 138 of the act would arise only if the accused defaulted payment

67 4 Kanhaya Lal v. Ram Kumar, AIR 1956 Raj 129: 1958 Raj LW 317: (1956)6 Raj 612. 131
68 5 Kothan V. K. v. Kannan, AIR 1951 Mad 632 (1949)2.
69 8 Ravi v. Kuttappan, (2007) 3KLT31: IV (2007) BC 162 (Ker).

60
within 15 days of the “receipt” of notice. This has got special significance; only if the
person accused of the offence knows as to the dishonour can he pay the amount within the
stipulated time.

V PROCEDURE OF NOTICE
Section 138 of the Amended Act is the section which may be terms as the king pin and
provides both for punishment of imprisonment and fine both alternatively with
imprisonment or fine as the case may be, yet, the working of the section is governed by the
three provisos to the Section which may be termed as the regulating and controlling factors.
In case any of the basic requirement is not fulfilled and in case any particular case is hit by
non-compliance to the condition specified therein, a person cannot be prosecuted under
Section 138 of the Act. These provisos have been in brief as under:
Clause (b) of the proviso of Section 138 states that the payee or the holder in due course
of the cheque makes a demand by giving a notice within 15 days of the receipt of
information by him regarding the dishonour of the cheque. Now the period of 15 days has
been increased to that of 30 days by the Amendment Bill No. 55 of 2002. In this way this
proviso stipulates –

a) The payee is the holder in due course.

b) A demand in made by giving a notice by the payee to the drawer.
c) The notice is given within a period of 15 days (now 30 days as per new provisions)
from the date of receipt of the information about dishonour.
The provision of a notice in the proviso (b) to Section 138 of the Act has been enacted
so as to give an opportunity to the person who has drawn the cheque to make the payment.
In case there is no mala fide on his part. What is contemplated by the section is a ‘notice
in writing’.

61
 A. Written Form -
The Clause (b) of proviso to Section 138 of the Negotiable Instruments Act, 1881
contemplates ‘notice in writing’. It does not say that is should be sent by Registered Post
or that is should be served by post. The Section 27 of the General Clauses Act cannot be
transposed into Section 138 of the Negotiable Instruments Act, where the ‘service by post’
is not contemplated and what is contemplated is ‘notice in writing.’70

B. Proper Address –

Where the notice, which was sent to the accused, returned with endorsement ‘not
found’ and the complainant immediately went to the business place of the accused to
deliver notice, which was refused, it was held that notice sent at proper address amounts to
constructive notice. This is a notice which was sent by the complainant by the Registered
Post for the purpose of Section 138 of the Negotiable Instruments Act and which was
returned with the endorsement ‘unclaimed’. This shall be sufficient service for the purpose
of the Act and shall amount to a culpable default or deliberate evasion of the accused. This
would constitute ‘receipt of notice’.71
a) The Delhi High Court has held that the receipt of notice by even a partner
habitually working for the business of the Firm operates as a notice to the
firm.72
b) In case a notice is issued to a firm then there is no question of issuing a notice
to all the partners.73 In the case the notice is refused, the cause of action is the
date of refusal and file the complaint within 15 days of the refusal of the
notice.74

70 9 V.P.Ravathi v. Asha Bagree, 1 (1992) BC 467: (1992) 1 Crimes 743: 1992 Vol. 75 Comp. Cas. 372
71 Prasanna v. R. Vijay Lakshmi, 1 (1992) BC 671: 11(1993) Crimes 679
72 Renu Vohra v. Shreyans Papers Mills Ltd., II (1993) CCR 1471
73 Oswal Ispat Udyog v. Salem Steel Suppliers, 78(1993) Comp. Cas. 512
74 Ghanshyam M.Swamy v. M/s. Classic Steel Products, (1992) 75 Comp. Cas. 695: 1 (1992) BC 240.

62
 c) The Calcutta High Court has held that in case of offence by the Company, no
separate notice under clause (b) of proviso to section 138 is required to the
Director of the Company.75

C. Obligations under Section 138 of Negotiable Instruments Act, 1881 –

To constitute an offence under Section 138 of the Negotiable Instruments Act, 1881,
the Complainant is obliged to prove its ingredients which include the ‘receipt of notice’ by
accused under clause (b). It is to be kept in mind that it not the ‘giving of notice’ which
makes the offence, but is the ‘receipt’ of the notice by the drawer which gives cause of
action to complainant to file the complaint within the statutory period.76
It is settled law that without taking peremptory action in exercise of his right under
clause (b) of Section 138 of the Negotiable Instruments Act, 1881, the payee cannot go on
presenting the cheque so as to enable him to exercise his right at any point of time during
the validity of the cheque. But once he gives a notice under clause (b) of the proviso to
Section 138 of the Act, he forfeits the right of presenting the cheque all over again, for, in
the case of failure of drawer to pay the money within the stipulated time, the drawer would
be liable for the offence and the cause of action for filing the complaint will arise with the
period of one month for filing the complaint being required to be reckoned from the day
immediately following the day on which the period of fifteen days from the date of the
notice by the drawer expires.77
Statutory notice of demand must be a written notice and not an oral notice. When the
complainant brought fact of dishonour of Cheque to notice of accused orally but on request

75 Dalip Kumar Jaiswal v. Debapriya Bannerjee, 1 (1992) BC 403 (DB): 1992(1) Crimes Cal. 1233:
(1992)73 Comp. Cas 434: 1992 Bank J. 417
76 Dalmia Cement ( Bharat) Ltd. v. Galaxy Traders and Agencies Ltd. and others, (2001) 5 Comp.LJ

26 (SC)
77 Sadanandan Bhadran v. Madhavan Sunil Kumar (1998) 4 Comp. LJ 228(SC): (1998) 94 Comp.

Cas 812 (SC) : AIR 1998 SC 3043.

63
by accused, complainant allowed three months’ time. On second presentation, cheque was
again dishonoured. Statutory Notice after second dishonour by complainant was well
within validity period then complaint filed after second dishonour within validity period
was proper.78

D. Whether Service of Notice could be Constructive –

It has been held that sub- Section (c) of Section 138 does not at all contemplate any
constructive notice79. If constructive notice has been contemplated under the said sub-
Section by the Legislature, sufficient phraseology would have been utilised for such a
purpose. The language used therein, namely, ‘receipt of the said notice’, unambiguously
points out actual receipt of the notice.
In the case on hand notice issued has not been actually served but it has been returned
with a postal endorsement as ‘not found’. Such being the case, it cannot at all be stated that
the provisions of sub-Section (c) of the said Section had been duly complied with and the
non-compliance of the said provision is sufficient enough for the prosecution to be thrown
back, stock and barrel.
The provisions of sub-Section (c) of the said Section contemplates constructive notice,
even then it cannot be stated that in the case on hand, there is a plausibility to come to the
conclusion of the existence of such a constructive notice. It is not as if the notice has been
returned as “refused to receive” and in such an eventuality, one can attribute knowledge on
the part of the person responsible for the refusal of such a notice. In the case of a postal
acknowledgement as ‘not found’, which is exactly the situation in the case on hand, it
cannot be stated that there could have been any sort of wilful evasion of such a notice, in
as much as issuance of such a notice could not be put to the knowledge of the person to
whom it was intended.

78 H.N.Haria v. A.J. Mavla (2002) 1 Comp. LJ 143 ( Karn)

79 R.M. Sundaram v. C.M. Ramraj, 283 Mad.

64
 Therefore it is held that it cannot be stated that the complaint had complied with the
provisions of sub Section (c) of Section 138 of the Act and consequently, he has to face the
music of dismal failure of his complaint being thrown out.
If refusal and even failure to claim in circumstances as here will be tantamount to
service of notice. The appellant was not case at all that it had not been proper addressed to
him that, therefore, it was returned. The evidence in this case showed that it was properly
addressed to him, that he refused/failed to claim and that there was, therefore, proper
service of notice upon him, whose grievance in this behalf was unfounded. 80 If a notice is
not given within the stipulated period as mentioned in clause (b) of the proviso attached to
Section 138 of the Act, the said section would not apply. As the provision in terms states
that nothing contained in this section shall apply unless clause, a, b or c are complied. 81

i) Service of Notice
Madras High Court held that where the notice was returned by the post office with the
remark that the addressee was not found, it was held to be not a notice for the purposes of
a complaint. The court noted the language used in Section 138 (c) “receipt of the said
notice” and said that this unambiguously pointed to the actual notice to the other party. The
return of the notice must show at least wilful evasion.82 The court followed its own earlier
decision to the effect that Section 138 (c) did not contemplate constructive notice. Hence,
a written demand notice returned with the postal endorsement “not found” could not be
said to have complied with the requirements of the Act83. The court said that if constructive
notice had been contemplated, the legislature would have used apt phraseology for the
purpose. The matters would have been different if the notice had been returned under
refusal because in that case presumption of notice would be there.

80 Kunjan Panicker v. Christudas, 1997(4) Crimes 477 at pp. 479,480

81 Jitinder Kumar Chopra v. Harish Kumar, II (1997) CCR 626 at p. 627
82 L.Mani v. Kandan Finance,(1996) 86 Comp. Cas. 205 Mad.
83 R.M.Sundaram v. C.M. Ramraj, (1993) 3 Crimes 175 Mad.

65
 The Allahabad High Court has held that the omission to mention the date of service in
the complaint did not affect the maintainability of the complaint.
Madras High Court held that wherein the allegations in the complaint were that the
notice was deliberately avoided, complaint was not quashed. In another case it was held
that the deliberate avoidance of notice amount to constructive notice and refusal notice is
also constructive service.
Then Kerala High Court has held that the miscarriage of notice in post does not affect
the validity of notice.84
Bombay High Court has held that the Provisions requiring notice to be given are
generally construed liberally. In the context in which notice to the drawer is contemplated
in clause (b) of the proviso of Section 138, a liberal interpretation is needed in favour of
the person who is under the statutory obligation of giving notice since he is the loser in the
transaction and it is for safeguarding his interest that the new provisions have been made.
The giving of notice and receipt of notice are two different things but even so the court
held that in the present context if the payee has despatched notice to the correct address of
the drawer reasonably ahead of the expiry of 15 days, it would be sufficient to show that
the notice has been received by the opposite party. 85
Kerala High Court has held that the questions whether the notice was despatched in
time, whether the drawer evaded service can be decided at the trial.86
On the other hand the Bombay High Court has held return of acknowledgement receipt
is a good evidence of constructive notice.
The date of service can also be examined at the trial even if not mentioned in the
complaint.

ii) Mode of communication –

84 Mahadevan Sunil Kumar v. Bhadran, (1992) 74 Comp. Cas. 805 Ker.

85 K.Madhu v. Omega Pipes Ltd.(1996) 87 Comp. Cas. 118 Bom.
86 Syed Hamid Bafaky v. Moideen, (1996) 85 Comp. Cas 267 Ker.

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 Section 94 of the Negotiable Instruments Act provides that the notice of dishonour
may be given to a duly authorised agent of the person to whom it is required to be given,
or, where he has died, to his legal representative, or where he has been declared an
insolvent, his assignee; may be oral or written; may, if written, be sent by post; and may
be in any form; but it must inform the party to whom it given either in express terms or by
reasonable intendment, that the instrument has been dishonoured, and in what way, and
that he will be liable thereon; and it must be given within a reasonable time after dishonour,
at the place of business or ( in case such party has no place of business) at the residence of
the party for whom it is intended.
If the notice is duly directed and sent by post and miscarried, such miscarriage does
not render the notice invalid.
Madras High Court has upheld its earlier view87 that it is not necessary that the notice
of dishonour (notice in writing) which is required under Section 138(b) should be sent by
registered post. It may be sent by an ordinary letter or even by a telegram. The same High
Court held that notice within stipulated time requiring payment of cheques as well as other
dues is valid.

VI CAUSE OF ACTION
Allahabad High Court held that the cause of action under the proviso (b) and (c) of
Section 138 of the Negotiable Instruments Act, filing complaint cannot be said to arise
merely on the cheque being dishonoured but will arise only after the giving of notice of
demand of a the amount of the cheque by payee or holder in due course of the cheque to
the drawer of the cheque and coupled with the failure of the drawer of the cheque to pay
the amount within 15 days of the date of service or receipt of the notice on or by him.
Whereas the Madras High Court held that the mere presentation and dishonour do not
create the cause of action. It is the notice, which gives the cause. There is no restriction on
the number of times for presenting the cheque for payment. Accordingly, any one of those

87 V.P.Revathi v. Asha Bagree, (1992) 75 Comp. Cas. 372 Mad 1991) LW (Cri) 468

67
presentments, within the time limit of six months, may be chosen for given notice and
launching prosecution.88In this case it followed its earlier decision89. In another case it held
that the date of the issue of the cheque could be enquired at the trial90.
A cheque can be presented by the payee or its holder in due course on different
occasions but within the prescribed period of six months or the period of validity of the
cheque whichever is earlier, further a clear stipulation that upon the dishonouring of the
cheque for the first time, the payee has not taken any action as postulated in terms of
provision (b) and (c) of provision to Section 138 of the Act.91
Failure to file prosecution on the dishonour of a cheque on the first occasion is not a
bar for initiation of a prosecution subsequently, and successive dishonour of cheque on
different occasions, of course, presented within its period of validity, will have to be
construed as constituting separate cause of action for the initiation of a prosecution.
According to Sections 138 and 142(b) cause of action to file complaint arises on the
expiry of notice demanding payment and not earlier.
VII PROCEDURE FOR FILING OF COMPLAINT –
The Act does not define complaint anywhere in the act itself but only states that after
dishonouring of a cheque a notice within 15 days of information received from the banker
complaint be instituted before the Magistrate 1st Class having jurisdiction to try the case.
However, the term ‘complaint’ has been defined in Section 2(d) of Code of Criminal
Procedure, 1973 as under:
“Complaint, means any allegation made orally or in writing to a Magistrate with a view
to his taking action under this Code, that some person, whether known of unknown, has
committed an offence, but does not include a police report.

88 K.Annakldi Ammal v. K. Ethiraj, (1994) 80 Comp. Cas. 870 Mad.

89 K.V. Iyer v. Chitra & Co. (1990) 2 MWN ( Cri) 47
90 L.Sashikala v. Integrated Finance Co. Ltd. (1994) 80 Comp. Cas, 875 Mad.
91 Harshivinder Singh v. M/s Bhagat Trading Co. (1998 Cri LJ 345 at 350,351

68
 A report made by a police officer in a case which discloses, after investigation, the
commission of a non-cognizable offence shall be deemed to be a complaint; and the police
officer by whom such report is made shall be deemed to be the complainant.”
It is crystal clear that the complaint filed before the Magistrate should sets out the
allegation, which prima facie constitute an offence under the Act stated therein, and also
there is a prayed therein to take cognizance of the said offence and to compel the accused
by legal process to stand his trial under the law. For the refraction or violation of the
provisions of Section 138 of the Negotiable Instruments Act, the Court is empowered to
take cognizance of such offence only if the complaint is preferred by the payee or the holder
in due course of the cheque. In case of Company or Firm it will be filed by its
representative.

