Circumstances when Section 138 NI Act complaint could be quashed

 

The Sections 138- 148 has been a complete code itself as it contained various aspects of cheque bouncing and remedies prescribed. The provision is quite unique in as much as it has the trapping of civil cases, though, it is considered as a criminal complaint. The procedure for pursuing the complaint is largely based on Cr,PC (Now BNSS- Bhartiyaq Nagrik Suraksha Sanhita). Therefore, the complaint u/s 138 of Negotiable Instruments act is also considered as quasi criminal in nature. Why the bouncing of cheque has been treated as penal offence and the reasons of bringing forth the provision in Negotiable Instruments act in 1988 are too well known to further elucidate herein. Suffice to say, that as the complaint u/s 138 of Negotiable Instruments Act has the trapping of criminal cases and the procedure as contained in Cr.PC (BNSS) shall be applicable in such complaints. What may follow inevitably, therefore, that a criminal complaint can be quashed either by recalling of summon, discharge of accused, acquittal of accused and/or by quashing of complaint. The offence is compoundable and therefore, the parties may settle the dispute before a court of Magistrate to seek culmination of case and thereby a Magistrate shall record the matter as compounded and the accused in such an event shall be acquitted of all charges. However, if a complaint is contested and if the accused believes that the complaint suffers from several lapses so as to necessitating its quashing, then, the High Court is approached by the accused for seeking quashing of such complaint u/s 482 of Cr.PC (corresponding to section 528 of BNSS).

                        CRITERIA of quashing

The criteria of quashing and circumstances leading to prospect of quashing of a complaint u/s 138 of Negotiable Instruments Act is being dealt with herein.

(1) Deviation from specifics time line

The complaints u/s 138 of Negotiable Instruments Act has to conform to the provisions stipulated therein and any deviation to the specifics may lead the complaint not maintainable and could be quashed. For instance, if complaint is filed beyond the prescribed limit of time, the complaint may not be maintainable (Ref: Patel Somabhai Vithalbhai Vs State of Gujarat 2024 latest caselaw 307 Guj = RCR/MA 13742/19. In the aforesaid case, Gujarat High Court relied upon the judgment of Supreme Court reported as Inder Mohan Goswami and Another versus State of Uttaranchal (2007) 12 SCC 1, in para 23 and 24 it is held therein as under:

"23. This Court in a number of cases has laid down the scope and ambit of courts' powers under Sec. 482 CrPC. Every High Court has inherent power to act ex debito justitiae to do real and substantial justice, for the undefined administration of which alone it exists, or to prevent abuse of the process of the court. Inherent power under Sec. 482 CrPC can be exercised: [(i) to give effect to an order under the Code;]

[(ii) to prevent abuse of the process of court, and]

[(iii) to otherwise secure the ends of justice.]”

 

“24. Inherent powers under Sec. 482 CrPC though wide have to be exercised sparingly, carefully and with great caution and only when such exercise is justified by the tests specifically laid down in this section itself'. Authority of the court exists for the advancement of justice. If any abuse of the process leading to injustice is brought to the notice of the court, then the court would be justified in preventing injustice by invoking inherent powers in absence of specific provisions in the statute”.

 

2. DO NOT ATTRIBUTE SPECIFIC ACts

 

If a complaint does not categorically contains averments to the effect that accused was responsible for day to day affairs, for instance, in the case of company, the role of Directors who are arrayed as an accused should be categorically and specifically spelt out as to in what manner the said Director was responsible for the commission of offence. It is no res integra that for want of specific roles attributed to Directors, the complaint against the Director is liable to be quashed. (Ref: JN Bhatia Vs State (2008) IITR 276(Delhi)). It is observed in JN Bhatia (Supra) that:

15. Before the decision of the Supreme Court in SMS Pharmaceuticals v. Neeta Bhalla SMAIRONLINE 2007 SC 207 , which I shall advert to and discuss in detail at the appropriate stage) the trend in case law shows parallel thinking in either direction. One line of cases indicates that once there is an imputation made to the effect that the concerned director/person imp leaded as accused was responsible for the conduct of the business of the company that would be sufficient and whether such a person was, in fact, responsible or not would be a matter of trial. At the stage of summoning when evidence is yet to be led by the parties, the High Court could not on assumption of facts come to a finding that the said person was not responsible for the conduct of the business”.

