SEction
138-NI Act- PROVING financial capacity MANDATORY OR NOT?
In
order to accord credence to cheque transaction, the legislature has enacted the
provisions of 138-148 of Negotiable Instruments Act. Ever since, the provision
has become part of the statute book in 1988 i.e Negotiable Instruments Act 1881,
the aforesaid provisions have undergone periodical changes with a view to cater
to the situation emerging and therefore provisions were accordingly provided
for so as to aid and facilitate the commercial transactions and all other
transactions with provisions which may act as deterrent. The process of trial
and its intricacies as evolved has also been settled by way of judicial
precedents as settled by the Supreme Court. The process, as we all know has its
dynamics and evolution of the process is an ongoing process, The complaint u/s
138 of Negotiable Instruments Act was originally conceived as entailing summary
procedure, however, when subsequently, the terms of imprisonment of two years was
prescribed for the offence u/s 138 of Negotiable Instruments Act and therefore,
the summary process gave rise to summon procedure i.e summon cases and hence,
after recording pre-summoning evidence, upon appearance of accused and after
framing of notice and based on the probable defence shown while framing of
notice, the case could be treated as summon case and therefore, the complainant
evidence post summoning and cross examination of complainant is also envisaged.
The trial in such complaints is conducted as per Code of Criminal Procedure and
Bhartiya Nyay Suraksha Sanhita(BNSS)2023 in case of complaints filed after
01.07.2024.
The
process of trial entails examination and cross examination of complainant,
statement of accused u/s 313 of Cr.PC and defence witnesses if the accused
opted to lead. Since, the initial pr4esumtion of debt is presumed in favour of
the complainant i.e holder of the cheque/payee and thus, the accused is
req2uired to rebut the complaint set out by the complainant, during cross
examination and only, if accused is able to rebut the initial presumption
existing in favour of the complainant that the onus shall shift on the
complainant to revert on the rebuttal and therefore process of cross examination
is of utmost importance in the cases of complaints u/s 138 of Negotiable
Instruments Act.
Naturally,
during cross examination of complainant, the questions are put to the
complainant witness as to elicit the defence and the web of questions akin to
rigmarole is put to complainant witness. The issue of financial capacity is
often raised on behalf of the accused to buttress the point of no consideration
and it is done on the premise that assuming that in case of loan or friendly
loan, the amount could be lent only, if the accused was financially capable of
lending money, more so, in case of part of transactions being in cash. Thus, if
financial capacity was not disclosed by way of cogent evidence, the balance
used to tilt in favour of accused, However, that is no more a situation. As
narrated, though, earlier, the capacity of the complainant in lending money to
the accused was found relevant by the Courts, but subsequently, the financial
capacity of the complainant for lending money in itself is not construed as
clinching.
To
further deliberate on the aspect, if the cheque was issued in discharge of loan
availed by the accused, presumption under Section 118 read with Section 139 of
the Act would operate in the complainant’s favour. The burden of proof lies on
the accused and he has to raise a probable defence. In the absence of any
evidence, a mere oral statement that there did not exist any debt would not be
sufficient to rebut the presumption, especially when the signature on the
cheque has been admitted by the accused in his evidence.
The
Supreme Court has recently adverted to the issue conclusively in a matter
reported as 2025 INSC 427 captioned as Ashok Kumar Singh Vs
State of Uttar Pradesh (Criminal Appeal No. 4171 of 2024.
LAW
The
relevant case laws in this regard are as under: 1.
1. Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197;
2.
Rajesh Jain v. Ajay Singh, (2023) 10 SCC 148;
3.
Kishan Rao v. Shankargouda, (2018) 8 SCC 165,
4.
Uttam Ram v. Devinder Singh Hudan, (2019) 10 SCC 287
5.
Dattatraya v. Sharanappa, 2024 SCC OnLine SC 1899
In Ashok Singh (Supra) the Supreme Court has
observed as under:
“15.
There can be no dispute that in matters relating to alleged offences under
Section 138 of the Act, the complainant has only to establish that the cheque
was genuine, presented within time and upon it being dishonoured, due notice
was sent within 30 days of such dishonour, to which re-payment must be received
within 15 days, failing which a complaint can be preferred by the complainant
within one month as contemplated under Section 142 (1)(b) of the Act.