A. Private Complaint –
Clause (a) of Section 142 contemplates of filing of a private complaint only. This
section does not give any indication to refer such a private complaint filed by the payee or
the holder in due course to the police for investigation under Section 156(3) of the Code of
Criminal Procedure by the magistrate before whom such a complaint is filed.92
Andhra Pradesh High Court held that the cognizance of a complaint by a magistrate
on police complaint not to be valid.93 In another case the same High Court has held that the
Magistrate has no power to refer to the matter to the police.94
B. Reference to Police –
Karnataka High Court held that there is much force in the contention that for an offence
punishable under Section 138 of the Act, the procedure as contemplated under Section 142
of the Act is an answer and making reference to police under Section 156(3) Cr. P.C. is not
warranted. This contention supported by its earlier decision.95

92 K.Mahadevan v. Y.Venkatesh ,(1992) 3 ALT 634

93 Y.Venkateshwar Rao v. Mahee Handlooms P. Ltd.(1994) 79 Comp. Cas. 206 AP
94 Jagarlamudi Durga Prasad v. State of A.P., (1993) 76 Comp. Cas 339 AP
95 H.Mohan v. State of Karnataka, 1991(2) Crimes 93 (Kar).

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 VII. LIMITATION FOR FILING COMPLAINT
The object which such provisions seeks to sub-serve is clearly in consonance with the
concept of fairness of trial as enshrined in Article 21 of the Constitution of India. It is,
therefore, of the utmost importance that every prosecution must abide by the letter of law
or take the risk of the prosecution falling on the ground of limitation.
Clause (c) of Section 138 of the Negotiable Instruments Act, 1881 provides that the
cause of action arises on the failure of the drawer “to make 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
15 days of the receipt of the said notice” given under Clause (b) thereof, and not before
that. No such complaint can, therefore, legally be filed before the aforesaid period. That
being so, the material and relevant date for accrual of cause of action for such-like
complaint is the date of receipt of the notice by the drawer. Knowledge of the sender about
the date of receipt of the notice by the drawer is, therefore, very much material as regards
accrual of the cause of action for making such-like complaint.
In cases where notice is sent by registered post A/D, the knowledge of the sender
(complainant) about the date of receipt of such notice would invariably be dependent upon
other agencies, namely, the Postal Department which is obliged to return back the A/D card
to the sender of the registered notice. More often than not A/D card is hardly returned back
to the sender in time or never reaches back the sender, necessitating correspondence with
the Postal Department as to the delivery/service of the registered notice or the date of
delivery/service of such notice, which may often involve a time consuming process. In
such cases, such like complaint is likely to fail for no fault of the complaint, but for the
failure/latches on the part of the Postal Department.
The knowledge of the sender of the notice about the date of receipt of the same being
an essential requirement of fair play and natural justice, the expression “within 15 days of
the receipt of the said notice”, used in the aforesaid provision, should clearly mean the date

70
when the sender acquires the knowledge about the date of the receipt of the notice given
by him under Clause (b) of the relevant provision. If a person is given a right to resort to a
remedy within a prescribed time, limitation should not be computed from a date earlier
than that on which the party aggrieved actually knew about the date of accrual of cause of
action for making a complaint before the competent court for seeking redress thereof, or
else, it might be an absurd and unreasonable application of law.
On a fair and reasonable construction, cause of action for such complaint, so far as the
complainant is concerned, would thus accrue on the failure of the drawer to make payment
within 15 days from the date of knowledge of the complainant about the receipt of the
notice by the former (Drawer).96
From a plain reading of section 142 (b) of the Act, it is manifest that a competent court
can take cognizance of a written complaint of an offence under section 138 if it is made
within one month of the date on which the cause of action arises under clause (c) of the
proviso to section 138. The term “one month” would be the calendar month and as per
section 3(35) of the General Clauses Act, 1897, the number of days in a month be reckoned
according to the British Calendar, under which some months have 31 days and others have
30m days while one month has 28 or in a leap year 29 days.There was a controversy as to
whether the period of one month should be reckoned from the day after the period of 15
days or excluding that day. Examining the matter in the light of section 12 (1) and (2) of
Limitation Act, 1963 and section 9 of the General Clauses Act, 1897, the Apex Court laid
down that ordinarily in computing the time, the rule observed is to exclude the first day
and to include the last. Thus the period of one month as contemplated in section 142 (b)
for filing complaint shall be reckoned from the day immediately following the day on
which the period of 15 days from the date of the receipt of notice by the drawer expires but
excluding that very day.
In this case the period of 15 days expired on 14 October 1995, and cause of action
arose on 15th October, 1995. It was held that after excluding 15th October 1995 the period

96 Santa Priya Engineers Pvt. Ltd. and others. v. Uday Sanker Dass and others. (1996) 296 (Cal)

71
of one month will extend upto 15th November 1995 therefore, complaint filed on 15th
November 1995 is within limitation; refer : M/s Saketh India Ltd. & Others Vs. M/s India
Securities Ltd., A.I.R. 1999 SC 1090. Earlier in Sections 138 to 142 there was no provision
for condonation of delay in making complaint. By Amending Act of 2002 a proviso has
been added to sub-clause (b) of Section 142 which provides that the Court may take
cognizance of complaint after the prescribed period if it is satisfied that the complainant
had sufficient cause for not making complaint within prescribed period. The Amendment
Act of 2002 has come into force from 6.2.2003. Apart from the period of limitation
prescribed in section 142 (b) of the Act, two other timeframes are also required to be
noticed which a complainant is expected to observe in order to have a cause of action for
filing a complaint under Section 138 of the Act. Firstly, as required by proviso (a) to
Section 138, the cheque must be presented to the drawee Bank within a period of six
months from the date on which it is shown to have been issued or within the period of its
validity, whichever is earlier.
The non-presentation of the cheque to the drawee bank within the specified period
would absolve the person issuing the cheque of his criminal liability under section 138 of
the Act; refer: Shri Ishar (supra). In case of a post-dated cheque the period of six months
shall commence from the date written on the cheque. Secondly, after dishonour of the
cheque the complainant should make a demand for the payment of money by giving a
notice “to the drawer of the cheque within 30 days (prior to Amendment of 2002 – 15 days)
of the receipt of information by him from the bank regarding the return of the cheque as
unpaid”. So 30 days are to be counted from the receipt of information regarding the return
of the cheque as unpaid.
In M/s Munoth Investments Ltd. Vs. Puttokola Proprietors Ltd., A.I.R 2001 SC 752,
the cheque was returned by the bank on 13th and information was given to the complainant
only on 17th because 14th, 15th and 16th were Pongal holidays, the Apex Court held that
the period of 15 days is to be counted from 17th and not from 13th.

72
 A. When the period of limitation expires on holiday
It has been held by the Madras High Court that the complaint to be filed within 45 days
from the date of service of notice of dishonour on the drawer and where the period of 45
days expired on a holiday, presentation of complaint on next working day as the same is
not barred by time.97

B. Successive dishonour –
It has been held by the Andhra High Court that the complainant can file a complaint
for offences under Section 138 read with 142 of the Negotiable Instruments Act after the
dishonouring of the cheque for the first time or he may choose to present the cheque at the
request of the drawer with the said period of six months from the date of the cheque any
number of times but the action to be taken by filing complaint is only once and the period
of limitation has to be counted from the date of last dishonouring of the cheque. That means
the limitation period cannot be taken into consideration from the first date of dishonouring
and the last date of dishonouring alone has to be taken into consideration.98

C. Fresh Representation Does Not Increase Limitation –

It has been held by the Punjab and Haryana High Court that once a cause of action had
arisen, the limitation will begin to run and it could not stopped by presenting the cheque
again so as to have a fresh cause of action and fresh limitation. The criminal prosecution
(under Section 138 of the Negotiable Instruments Act) had to be launched within one
month of the expiry of fifteen days period from the receipt of notice by the drawer as
provide by Section 142(b) of the Act.
Section 138 of the Amended Act is the section which may be terms as the king pin and
provides both for punishment of imprisonment and fine both alternatively with

97 M.Y.Maharishi v. M/s Tagore Financiers, (1992) Mad. 306

98 M/s Syed Rasool and Sons and Others v. (M/s) Alida and Co. and others (1996) 14 (A.P.)

73
imprisonment or fine as the case may be, yet, the working of the section is governed by the
three provisos to the Section which may be termed as the regulating and controlling factors.
In case any of the basic requirement is not fulfilled and in case any particular case is hit by
non-compliance to the condition specified therein, a person cannot be prosecuted under
Section 138 of the Act. Clause (b) of the proviso of Section 138 states that the payee or the
holder in due course of the cheque makes a demand by giving a notice within 15 days of
the receipt of information by him regarding the dishonour of the cheque. Now the period
of 15 days has been increased to that of 30 days by the Amendment Bill No. 55 of 2002.
SUCCESSIVE PRESENTATION – ONE CAUSE OF ACTION:
A cheque can be successively presented before the bank but the question arises
whether every presentation and consequent dishonour of the cheque gives rise to a fresh
cause of action. Dealing with this issue the Apex Court in Sadanandan Bhadran Vs.
Madhavan Sunil Kumar, (1998) 6 SCC 514, laid down that of course, in the course of
business transactions it is not uncommon for the cheque being returned due to insufficiency
of funds or such similar reasons and being presented again by the payee after sometime, on
his own volition or at the request of the drawer in expectation that it would be encashed.
The primary interest of the payee is to get his money and not prosecution of the drawer,
recourse to which, normally, is taken out of compulsion and not choice. On each
presentation of the cheque and its dishonour, a fresh right-and not cause of action accrues
in his favour. He may, therefore, without taking pre-emptory action in exercise of his right
under clause (b) of section 138, go on presenting the cheque so as to enable him to exercise
his right at any point of time during the validity of the cheque. But once he gives a notice
under clause (b) of section 138, he forfeits such right, for in case of failure of the drawer
to pay the money within the stipulated time, the cause of action for filing the complaint
will arise.

SUM UP:

74
 The people who issue cheques knowingly well that cheque is not going to be honoured
on presentation, try to create circumstances in which the banks return the cheque with such
endorsements as “Stop payment”, “Refer to Drawer” and “A/c closed”. This is with a view
to escape from the criminal liability. ‘Account Closed’ cannot afford a ground for taking
penal action under the Act. Except the two ground i.e. the insufficiency of the funds or
exceed arrangement because the cheque exceeds the amount arranged to be paid there is
no third eventuality contemplated under the Act. Further, the main object of Section 138
was to inculcate faith in the efficacy of banking operations and credibility in transacting
business on negotiable instruments. Despite civil remedy, the present day economies of the
world which are functioning beyond the international boundaries are relying to a very great
extent on the mechanism of the Negotiable Instruments such as cheques and bank drafts
and also the oriental bill of exchange as the business activities have increased, the attempt
to commit crimes and indulge in activities for making easy money has also increased.
Thus besides civil law, an important development both, in internal and external trade
is the growth of crimes and find that banking transactions and banking business is every
day being confronted with criminal actions and this has led to an increase in the number of
criminal cases relating to or concerned with the Banking transactions. Whenever a cheque
is dishonoured, the legal machinery relating to the dishonour of a cheque comes into
motion. It is in the larger public interest that commercial transaction maintains the speed
and tempo and that a swift sale or a prompt purpose, is not unduly impeded by suspicions
always hovering round that part of promise to be performed in future. The issue of a cheque
carries with it assumptions which could regulate the normal functioning of an honest
citizen. 67 Belgaun Bank Ltd. v. Bando Raghunath AIR 1945 Bom.
Notice may be given to the party himself or his agent in that behalf. If the drawer or
endorser is dead, and the party giving notice knows it, it must be given to his legal
representative if he could be reasonably found. If the drawer or endorser is a bankrupt,
notice may be given to him or his official assignee. If there are two or more drawers or
endorsers who are not partners, notice must be given to each of them, unless one of them

75
has authority to receive such notice for the others. It is necessary that it must have been
given within a reasonable time. The notice must also clearly estimate that payment was
demanded from the drawee but refused and that the holder holds the person notified liable
on the instruments. For filing complaint cannot be said to arise merely on the cheque being
dishonoured but will arise only after the giving of notice of demand of a the amount of the
cheque by payee or holder in due course of the cheque to the drawer of the cheque and
coupled with the failure of the drawer of the cheque to pay the amount within 15 days of
the date of service or receipt of the notice.

CHAPTER V: JURISDICTION OF COURTS AND INITIATION OF TRIAL

76
 4.1 JURISDICTION
The jurisdiction of the Area is concerned, the complainant can choose any one of those
courts having jurisdiction over any of the local areas within the territorial limits of which
any one of the following acts took place:
i) Drawing of the cheque.
ii) Presentation of the cheque
iii) Returning of the cheque by drawee bank
iv)Giving of notice in writing to the drawer of the cheque demanding payment of
cheque and failure of the drawer to make payments within 15 days of receipt of notice.99

Jurisdiction u/s 138 of N.I. Act, 1881 –

A. Cause of Action:
Where a cheque was issued for business purchased at one place and the recipient of
the cheque also deposited the cheque into his account at that very place, but, after
dishonour, he issued notice of dishonour from his place of business in some other town, it
was held that a complaint filed at that place was competent. The cause of action partly
arose there because to discharge his liability the drawer would have to make arrangement
for payment at the recipient place. Thus the places where the payment was to be made and
where the cheque was delivered are also relevant. Where a cheque was given at Delhi but
was deposited by the payee at some other place, there was no jurisdiction at that place. It
is the duty of the debtor to seek his creditor and, therefore, the court at the place of the
payee had jurisdiction.
Cause of action may arise at the place where the cheque was issued or delivered or
where the money was expressly or impliedly payable. Where there was averment in the
compliant of an agreement to return the money at the residence of the complainant, it was
held that the cause of action arose there.