However, during the said period itself, contrary views were also being taken, such as that mere repetition of words of Section 141 of Negotiable Instruments Act shall not be enough to rope in the Directors/Manager etc, unless specific averments against their roles are made in the complaint. In other words, bald allegation with a view to meet the requirement of section 141 of Negotiable Instruments Act shall not be enough. The allegation should be a clear and unambiguous allegation as to how the directors etc. were in charge of and responsible for the conduct of the business. In case., no such details are mentioned in the complaint, the concerned person/director could not be made liable.

The Supreme Court in Smt Katta Sujatha Vs Fertilizers and Chem Travancore Ltd. 111 (2005) BC 575 (SC) after considering various earlier decisions held that complaint cannot proceed against the accused director who is not described as in charge of and responsible for the conduct of the business of the company or against whom complainant had not attributed any specific particular act in his complaint. 

However, yet another two-Judge Bench of the Supreme Court in Ashok Leyland Finance Ltd. v. R.S. Aggarwal 2003 (10) SCALE 1000, did not agree with the reasoning given in Katta Sujatha and referred the matter to a Larger Bench after formulating the following three questions:

(a) Whether for purposes of Section 141 of the Negotiable Instruments Act, 1881, it is sufficient if the substance of the allegations read as a whole fulfill the requirements of the said section and it is not necessary to specifically state in the complaint that the persons accused was in charge of, or responsible for the conduct of the business of the company?

(b) Whether a Director of a company would be deemed to be in charge of, and responsible to, the company for conduct of the business of the company and, therefore, deemed to be guilty of the offence unless he proves to the contrary?

(c) Even if it is held that specific averments are necessary whether in the absence of such averments the signatory the cheque and/or the Managing Directors or Joint Director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against?

Interestingly, the three questions as formulated remained unanswered then, in view of settlement between the parties.

Subsequently, the three bench judge had to answer the aforesaid questions, being pertinent in the context of the complaints u/s 138 of Negotiable Instruments Act.

The three judge bench specifically pointed out "the question for consideration is what should be the averments in a complaint under Section 138 and 141. It was clarified that this question assumes importance in view of the fact that, at the stage of issuing of process, the Magistrate will have before him only the complaint and the accompanying documents. It also specifically observed that since the Magistrate has power to reject the complaint at the threshold, it necessarily suggests that a complainant should make out a case for issue of process, namely, prima facie the ingredients of Section 138 and 141 are to be satisfied. The Court clarified that simply because a person is a Director in a company, he is supposed to discharge particular functions on behalf of the company is not enough. While taking note of the provisions of Companies Act  i.e Section 291 and 293 of Companies Act containing powers of the 'Board of Directors', the Supreme Court opined that a person may be a Director in a company, but, yet,  he may not know anything about the day-to-day functioning of the company. Further, merely, because, as a Director, he was attending Board meetings of the company, may not be enough in itself, in as much as, usually they decide policy matters and guide the course of business of the company in such meetings. Nothing is oral and the position in this respect was summarized in the following manner:

8. ...What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its every day affairs. We have discussed about the position of a director in a company in order to illustrate the point that there is no magic as such in a particular word, be it Director, Manager or Secretary. It all depends upon the respective roles assigned to the officers in a company. A company may have managers or secretaries for different departments, which means, it may have more than one Manager or Secretary. These officers may also be authorised to issue cheques under their signatures with respect to affairs of their respective departments. Will it be possible to prosecute a Secretary of Department B regarding a cheque issued by the Secretary of Department A which is dishonoured? The Secretary of Department B may not be knowing anything about issuance of the cheque in question. Therefore, mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint. When the requirement in Section 141, which extends the liability to officers of a company, is that such a person should be in charge of and responsible to the company for conduct of business of the company, how can a person be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements. Not every person connected with a company is made liable under Section 141. Liability is cast on persons who may have something to do with the transaction complained of. A person who is in charge of and responsible for conduct of business of a company would naturally know why the cheque in question was issued and why it got dishonoured.