16.
On the other hand, the foremost defence available to the accused is to deny the
very liability to pay the amount for which the cheque was issued on the ground
that it was not a ‘legally enforceable debt’ under the Act.”
According
to Supreme Court in deciding a criminal revision application under Section 482 CrPC
for quashing a proceeding under Sections 138/141 of the NI Act, the laudable
object of preventing bouncing of cheques and sustaining the credibility of
commercial transactions resulting in enactment of the said sections has to be
borne in mind. It is also to be noted that the provisions of Sections 138/141
of the NI Act create a statutory presumption of dishonesty on the part of the
signatory of the cheque, and when the cheque is issued on behalf of a company,
also those persons in charge of or responsible for the company or the business
of the company. Every person connected with the company does not fall within
the ambit of Section 141 of the NI Act.
In
Ashok Singh (Supra) it is held by the Supreme Court as under:
21.
One of the grounds, which weighed heavily with the High Court to acquit the
respondent no.2 was that the appellant was unable to prove the source of
Rs.22,00,000/- (Rupees Twenty-Two Lakhs) given to the respondent no.2 as loan.
Admittedly, the signature on the cheque is of the respondent no.2 himself. The
decision in Rohitbhai Jivanlal Patel v. State of Gujarat, (2019) 18 SCC
106 can be profitably referred to:
‘18. In
the case at hand, even after purportedly drawing the presumption under Section
139 of the NI Act, the trial court proceeded to question the want of evidence
on the part of the complainant as regards the source of funds for advancing
loan to the accused and want of examination of relevant witnesses who allegedly
extended him money for advancing it to the accused. This approach of the trial
court had been at variance with the principles of presumption in law. After
such presumption, the onus shifted to the accused and unless the accused had
discharged the onus by bringing on record such facts and circumstances as to
show the preponderance of probabilities tilting in his favour, any doubt on the
complainant's case could not have been raised for want of evidence regarding
the source of funds for advancing loan to the appellant accused. The aspect
relevant for consideration had been as to whether the appellant-accused has
brought on record such facts/material/circumstances which could be of a
reasonably probable defence”.
“20. Hereinabove,
we have examined in detail the findings of the trial court and those of the
High Court and have no hesitation in concluding that the present one was
clearly a case where the decision of the trial court suffered from perversity
and fundamental error of approach; and the High Court was justified in
reversing the judgment of the trial court. The observations of the trial court
that there was no documentary evidence to show the source of funds with the
respondent to advance the loan, or that the respondent did not record the
transaction in the form of receipt of even kachcha notes, or that there were
inconsistencies in the statement of the complainant and his witness, or that
the witness of the complaint was more in the know of facts, etc. would have
been relevant if the matter was to be examined with reference to the onus on
the complaint to prove his case beyond reasonable doubt. These considerations
and observations do not stand in conformity with the presumption existing in
favour of the complainant by virtue of Sections 118 and 139 of the NI Act.
Needless to reiterate that the result of such presumption is that existence of
a legally enforceable debt is to be presumed in favour of the complainant. When
such a presumption is drawn, the factors relating to the want of documentary
evidence in the form of receipts or accounts or want of evidence as regards
source of funds were not of relevant consideration while examining if the
accused has been able to rebut the presumption or not. The other observations
as regards any variance in the statement of complainant and witness; or want of
knowledge about dates and other particulars of the cheques; or washing away of
the earlier cheques in the rains though the office of the complainant being on
the 8th floor had also been irrelevant factors for consideration of a probable
defence of the appellant. Similarly, the factor that the complainant alleged
the loan amount to be Rs 22,50,000 and seven cheques being of Rs 3,00,000 each
leading to a deficit of Rs 1,50,000, is not even worth consideration for the
purpose of the determination of real questions involved in the matter. May be,
if the total amount of cheques exceeded the alleged amount of loan, a slender
doubt might have arisen, but, in the present matter, the total amount of 7
cheques is lesser than the amount of loan. Significantly, the specific amount
of loan (to the tune of Rs 22,50,000) was distinctly stated by the appellant
accused in the aforesaid acknowledgment dated 21-3 2017”.