99 K.Bhaskarn v. Shanta Karan Vidyan Balan AIR 1999-7 SC-570

77
 B. Where Refusal Takes Place –
Section 177 of The Code of Criminal Procedure states that every offence shall
ordinarily be enquired into and tried by Court within whose local jurisdiction it was
committed and Section 179 of the said Code states that when an act is an offence by reason
of anything which has been done, and of a consequence which has ensured, the offence
may be enquired into or tried by the Court within whose local jurisdiction such thing has
been done or such a consequence has ensued. So far as the complaint lodged by the
respondent No. 2 against the petitioners for an alleged offence under Section 138 of the
Negotiable Instruments Act, 1881 is concerned, from the complaint, it is evident that the
cheques that were issued by the petitioner No 1 under the signature of the petitioner No. 2
in the name of the respondent No. 2, were drawn on the Vijaya Bank at Shakespeare Sarani
in Calcutta, although sent to Bombay, and the cheques were produced at Vijaya Bank at
Shakespeare Sarani in Calcutta for encashment where those were dishonoured.
Accordingly, if any offence was committed by the petitioners at all, it was committed in
Calcutta as per the provisions of Section 179 read with Section 177 of the Code of Criminal
Procedure and such an offence is to be tried by the Court within whose local jurisdiction
such offence was committed namely, by a competent Criminal Court in Calcutta. The ratio
of the decisions in AIR 1954 SC 429: AIR 1960 Cal 513: AIR 1963 Pat. 398 and AIR 1974
P & H 2, therefore, apply with full force so far as the contention of Mr. Mukherjee
regarding the lack jurisdiction of the Metropolitan Magistrate’s Court in Bombay to
entertain the disputed complaint against the petitioners is concerned, as from the facts of
the present case, it becomes quite clear, that if there be any cause of action for starting a
criminal proceeding against the writ petitioners for their alleged offence at all, such cause
of action has arisen wholly in Calcutta when the alleged offence has been committed and
not in Bombay as no part of such cause of action has arisen there.100

100Indmark Finance and Investment Co. (Pvt) Ltd. v. The Learned Metropolitan Magistrate 28th
Court, 1992(1) Crimes 993 at p. 997

78
 Once the cheque is dishonoured and the payee serves the notice he is entitled to enforce
his rights under Section 138 of the Negotiable Instruments Act at the place of his business.
The Courts at Khanna have the jurisdiction to try the criminal charges against the
petitioner. No case is thus, made out for quashing of the complaint and consequent
proceedings.101
The complaint can be filed in a Court within the jurisdiction of which the cheque has
been drawn or the place where the cheque is presented for collection and received an
endorsement about the dishonour of the cheque or the place where the cheque is
dishonoured. In this case the cheques drawn on State Bank of India, Kurnool Branch of
Hyderabad for collection where a part of the cause of action arose. Therefore, the Court at
Hyderabad has got jurisdiction to try the case. Under those circumstances, the learned
Magistrate is perfectly right in dismissing the petition filed by the accused which does not
call for interference.102

C. In Case of Non Payment –

Since Section 142(b) of the Acts speaks of cause of action. What does cause of action
mean? A court gets jurisdiction over the matter if the cause of action arises within the local
limits of its jurisdiction. Cause of action means: “the whole bundle of material facts which
it is necessary for the plaintiff to prove in order to entitle him to succeed in the suit” to
ascertain whether the bundle of facts give rise to the cause of action and to determine
whether one or more of those facts had occurred within the territorial jurisdiction of the
Court the entire plaint has to be taken into consideration.
In the decision in the State of Madras v. C.P. Agencies,103 the Supreme Court quoted
with approval the following observations in Ms. Chand Kaur v. Partap Singh,104

101 T.K.Khungar v. Sanjay Ghai, 1994(3) Crimes 802

102 M/s Goutham T.V. Centre v. M/s Apex Agencies, 1993(1) Crimes 723: 1993 Cri. LJ 1004.
103 AIR 1960 SC 1309.
104 15 Indian Appeals, 156.

79
 Now the cause of action has no relation whatever to the defence which may set up by
the defendant, nor does it depend upon the character of the relief prayed for by the plaintiff.
It refers entirely to the grounds set forth in the plaint as the cause of action, or, in other
words, to the media upon which the plaintiff asks the Court to arrive at a conclusion to his
favour.
The question whether the Court within whose jurisdiction cheque is delivered can
entertain the suit arose for consideration in the decision of Lachhman Dass v. Chuhra
Mal. 105 It was held that in a suit for recovery of loan, the cause of action does not constitute
merely the giving of loan but it consists for of a bundle of facts including the agreement
relating to the loan, the place where the plaintiff delivered to the defendant the cheque for
the amount of loan and the place where the loan was to be paid back. It was observed that
if no cash was advanced by plaintiff to the defendant but it was the cheque that constituted
the loan, then the place where the defendant got the cheque from the plaintiff gives rise to
a part of the cause of action and the plaintiff has a right to institute the suit in the Civil
Courts within whose territorial jurisdiction the cheque was delivered to the defendant.
The complaint can be laid at the place wherein the cheque was dishonoured and also
at the place where the cheque was issued, which means that the complaints laid in these
cases before the Judicial First Class Magistrate-II Kannur has jurisdiction to try the
offence.106
As per Section 179 of Cr. P.C. the place where the cheque was given or handed over
will have jurisdiction and the courts of that place will have jurisdiction to try the offence.
Likewise for purpose of Section 178(b) payment of cheque may be one part of an offence
and dishonour of the cheque may be another part and, therefore, both places, i.e. place
where the cheque was handed over and the place where it was dishonoured will have
jurisdiction.107

105 AIR 1952 Pepsu 5.

106 Mohmmed Kunhi v. Abdul Kagged, 1996(3) Crimes 406: 1 (1996) BC 271 Ker.
107 CanBank Financial Services Ltd. v. Gitajli Motors Pvt. 1996 (1) BC 221: 1995 Cri. LJ 1222: 1995 (1)

Crimes 342 : 1995(1) Civil LJ 902.

80
 D. The Court to Try Offence –
The offence falling under Section 138 of the Act will not be the only solitary act of
dishonour by the Bank on which the cheque is drawn. Even giving of the cheque by the
accused when he has not made arrangements for honouring of the cheque itself will be a
part of the facts constituting the offence. Section 178(b), Cr. P.C. lays down that when an
offence is committed partly in one local area and partly in another area, it may be enquired
into and tried by a Court having jurisdiction over any of such local areas. Under Section
179, Cr. P.C. 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.
Giving the cheque by the accused to the complainant and giving the cheque for collection
by the complainant to its Banker at Bangalore will also be the facts constituting the offence.
Therefore, in view of the provisions of Sections 178(b) and 179 Cr. P.C. the complaint can
be filed in a court within the jurisdiction of which the cheque has been issued or the place
where the cheque is presented for collection or the place where the cheque is not honoured.
In view of this position of law, the learned Magistrate was wrong in coming to the
conclusion that he has no jurisdiction to entertain the complaint. He has the jurisdiction to
entertain the complaint in view of the fact that the cheque was issued by the accused at
Bangalore and the cheque was given for collection by the complainant to its Banker at
Bangalore. These are the facts which took place within the jurisdiction of the Court.108
It is well settled now that the Court has jurisdiction over the area where the cheque
was issued or delivered or where the drawer of the cheque fails to make payment of the
money or where the cheque was presented for encashment or the area where the payment
was to be made. Therefore, the appellant had cause of action to file the complaint before
the lower Court where the cheque was presented for encashment and the lower court had

108 M/s. Pohathi Agencies v. The State of Karnataka, 1991 Cr. LJ 2530 at p. 2531 Kar.

81
jurisdiction to take cognizance of the offence. Therefore, the finding of the lower court that
it had no jurisdiction to take cognizance of the offence is absolutely unsustainable. 109
The non payment of cheque amount at Madras, despite the written demand from the
Registered Office at Madras, would make the offence complete. This is made clear even
from the observation made by the High Court of Kerala in P.K. Muraleedharan case,110
that the cause of action arises at the place, where the cheque was issued or delivered or the
place where the money was expressly or impliedly payable. In the instant case, the
complainant, the Registered office at Madras demands money from Madras, asking the
drawer to pay the money to Madras office. Therefore, the place where the money is payable
also will have the jurisdiction.111

E. Where Cheque Dishonoured- Under Section 138 of Negotiable Instruments

Act, 1881 and Sections 177 & 179 Cr. P.C.
A reference may also be made to the decision in Re Jivandas v. Savchand,112which
deals with the question of jurisdiction in a case filed for the offence under Section 406 of
the Indian Penal Code. It was held by the Full Bench of the Bombay High Court as follows:
“What Section 179 provides is that when a person is accused of the commission of any
offence by reason of two things, by reason first, of anything which has been done, and
secondly, of any consequence which has ensued, then the jurisdiction is conferred on the
Court where the act has done or the consequence has ensued. The offence, therefore, must
be charged by reason of the two things, the act done and the consequence which ensued
and the consequence, therefore, forms the necessary part of the offence.”113
Where cheque was presented for collection that Court had also the jurisdiction to try
the complaint. In the present case, the cheque was presented at Chandigarh and respondent

109 Varghese v. C.K. Ramani, 1998 Cri. LJ 2755 at p. 2757.

110 1993(1) Crimes 46.
111 Narang Industries Ltd. v. Ashok Leyland Finance Ltd., I (1998) BC 532 at p. 542.
112 AIR 1930 Bom. 490(FB).

113 M/s. Goutham T.V. Centre v. M/s. Apex Agenceis, 1993 Cr. LJ 1004 at pp. 1005-1007 AP.

82
was also informed through Bank regarding bouncing of the cheque. Therefore, the Courts
at Chandigarh had the jurisdiction to entertain the criminal complaint. 114

F. Where Even Part Cause of Action Arises –

Coming to the question of jurisdiction, it is to be considered that the issuance of the
cheques and their dishonouring are only a part of cause of action, the offence was complete
only when the petitioners failed to discharge their liability to the respondent-firm. For
discharging a debt, it is the debtor who has to find out his creditor and since in the present
case the respondent, who is the creditor, has its office at Panchkula, the Court at Ambala
had the territorial jurisdiction to try the offence complained of.115
In the present case the cheques were issued at Moga and these were presented by the
respondent for collection of payment to State of Patiala at Moga. The cheques were
dishonoured by the State Bank of Indian Jalanadhar but intimation of dishonour was
received at Moga. Notices were sent by the respondent to make payment at Moga. Moga
Court had, therefore, jurisdiction to try the case. Similar view was taken in the case of M/s
Probathi Agencies v. State of Karnataka.116The Court at Moga, thus, had jurisdiction to
entertain the complaints. No. case is made out for quashing the complaints and consequent
proceedings.117

G. When Complainant Died –

Bombay High Court had occasion to hold that the trying Magistrate has discretion in
proper cases to allow the complaint to continue by a proper and fit complainant. The court
held that,
“In a case of non-cognizable offence instituted upon a complaint, the axiom of actio
personalis moritur cum persona, in civil law confined to torts, does not apply, and the

114 M/s. Meltro Enterprises v. Ramesh Chander Jain, 1997 (3) Crimes 360 at p. 361.
115 M/s. Ess Bee Food Spectalities v. Kapoor Brothers, 1992 Cri. LJ 739 at pp.741, 742 P & H.
116 1991(2) Recent Criminal Reports 685.
117 Tarsem Lal Hans v. Prem Nath Palta, 1995 Cri. LJ 2408.

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trying Magistrate has discretion in proper cases to allow the complainant to continue by a
proper and fit complaint, if the latter is willing.”118
The above view has been adopted in Subbamma v. Kannappachari,119 where the
Mysore High Court held that the death of the complainant in a case of non-cognizable
offence does not abate the prosecution and it is within the discretion of the trying
Magistrate in a proper case to allow the complaint to continue by a proper and fit complaint
if the later is wiling but some other High Courts have taken a contrary stand.
As to the question whether the complainant’s death ends the proceedings in a summons
case, the Law Commission in its 41st report observed :
A question has arisen whether the complainant’s death ends the proceedings in a
summons case; and we find that different views have been expressed on this question. As
a matter of policy we think the answer should depend on the nature of the case and the
stage of the proceedings at which death occurs. It is impracticable to detail the various
situations that may arise and the considerationsthat may to be weighted. We think, in the
circumstances, that the decision should be left to the judicial discretion of the Court, and,
the legal provisions need only be that death and absence stand on the same footing. We
trust this will in practice work satisfactorily.
As sub-section (2) of section 256 of Code of Criminal Procedure is intended to achieve
this objective it cannot be held that the Magistrate has no option but to acquit the accused
when the complainant is dead. In other words, in appropriate cases the Magistrate can grant
permission to the son of the deceased complaint to proceed with the complaint.120

H. Compoundable Offence –

118 Mahomed Azam v. Emperor, AIR 1926 178.

119 AIR 1969 Mys. 221.
120 T.N. Jayarajan v. Jayarajan, 1992(3) Crimes 866 at. 667.

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 Though before introducing ‘The Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002 remedies regarding compounding of an offence
committed under Section 138 were available under various sections of Code of Criminal
Procedure viz. in Section 239,319, 320 but now by inserting Section 147 the offence has
been made compoundable. Section 147 of the Negotiable Instruments Act, 1881 reads as:
“Notwithstanding anything contained in the Code of Criminal Procedure, 1973(2 of
1974), every offence punishable under this Act shall be compoundable”

Territorial jurisdiction:
The issue relating to the jurisdiction of Court in respect of cases arising u/s 138 of the
Act was considered in detail by the Apex Court in K. Bhaskaran v. Sankaran Vaidhyan
Balan and another, AIR 1999 SC 3762. After referring to Sections 177, 178 (d) and 179
of the Code of Criminal Procedure,1973 the Apex Court ordained that offence u/s 138 of
the Act can be completed only with the con-catenation of the following Acts ;
(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 was further observed that 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 of those five acts was done.

4.2 APPEARANCE OF COMPLAINANT

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 When a complaint raises all pleas regarding ingredients of the offence under Section
138 of the Negotiable Instruments Act, then at the time of taking cognizance, the
Magistrate cannot be expected to go into the niceties of the case which would be set up by
the accused and for which complainant’s personal presence should be needed. 121 The
complaint was by a Government company through its manager. The manager was
exempted from attendance. The counsel of the company did not appear on the listed date.
The dismissal of the complaint for such non–appearance was held to be not justified. There
was nothing to show lack of diligence to prosecute the complaint.122

4.3 PROPER EVIDENCE

When the accused challenged the prosecution for the offence under Section 138 of the
Act on the ground that goods supplied by the complainant were defective and having been
rejected there could be no liability to pay, it was held that without proper evidence at the
stage of the accused being summoned, it could not be said that the accused company did
not have the liability for which cheque was issued.123
Where a complaint was filed on the basis of the three cheques in a year, the court
demanded the complainant to make up his mind as to the cheque on which the prosecution
was to continue.124

4.4 DATE OF CHEQUE

The Supreme Court has held that there is a presumption that cheque is drawn on the
date it bears and it is to be presented within six months of the date of the cheque though
beyond six months of the date of delivery. Offence is committed within six months from
the date it bears irrespective of when the cheque was written or delivered. 125

121 Pearey Lal Rajindra Kumar Pvt. Ltd. v. State of Rajasthan, (1994 3 Crimes.308.
122 Steel Authority of India Ltd. v. Vishwakarma Agro and Allied Industries, (1996) 86 Comp. Cas.
929 P & H.
123 Dilip Kumar Jaiswal v. D. Banerjee, (1992) 1 Crimes 1233.
124 Printo Stick v. H.C. Oswal , (1996) 86 Comp. Vas. 942 Mad.
125 Manoj K. Seth v. Fernandez, (1994) 1 BC 1 SC.

