SECTION 138 NEGOTIABLE INSTRUMENT ACT,1881

 RECENT TRENDS:-

Negotiable Instruments have been used in commercial world since long as one of
the convenient modes for transferring money. Development in Banking sector
and with the opening of new branches, cheque become one of the favourite
Negotiable Instruments. When cheques were issued as a Negotiable Instruments,
there was always possibility of the same being issued without sufficient amount in
the account. With a view to protect drawee of the cheque need was felt that
dishonour of cheque he made punishable offence. With that purpose Sec.138 to
142 were inserted by Banking Public Financial Institutions and Negotiable
Instruments clause (Amendment) Act, 1988. This was done by making the drawer
liable for punishments in case of bouncing of the cheque due to insufficiency of
funds with adequate safeguards to prevent harassment of an honest drawer.

OBJECT:-The object of this amendment Act is:

1. To regulate the growing business, trade, commerce and Industrial activities.
2. To promote greater vigilance in financial matters.
3. To safeguard the faith of creditors in drawer of cheque.
(Krishna vs. Dattatraya 2008(4) Mh.L.J.354 (Supreme Court)

However, it was found that punishment provided was inadequate, the procedure
prescribed cumbersome and the courts were unable to dispose of the cases
expeditiously and in time bound manner. Hence, the Negotiable Instruments
(Amendment and Miscellaneous provisions Act 2002) was passed. The provisions
of sec.143 to 147 were newly inserted and provisions of section 148, 141, 142
were amended.

 NEGOTIABLE INSTRUMENTS ARE OF FOLLOWING KINDS :-

1. Promissory notes
2. Bill of Exchange
3. Cheque

Section138 of Act deals with dishonour of cheques. It has no concern with

dishonour of other negotiable instruments.
 INGREDIENTS:-

The ingredients of the offence as contemplated under Sec.138 of the Act are as
under:-
1. The cheque must have been drawn for discharge of existing debt or liability.
Legally recoverable debt:
In Somnath vs. Mukesh Kumar, 2015(4) Law Herald 3629 (P&H) it was held by
Hon'ble High Court the complaint under Section 138 is not maintainable when the
cheque in question had been issued qua a time barred debt. Similarly, supari
money for commission of crime is not legally recoverable debt and complaint
under Section 138 is not maintainable in such a case.
2. Cheque must be presented within 3 months or within validity period which
ever is earlier.
3. Cheque must be returned unpaid due to insufficient funds or it exceeds the
amount arranged.
4. Fact of dishonour be informed to the drawer by notice within 30 days.
5. Drawer of cheque must fail to make payment within 15 days of receipt of
the notice.
A mere presentation of delivery of chqeue by accused would not amount to
acceptance of any debt or liability. Complainant has to show that cheque was
issued for any existing debt or liability. Thus, if cheque is issued by way of gift and
it gets dishonoured offence u/s. 138 of the Act will not be attracted.

 Procedure:-
The normal procedure for dishonour of a cheque is as follows:-

1. Cheque Return:- The bank returns the cheque to the payee's bank,
mentioning the reason for dishonour (e.g., insufficient funds, expired
cheque, etc.).
2. Cheque Return Memo:- The bank sends a cheque return memo to the
payee, explaining the reason for non-payment.
3. Resubmission:- The payee can resubmit the cheque to the bank within
three months of the date on the cheque.
4. Second Dishonour:- If the cheque is dishonoured again, the payee must
send a written notice to the defaulter/drawer demanding payment within
15 days.
 5. Legal Notice:- The payee must send a legal notice to the defaulter/drawer,
stating the amount, cheque details, and a demand for payment.
6. Filing a Complaint:- If the defaulter/drawer fails to pay within 15 days, the
payee can file a criminal complaint under Section 138 of the Negotiable
Instruments Act.
7. Court Proceedings:- The court may impose penalties, including
imprisonment for up to two years, a fine of up to double the amount, or
both, if the drawer is found guilty.

Note:- The payee has one month from the notice period's expiration to submit a
complaint in the jurisdictional magistrate's court.