The Three bench Judge in SMS Pharmaceutical (Supra) has therefore, in view of the above discussion, answered the three (3) questions formulated earlier, as under:

(a) 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 the business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirement of Section 141 cannot be said to be satisfied.

(b) The answer of the question posed in sub-para (b) has to be in the negative. Merely being a director of a company is not sufficient to make the person liable under Sectio0n 141 of the Act. A director in a company cannot be deemed 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 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.

(c) The answer to Question (c) has to be in the affirmative. The question notes that the Managing Director or Joint Managing Director would be admittedly in charge of the company and responsible to the company for the conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under Sub-section (2) of Section 141.

Clearly, if any Director of accused company is roped in as accused without specifics in terms of above, the complaint against such Directors is liable to be quashed.

The Delhi High Court has, earlier quashed the complaints u/s 138 against the Directors u/s 138 of Negotiable Instruments Act on the premise that mere repetition of the words that the person is a director of the company and responsible for the conduct of the business of the company, without specifying how he is so responsible and on what basis such allegation has been made out, would not be sufficient. The judgments rendered by the Delhi High Court  in support of the above are as under for reference:

(i) G.S. Rajgarhia v. Air Force Naval Housing Board 2004 (3) JCC 236 (NI).

(ii) V.P. Gupta v. National Small Industries Corporation 2004 (3) JCC 238 (NI).

(iii) V.K. Kaura v. K.K. Ahuja 2003 (67) DRJ 398.

(iv) Cdr. Shekhar Singh Vs N.K Wahi 2002 VI AD (Delhi) 1021

(v) Rachna Kapoor vs State of NCT of Delhi.2005 VI AD (Delhi) 71

(vi) Nucor Wires Ltd Vs HMT International 1998 DCR 391

Subsequently, the law is settled by the Supreme Court in the aforesaid lines in a matter reported as SMS Pharmaceuticals Ltd Vs Neeta Bhalla. AIRONLINE 2007 SC 207

In JN Bhatia (Supra), therefore, it is held as under:

“30. In view of the judgment of the Supreme Court in Adalat Prasad Vs Roopsingh Jindal 113 (2004) DLT 356 (SC) after summoning orders are passed by the Trial Court, it has no power to recall the same and in that case, , the remedy available to the aggrieved party is to approach the High Court alone by filing petition under Section 482 of the Code of Criminal Procedure. Because of this position in law, the responsibility of the Magistrates to carefully examine the complaint and the pre-summoning evidence before issuing the summons becomes paramount. It is observed that not only the summons are issued against all those who are imp leaded as directors where the prime accused is the company even when there are no averments there against sometimes even without taking care as to whether other ingredients under Section 138, 142 of the NI Act are prima facie satisfied or not”.

“31. Summoning an accused in a criminal case is not an empty formality. The Court issuing process under Section 204 of Cr.P.C. has to be satisfied on the basis of complaint, documents and other material on record that there are sufficient grounds for proceeding against him. In a criminal case, it is for the complainant to allege and make out all the ingredients of the offence before calling upon the Court to proceed against an accused. Only those presumptions which are permissible under the law are permitted to be raised against an accused. All other facts are required to be established by the complainant/prosecution. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set in motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence, both oral and documentary, in support thereof and whether that would be sufficient for the complainant to succeed in bringing home charge to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinize the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers in order to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused. No doubt, the Magistrate can discharge the accused at any stage of the trial if he considers the charge to be groundless, but the accused is entitled to approach the High Court under Section 482 of the Cr.P.C. or Article 227 of the Constitution to have the proceeding quashed against him when the complaint does not make out any case against him, instead of having to undergo the agony of a criminal trial”.

In JN Bhatia (Supra) therefore, the Delhi High Court has observed that the accused No. 1 was a limited company and the accused Nos. 2 to 6 were its Directors’ and persons in charge of and are responsible for day-to-day affairs of the business of accused No. 1 company. It was the specific case of the petitioner that they were non-working Directors of the company and they had resigned from the company much prior to the issuance of the cheques in question and Form 32 was also filed with the Registrar of Companies. It is also stated that they have not signed the cheques; there are bald allegations that they were responsible for the day-to-day affairs and no material has been produced on record which would indicate that they were in charge of the affairs of the company or were vicariously liable. In view of that the summoning orders qua the petitioner i.e accused Nos. 4 and 5 were quashed and the complaint qua them was dismissed.