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 4.5 DEFENCES TO PROCEEDINGS UNDER SECTION 138 –
(i) That the drawer had believed that the cheque may not be dishonoured on
presentation.126
(ii) A banker cannot take advantage of his own fault.127
(iii) Insufficiency of funds.
(iv)Exceeding arrangement with Bank.

4.6 STAY PROCEEDINGS (SECTION 138)

Where after the issue of notice to the drawer of the dishonour of his cheque he filed a
civil suit denying his liability to pay and, therefore, contending that Section 138 was not
attracted and obtained an interlocutory injunction retraining the payee of the cheque from
proceeding under Section 138. The grant of the injunction was held to be illegal.128
Whereas The Supreme Court held that where a civil suit was pending at the time when
criminal proceedings were launched for the dishonour of a cheque and the High Court
stayed the civil proceedings under the apprehension that the defendant’s defences in the
criminal case would become disclosed in advance, the approach of the High Court was not
correct. The court noted that the defence in the criminal case had already been filed and
therefore, nothing remained which deserved protection from disclosure.129
Civil and criminal proceedings are simultaneously possible. Hence, a complaint is not
liable to be stayed pending the disposal of a civil suit.130 The court said that a civil suit
cannot debar a criminal prosecution. The successful end of a civil suit cannot by itself
amount to abuse of the process of the court.

4.7 PRESUMPTION IN FAVOUR OF HOLDER -

126 Holland v. Manchester & Liverpool District Banking Co.(1909) 25 TLR 386.
127 Brahma v. Chartered Bank, AIR 1956 Cal.399.
128 Aristo Printers P. Ltd. v. Purbanchal Erade Centre, AIR 1992 Guau 81.
129 State of Rajasthan v. Kalyan Sundaram Cement Industries Ltd. (1996) 3 SCC 87 : (1996) 86 Comp.Cas. 433.
130 Sanjiv Kumar v. Surendra Steel Rolling Mills, (1996) Comp. Cas. 418 P & H.

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 The special rules of evidence contain certain presumptions concerning negotiable
instruments and the estoppels arising from them. The presumptions are stated in Section 1.
They are presumptions of law. The court is bound to raise such presumptions. The
presumptions being rebuttable, the party against whom a presumption is drawn can lead
evidence to the contrary to overthrow the presumption. There is, for exampled the
presumption that all instruments have been issued or transferred for consideration. It
relieves the plaintiff of the initial burden of proving that he became a holder for
consideration. The opposite party may show that there was no consideration, in which case
the plaintiff will have to prove consideration, the presumption in his favour having been
rebutted. Section 118 is as follows–
“118. Presumptions as to negotiable- Until the contrary is proved the following
presumptions shall be made :
(A) of consideration: that every negotiable instrument was made or drawn for
consideration, and that every such instrument which it has been accepted,
endorsed, negotiated or transferred, was accepted, endorsed, negotiated or
transferred for consideration;
(B) As to date: that every negotiable instrument bearing a date was made or drawn on
such date;
(C) As to time of acceptance: that every accepted bill of exchange was accepted within
a reasonable time after its date and before its maturity;
(D) As to time of transfer: that every transfer of negotiable instrument was made
before its maturity;
(E) As to order of endorsement: that the endorsements appearing upon a negotiable
instrument were made in the order in which they appear thereon;
(F) As to stamp: that a lost promissory note, bill of exchange or cheque was duly
stamped;
(G) That holder is a holder in due course: that the holder of a negotiable instrument
is a holder in due course:

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 Provided that, where the instrument has been obtained from its lawful owner, or from
any person in lawful custody, thereof, by means of an offer or fraud, or has been obtained
from the maker or acceptor thereof by means of an offence or fraud or for unlawful
consideration, the burden of proving that the holder is a holder in due course lies upon
him.”
Section 139 of the Act says
“it shall be presumed, unless the contrary is proved, that the holder of a cheque
received the cheque, of the nature referred to in Section 138 for the discharge, in whole or
in part, of any debt or other liability.”
In this way Sections 118 and 139 collectively provide:
(i) Special rules of Evidence;
(ii) Presumption and their applicability;
(iii) Holder;
(iv)Essential ingredients
(v) Liability;
(vi)Debt;
(vii) ‘Shall presume’

(i) Special Rules of Evidence –

Section 139 is what may be termed as Special Rules of Evidence and to confirm the
presumption already provided by sections 118(a) and 118(g) of Chapter XII of the
Negotiable Instruments Act. It means that the cheque is for discharge of an existing debt
and not for creation of a new debt. The phrase “shall presume” is explained under Section
4 of the Indian Evidence Act, 1872. 166
It says that whenever it is directed by this Act that the Court shall presume a fact, it
shall regard such fact as proved unless and until it is disapproved. Thus in this case onus
will be on the drawer to prove:

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 a) that cheque was not received by the holder for discharge of a debt or other
liabilities;
b) that the person in possession of cheque is not the holder;
c) that cheque represented for payment of any gratuitous act like donation, gift, etc.
(ii) Presumptions and their applicability –
According to the section the presumption can be rebutted also and thus if A give a loan
to B by means of a cheque, if the cheque is dishonoured and B wants to prove under Section
138 of the amended Act then A can prove that it was a transaction creating a new debt.
Moreover, the presumption under Section 139 is applicable only for the cheques referred
to under Section 138 and not in any other case i.e. cheques issued for the discharge of a
lawful debt or liability. In suits on negotiable instruments, though the plaintiff is not in
general required to prove that he gave value for the instrument and the want of
consideration is to be proved by the defendant, yet the burden may shift in case of fraud
and undue influence etc. and the plaintiff may be required to prove his case.131
It should be kept in mind that the rules stated in Section 118(a) of the Negotiable
Instruments Act as to shifting of onus of proof when fraud of legality is proved must be
taken with the provisions of Section 53 of the Act. In certain cases the plaintiff is to prove
that consideration was free from taint.
(iii) Holder –
Every instrument initially belongs to the payee and he is entitled to its possession. The
payee can transfer it to any person in payment of his own debt. This transfer is known as
‘negotiation’. Negotiation takes place in two ways. A bearer instrument passes by simple
delivery and the person to whom it is delivered becomes the holder. An order instruments,
on the other hand, can be negotiated only by endorsement and delivery and the endorsee
becomes the holder. Hence the holder means either the bearer of endorsee of an instrument.
Accordingly Section 2 of the English Bills of Exchange Act, 1882, provides that “holder
means the payee or endorsee of a bill or note who is in possession of it or the bearer

131 40 Shanmugha Rajeswara v. Chidambaram, ILR (1938) Mad 646( PC) : AIR 1938 PC 123.

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thereof”. The definition contained in Section 8 of the Indian Act is to the same effect,
although expressed in different words. It says that holder “means any person entitled in his
own name to the possession” of an instrument “and to receive and recover the amount”.
Now, no one can be entitled to the possession of a bill or note unless he becomes either the
bearer or endorsee thereof.132 Section 8 says :
“The ‘holder’ of a promissory note, bill of exchange or cheque means any person
entitled in his own name to the possession thereof and to receive or recover the amount due
thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled
at the time of such loss or destruction.”
In Section 139 the words used are the ‘holder of a cheque received the cheque.’ The
word ‘Holder’ has been defined in Section 8 of the Negotiable Instruments Act as well as
in Section 2 of English Bills of Exchange Act, 1882 as mentioned above. Reading these
definitions with section 78 of the Negotiable Instruments Act it means that a person to
whom the payment should be made in order to discharge the maker or acceptor from all
liabilities under the instrument is the holder of the instrument or he is accredited agent such
as Banker, acting as an agent for collection. A person cannot claim and does not have right
to recover the amount due on the instrument, is not the holder. Thus, a person who can sue
in his name is a holder. He may be the payee or one who becomes entitled to it as endorsee
or becomes the bearer of an instrument payable to the bearer. The most significant words
in the section are ‘entitled in his own name’. Thus, the term ‘holder does not include a
person who, though in possession of the instrument, has no right to recover the amount due
thereon from the parties thereto. However, the assignee of such person is entitled to sue in
his own name.133
(iv) Essential ingredients –

132 Avtar Singh’s Negotiable Instruments at p. 39.

133 S.N.Gupta’s Dishonur of Cheques, 3rd Ed.1995.

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 The following may be stated to be the essential ingredients for bringing the offence
under Section 138 of the Act :-
a) the cheque should have been issued for the discharge in whole or part of any debt
or liability.
b) debt or liability means legally enforceable debt or other liability.
So far as the word ‘debt’ is concerned in accordance with section 2(b) of the Presidency
Towns Insolvency Act, 1909 it includes a judgement debt. According to a Dictionary of
Banking by F.E. Perry, ‘debt’ means something owned to another, a liability, an obligation.
A chose –in –action which is capable of being assigned by the creditor to some other
person. The assignment must be in writing and must apply to the whole of the debt.
According to the same Dictionary ‘debtor’ means one who owes money, or is under some
obligation to another, the debit side of an account. For the purposes of the Consumer Credit
Act, 1974 ‘debtor’ means the individual receiving credit under a Consumer Credit
Agreement or the person to whom his rights and duties under the agreement have passed
by assignment or operation of law, and in relation to a prospective consumer credit
agreement includes the prospective debtor. According to the section the cheque must have
been issued in discharge of whole or part of debt or liability. Thus, a cheque given as gift
will be out of the frame work of this chapter. According to New Webster Dictionary ‘debt’
means which one person is bound to pay to or perform for another. It means an obligation
and the state of owing something to another, as to be in debt. It must be an existing debt
and not a contingent debt. It must a debt accrued and not a debt in future134. The Supreme
Court made the following observation:135
“The question whether a contingent debt is a debt as understood in law has often come
up for consideration before English Courts in connection with garnishee proceedings taken
by the judgement creditors to attach it as a debt. The decision has invariably been that they

134 S.N.Gupta’s Dishonour of Cheque 3rd ed. at p.164- 165.

135Shanti Prasad Jain v. Director of Enforcement Foreign Regulation Act, BLC Vol. 2 p. 347: AIR 1962 SC 1964:
1962(2) SCR 297.

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are not debts ‘accruing’ and could not be attached. The point for decision 136 was whether
an amount payable by a trustee to the beneficiary in futuro could be attached by a
judgement-creditor as a debt ‘owing or accruing’, and it was answered in negative.
Discussing the distinction between an existing debt, and a contingent debt, Lord Lindley
observed: “I should say apart from any authority, that a debt legal or equitable can be
attached whether it be a debt owing or accruing; but it must be debt, and a debt is a sum of
money which is now payable or will become payable in the future by reason of a present
obligation, debitum in praesenti, solvendum in futuro. An accruing debt, therefore is a debt,
not yet actually payable but a debt which is represented by an existing obligation… The
result seems to me to be this: you may attach all debts, whether equitable or legal; but only
debts can be attached ; and money which may or may not become payable from a trustee
to his cestuigue trust are not debts.”
Thus, the cheque must have been issued in connection with the discharge of a debt.
The word liability is defined in the Explanation to section 46 of the Presidency Towns
Insolvency Act, 1909. Liability means the state of being liable. It means something for
which a man is liable and includes pecuniary liability or limited liability. Payment for taxes,
house rents may amount to enforceable liability. If the cheque is issued and the cheque is
dishonoured for insufficiency of funds, unless the contrary is proved, it can be presumed
that the cheque has been issued to discharge liability.

(v) Liability -
As regards liability, The Law Lexicon by P.Ramanath Aiyar states:
“LiabiliIty: A broad term; it may be employed as meaning the state of being liable, that
for which one is responsible or liable; obligation is general; that condition of affairs which
given rise to an obligation to do a particular thing to be enforced by action; responsibility;
legal responsibility. In other words, the condition of one who is subject to a charge or duty
which may be judicially enforced.”

136 Webb v. Stenton, (1883) 11 QBD 518.

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 Liability of managing director/directors:
There was some controversy regarding the liability of Managing Director/Signatory of
cheque regarding the cheque issued on behalf of the company. Considering the issue a
larger Bench of the Apex Court in S.M.S. Pharmaceuticals v. Neetal Bhalla and another,
(2005) 8 SCC 89 has held that following principles should be followed while dealing with
such matter:
Firstly, it is necessary to specifically aver in a complaint under Section 141 that at the
time the offence was committed, the person accused was in charge of, and responsible for
the conduct of business of the company. Without this averment being made in a complaint,
the requirements of Section 141 cannot be said to be satisfied.
Secondly, merely being a Director of a company is not sufficient to make the person
liable under Section 141 of the Act. A Director in a company cannot be said to be in charge
of and responsible to the company for the conduct of its business. The requirement of
Section 141 is that the person sought to be made liable should be in-charge of and
responsible for the conduct of the business of the company at the relevant time. This has
to be averred as a fact as there is no deemed liability of a Director in such cases.
Thirdly, Managing Director/Joint Managing Director by virtue of the office they
hold are persons in charge of and responsible for the conduct of business of the company.
Therefore, they become liable u/s 141 of the Act on behalf of the Company.
Lastly, the signatory of a cheque which is dishonoured, is clearly responsible for the
incriminating act and will be covered under sub-section (2) of Section 141.” The aforesaid
legal propositions make the position very clear on the issue relating to liability of Managing
Director, Director and Signatory of the cheque.

(vi)Debt or Liability –
These terms should be interpreted within the limited meaning so as to include a legally
enforceable debt or liability. Different Acts have given different definitions of these terms.