The Legal Procedure for dishonor of a cheque is as follows:-

Section 142 of the N. I. Act creates bar against taking cognizance of the offence
u/s. 138 of the N. I. Act except upon complaint in writing by payee or holder in
due course. Complaint may be instituted by Power of Attorney Holder. However,
if the holder of Power of Attorney has merely lodged complaint without being
aware of the facts, then recording the statement of payee becomes imperative.

Once Magistrate is satisfied that there is proper compliance of the proviso to

Sec.138 N. I. Act and jurisdictional conditions are fulfilled, Magistrate shall issue
the process. Service of summons by speed post or approved courier is recognized
by Sec. 144 of N. I. Act. If accused does not appear in response to summons or
remains absent subsequent, a coercive process needs to be taken by the court.

In case of Bhaskar Industries Ltd. vs. M/s Bhiwani – Denim and Apparens Ltd.
2001 All M.R. ( Criminal) 1961 ). Advocate who appeared in absence of accused
was allowed to plea on behalf of accused. Section145 (1) of the Act permits the
recording of evidence of complainant on affidavit. Even evidence of accused and
witnesses can be recorded on affidavit. This was for expedite disposal of the
cases. Bank slips are held as a primary evidence and admissible directly. Accused
are given effective opportunity to defend the case. Considering presumptions
under sec.118 and 139 of the N.I. Act effective opportunity is to be given to
accused to cross examine the witnesses.
 It is common experience that in cases u/s 138 of N.I. Act evidence is recorded by
one Judicial Officer and before delivery of Judgment he is transferred, in such
situation the successor has to proceed with denovo trial.

In Nitinbhai Saevatilal Shah and another vs. Manubhai Manji bhai Panchal and
another, 2011(4) RCR (Criminal) 149 (SC) it was held by the Hon'ble Supreme
Court in summary trial of complaint under Section 138 of the Act, if the
Magistrate who recorded the evidence is transferred, the successor Judge can’t
pronounce judgments on basis of evidence recorded by his predecessor. He has to
try case de novo.

However, in case of Mehsana Nagarik Sahakari Bank Ltd. vs. Shreeji CAB
company ltd. and others 2014 Cr.L.J. 1953. The apex court held that if evidence is
recorded in full and not in summary manner, then evidence recorded by
predecessor can be acted upon.

Though the provision contained in Sec.143 of the N. I. Act provides that cases
u/s.138 are to be tried in summary way, they should be tried as a regular
summons cases. If it appears to the Magistrate that nature of case is such that
sentence of imprisonment for a term exceeding one year may have to be passed,

Or that it is for any other reasons undesirable to try the case summarily,
Magistrate shall after hearing the parties record and order to that effect and try
the case as a regular summons case.

Recently in case of Indian Bank Association and others vs. Union of India &
others reported in AIR 2014 Supreme Court 2528, general directions have been
given by the Apex court. The directions are worth quoting and they are as under:-

1. Metropolitan Magistrate/ Judicial Magistrate (MM/JM), on the day when

the complaint under Section 138 of the Act is presented, shall scrutinize the
complaint and, if the complaint is accompanied by the affidavit, and the
affidavit and the documents, if any, are found to be in order, take
cognizance and direct issuance of summons.
2. MM/JM should adopt a pragmatic and realistic approach while issuing
summons. Summons must be properly addressed and sent by post as well
as by email address got from the complainant. Court in appropriate cases,
 may take the assistance of the police or the nearby court to serve notice to
the accused. For notice of appearance, a short date be fixed. If the
summons is received back unserved, immediate follow up action be taken.
3. Court may indicate in the summons that if the accused makes an
application for compounding of offences at the first hearing of the case
and, if such an application is made, Court may pass appropriate orders at
the earliest.
4. Court should direct the accused, when he appears to furnish a bail bond,
the ensure his appearance during trial and ask him to take notice under
Section 251, Cr.P.C. to enable him to enter his plea of defence and fix the
case for defence evidence, unless an application is made by the accused
under Section 145(2) for recalling a witness for cross examination.
5. Court concerned must ensure that examination in chief, cross examination
and re examination of the complainant must be conducted within three
months of assigning the case. The court has option of accepting affidavits of
the witnesses, instead of examining them in Court. Witnesses to the
complainant and accused must be available for crosse xamination as and
when there is direction to this effect by the Court.