 

3. COMPLAINT SHOULD NOT BE QUASHED ON DISPUTED FACTS

If in a complaint disputed facts are raised, the complaint in such an event ought not to be quashed. For instance, a plea of non- service of notice is also a matter of evidence and though, service of a legal demand notice is a pre-requisite of a complaint u/s 138 of Negotiable Instruments Act, yet, the plea of non- service of notice shall be the disputed facts and evidence will have to be lead in that regard and hence, on the premise of such a plea, the complaint cannot be quashed.(Ref- Ajeet Seeds Ltd Vs K. Gopala Krishnaiah AIR 2014 SUPREME COURT 3057)

In Ajeet Seeds (Supra) it is observed by the Supreme Court that:

9. This Court then explained the nature of presumptions        under Section 114 of the Evidence Act and under Section 27 of the GC Act and pointed out how these two presumptions are to be employed while considering the question of service of notice under Section 138 of the NI Act. The relevant paragraphs read as under:

“13. According to Section 114 of the Act, read with Illustration (f) thereunder, when it appears to the Court that the common course of business renders it probable that a thing would happen, the Court may draw presumption that the thing would have happened, unless there are circumstances in a particular case to show that the common course of business was not followed. Thus, Section 114 enables the Court to presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business in their relation to the facts of the particular case. Consequently, the court can presume that the common course of business has been followed in particular cases. When applied to communications sent by post, Section 114 enables the Court to presume that in the common course of natural events, the communication would have been delivered at the address of the addressee. But the presumption that is raised under Section27 of the General Clauses Act is a far stronger presumption. Further, while Section 114 of Evidence Act refers to a general presumption, Section 27 refers to a specific presumption. For the sake of ready reference, Section 27 of General Clauses Act is extracted below:

“27. Meaning of service by post.- Where any Central Act or regulation made after the commencement of this Act authorizes or requires any document to be served by post, whether the expression ‘serve’ or either of the expressions ‘give’ or ‘send’ or any other expression is used, then, unless a different intention appears, the service shall be deemed to be effected by properly addressing, pre-paying and posting by registered post, a letter containing the document, and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post”.

14. Section 27 gives rise to a presumption that service of notice has been effected when it is sent to the correct address by registered post. In view of the said presumption, when stating that a notice has been sent by registered post to the address of the drawer, it is unnecessary to further aver in the complaint that in spite of the return of the notice unserved, it is deemed to have been served or that the addressee is deemed to have knowledge of the notice. Unless and until the contrary is proved by the addressee, service of notice is deemed to have been effected at the time at which the letter would have been delivered in the ordinary course of business. This Court has already held that when a notice is sent by registered post and is returned with a postal endorsement ‘refused’ or ‘not available in the house’ or ‘house locked’ or ‘shop closed’ or ‘addressee not in station’, due service has to be presumed. [Vide Jagdish Singh Vs Nathu Singh (1992) 1 SCC 647; State of MP Vs Hiralal & Ors (1996) 7 SCC 523 and V Raja Kumari Vs P. Subbarama Naidu & Anr (2004) 8 SCC 74] It is, therefore, manifest that in view of the presumption available under Section27  of the Act, it is not necessary to aver in the complaint under Section138 of the Act that service of notice was evaded by the accused or that the accused had a role to play in the return of the notice unserved.”

The Supreme Court has held through a three bench judgment in a matter reported as C.C. Alavi Haji v. Palapetty Muhammed & Anr (2007) 6 SCC 555, that it is explicit that Section 27 of the General Clauses Act gives rise to a presumption that service of notice has been effected, when it is sent to the correct address by registered post. It is not necessary to aver in the complaint that in spite of the return of the notice unserved, it is deemed to have been served or that the addressee is deemed to have knowledge of the notice. Unless and until the contrary is proved by the addressee, service of notice is deemed to have been effected at the time at which the letter would have been delivered in the ordinary course of business.