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Different meanings have been give under the Income Tax Act, 1961, various Debt Relief
Act, Wealth Tax Act, 1957, Indian Contract Act, 1872 and so on. Similarly there may be
various type of liabilities which may arise in different ways and they may be real or
contingent and may be legally enforceable debt or not. However, we are concerned only
with a legally enforceable debt or liability. There are various debt which are not legally
enforceable by law the detail of which is given below:
a) A debt barred by limitation is not legally enforceable and not a debt for the purposes
of this Act.
b) A debt due on a wagering contract is not a lawful consideration.
c) Similarly a gratuitous payment is also not covered under Section 138 of the
Negotiable Instruments Act, 1881.
Whereas Explanation to Section 138 states that for the purposes of that section ‘debt
or other liability’ means a legally enforceable debt or other liability. Section 139 provides
for the discharge in whole or in part, or any debt or other liability. The purpose of Section
139 seems to confirm the presumptions already provided under Section 118(a) and 118(b)
of the Chapter XIII of the Act. In fact Article 40 of Schedule 1 of the Limitation Act dealt
with the computation of Limitation of limitation period for filing any suit for an amount of
cheque dishonoured. A cheque so returned prima facie, suggests that cheque is issued as a
payment toward existing debt.
Legally enforceable debt or liability:
The penal liability u/s 138 of the Act arises only when the cheque which has been
dishonoured was for the discharge, in whole or in part, of any debt or liability. Explanation
appended to Section 138 says that expression ‘debt or other liability’ means legally
enforceable debt or other liability. There has been some controversy regarding this
expression and it has been held by Andhra Pradesh High Court in the case of Giridhari Lal
Rathi v. P.T.V. Ramanujachari, 1997 (2) Crimes that a complaint in respect of a cheque,
which was issued for time barred debt is not maintainable. This issue was also addressed
by the Apex Court in A.V. Murthy v. B.S. Nagabasavanna, AIR 2002 SC 985. Though the

95
Apex Court refrained itself from expressing any final opinion on this point yet it was
pointed out that under sub-sec. (3) of S. 25 of the Indian Contract Act, 1872, a promise,
made in writing and signed by the person to be charged therewith, or by his agent generally
or specifically authorized in that behalf, to pay wholly or in part a debt of which the creditor
might have enforced payment but for the law for the limitation of suits, is a valid contract.
This observation has kept the doors open for a more constructive and purposive
interpretation of expression ‘debt or other liability’ as used in Section 138 of the Act.
(vii) ‘Shall presume’ –
The phrase ‘shall presume’ is explained under Section 4 of Indian Evidence Act, 1872
. Section 4 reads :
“Whenever it is provided by this Act the Court may presume in fact, it may either
regard such fact as proved, unless and until is disproved, or may call for proof of it:
Shall presume: When it is directed by this Act that the court shall presume a fact, it
shall regard such fact as proved unless and until it disproved:”
Thus, in this case onus will be on the drawer to prove:
1. a). that cheque was not received by the holder for discharge of a debt or other
liabilities;
2. b). that the person in possession of cheque is not the holder;
3. c). that cheque represented for payment of any gratuitous act like donation, gift
etc.

This presumption is available only in cases of cheques as per the scheme of Chapter
XVII and not against other negotiable instruments. It shall be for the defendant to allege
and prove want of consideration.137
Where a cheque was issued for business purchased at one place and the recipient of
the cheque also deposited the cheque into his account at that very place, but, after
dishonour, he issued notice of dishonour from his place of business in some other town,

137 Suanmugha Rajeshwara v. Chidambharam, ILR (1938) Mad 646 PC : AIR 1938 PC 123.

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the cause of action partly arose there because to discharge his liability the drawer would
have to make arrangement for payment at the recipient place. Thus the places where the
payment was to be made and where the cheque was delivered are also relevant. Cause of
action may arise at the place where the cheque was issued or delivered or where the money
was expressly or impliedly payable.

4.8 Liability on Dishonour of Cheque

a. Necessary Ingredients for Liability
b. Civil Liability
c. Criminal Liability

a. Necessary Ingredients for Liability

In Anchor Capital of India vs. State of Gujarat1, relates to the ingredients that are
necessary to constitute an offence under section 138. The necessary ingredients are as
follows:-
a. the cheque must have been issued in favour of the payee;
b. the cheque so issued must have been issued in discharge, either in whole or in part,
of a legally enforceable debt or liability;
c. the cheque should have been presented for encashment within six months of the date
it bears or within its specific validity period which is earlier;
d. the cheque should have been returned by the bank unpaid, because the amount of
money standing to the credit of the account is insufficient or it exceeds the amount
arranged;
e. that the payee should have given a notice of dishonour to the drawer within 15 days
of the receipt of information by him from the bank regarding dishonour of the cheque
demanding payment of the cheque amount;
f. that the drawer should have failed to make payment within 15 days of the receipt of
notice.

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 g. Under section 142 of the Act, the Magistrate is empowered to take the cognizance
of any offence under section 138 only on a complaint in writing made by the payees or the
holder in due course of the cheque provided that such complaint is made within one month
from the date on which a cause of action has arisen under clause (c) of the proviso to section
138.
b. Civil liability
Civil Liability is also arises when the cheque is presented for the payment to the bank
gets dishonoured. Section 138 also provides for civil liability which provides for fine twice
the amount of dishonoured cheque.
c. Criminal Liability
A criminal liability is provided under section 138 of the Act, which provides
imprisonment for two years or with fine which may extend to twice the amount of the
cheque, or with both.
In case of dishonour of cheque the drawer of it may be prosecuted under sections 417
and 420 of the Indian Penal Code, 1960 (IPC). However, it all depends on the
circumstances of each case. Every dishonour of a cheque is not cheating.
In A Veerbhadra Rao vs. Government of A.P., it has been held by the Andhra Pradesh
High Court that where the accused issues a post-dated cheque with knowledge that the
funds in his account are insufficient and such cheque would be dishonoured; he commits
offence of cheating under section 420 of IPC.
The punishment in the form of two years imprisonment has been provided in case of
dishonour of cheque.The imprisonment generally given only for criminal activity and
dishonour of cheque considering criminal Act punishment for two years imprisonment
provision has been made. Consequently, criminal liability has been imposed when the
cheque gets dishonoured.
Exceptions to Criminal Liability

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 a. Cheque issued in Discharge of Liability: It is must that the cheque which is given
should be in discharge, in whole or in part of any debt or other liability of the drawer
towards the payee.
In K. Kumar vs. Bapsons Foot Wear, a complaint was filed for the dishonour of a
cheque, it was alleged that in the course of business the accused issued a cheque. A petition
was filed to quash the complaint. The court allowed the petition holding that the essential
requirement for an offence under section 138 of the Act that the cheque must be drawn for
discharge in whole or in part of any debt or other liability has not been fulfilled as according
to the allegation in the complaint the cheque was issued in the course of their business by
the accused.
1. Cheque must not be given as a gift: In B. Mohan Krishna vs. Union of India, the
court held that if a cheque was not issued for the purpose of discharge of any debt or other
liability, the maker of the cheque is not liable for prosecution. If the cheque is given by
way of gift or present and if it is dishonoured by the bank, the maker of the cheque is not
liable for prosecution. Unless the two conditions set out in section 138 were satisfied, no
criminal liability can be fastened.
ii. Defence that may be taken
If the matter is examined critically, then the following may be a set of defence that
may be taken are as follows:-
1. Absence of a legally enforceable debt or liability.
2. Cheque was not returned for the reasons constituting an offence.
3. Complaint is not as per time period provided in sections 138 and 142, i.e., the plea
of limitation.
4. Absence of legal notice of 15 days.
5. Lack of Jurisdiction.
6. No return of cheque to the payee.

4.9 DOES CRIMINAL LIABILITY HAS SOLVED THE PROBLEM?

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 The criminal liability under section 138 of the Act has not solved the problem of
cheque bouncing and did not develop faith in this credit instrument among the people who
widely use it Our judiciary has played a crucial role by imposing strict liability when the
cheque is dishonoured but it did not work effectively and still the cheques are getting
dishonoured. It is evident from the fact that courts are overburdened due to the complaints
of dishonour of cheques inspite of law in this regard.

THE ACT A FAILURE

It is sadly submitted that the Act is a failure; numerous factors have all contributed to
this failure. The structural flaws intrinsic in the Act caused its failure, more than anything
else, but the larger reason of failure is socio-cultural. For the activity the Act was enacted
to remove is still rampant. In other words, people still choose to gather cash in the discharge
of obligations owed them in preference to cheque. It is general place to get that people still
hold large amount of cash in settlement of financial obligations and in consummation of
commercial activities. The foremost reason for the preference for cash is a lack of
confidence in the use of cheques. This lack of confidence primarily due to the continuing
prevalence of dishonoured cheques.

i. Socio Cultural Impediment

The failure of the Act has more sociological and cultural bases than structural defects
inbuilt in the Act. Indian does have extremely small regard for the imperatives of
discharging his financial obligations. They think nothing erroneous in issuing a cheque for
the reason of discharging his financial obligations that he knows will be dishonored on
presentation for insufficiency of funds in his bank account. This is a constituent of the
encompassing widespread corruption that damages the foundation of Indian society. They
don’t file a complaint being issued a dishonour cheque in the court, but would rather find
other means of getting back debts owed them by the drawers of the cheque.

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 There is a dearth of reported cases of the offense created in the Act and by implication,
of prosecution of cases under the Act. There is the urgent need to amend the Act.
ii. Adequacy of the Penalty
The punishment provided by the Act has become dreadfully low and reflects very little
significance about limiting the criminal behavior to which the Act is committed. Only two
years imprisonment has been provided which seems to be very less in view of the wrong.
iii. Cognizance of offences
The procedure provided under section 142 of the Act is not friendly and viable because
it provides that the court will take cognizance of offence or complaint only in writing. It’s
merely cumbersome formality. The court should take the cognizance of offences or
complaint in oral also as provided under section 200 Criminal Procedure Code, 1973.
iv. Short period Limitation
The limitation provided for filing written complaint in the court is one month of the
date on which the cause of action arises under clause (c) of the proviso to section 138. The
time period within which complaint should be filed is very less, it should be extended
maximum 6 months because people are not aware of any such short period of limitation in
the Act itself. It takes away their right and left those with no remedy in spite of they have
committed no wrong.

SUM-UP:

The jurisdiction of the Area is concerned, the complainant can choose any one of those
courts having jurisdiction over any of the local areas within the territorial limits of which
any one of the following acts took place : (i) Drawing of the cheque (ii) Presentation of the
cheque; (iii) Returning of the cheque by drawee bank; (iv) Giving of notice in writing to
the drawer of the cheque demanding payment of cheque and failure of the drawer to make
payments within 15 days of receipt of notice. We are fully alive to the imperatives of a
sound “Cheque system” and in our anxiety to scares away the offenders, we are providing

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more stringent So far as jurisdiction of the Area is concerned, the complainant can choose
any one of those courts having jurisdiction over any of the local areas within the territorial
limits of which any one of the following acts took place : (i) Drawing of the cheque (ii)
Presentation of the cheque; (iii) Returning of the cheque by drawee bank; (iv) Giving of
notice in writing to the drawer of the cheque deterrents as spelled out in the Negotiable
Instruments Act (Amendment) 2002 interalia provides 2 years imprisonment and issue of
notice from 15 days to 30 days and day to day hearing in the case and absent only giving
the sound reasons.
The Code of Criminal Procedure states that every offence shall ordinarily be enquired
into and tried by Court within whose local jurisdiction it was committed. The complaint
can be filed in a Court within the jurisdiction of which the cheque has been drawn or the
place where the cheque is presented for collection and received an endorsement about the
dishonour of the cheque or the place where the cheque is dishonoured.
It is well settled now that the Court has jurisdiction over the area where the cheque
was issued or delivered or where the drawer of the cheque fails to make payment of the
money or where the cheque was presented for encashment or the area where the payment
was to be made. Therefore, the appellant had cause of action to file the complaint before
the lower Court where the cheque was presented for encashment and the lower court had
jurisdiction to take cognizance of the offence. Therefore, the finding of the lower court that
it had no jurisdiction to take cognizance of the offence is absolutely unsustainable.
After the issue of notice to the drawer of the dishonour of his cheque he filed a civil
suit denying his liability to pay and, therefore, contending that Section 138 was not
attracted and obtained an interlocutory injunction retraining the payee of the cheque from
proceeding under Section 138. The grant of the injunction was held to be illegal. Civil and
criminal proceedings are simultaneously possible. In suits on negotiable instruments,
though the plaintiff is not in general required to prove that he gave value for the instrument
into his account at that very place but after dishonour, he issued notice of dishonour from
his place of business in some other town, the cause of action partly arose there because to

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discharge his liability the drawer would have to make arrangement for payment at the rec
t and the want of consideration is to be proved by the defendant, yet the burden may shift
in case of fraud and undue influence etc. and the plaintiff may be required to prove his
case. Cause of action may arise at the place where the cheque was issued or delivered or
where the money was expressly or impliedly payable.

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CHAPTER V: JUDICIAL PRONOUNCEMENT

The law in this particular branch has developed rapidly by way of pronouncements of
the Superior Courts. This chapter attempts to explore and examine the position of law in
respect of some important issues which have been raised from time to time regarding
applicability of these provisions.
The analysis of the section will show that in each case when the cheque is dishonoured,
one has to find out as to what the intention of the drawer was at the time when the cheque
was issued and whether the drawer knew that the cheque was bound to be dishonoured.
Moreover, we have to see as to whether the cheque was issued to meet an antecedent debt
or a liability or whether it was only for a future transaction. Thus it has to be seen and
determined whether it was a civil or a criminal liability and whether it amounted to cheating
or could lead only to a civil liability. A reference to case law can be of help to determine
whether the accused had a guilty intention.

CASE LAWS:

Presumption u/s 139 N.I. Act, nature of and standard of requisite proof for rebuttal
thereof. Explained
Hiten P. Dalal v. Bratindranath Banerjee
Reported in – (2001) 6 SCC 16
Because both Sections 138 and 139 require that the court “shall presume” the liability of
the drawer of the cheques for the amounts for which the cheques are drawn, as noted in
State of Madras v. A. Vaidyanath Iyer, AIR 1958 SC 61 it is obligatory on the court to
raise this presumption in every case where the factual basis for the raising of the
presumption had been established. “It introduces an exception to the general rule as to the
burden of proof in criminal cases and shifts the onus on to the accused.” (Ibid. at p. 65,
para 14.) Such a presumption of fact which describes provisions by which the court “may

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presume” a certain state of affairs. Presumptions are rules of evidence and do not conflict
with the presumption of innocence, because by the latter, all that is meant is that the
prosecution is obliged to prove the case against the accused beyond reasonable doubt. The
obligation on the prosecution may be discharged with the help of presumptions of law or
fact unless the accused adduces evidences showing the reasonable possibility of the non-
existence of the presumed fact. In other words, provided the facts required to form the basis
of a presumption of law exist, no discretion is left with the court but to draw the statutory
conclusion, but this does not preclude the person against whom the presumption is draw
from rebutting it and proving the contrary. A fact is said to be proved when, “after
considering the matters before it, the court either believes it to exist, or considers its
existence so probable that a prudent man ought, under the circumstances of the particular
case, to act upon the supposition that it exists” (Section 3 Evidence Act). Therefore, the
rebuttal does not have to be conclusively established but such evidence must be adduced
before the court in support of the defence that the court must either believe the defence to
exist or consider its existence to be reasonably probable, the standard of reasonability being
that of the “prudent man”. Judicial statements have differed as to the quantum of rebutting
evidence required. In Kundan Lal Rallaram v. Custodian, Evacuee Property, AIR
1961 SC 1316 the Court held that the presumption of law under Section 118 of the
negotiable Instruments Act could be rebutted, in certain circumstances by a presumption
of fact raised under Section 114 of the Evidence Act. The decision must be limited to the
facts of that case. The more authoritative view has been laid down in the subsequent
decision of the Constitution bench in Dhanvantrai Balwantrai Desai v, State of
Maharashtra, AIR 1964 SC 575 where this Court reiterated the principle enunciated in
State of Madras v. Vaidyanatha Iyer (Supra) and clarified that the distinction between the
two kinds of presumption lay not only in the mandate to the court, but also in the nature of
evidence required to rebut the two. In the case of a discretionary presumption the
presumption if drawn may be rebutted by an explanation which “might reasonably be true
and which is consistent with the innocence” of the accused. On the other hand in the case

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of a mandatory presumption“the burden resting on the accused person in such a case would
not
be as light as it is where a presumption is raised under Section 114n of the Evidence Act
and cannot be held to be discharged merely by reason of the fact that the explanation
offered by the accused is reasonable and probable. It must further be shown that the
explanation is a true one. The words ‘unless the contrary is proved’ which occur in this
provision make it clear that the presumption has to be rebutted by ‘proof’ and not by a bare
explanation which is merely plausible. A fact is said to be proved when its existence is
directly established or when upon the material before it the court finds its existence to be
so probable that a reasonable man would act on the supposition that it exists. Unless,
therefore, the explanation is supported by proof, the presumption created by the provision
cannot be said to be rebutted”.
BURDEN OF PROOF:
Under Section 118 of the Act, unless the contrary is proved, it is to be presumed that the
negotiable instruments including a cheque had been made or drawn for consideration.
Under Section 139 the Court has to presume, unless the contrary is proved, that the holder
of the cheque received the cheque for discharge in whole or in part of a debt or liability.
Thus in complaints under Section 138, the Court has to presume that the cheque had been
issued for a debt or liability. This presumption is rebuttable. However, the burden of
proving that a cheque had not been issued for a debt or liability is on the accused. Refer :
Hiten P. Dalal v. Brajendranath Banerjee (2001) 6 SCC 16. In K.N. Veena v.
Muniyappan & Another, A.I.R. 2001 SC 2895, the accused led no evidence except some
formal evidence, it was held that the accused had to prove in the trial, by leading cogent
evidence, that there was not debt or liability. The accused not having led any evidence
could not be said to have discharged the burden cast on him.