Some important principles laid down by the Hon'ble High Courts and Apex Court
are as under:-

i. Cheque to pay time barred debt is enforceable by virtue of section 25 (3) of

Contract Act, ( Kadir vs. Dattatraya 2005 (3) Mh L.J. 1076 ). However, In
Somnath vs. Mukesh Kumar, 2015(4) Law Herald 3629 (P&H) it was held by our
Hon'ble High Court the complaint under Section 138 is not maintainable when the
cheque in question had been issued qua a time barred debt.
ii. Legal heirs of complainant can continue the complaint.
( Revi Selval vs. Navin 2000 (2) Bombay Cri. Cases, 23. )
iii. However, legal representatives of accused cannot be made to face trial.
(Smt. Dropadi @ Maya Shippi vs. State of Rajasthan 2000(3) Crimes 6045. )
iv. Part payment made does not absolve to the drawer from liability.
( Ramnarayan Madanlal Khandelwar vs. Proprietor Daulat Enterprise, 2005
(4) Mh L.J. 796)
 v. Cheque issued as a security are in discharge of liability as a guarantor attracts
Sec.138 (ICBS Ltd. vs. Beena Shabeer 2002 AIR SCW 3358)
vi. “Any liability does not include any other's liability unless there is agreement
between drawer and original debtor.
(Hinten Sagar and another vs. IMC Ltd & another 2001 (3) Mh L.J. 659)”
vii. Demanding cheque amount interest, damages, separately in the notice would
not invalidate the notice.
( Suman Shetty vs. Ajay A. Chudiwal AIR 2000 (SC) 828.)
viii. A single complaint in respect of dishonoured cheques is maintenable though
consolidated single notice is sent and single complaint is maintenable.
(Charashni Kumar Talwani vs. M/s. Malhotra Poultries 2014 Cr.L.J. 2908 )
ix. A single complaint in respect of dishonoured cheques is maintenable though
consolidated single notice is sent and single complaint is maintenable.
(Charashni Kumar Talwani vs. M/s. Malhotra Poultries 2014 Cr.L.J. 2908 )

 PRESUMPTIONS:-

There is presumptions under Section 118 and 139 of the Negotiable Instruments
Act in favour of holder of the cheque. Until contrary is proved, presumption is in
favour of holder of cheque that it has been drawn for discharge of debt or
liabilities. However, it is rebutable one and accused can rebut it without entering
into witness box, through cross examination of the prosecution witnesses.
Complainant is not absolved from liability to show that cheque was issued for
legally enforceable debt or liability. Burden on accused in such case would not be
as light as it is in the cases under sec.114 of the Evidence Act.

In case of “ Goa Plast Pvt. Ltd. vs. Shri Chico Ursula D' Souza 1996 (4) All MR 40”
relations between accused and complainant were of employee and employer. No
evidence led to show that accused was liable to pay any due or part thereof and
thus liability was not proved. Similarly, it was not proved that the cheque was
given towards those liabilities. Accused much prior to presentation of cheques to
the Bank had appraised the complainant that he was not liable to pay any
amount, and therefore, stopped payment. Bombay High Court had observed that
complainant failed to prove that cheque was issued for discharge of legal
liabilities.
 Section 139 of the Act merely raises a presumption in regard to the second aspect
of the matter.Existence of legally recoverable debt is not a matter of presumption
u/s 139. It merely raises a presumption in favour of holder of the cheque that the
same has been issued for discharge of any debt or other liability.

Many a times cheques are issued bearing no date or post dated cheques.
Holder of cheque enters the date, and thereafter cheques are presented to banks.
Hon'ble Bombay High Court in case of Purushottamdas Gandhi vs. Manohar
Deshmukh 2007 (1) Mh.L.J. 210 has observed that inserting such date does not
amount to tampering or alteration but by delivery of such undated cheque
drawer authorizes holder to insert date. Period of 6 months for presentation of
such cheque to the Bank would start from the date mentioned on cheque.
( Ashok Badwe vs. Surendra Nighojkar A.I.R. 2001, S.C. 1315)

Return of cheque is itself an indication that funds are not forthcoming. The words
“refer to drawer” or “account closed” are covered under the term “insufficient
funds”. Thus, liability of drawer can’t be avoided if he closes account and cheque
is dishonoured. A safeguard has been made to prevent hasty action is that the
payee or holder in due course of cheque shall make a demand for payment of
amount covered by cheque by giving a notice in writing to drawer within 30 days.