 4. IF THE Company IS IN Liquidation

A complaint under Section 138 is not maintainable if the company has been ordered to be wound up, as the legal entity ceases to exist. If on the date of presentation of cheque or before the offence is committed, the company is already wound up, then , the complaint u/s 138 of Negotiable Instruments act may not be maintainable.  

 

The Madhya Pradesh High Court in a matter captioned as Shashikant Patel Vs Swadhyay Flex Pack Pvt Ltd M.Cr,C No. 1928/2019

The MP High Court in para 16 relying upon Anil Hada has observed as under:

16. The Hon'ble apex Court in the case of Anil Hada Vs Indian acrylic Ltd 2000 Crl.L.J. 373, in paragraph No. 12 has held as under:

"12. xxxxxxxxx The effect of reading Section 141 is that when the company is the drawer of the cheque such company is the principal offender under Section 138 of the Act and the remaining persons are made offenders by virtue of the legal fiction created by the Legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons can also become liable for the offence."

In para no. 17 in Shashikant Patel (Supra) is held as under:

“17. Thus, what is emphasized is that actual offence has to be committed by the company and then alone the Directors can become liable for the offence. When the company goes into liquidation and the cheque is presented thereafter, it cannot be said that the company has committed the offence as it is because of legal bar that it is precluded from making the payment. Once dishonour of the cheque by the Bank and failure to make payment of amount by the company is beyond its control, the Directors (who are in fact ex-Directors) can also not be held liable. Sustenance for this proposition can be drawn from another judgment of the Supreme Court in the case of Kusum Ingots and Alloys Ltd. etc. v. Pennar Peterson Securities Ltd. and Ors. [2000] 100 Company Cases 755(SC). That was a case where reference in respect of the company was pending before the Board of Industrial and Financial Reconstruction (for short `BIFR') under the Sick Industrial Companies (Special Provisions) Act 1985 (SICA). The Court held that mere registering the reference would not be sufficient to bar the proceedings under Section 138 of the N.I. Act even by virtue of Section 22 of SICA as Section 22 which provided that no proceedings would be instituted against the company related to only to civil proceedings and does not include criminal proceedings. However, the Court further held that position would be different if order is passed by the BIFR under Section 22A of SICA restraining the company or its Directors from disposing of the assets of the company.”

Thus, the aforesaid discussion leads to an inference that as regards company, since, arraigning company in a complaint u/s 138 of Negotiable Instruments Act is a must and since the Director shall represent the company for the offence committed by it, but, if the company itself is wound up before the cause of action regarding the complaint u/s 138 of Negotiable Instruments Act, such complaint against even the Directors shall not be maintainable. If the company is wound up subsequently and cause of action had arisen before, then, the Directors can nevertheless be prosecuted is now settled.

Therefore, it is fairly settled that complaints against u/s 138 of Negotiable Instruments Act and order of summoning can be quashed under section 482 of CrPC (Correspond to Section 528 BNSS), if the prescription under the said section and the trap of section 138-142 are not followed. The strict provision of the section as aforesaid shall have to be met before filing complaint. The situation under which the complaints and summoning order could be quashed by the High Court has already been deliberated before.  

                                    -----

Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com

 

 

 

 

 

Can section 138 NI Act COMPLAINT be amended after cognisance

 

The Supreme Court in a matter captioned as Bansal Milk Chilling Centre Vs Rana Milk Food Private Ltd. & Anr CRIMINAL APPEAL NO. OF 2025 (@ SPECIAL LEAVE PETITION (CRL.) NO.15699 OF 2024) had to settle the issue raised before it i.e whether a complaint u/s 138 of Negotiable Instruments Act could be amended after cognisance is taken on it by the Magistrate.

In Bansal Milk Chilling Centre (Supra), Summons was issued to the respondents and at the stage when the complainant was yet to be cross-examined, an amendment application to amend the complaint was moved by the appellant. It was contended by the appellant that due to a typographical mistake it had been pleaded that the respondents had been purchasing Desi Ghee (Milk Products) while it should have been that the respondents were purchasing “Milk”. The respondents, had opposed the pea on the premise that no amendment was permissible after cognizance is taken and that the amendment sought, shall change the very nature of the complaint.