Notice required to be given u/s 138 for demand – Notice need not necessarily be by
registered post – Law explained.

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Janak Gandhi v. State of M.P.
Reported in – 2005 (I) MPWN 99
Counsel for the petitioner submits that in absence of notice by registered post the
proceedings under section 138 of the Negotiable Instruments Act cannot continue against
him. For this purpose counsel for the petitioner relied upon a decision of Bombay High in
the case of Baroda Ferro Alloys and Industries Ltd. & others v. Span Overseas Pvt. Ltd. &
another (2000 DCR 331). In that case Bombay High Court has held that service of notice
by Fax is not sufficient to constitute demand under section 138 of the Negotiable
Instruments Act and the demand must be in writing and by registered post. However, while
deciding the aforesaid case Bombay High Court has not considered the effect of Section
94 of the Negotiable Instruments Act. Section 138 of the Negotiable Instruments Act
nowhere provides the mode of service. Mode of service is provided in Section 94 of the
Act. Section 94 of the Act provides that notice of dishonour may be given to a duly
authorized agent of the person to whom it is required to be given, or, where he has died, to
his legal representative, or, where he has been declared an insolvent, to his assignee, may
be oral or written; may, if written, be sent by post, and may be in any form; but it must
inform the party to whom it is given, either in express terms or by reasonable intendment
that the instrument has been dishonoured, and in what way, and that he will be held liable
thereon; and it must be given within a reasonable time after dishonour. Thus, as per this
section it is not required that the notice must be given by registered post. The Bombay High
Court has not considered impact of Section 94 of the Act, the said judgment is per incuriam
and does not help the present petitioner.

Notice u/s 138, object of – Form of the notice – Law explained.

Central Bank of India v. Saxons Farms
Reported in – 2000 (1) MPLJ 149 (SC)
Notice of demand by counsel for payee to drawer of cheque. Nature of demand. though
no form of notice is prescribed in clause (b) of proviso to section 138 of the Negotiable

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Instruments Act, the requirement is that notice shall be given in writing within fifteen days
of receipt of information from the bank regarding return of cheque as unpaid and in the
notice a demand for payment of an amount of the cheque has to be made. The object of
notice is to give a chance to the drawer of the cheque to rectify his omission and also to
protect an honest drawer. Service of notice of demand in clause (b) of the proviso to section
138 is a condition precedent for filing a complaint under section 138 of the Act. Where the
appellant through his counsel gave notice containing the following words “Kindly arrange
to make the payment to avoid the unpleasant action of my client” it was clear demand as
required under clause (b) of the proviso to section 138, Negotiable Instruments Act.

Presumption under Section 139 of the N.I. Act, Explained.

Maruti Udyog Ltd. v. Narender and others
Reported in – (1999) 1 SCC 113
Presumption must be drawn that holder of the cheque received the cheque of the nature
referred to in S. 138 unless the contrary is proved. “In view of the express provisions of
Section 139 of the Negotiable Instruments Act, 1881, a presumption must be drawn that
the holder of the cheque received the cheque, of the nature referred to in Section 138, for
the discharge of any debit or other liability unless the contrary is proved. Therefore, the
High Court was not justified in entertaining and accepting the plea of the accused
respondent at the initial stage of the proceedings and quashing the complaints filed by the
appellant. We, therefore, allow these appeals, set aside the impugned orders of the High
Court and direct the trial court to proceed with the complaints in accordance with law.”

Cheque returned by the bank unpaid on the ground that the account is closed
Whether if amount dishonour on account of insufficiency of funds. Held, Yes.
NEPC Micon Ltd. v. Magma Leasing Ltd.
Reported in – 2000 (1) MPHT 310 (SC)

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The question is, in a case where cheque is returned by the bank unpaid on the ground that
the ‘account is closed’, would it mean that cheque is returned as unpaid on the ground that
‘the amount of money standing to the credit of the account is insufficient to honour the
cheque’. In our view, the answer would obviously be in the affirmative because cheque is
dishonoured as the amount of money standing to the credit of ‘that account’ was ‘nil’ at
the relevant time apart from it vein closed. Closure of the account would be an eventuality
after the entire amount in the account is withdrawn. It means that there was no amount in
the credit of ‘that account’ on the relevant date when the cheque was presented for
honouring the same, the expression ‘the amount of money standing to the credit of that
account is insufficient to honour the cheque’ is a genus of which the expression ‘that
account being closed’ is specie. After issuing the cheque drawn on an account maintained
a person, if he closes ‘that account’ apart from the fact that it may amount to another
offence, it would certainly be an offence under Section 138 as there was insufficient or no
fund to honour the cheque in ‘that account’

Whether pendency of civil suit operates as bar to proceed with criminal case? Held,
No.
State of Rajasthan v. M/s Kalyan Sundaram Cement Industries Ltd.
Reported In – 1996 (2) MPWN Note 61 (SC)
It is settled law that pendaency of the criminal matters would not be an impediment to
proceed with the civil suits. The criminal Court would deal with offence punishable under
the Act. On the other hand, the Courts rarely stay the criminal cases and only when the
compelling circumstances require the exercise of power. We have never come across stay
of any civil suits by the Courts so far.
The High Court of Rajasthan is only an exception to pass such orders. The High
Court proceeded on wrong premise that the accused would be expected to disclose their
defence in the criminal case by asking them to proceed with the trial of the suit. It is not
a correct principle of law. Even otherwise it no longer subsists, since many of them have

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filed their defences in the civil suit. On principle of law, we hold that the approach
adopted by the High Court is not correct. But since the defence has already been filed
nothing survives in this matter. The appeal is accordingly allowed. The order of the High
Court is set aside. No costs.

Out-of-court Settlement – Compounding

R. Raju vs. K. Sivaswamy, MANU/SC/1449/2011),
Compounding refers to a compromise between the victim and the accused whereby the two
agree to close the judicial process. Proceedings relating to cheque bouncing are
compoundable. In other words, at any stage the drawer of the cheque and the holder of
cheque can arrive at a compromise and apply to a court to close the proceedings. In this
case under Section 138 ,the Magistrate convicted the accused and sentenced him to undergo
one year simple imprisonment and to pay a fine of Rs. 5000/-, in default, to undergo simple
imprisonment for three months. The Sessions Court confirmed the sentence. The accused
filed an appeal in High Court. During the pendency of the appeal, the parties entered into
an agreement. The complainant applied to the High Court stating
that he had received full money and wanted the offence to be compounded. The High Court
did not grant the application for compounding. However, the Supreme Court overruled the
order of the High Court and allowed compounding. However, the Supreme Court felt that
the time of the judicial process had been wasted and therefore awarded exemplary costs.
The following extract from the judgment sums it up.
In conclusion, it can be said that if one is caught in a case involving bouncing of cheque
the option of a compromise is always open – even when the Magistrate has convicted and
the Sessions Court has confirmed the sentence.

B.Sarvothama vs S.M.Haneef on 17 July, 2013

This Criminal Revision Petition is filed under Section 397 read with Section 401 Code of
Criminal Procedure, 1973 , praying to set aside the judgment and order dated 11.11.2008

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in C.C.No.176 of 2006 passed by the Additional Civil Judge (Jr.Dn.) and Judicial
Magistrate First Class, Karkala and further set aside the judgment and order dated
13.10.2009 in Criminal Appeal No.229 of 2008 passed by the Fast Track Court, Udupi
District, Udupi. This petition, having been heard and reserved on 20.06.2013 and coming
on for Pronouncement of Orders this day, the Court delivered the following:-
ORDER
The petitioner was the accused before the trial court. The complainant had alleged the
commission of an offence punishable under Section 138 of the Negotiable Instruments Act,
1881(Hereinafter referred to as the NI Act, for brevity.)
2. It was alleged that the petitioner had purchased a bus from the complainant. The
petitioner was in arrears in the payment of the price, in a sum of Rs.28,000/-. It is stated
that in discharge of the said liability, the petitioner had issued a cheque drawn on " self or
bearer ". The complainant having presented the cheque for payment to the banker of the
petitioner, the same is said to have been dishonoured for want of sufficient funds. A memo
was issued by the bank to that effect. The complainant had issued a legal notice demanding
the payment of the amount covered under the cheque, claiming to be a holder in due course,
as contemplated under Section 9 of the NI Act. On the failure of the petitioner to meet the
demand, the complaint was filed.
The trial court took cognizance of the offence punishable under Section 138 of the NI Act,
and after recording the sworn statement of the complainant, had issued summons to the
petitioner , who appeared before the court and pleaded not guilty and claimed to be tried.
The complainant had tendered evidence as PW - 1 and examined four other witnesses on
his behalf. The statement of the accused under Section 313Cr.P.C, was recorded, he
tendered evidence as DW-
1 , in support of his defence. The court framed the following points for consideration : "1.
Whether the complainant proves beyond all reasonable doubt that the accused had issued
him a bearer cheque bearing No.0434454 to discharge his debt or liability for Rs.28,000/-
dated 5.11.2005 drawn on Vijaya Bank, Mandarti Branch?

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2. Whether the complainant proves beyond all reasonable doubt that the complainant has
presented the said cheque for encashment before Vijaya Bank, Karkala Branch and the said
cheque has been dishonoured due to insufficient funds in the account of the accused?
3. Whether the complainant proves beyond all reasonable doubt that after having the
intimation and receiving endorsement of the dishonour of the cheque, complainant got
issued legal notice to the accused as required under Section 138 of the NI Act?
4. Whether the complainant proves beyond all reasonable doubt that after receipt of the
notice, accused ahs failed to pay the cheque amount within 15 days from the date of receipt
of the said notice ?" All the points were answered in the affirmative and the petitioner was
convicted and sentenced to undergo simple imprisonment for a period of six months and
to pay a fine of Rs.30,000/-. Out of the fine amount, Rs.28,000/- was to be paid as
compensation to the complainant in terms of Section 357(1)(b) of the Code of Criminal
Procedure, 1973 (Hereinafter referred to as the 'Cr.PC', for brevity) .
This was challenged in appeal. The appellate court however, dismissed the appeal and
affirmed the judgment of the trial court, but modified the punishment imposed, the sentence
of imprisonment was eschewed. It is the affirmation of the conviction that is under
challenge in the present petition.
3. The learned counsel for the petitioner would contend that the cheque in question was
drawn on self, and the dishonour of the same would not attract Section 138 of the NI Act,
as held by a learned single judge of this court in the case of V. Rama Shetty v. N. Sasidaran
Nayar, 2008 Cri. L. J. 4297. The learned counsel would contend that the courts below had
committed an error in concluding that though the cheque in question was a self cheque, it
was issued in discharge of the liability aforesaid and that the complainant was a "holder in
due course" and the dishonour of the cheque in the hands of the complainant, attracted
Section 138 of the Act. The learned counsel would insist that this court having opined as
above, the courts below were bound by the same and could not have placed reliance on
decisions of other High Courts in taking a different view.
4. The learned counsel for the respondent has remained absent.