Offence u/s. 138 is committed only when payment is not made by drawer on
expiry of 15 days after service of notice as prescribed by proviso (c) of Sec. 138.
In K. Prakashan Vs. P.K. Surenderan, 2007(4) RCR (Criminal) 588 (SC) it was held
by the Hon'ble Supreme Court that the presumption under Section 139 of the NI
Act can be raised only when the complainant is able to show that he had requisite
funds for advancing loan to the accused.

 Cognizance of offence:-

Cognizance of an offense under the Negotiable Instruments Act (NI Act) refers to
the process by which a court takes judicial notice of a complaint or a case related
to a dishonored negotiable instrument, such as a check or promissory note.
 Here are the steps involved in taking cognizance of an offense under the NI Act:-
1. Filing of Complaint: The payee or holder of the instrument files a complaint
with the court, alleging that the instrument was dishonored due to reasons
such as insufficient funds, stop payment, or cancellation.
2. Examination of Complaint: The court examines the complaint to determine
whether it meets the requirements of Section 142 of the NI Act.
3. Issuance of Notice: If the court finds the complaint to be valid, it issues a
notice to the accused (drawer of the instrument) to appear before the court.
4. Appearance of Accused: The accused appears before the court and may file
a written statement or reply to the complaint.
5. Cognizance Taken: The court takes cognizance of the offense and proceeds
with the trial.
6. Trial: The court hears evidence and arguments from both sides and passes a
judgment accordingly.

Some essential points to note:-

- Cognizance can be taken only by a court that has jurisdiction over the offense.
- The complaint must be filed within the limitation period prescribed under the NI
Act (usually one month from the date of dishonor).
- The court may dismiss the complaint if it finds that there is no prima facie case
made out against the accused.

 JURISDICTION:-

Considering ingredients of sec.138 referred above Hon'ble Apex Court in case of

K. Bhaskaran vs. Shankaran AIR 1999, SC 3762, had given jurisdiction to initiate
the prosecution at any of the following places:
1. Where cheque is drawn.
2. Where payment had to be made.
3. Where cheque is presented for payment
4. Where cheque is dishonoured.
5. Where notice is served upto drawer.
However, recently in case of Dashrath Rupsingh Rathod v. State of Maharashtra,
reported in MANU /SC/ 0655/ 2014 interpreted various provisions of Sec.138 of
Negotiable Instruments Act and held:-
1. An offence under Section 138 of the Negotiable Instruments Act, 1881 is
committed no sooner a cheque drawn by accused on an account being
maintained by him in a bank for discharge of debt/liability is returned
unpaid for insufficiency of funds or for the reason that the amount exceeds
the arrangement made with the bank.
2. Cognizance of any such offence is however forbidden under Section 142 of
the Act except upon a complaint in writing made by payee or holder of
cheque in due course within a period of one month from the date of cause
of action accrues to such payee or holder under clause (c) of proviso to
Section 138.
3. Cause of action to file a complaint accrues to a complainant /payee/ holder
of a cheque in due course if,
(a) the dishonoured cheque is presented to the drawee bank within a
period of three months from the date of its issue.
(b) If complainant has demanded payment of cheque amount within
thirty days of receipt of information by him from the bank regarding
the dishonour of cheque and
(c) If the drawer has failed to pay the cheque amount within fifteen days
of receipt of such notice
4. The facts constituting cause of action do not constitute the ingredients of
the offence under Section 138 of the Act.
5. Proviso to Section 138 simply postpones/ defers institution of criminal
proceedings and taking of cognizance by Court till such time cause of action
in terms of clause (c) of proviso accrues to the complainant.
6. Once the cause of action accrues to complainant, jurisdiction of Court to try
the case will be determined by reference to the place where cheque is
dishonoured.
7. General rule stipulated under Section 177 of Cr.P.C. applies to cases under
Section 138 of the Negotiable Instruments Act. Prosecution in such cases
can, therefore, be launched against the drawer of the cheque only before
the Court within whose jurisdiction the dishonour takes place except in
situations where the offence of dishonour of cheque punishable under
Section 138 is committed along with other offences in a single transaction
within the meaning of Section 220(1) read with Section 184 of the Code of
Criminal Procedure or is covered by the provisions of Section 182(1) read
with Sections 184 and 220 thereof.
 Who can file Complaint:-