The trial court had allowed the amendment as it was held that no prejudice shall be caused to the accused, since cross examination of complainant was yet to begun. Moreover, it was held that amendment was in the nature of a typographical error, and since the amendment sought is in the initial stage of the case, therefore, it was allowed.

The matter was agitated before the High Court u/s 482 of Cr.P.C. It was contended that the amendment sought was not a typographical error, since, even in legal notice that preceded filing of the complaint,

There was mention of “Desi Ghee (Milk Products)”. It was thus contended that by way of afterthought with a view to avoid liability under the Goods and Services Tax Act, 2017 (for short the ‘GST’) the amendment was mooted. The High Court had allowed the petition as it was held that the amendment sought was not in the nature of a typographical error, but it had a wider impact upon the entire matter in dispute and, therefore, it changed the nature of the complaint. The High Court also found merit in the contention of the respondents that the amendment was sought, as no GST was leviable on milk.

The order of the High Court was impugned before the Supreme Court in Bansal Milk Chilling Centre (Supra). The Supreme Court has observed that earlier, the Supreme Court has held that there is no prohibition to amendment.  In S.R Sukumar Vs Sunand Raghuram (2015) 9 SCC 609, the Supreme Court has earlier held as under :-

“19. What is discernible from U.P. Pollution Control Board case is that an easily curable legal infirmity could be cured by means of a formal application for amendment. If the amendment sought to be made relates to a simple infirmity which is curable by means of a formal amendment and by allowing such amendment, no prejudice could be caused to the other side, notwithstanding the fact that there is no enabling provision in the Code for entertaining such amendment, the court may permit such an amendment to be made. On the contrary, if the amendment sought to be made in the complaint does not relate either to a curable infirmity or the same cannot be corrected by a formal amendment or if there is likelihood of prejudice to the other side, then the court shall not allow such amendment in the complaint.”

Thus, it is explicit that a complaint can be amended and there is no blanket prohibition to that.

Though, the respondent had contended that in the said case amendment was sought and allowed at the pre-cognizance stage and as such the said case can have no application here, but was rejected by the Supreme Court. It was held that a careful reading of the judgment in S.R. Sukumar’s case (supra) reveals that the said judgment followed the earlier judgment of this Court in U.P. Pollution Control Board vs. Modi Distillery and Others (1987) 3 SCC 684, where, after the process was issued to the respondents therein, a revision was filed by few of the accused and a Section 482 Cr.PC petition was filed by few other accused. Invoking the revisional jurisdiction, the High Court quashed the proceedings holding that vicarious liability could not be saddled on the Directors unless “Modi Industries Limited” was arrayed as accused. The Complainant in that case had arrayed “Modi Distillery”, an industrial unit and averred that Modi Distillery was a Company. The High Court focusing on the technical flaw in the complaint quashed the proceedings on the premise that “Modi Industries Limited” was not made an accused.

The Supreme Court in UP Pollution Control Board (Supra), while allowing the appeal of the Complainant has held as under:

“6. ……The learned Single Judge has focussed his attention only on the technical flaw in the complaint and has failed to comprehend that the flaw had occurred due to the recalcitrant attitude of Modi Distillery and furthermore the infirmity is one which could be easily removed by having the matter remitted to the Chief Judicial Magistrate with a direction to call upon the appellant to make the formal amendments to the averments contained in para 2 of the complaint so as to make the controlling company of the industrial unit figure as the concerned accused in the complaint. All that has to be done is the making of a formal application for amendment by the appellant for leave to amend by substituting the name of Modi Industries Limited, the company owning the industrial unit, in place of Modi Distillery. Although as a pure proposition of law in the abstract the learned Single Judge's view that there can be no vicarious liability of the Chairman, Vice-Chairman, Managing Director and members of the Board of Directors under sub-section (1) or (2) of Section 47 of the Act unless there was a prosecution against Modi Industries Limited, the company owning the industrial unit, can be termed as correct, the objection raised by the petitioners before the High Court ought to have been viewed not in isolation but in the conspectus of facts and events and not in vacuum. We have already pointed out that the technical flaw in the complaint is attributable to the failure of the industrial unit to furnish the requisite information called for by the Board. Furthermore, the legal infirmity is of such a nature which could be easily cured. Another circumstance which brings out the narrow perspective of the learned Single Judge is his failure to appreciate the fact that the averment in para 2 has to be construed in the light of the averments contained in paras 17, 18 and 19 which are to the effect that the Chairman, Vice-Chairman, Managing Director and members of the Board of Directors were also liable for the alleged offence committed by the Company.”