The
provisions of Sections 138/141 of the NI Act create a statutory presumption of
dishonesty on the part of the signatory of the cheque, and when the cheque is
issued on behalf of a company, also those persons in charge of or responsible
for the company or the business of the company. Every person connected with the
company does not fall within the ambit of Section 141 of the NI Act.
It is further held in Ashok
Singh (Supra) that:
22.
The High Court while allowing the criminal revision has primarily proceeded on
the presumption that it was obligatory on the part of the complainant to
establish his case on the basis of evidence by giving the details of the bank
account as well as the date and time of the withdrawal of the said amount which
was given to the accused and also the date and time of the payment made to the
accused, including the date and time of receiving of the cheque, which has not
been done in the present case. Pausing here, such presumption on the
complainant, by the High Court, appears to be erroneous. The onus is not on the
complainant at the threshold to prove his capacity/financial wherewithal to
make the payment in discharge of which the cheque is alleged to have been
issued in his favour. Only if an objection is raised that the complainant was
not in a financial position to pay the amount so claimed by him to have been
given as a loan to the accused, only then the complainant would have to bring
before the Court cogent material to indicate that he had the financial capacity
and had actually advanced the amount in question by way of loan. In the case at
hand, the appellant had categorically stated in his deposition and reiterated
in the cross-examination that he had withdrawn the amount from the bank in
Faizabad. The Court ought not to have summarily rejected such stand, more so
when respondent no.2 did not make any serious attempt to dispel/negate such
stand/statement of the appellant. Thus, on the one hand, the statement made
before the Court, both in examination-in-chief and cross examination, by the
appellant with regard to withdrawing the money from the bank for giving it to
the accused has been disbelieved whereas the argument on behalf of the accused
that he had not received any payment of any loan amount has been accepted”.
The
Supreme Court has further observed in M/s S. S. Production v. Tr.
Pavithran Prasanth, 2024 INSC 1059, we opined:
8.
From the order impugned, it is clear that though the contention of the
petitioners was that the said amounts were given for producing a film and were
not by way of return of any loan taken, which may have been a probable defence
for the petitioners in the case, but rightly, the High Court has taken the view
that evidence had to be adduced on this point which has not been done by the
petitioners. Pausing here, the Court would only comment that the reasoning of
the High Court as well as the First Appellate Court and Trial Court on this
issue is sound. Just by taking a counter-stand to raise a probable defence
would not shift the onus on the complainant in such a case for the plea of
defence has to be buttressed by evidence, either oral or documentary, which in
the present cases, has not been done. Moreover, even if it is presumed that the
complainant had not proved the source of the money given to the petitioners by
way of loan by producing statement of accounts and/or Income Tax Returns, the
same ipso facto, would not negate such claim for the reason that the cheques
having being issued and signed by the petitioners has not been denied, and no
evidence has been led to show that the respondent lacked capacity to provide
the amount(s) in question. In this regard, we may make profitable reference to
the decision in Tedhi Singh v Narayan Dass Mahant, (2022) 6 SCC 735:
‘10.
The trial court and the first appellate court have noted that in the case under
Section 138 of the NI Act the complainant need not show in the first instance
that he had the capacity. The proceedings under Section 138 of the NI Act is
not a civil suit. At the time, when the complainant gives his evidence, unless
a case is set up in the reply notice to the statutory notice sent, that the
complainant did not have the wherewithal, it cannot be expected of the
complainant to initially lead evidence to show that he had the financial
capacity. To that extent, the courts in our view were right in holding on those
lines. However, the accused has the right to demonstrate that the complainant
in a particular case did not have the capacity and therefore, the case of the
accused is acceptable which he can do by producing independent materials,
namely, by examining his witnesses and producing documents. It is also open to
him to establish the very same
The
Supreme Court, in Ashok Singh (Supra) on an overall
circumspection of the entire facts and circumstances of the case, has held that
the appellant succeeded in establishing his case and the Orders passed by the
Trial Court and the Appellate Court did not warrant any interference. It was
held that the High Court erred in overturning the concurrent findings of guilt
and consequential conviction by the Trial Court and the Appellate Court. It is
held that it becomes the duty of the courts to consider carefully and
appreciate the totality of the evidence and then come to a conclusion whether
in the given case, the accused has shown that the case of the complainant is in
peril for the reason that the accused has established a probable defence.
-------
Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com
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