Payee or holder in due course is a competent person to file complaint. Complaint

must be by corporal person capable of making physical appearance in court. In
case of company and firm natural person should represent it. Complaint can be
filed by Power of Attorney Holder. It is not requirement that the person whose
statement was taken on oath at the first instance should alone represent the
company till the proceeding have ended. Even if the person sent earlier had no
authority, the company can at subsequent stage send a person competent to
represent the company. (Associated Cement Company Ltd. vs. Keshavanand
(1998) 91 company cases 3619SC.)

It is further observed in the above case that a complaint which is made in the
name and behalf of company can be made by any officer of that company and the
section does not require that complaint must be signed and presented only by
authorized agent or a person empowered under the Articles of association or by
any resolution of the Board of Directors.

In M/s Capital Leasing and Finance Co. Vs. Navrattan Jain, 2005(4) RCR (Criminal) 331
(P&H) it was held by Hon'ble High Court that even an unregistered partnership firm can
file a complaint under Section 138 of the Act.

In Vinita S. Rao vs. M/s Essen Corporate Services Pvt. Ltd. And another, 2015 AIR (SC)
882 it was held by the Hon'ble Supreme Court that complaint can be filed by the
complainant through his Power of Attorney but the power of attorney must have
knowledge about the relevant transactions.

 CAUSE OF ACTION:-

Cause of action arises when notice is served on the drawer and drawer fails to
make payment of the amount of cheque within 15 days. Limitation to file
complaint is one month from the date of cause of action. However, by
Amendment Act of 2002 court is empowered to take cognizance of the offence
even if complaint is filed beyond one month by condoning the delay if sufficient
cause is shown. It has been held in various other cases that offence is not made
out:-
1. When cheque returned as defective one
(Babulal vs. Khilji 1998 (3) Mh L.J.762 )
2. When no notice is given to company and cheque is drawn by company
(P.Raja Rathinalm vs. State of Maharashtra 1999 (1) Mh.L.J. 815)
 3. Cheque is given as a gift.
4. Complainant was not a payee.
5. Signature of drawer on the cheque is incomplete.
( Vinod vs. Jahir 2003 (1) MhL.J. 456.)

 PUNISHMENT:-

After the amendment of 2002 the imprisonment that may be imposed may
extend to two years, while fine may extend to twice the amount of cheque.
However, the trial is conducted in summary way, then Magistrate can pass
sentence of imprisonment not exceeding one year and amount of fine exceeding
Rs.5,000/.There is no limitation for awarding compensation.The sentence should
be such that it gives proper effect to the object of the legislation. No drawer can
be allowed to take advantage of cheque issued by him lightly. Apex court has
cautioned against imposing flee bite sentences.
In case of Sujanti Suresh Kumar vs. Jagdeeshan 2002 Cr.L.J. 1003 Prior to the
amendment of 2002 a sentence of fine in excess of Rs.5,000/by Judicial
Magistrate, First Class or Metropolitan Magistrate was held to be illegal.
However, after the amendment the Magistrate are empowered to impose fine
exceeding Rs.5,000/.
In case of Dilip vs. Kotak Mahindra Company Ltd. 2008 (1) Mh L.J. 22 it was
enunciated that the amount of compensation sought to be imposed must be
reasonable and not arbitrary.
Before issuing a direction to pay compensation the capacity of accused to pay the
same must be judged. An inquiry in this behalf even in summary way may be
necessary. Sub section 3 of Sec. 357 does not impose any limitation but the
powers thereunder should be exercised only in appropriate cases. Ordinarily it
should be lesser than the amount which can be granted by Civil Court upon
appreciation of evidence. A criminal case is not a substitution for civil suit