The Supreme Court has further held that in SR Sukumar (Supra) it does not follow from that the post-cognizance, no amendment can be allowed. In fact, a reading of the paragraph 20 of the said judgment clearly brings out the fact that four distinct reasons were given: -

The term “complaint” is defined in Section 2(d) of the Code of Criminal Procedure, 1973 [Section 2(1)(h) of the Bharatiya Nagarik Suraksha Sanhita, 2023] which reads as follows:-

“2 (d) “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 or unknown, has committed an offence, but does not include a police report.”

As would be seen ordinarily, a complaint could even be oral. However, dealing with a case under Section 138 of the NI Act, it may be noticed that Section 142 of the NI Act states that to take cognizance of any offence punishable under Section 138, a written complaint is mandatory. Unless expressly prescribed, if to set a criminal case in motion, ordinarily an oral complaint would be sufficient, any question about amendment of a written complaint should be considered by giving the widest latitude. However, as was rightly pointed out in S.R. Sukumar (supra), it should be ensured that no prejudice should be caused to the accused.

What clearly emerges that the amendment application if contains formal amendment but not a substantial one, the Magistrate may allow the amendment application when no cognizance was taken of the complaint, before the disposal of amendment application. Moreover, the situation will be different before issuing summons and hence no prejudice would be caused to the accused. It is also to be seen that amendment should not change the nature and character of the complaint. It is also a relevant factor that not allowing the amendment, if likely to lead to multiplicity of proceedings, the amendment should be allowed.

What is noteworthy is that amendments/alterations are not alien to the Code of Criminal Procedure. Section 216 of the Cr.P.C. deals with the power of Court to alter any charge and the concept of prejudice to the accused. No doubt when a charge is altered, what is altered is the legal provision and its application to a certain set of facts. The facts per se may not be altered. However, the section does throw some light in considering the issue of amendments.

Further, Section 216 and 217 of Cr.P.C [Section 239 and 240 of the Bharatiya Nagarik Suraksha Sanhita, 2023] read as follows:-

“216. Court may alter charge.-

(1) Any Court may alter or add to any charge at any time before judgment is pronounced.

(2) Every such alteration or addition shall be read and explained to the accused.

(3) If the alteration or addition to a charge is such that proceeding immediately with the trial is not likely, in the opinion of the Court, to prejudice the accused in his defence or the prosecutor in the conduct of the case, the Court may, in its discretion, after such alteration or addition has been made, proceed with the trial as if the altered or added charge had been the original charge.

(4) If the alteration or addition is such that proceeding immediately with the trial is likely, in the opinion of the Court, to prejudice the accused or the prosecutor as aforesaid, the Court may, either direct a new trial or adjourn the trial for such period as may be necessary.

(5) If the offence stated in the altered or added charge is one for the prosecution of which previous sanction is necessary, the case shall not be proceeded with until such sanction is obtained, unless sanction has been already obtained for a prosecution on the same facts as those on which the altered or added charge is founded.

217. Recall of witnesses when charge altered. –

Whenever a charge is altered or added to by the Court after the commencement of the trial, the prosecutor and the accused shall be allowed –

(a) to recall or re-summon, and examine with reference to such alteration or addition, any witness who may have been examined, unless the court, for reasons to be recorded in writing, considers that the prosecutor or the accused, as the case may be, desires to recall or re-examine such witness for the purpose of vexation or delay or for defeating the ends of justice;

(b) also to call any further witness whom the Court may think to be material.”

It will be noticed that when a charge is altered, if there is no prejudice to the accused, the trial can be proceeded with. Further, if it is likely to prejudice, the Court may either direct a new trial or adjourn the trial to such period. Section 217 of the Cr.P.C. grants liberty to the prosecutor and the accused to recall witnesses when charges are altered under the conditions prescribed therein. The test of ‘prejudice to the accused’ is the cardinal factor that needs to be borne in mind.