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5. The point for consideration by this bench is, whether the petition ought to be allowed on
the short ground that the decision in Rama Shetty's case, supra, was to be followed by the
courts below and therefore, warrants interference by this court. Or whether it could be said
that there were distinguishing features in the present case on hand that justifies the
decisions of the courts below. In this regard, the findings of fact, on the basis of the
evidence of the complainant in support of his case, is relevant. The trial court has found
that though the cheque is drawn as a self cheque, the words " or bearer", have not been
scored off and hence the complainant, who had financial transactions with the petitioner
would answer to the definition of a holder in due course, as contemplated under Section 9
of the NI Act, and has relied on a decision in the case of Mahesh Goyal v. S.K. Sharma,
1997 Cri. L. J. 2868, in this regard.
Secondly, from the evidence of the witnesses, PW-1, PW- 3, 4 and 5, the trial court has
found that the cheque was issued in discharge of the liability to pay the balance outstanding,
of the price, towards the purchase of the bus, by the petitioner from the complainant.
Thirdly, the trial court has found that the complainant had complied with all the
requirements of Section 138 of the NI Act and had proved the allegations in the complaint.
Incidentally, the decision of this court in Rama Shetty's case, is not shown to have been
brought to the attention of either the trial court or the appellate court.
In Rama Shetty's case, from the facts stated in the report of the decision, it appears that the
cheque in question was a self cheque. It is not stated whether the words "or bearer",
normally found on a cheque leaf, were intact or were scored off. The opinion expressed
therein is with reference to the tenor of Section 138 of the NI Act, more particularly the
following: “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." It is then held that the said
cheque being a self cheque and not drawn in favour of another person, Section 138 of the
NI Act would not be attracted for the dishonour of a self cheque. But in Amolak Textiles
vs. Uphar Fashions, ILR 2009 Kar. 628, the very learned judge who had rendered the
decision in Rama Shetty, supra, has found that in the case of a self cheque, the drawer

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having signed on the obverse of the cheque and having endorsed it in favour of the
complainant, would make him a holder in due course and that he could bring an action on
the same.
In the instant case on hand, the cheque in question was drawn on self or bearer. It is seen
that several High courts have taken a view that a bearer cheque, if dishonoured, would
attract the rigour of Section 138 of the Act. The Allahabad High Court in Farhat Hussain
Siddiqui vs. State of Uttar Pradesh, 2010 Cri. LJ 1213, has held that a bearer cheque issued
in discharge of debt or other legal liability would enable the person in possession of the
same to claim as a holder in due course, as defined under Section 9 of the NI Act, even
though the cheque is payable to bearer.
The Andhra Pradesh High Court in M/s Intech Net Limited vs. State, 2007 Cr.LJ 216, has
held that once the issuance of a cheque is admitted and if the words " or bearer" are not
scored off, the person in possession would be a holder in due course and would be entitled
to invoke Section 138 NI Act, in case of dishonour of the same.
The Punjab and Haryana High Court has in Mahesh Goyal vs. S.K.Sharma, (1997 Cri LJ
2868) (P &H), held as under: - "8. The expression "holder in due course" is clear and
unambiguous. The words are plain and meaning clear. A holder in due course is a person
who is possessor of an instrument even when it is payable to bearer. He must be in
possession on it. If the bill is payable to holder then he has to be a payee or indorsee of the
same.
9. In the present case in hand perusal of the cheque indicates that it was addressed as
payable to "self" and that the word bearer has not been deleted. It is not even scored off.
There were certain transactions alleged and the money was claimed to be due. The
respondent was in possession of the same and presented it before the bank, but it was
dishonoured. He was obviously holder in due course. When other conditions were satisfied,
there was no question of holding that merely because the cheque was addressed to self,
Section 138 in the facts would not be attracted. Once the cheque had been given for valid
consideration, the respondent must be taken to be holder in due course." The Kerala High

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Court in Michael Kuruvilla vs. Joseph J Kondody, (1998(2) Andh.LD (Cri)957)(Ker), after
following the judgment of the said Court in A.K.Hameed vs. Appakutty,AIR 1969 Ker.189
and after considering the definition of 'Holder in due course' under Section 9 of the Act
held that though the cheque does not contain the name of the payee and the printed words
"or bearer" are struck off and also it is written pay to cash, is a legal and a valid negotiable
instrument. It has to be implied that the direction is to pay to the bearer and there is nothing
on record to show that the appellant cannot be treated as holder in due course as
contemplated under Section 9 of the Act. Having observed so, the learned Judge set aside
the judgment of the trial court in finding the accused not guilty of the offence under Section
138 of the Act and held that the accused was guilty of the offence and accordingly
convicted him for the said offence. The Madras High Court in Prabhakaran vs. Natesan,
1998(4) Crimes 554)(Mad), held that once the complainant becomes the bearer and he
presented the cheque for encashment, virtually the complainant becomes the holder in due
course and as such, it could very well be said that he is competent to file a complaint on
the non-payment of the cheque amount after dishonour of the cheque.
In the instant case, it is shown that there were financial transactions between the parties
preceding the issuance of the cheque in question. In order to address the issue, whether the
complainant could claim that the cheque being a bearer cheque would attract the rigour of
Section 138 of the NI Act, we may usefully refer to the definition of the phrase " Holder in
due course" as expressed under Section 9 of the NI Act. It reads as follows :"9. "Holder in
due course" means any person who for consideration became the possessor of a promissory
note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if
[payable to order], before the amount mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title." The holder of a cheque becomes a holder in due course, only when he
has become the possessor thereof for consideration without knowing that any defect existed
in the title of the person from whom he derived title. There is, of course, a presumption in
favour of the holder in due course that the instrument was drawn for consideration, unless

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the contrary is proved. It is usually almost impossible to prove that a holder is not a holder
in due course by direct evidence and the question has to be decided on probabilities, the
mutual position of the parties and other circumstances connected with the case. (See: Raza
Ali v. Rahat Hussain, AIR 1933 All 754.)
In so far as the presentation of a bearer cheque to the banker for encashment is concerned
- the banks ordinarily require the person, presenting a bearer cheque for payment, to
endorse it though it is not a legal requirement. And the bank is bound to make payment to
the bearer.
The view, that once a bill of exchange is issued as payable to bearer, it remains always a
bearer, held the field, until the ruling in Forbes Campbell & Co. v. the Official Assignee
of Bombay (1925)27 Bom.LR 34, which completely upset the ordinary banking practice
in India. It was held therein that, where a hundi was drawn in favour of a payee or bearer
and was endorsed by the payee to a third person, it ceased to be a bearer hundi and was
payable to the third person or his order. It was only with the passage of the Negotiable
Instruments (Amendment) Act, 1934, that the principle " once a bearer, always a bearer"
has been finally recognized so far as cheques are concerned and the difference between the
English and the Indian law on this point has been done away with. The amendment
introduced as sub- section (2) to Section 85 of the NI Act reads thus: "Where a cheque is
originally expressed to be payable to bearer, the drawee is discharged by payment in due
course to the bearer thereof, notwithstanding any endorsement whether in full or in blank
appearing thereon and not withstanding that any such endorsement purports to restrict or
exclude further negotiation.” The amendment however, does not change the legal position,
as held in Forbes (supra), in so far as hundis are concerned.
(See: Tannan's Banking Law & Practice in India, 22nd Edition, Volume 1, page 496, para
26 & page 497 para 27) Therefore, in the present case on hand, it was established that the
complainant had received a bearer cheque for consideration and in discharge of a legal
liability and was a holder in due course, of the same. The dishonour of the cheque was for
the reason that the account of the petitioner did not carry sufficient funds- the bank had

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also issued a memo in this regard to the complainant, which is produced and marked as a
document at the trial. The burden was heavy on the petitioner to establish that the cheque
was not issued in discharge of a legal liability. The petitioner has failed to do so. The plea
that the cheque being a self cheque would not attract Section 138 of the NI Act, is not
tenable.
Hence the petition is dismissed.

Limitation for complaint on cheque dishonour clarified – day of event

to be excluded
Econ antri ltd v. Rom industries ltd. 2013 (10) scale 555.
Due to an apparent conflict of opinion, the Supreme Court in econ antri ltd v. Rom
industries ltd.reconsidered the principle of limitation explained in saketh india ltd. And ors.
V. India securities ltd(“saketh”). This issue came before the supreme court in light of the
difference of opinion with respect to the commencement of the period of limitation under
section 142 (b) of the ni act and the calculation of one month period prescribed therein.
The issue was whether, in a case where a period is fixed within which a person must act,
the day on which the cause of action arises (i.e., receipt of notice under section 138 (b) of
the ni act intimating the drawer of the fact of dishonour of the cheque) should also be
counted while computing the limit of 30 days.
After considering saketh and sil import, usa v. Exim aides silk exporters which had
conflicting methods of computation, the supreme court held that for the purposes of
calculating the period of one month, the period had to be reckoned by excluding the date
on which the cause of action arose. Relying on precedents under the ni act, the general
clauses act, 1897 and halsbury’s laws of england, the supreme court concluded that where
a particular time was to be computed from the happening of a certain event, the day of the
event was to be excluded.

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Companies should be aware of when their right to initiate action against a party commences
or lapses under indian law and this judgment provides clarity on the principles to be
followed in computing the period of limitation.

Power of attorney holder’s competence to file complaint upheld

G. Kamalakar v. M/s Surana Securities Ltd. & Anr. 2013 SC (“Kamalakar’s case”).
Conflicting judgments on the legality of a power of attorney holder (“Attorney holder”) to
initiate action on behalf of the principal under Section 138 of the NI Act was settled by a
three-judge bench of the Supreme Court in A.C. Narayan v. State of Maharashtra &
Anr. (“Narayan’s case”) and G. Kamalakar v. M/s Surana Securities Ltd. &
Anr. (“Kamalakar’s case”). In this judgment the Supreme Court held that subject to certain
essential pre-conditions, an Attorney holder had the power and authority to file a complaint
under Section 138 of the NI Act.
In two different cases the maintainability of an Attorney holder initiating a complaint under
Section 138 of the NI Act came up for consideration before the Supreme Court. In
Narayan’s case the drawee of the cheque had authorized the Attorney holder to initiate
proceedings under Section 138 of the NI Act and this was upheld by the Bombay High
Court. However, in Kamalakar’s case, the drawer of the cheque challenged the order of the
Andhra Pradesh High Court upholding the maintainability of a complaint initiated by an
Attorney holder. The Supreme Court had to examine whether a complaint was maintainable
when initiated by an Attorney holder and whether an Attorney holder could depose on
behalf of the drawee / complainant.
The Supreme Court held that an Attorney holder could initiate a complaint on behalf of a
principal and also depose on behalf of the principal provided he had personal knowledge
of the complaint. For the prosecution of an offence under Section 138 of the NI Act, the
principal would not have to be present in person and the Attorney holder could testify on
his behalf. Further, the principal should specifically empower the Attorney holder where
the power is to be sub-delegated for initiating action under Section 138 of the NI Act.

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This ruling will be of immense assistance to both companies and individuals who require
action to be taken through an Attorney holder to help manage their affairs.

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 1651 OF 2013
[Arising out of S.L.P.(Crl.)No.6191 of 2011]
Somnath Sarkar Appellant V. Utpal Basu Mallick & Anr. ..Respondents
New Delhi October 07, 2013

1. Leave granted. The Appellant before us makes what is essentially a mercy plea – to
reduce the sum of Rs.80,000/- imposed on him by way of compensation in lieu of the six
months sentence of incarceration imposed by the Metropolitan Magistrate, Calcutta. The
Appellant has admittedly issued a cheque in favour of the Respondent No.1-complainant
for a sum of Rs.69,500/-, which cheque on presentation was dishonourned with the
endorsement ‘insufficient funds’. After due compliance with the statutory provisions
contained in the Negotiable Instruments Act, 1881 (for short, ‘N.I. Act’) prosecution was
commenced and the aforementioned punishment under Section 138 thereof came to be
passed. The payment of compensation amounting to Rs.80,000/- has admittedly been
received by the complainant. The Appellant preferred an appeal to the Additional District
& Sessions Judge, Calcutta who by judgment dated 5.7.2004 dismissed the appeal and
ordered the Appellant to surrender within 15 days. In these circumstances, Criminal
Revision Record No.2447 of 2004 was filed in the High Court of Calcutta which was
pleased to substitute the six months’ sentence by an additional payment of Rs.69,500/-.
C.R.R. No.2447 of 2004 was heard and decided along with C.R.R. No.2865 of 2004 also
filed by the Appellant. Accordingly, as against the cheque amount of Rs.69,500/- the
Appellant is liable to the extent of Rs.1,49,500/-. Faced with the prospects of jail the
Appellant had earlier agreed to payment of the additional sum of Rs.80,000/- and for these
reasons his plea for reduction thereto was turned down by the High Court in the impugned

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order. The Appellant was directed to pay a sum of Rs.19,500/- by May 31, 2011 and the
balance of Rs.50,000/- in five equal instalments thereafter. Unfortunately, despite repeated
readings of the Orders and related documents, the total liability of the Appellant is not clear
as also the payments made till date.
2. Although the learned counsel for the complainant has appeared before us and has
endeavoured to persuade us to uphold the impugned order, we find it unnecessary to hear
him since the complainant has indubitably already received the sum of the dishonourned
cheque alongwith the compensation thereon aggregating Rupees Eighty Thousand.
3. It seems to us that since the Appellant has already faced prosecution in the Magistracy
in which he presented virtually no defence, and has thereafter filed an appeal before the
Sessions Court, and subsequently two Revisions before the High Court, the ends of justice
will be met, were he be directed to pay a sum of Rs.20,000/- only, in default, of which he
would be liable to undergo the punishment of simple imprisonment for a term of six months
as imposed by the aforementioned Magistrate. The said payment should be made within
eight weeks.
4. As already expressed, the language employed by the High Court in the impugned order
raises a doubt as to the total liability of the Appellant. A perusal of the sentence passed by
the Trial Court as well as the Sessions Judge while dismissing the Appeal also does not
completely clarify the position. The cheque amount is Rs.69,500/- and in this regard a sum
of Rs.80,000/- has been directed towards compensation which, by virtue of Section 357(3),
Code of Criminal Procedure (Cr.P.C.) would be receivable by the ainant. It appears that
this sum of Rs.80,000/- has been received by the complainant. The use of the word,
‘additional sum’ in the impugned order has led to considerable confusion. To put the matter
finally at rest, we hold that the total compensation payable under Section 138 of the N.I.
Act read with Section 357(3), Cr.P.C. is Rs.80,000/-. i.e., the cheque amount of Rs.69,500/-
together with Rs.10,500/- which may be seen as constituting interest on the dishonoured
cheque. In the arguments addressed before us there appears to be no controversy that this
sum has been duly paid to the Respondent-complainant. A reading of the impugned order

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appears to indicate that the payment of further sum of Rs.69,500/-, in the instalments
indicated in that order would be over and above the said sum of Rs.80,000/-. This would
violate Section 138 of the N.I. Act inasmuch as it would exceed the double of the cheque
amount. This leads us to conclude that the intention of the High Court was that
upon deposit/payment of the further sum of Rs.69,500/- (in addition to the earlier sum of
Rs.80,000/-), the sentence of imprisonment for six months would stand withdrawn.
Learned counsel for the Appellant has fervently submitted that the Appellant is a man of
limited financial means and this position has not been controverted. Palpably, the convict
has filed appeals all the way to the Apex Court which would have entailed further expenses
of no mean measure. We think that with the receipt of Rs.80,000/-, the complainant has
received compensation for the dishonoured cheque as per the adjudication of the Trial
Court. In these circumstances, any further payment would be in the nature of fine.
Accordingly, we clarify that the Appellant must pay a sum of Rs.80,000/- receivable by
the complainant within four weeks from today, if not already paid. The Appellant is also
sentenced to payment of a fine of Rs.20,000/-, payable within eight weeks from today, and
on the failure to make this payment, would be liable for imprisonment for six months. The
Appeal is allowed in these terms.

JUDICIAL TRENDS IN RESPECT OF NEGOTIABLE INSTRUMENTS

The Constitution has given the immense powers to the judiciary for the protection of
the Constitutional rights of citizens. There is no reason why the courts should not adopt
activist approach similar to Courts in America to set right the things and in order to bring
social changes. It is adopting right approach keeping in view the intention of the legislature
expressed through the Banking Public Financial Institutions and Negotiable Instruments
Laws ( Amendment) Act, 1888 ( 66 of 1988 ) and The Negotiable Instruments (Amendment
and Miscellaneous Provisions Bill, 2002 ( Bill No. 55 of 2002) in order to meet the
challenges of present day economy and ensuring the credibility and acceptability of
cheques to teach the lesson to the offenders who make the mockery of the sections relating

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to the dishonour of cheques in order to create loopholes and back doors from where a
through exist can be made.
It is the larger public interest that commercial transaction maintain the speed and tempo
and that a swift sale or a prompt purpose, is not unduly impeded by suspicions always
hovering round that part of promise to be performed in future. The issue of a cheque carries
with it assumptions which could regulate the normal functioning of an honest citizen. At a
period of time when multitudinous persons and institutions press into services, devices and
facilities available under the Negotiable Instruments Act, it may be necessary to ensure that
those who issue such vital documents, do not adopt a casual or careless attitude which
could block the free flow of trade. It is in the light of the experience which the State had,
that the enactment has been attempted. Court is unable to detect any legal infirmity or
constitutional incompetence. The courts have taken keen interest to prevent the fraud
relating to the dishonour of cheques as the Section 138 of the Negotiable Instruments was
enacted to ensure the preservation of that concept being the life blood of commerce and
economy.
In order to provide adequate remedy to the victims of an illegal act or a dishonest move,
the Parliament could then make a provision with sufficient teeth, as to strongly deal with
the ruffians in the trading area, or the unscrupulous elements who play foul with negotiable
instrument.
Global exposure has led to an awakening in Indian on all points leaving no segments of
business or society untouched. India is a signatory of WTO and therefore the international
global banking games rules must also apply to us and to have good credentials in the
international market of open economy we must have a sound, stable and creditable banking
system of which cheques and bill of exchange are important components. The Supreme
Court in BALCO & Contract Labor amply reveals that our judiciary is much alive to the
economic reforms.
The Apex Court has time and again forwarded the erring and defaulting drawers of fake
cheques still many of us are not forearmed and the malaise of dishonouring of cheques still

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persists. The Supreme Court whenever it gets an opportunity to dole the hole in this branch
of law, it does so unhesitatingly.
Thus, the legal machinery is to be geared in a new direction to prove a memo cure to
the dishonour of cheques as the battle is not to be fought on the legal field alone. A change
is also need in the moral and psychological approach to the subject to establish a convention
and it should be condemned unless warranted by serious consideration to prevent some
positive wrong. A change in the mental, moral and psychological attitude of all having
bank accounts and issuing cheques is also need to makes them realize that a changes is a
precious document and value lies in the its being honoured and not in its being retuned for
want of funds. As the intention of the Parliament was only to bring home offenders so save
the innocent individuals from harassment and loss except to such persons who wanted to
defraud the creditor by providing penalty in case of dishonour of the cheque as the cheques
are a backbone of the monetary system not only in the national but in the international
economy as a whole and specially keeping in view the fact the instance of dishonour of
cheques in India is greater in comparison to the other countries.

SUM UP:

In the wake of the increasing fraudulent and dishonest acts with respect to issue of
negotiable instruments, it is only imperative and inevitable that a liberal construction be
accorded to the provisions of a statute which seeks to protect the society against the wrongs
suffered by it.
Giving effect to the intention of the Act and the provisions therein, the wrongdoers should
not be allowed to escape the consequences by reason of adopting a strict interpretation to
such provisions under the garb that it is a penal provision. Thus, this step of the apex court,
combined with its previous decisions, go a long way to fulfil the objectives of the Act and
is a constructive measure to prevent the misuse of the provisions of law which are enacted
for the protection of the society rather than to encourage the illegal acts and misdeeds of

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the offenders of the society. It is also appreciable that the Supreme Court has taken into
consideration the genuine cases and suggested to follow the principle of the Laxmi
Dyechem on a case-to-case basis as it is also necessary to properly judge the intention of
the accused to avoid wrongful conviction. Hopefully our legislature in near future shall
incorporate the principles laid down by the judiciary into the statute by way of a much
needed amendment to Section 138 of the Act to avoid any ambiguity as well as consider
the inclusion of electronic operation of the bank accounts within the ambit of Section 138
of the Act.

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CHAPTER VI: MAJOR FINDINGS, CONCLUSIONS AND SUGGESTIONS

6.1 FINDINGS
While doing the research researcher found numerous cases pending in the country are
relatable to NI Act cases. This is a cause for huge concern. This is an indicator of the state
of affairs of pending NI Act cases.
Let us now look for the possible causes for delay in Section 138 cases which can be
avoided or improved for better results. It is very disappointing to note that cheque bouncing
cases are taking at least three to five years just like a civil suit for recovery of money. This
delay defeats the very purpose of the NI Act.
1. One of the main reasons for delay is attributable to less number of judicial
magistrates in comparison to the increasing number of 138 cases.
2. .Banks have been offering loans more liberally and collect postdated cheques
in advance and in many of the cases the judgment of the financial capacity is
wrong or in their endeavor is to reach targets for loans disbursal.
3. .In many of the courts, magistrates are caught in dilemma about as to whether
CRPC (Code of Criminal Procedure) is to be followed or special provisions of
NI act to are to be followed
4. Discretion has been given to the courts and every magistrate has to exercise
such power judiciously.
5. .It is noticed that some of the courts still follow the old system of for serving of
summons which takes at least six months while the upper time limit of six
months is specified for disposal. E-mails / fax / fast courier are not used for
serving of summons and in many cases, the accused manages with the post
department and returns the summon resulting in serving of summons second
time.
6. Adjournments are granted liberally and no efforts are made to complete
evidence and cross examination on the same day.

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 Newly inserted provisions of the Act would be rendered nugatory, if complaints filed
under Section 138 of the Act are not disposed of expeditiously. The judicial system itself
is portrayed in poor light, when Section138 cases take three to five years before final
judgment is passed.

6.2 CONCLUSION:

The situation is quite alarming and the judges are finding it very difficult to dispose
of these cases with promptitude, particularly, within the time frame of six months as
expected by Section 143 of the Act.
In earlier days, the use of cheques as a medium of transfer of money was not in
vogue.But, with the globalization and spurt in commercial activities, the dependence of
business community and other agencies dealing with them on Negotiable Instruments,
particularly cheques, has increased manifold. For proper and smooth flow of commercial
transactions it is but necessary that parties conduct themselves in an honest and upright
manner.
However, it was felt that in many cases cheques were issued as a devise to delay or
stall to payment of money or to defraud the creditor, which had the effect of eroding the
sanctity and credibility of the cheque system.
In Goaplast (P) Ltd. Vs. Chico Ursula D'Souza and another, (2004) 2 SCC 235
the Apex Court commenting on the situation observed that:
“..Dishonour of a cheque by the bank causes incalculable loss, injury and
inconvenience to the payee and the entire credibility of the business transactions within
and outside the country suffers a serious setback.The remedy available in a civil court is a
long-drawn matter and an unscrupulous drawer normally takes various pleas to feat the
genuine claim of the payee.”
For the protection of holder of cheque and to ensure acceptability of cheques in
settlement of liabilities, the Parliament in its wisdom, passed Banking and Public Financial

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Institutions and Negotiable Instruments Laws (Amendment) Act, 1988. By this
amendment Chapter XVII comprising of Sections 138 to 142 was inserted in the N.I. Act,
1881. Section 138 made the drawer of cheque liable under penal law if a cheque was
dishonoured due to insufficiency of funds and if he failed to pay despite notice. This law,
though helped the business community to some extent, did not prove very effective because
of the procedural delays in disposal of cases. Therefore, N.I. Act was further amended in
the year 2002 by inserting Sections 143 to 147 in it, which inter alia provide for time bound
disposal of such cases in a summary manner. The quantum of punishment was also
enhanced and certain other loopholes were also plugged in by amending Sections 138 &
142. These amended provisions of law are yet to have the desired effect on the malaise of
dishonour of cheques, the reason being that these provisions have not been effectively
implemented by the Courts. The researcher, realizing the great influx of cases under the
Act throughout the country, has already undertaken the task of holding work on the subject.
The researcher attempts to address the entire problem and has two precise objectives –
Firstly, to enrich the knowledge base of the judicial officers with respect to various
dimensions of law in this particular branch of law like Lokadalats can decide cheque
bouncing (Recently, the Bombay High Court held that Lokadalats constituted under Legal
Services Authority Act, 1985 can decide the issue of cheque bouncing cases, and their
verdict is final in such matters).
And secondly, to find out ways and means for effective implementation of the relevant
provisions of law so that the cases relating to dishonour of cheque for the protection of
holder of cheque can be disposed of within the time frame prescribed by law so as to ensure
effective and expeditious justice.
The researcher has prepared this Reading Material, in which we have tried to put all
the necessary material which can be helpful in dealing with various problems which the
judicial officers come across during discharge of their duties while dealing with cases
relating to offences u/s 138 N.I. Act.

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 Views of the Supreme Court
Hon’ble Supreme Court has narrated four key Judgments where the drawer was held
liable for Stop payment of cheques. However there is only one judgment which deals with
the laid preposition.
In M/s. Electronics Trade & Technology Development Corpn. Ltd.,
Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and
another, a cheque was presented by the complainant on 28-1-1990, through their bankers
M/s. Hyderabad Bank for realisation, with the promise by the accused, that the same will
be honoured when presented. However, the said cheque was dishonoured with the banker's
endorsement dated 29-11-1990 which stated”
(i) refer to drawer,
(ii) instructions for stopping payment and
(iii) stamped exceeds arrangements."
Appellant filed complaints under Section 138 of the Negotiable Instruments Act, 1881
for dishonour of cheque for insufficiency of funds in the accounts of the accused. It was
held by the 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".

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 The position of Law in this regard has changed dramatically from the 1990’s till date,
due to the amendment that has been brought into the section. A close look on the judgments
of various High Courts shows that the Courts relied on the presumption that the offence
referred to in Section 138 can be made out only on bouncing of a cheque on the ground of
inadequate balance in the account concerned. Where the cheque is returned unpaid on other
grounds, the same has not been made an offence or where the payment was countermanded
then it was without an offence. Courts during that time seemed to be more in favour of the
drawer. However, after the recent judgments of the Supreme Court, the burden has now
shifted to the drawer and a presumption has to be drawn in favour of the holder of the
cheque. As explained earlier, a plain reading of section 138 of the Negotiable Instruments
Act makes it clear that the words "either because of the amount standing to the credit of
that account is sufficient or that it exceeds the amount ..." have been specifically used. It
would, therefore, mean that only two contingencies are contemplated and as such, the
words "... either .... or" have been used. It is, therefore, clear that the cheque should be
dishonoured either for the insufficiency of the amount or, because it exceeds the amount
arranged to be paid from that account. No third contingency or eventuality has been
contemplated and the specific clear wording of section 138 eliminates any third
contingency other than what is mentioned in the section itself. It need not be stated that a
cheque can be dishonoured for so many reasons and there may be so many eventualities in
which the payee is denied payment by the bank. For example, mentioning the date
incorrectly or some corrections not initialled or the difference in between the amount
mentioned in figures and words are certain other contingencies in which the cheque will
be certainly dishonoured and would be returned as unpaid. It is not in respect of any of
these contingencies that the dishonour of a cheque has been made penal under section 138
of the said Act.
Section 138 of the Negotiable Instruments Act is a penal provision wherein if a person
draws a cheque 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

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of any debt or other liability, is returned by the bank unpaid, on the ground 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. However
with regard to "Payment stopped by the drawer" this section does not mention anything
specifically. Whatever may be ground or reason on the basis of which the cheque is
dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ"
or any other ground, an offence under the section is made out and the drawee has full right
to initiate proceedings u/s 482 CrPC. It is also important that the time restriction given in
Section 138 (c) also get attracted in case of stop payment when a notice as required by the
provision is sent to the drawer. It is seen that there are manifold reasons for the dishonor
of cheques by banks but there is statutory mandate upon the payee under Section 13 (b) of
Negotiable Instruments Act for giving a notice demanding the payment of the amount of
said cheque, within 15 days from the date of the information as to bouncing of the said
cheque from the drawer of the cheque and upon failure to make payment of the amount by
the drawer within 15 days, offence under section 138 is deemed to have been committed.
Moreover the decision of the Supreme Court in Electronics Trade & Technology
Development Corporation Ltd is explicit and has decided all sorts of controversies in
relation to bouncing of the cheque due to payment stopped by the drawer. It has expressly
held that if 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.
It can be concluded that whatever may be the ground or reason on the basis of which
the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or
"signature differ" or any other ground the offence under the section is made out and the
holder of cheque has full right to initiate proceedings and while deciding the case the Court

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should see that whether payment has been made by the drawer within 15 days of notice
issued by the drawee after the dishonour of cheque.

6.3 SUGGESTION
Some of the following suggestions are:
1. Fast track courts should be created to deal exclusively 138 cases.
2. Number of posts of magistrates should be increased.
3. The Courts have to be strict in not allowing adjournments to the accused
4. Trial of cases once commenced must be daily till judgment is passed.
5. Endeavour should be made to dispose of cases within a maximum period of six
months from the date of complaint or at worst should not stretch beyond one year.
6. High courts should monitor the pending cases.
7. Appeals should not be allowed unless the accused gives valid reasons or brings out
deficiencies in judgment of lower court.
8. Amendments should be made to empower courts to direct accused for deposit of full
amount of the cheque before the trial starts as it will compel accused to settle for
compounding at the earliest.
9. Penalties should be levied for delaying compounding of offence as directed by
Supreme Court.
10. The punishment should be enlarged to a minimum term of imprisonment for three
years, without an option of fine (for individuals), principally when it joined with the
punishment for the offence under IPC.
11. Lok Adalats should be given the jurisdiction to decide the issue of dishonour of
cheque and in this regard its decision should be made final.
12. The period of fifteen days for reporting the cheque bouncing by the payee to the
drawer should be increased because this is very short span of time and numerous
occasions it is felt inadequate. There should be maximum 6 months’ time should be
given to report the cheque bouncing to the drawer.

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 Keeping in view this, courts must adopt suitable and effective procedure to ensure
expeditious disposal of 138 cases to achieve the objective of the Act. The objective
of the part VII Act is to solidify the importance of cheque as a way to inspire the
development of banking, commerce, and the economy and the need to protect the
continuing reliability coupled with the use of cheque as a main constituent of
banking and as a medium of exchange in commerce and other economic endeavors.
We also have established that the micro objective of the Act is the annihilation of
the use of dishonour cheques to pay debts and settle sundry financial obligations.
The Amendments should be made to remove various structural and functional
defects that together with socio-cultural factors, have impeded the achievement of
the Act's purpose. The public must see that the writing of dishonour cheques is a
significant corrupt practice and that must be stopped. The public also should be
counseled that cheques should be issued only when there are enough funds in the
bank to honour the cheques drawn, which would ensure that paying banks would
honor the cheques. The Reserve Bank of India, in conjunction with the banks,
should increase awareness campaigns about the different strengths in using cheques
to make payments and to discharge other financial obligations and thereby persuade
people to use cheques in discharging monetary obligations. They should also
educate the public about the peril of dishonour cheques. The offence must be
considered committed immediately after issuance and not at any time before the
expiration of six months afterwards. LokAdalats will reduce the burden in the higher
courts.
Also the government may focus on improving the infrastructure facilities and efficacy
of the courts to facilitate expeditious disposal of 138 cases.

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