It was thus held by Supreme Court in Bansal Milk Chilling Centre (Supra):

 

17. We have carefully perused the complaint and the application for amendment. The amendment was moved at a stage when after summons being issued to the respondents, the chief examination of the complainant had concluded and when cross-examination was awaited. The amendment made is also only with regard to the products supplied. According to the complainant, while what was supplied was “milk”, by an inadvertent error “Desi Ghee (milk products)” was mentioned. The error which occurred in the legal notice was carried in the complaint also”.

 

18. On the facts of the present case and considering the stage of the trial, we find that absolutely no prejudice would be caused to the accused/respondents. The actual facts will have to be thrashed out at the trial. As to what impact the amendment will have on the existence of debt or other liability is for the Trial Court to decide based on the evidence. It was a curable irregularity which the Trial Court rightly addressed by allowing the amendment. It could not be said that by allowing the amendment at a stage when the evidence of the complainant was incomplete, failure of justice would occasion”.

It was thus observed that the High Court was in error and had completely mis-directed itself in delving into the aspects of GST and its leviability, as that could be a concern of the appropriate authorities under the relevant statute. Still further, the amendment as sought was not in any way to change the nature and character of the complaint. Hence, order passed by the High Court was set aside.

It is also necessary tom point out that all kinds of amendment cannot be allowed. In a matter reported as Munish Kumar Gupta Vs Mittal Trading Company 2024 SCC OnLine 1732 it is held as under:

“9. In the present matter, where the date is a relevant aspect based on which the entire aspect relating to issue of notice within time frame as provided under the Negotiable instruments Act, 1881, and also as to whether as on the date there was sufficient balance in the account of the issuer of the cheque would be the question, the amendment as sought for, the present circumstances was not justified.”

What could be culled out from the above discussion is that the amendment in the nature of above may not be allowed for the reason that time frame of issuance of notice is the backbone of complaint u/s 138 of Negotiable Instruments Act, as also the existence of sufficient balance in the account of issuer in the relevant time. Moreover, if amendment is sought after long delay, the same may not be allowed. However, a formal amendment before the cognisance is taken could be allowed. In fact, even after taking cognisance, the amendment application, provided the same are formal in nature can still be allowed.

                                                -----

                                      Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com  

  

 

 

Section 269-SS of Income Tax Act & section 138 of Negotiable Instruments Act: inter relations

 

The Division Bench of Bombay High Court, Nagpur Bench had the occasion to deal with the interrelationship of section 269-SS of Income Tax Act 1961 and complaint u/s 138 of Negotiable Instruments Act in a matter captioned reported as 2023: BHC-NAG:12352 (CRIMINAL APPEAL NO. 795/2018) captioned as Prakash Madhukar Rao Desai Vs Dattatraya Sheshrao Desai. The reference was as under:

“Whether in case the transaction, is not reflected in the Books of account and/or the Income Tax Returns of the holder of the cheque in due course and thus is in violation to the provisions of Section 269-SS of the Income Tax Act, 1961 whether such a transaction, can be held to be “a legally enforceable debt” and can be permitted to be enforced, by institution of proceedings under Section 138 of the Negotiable Instruments Act ?”

Later, the reference was bifurcated in the following manner:

“Whether in case the transaction is (a) not reflected in the books of account and/or the Income Tax returns of the holder of the cheque in due course and/or (b) is in violation of the provisions of Section 269-SS of the Act of 1961, the same can be held to be a “legally enforceable debt” and can be permitted to be enforced by institution of proceedings under Section 138 of the Act of 1881 ?

Shorn of unnecessary details, the complainant had advanced a hand loan of Rupees One Lakh Fifty Thousand to the respondent-accused. The accused issued a cheque in lieu of the loan for the aforesaid amount dated 19.05.2016 drawn in favour of the complainant. The said cheque was dishonoured due to insufficient funds as per the Bank Advice. A statutory notice was issued under Section 138 of the Act of 1881. The trial Court had dismissed the complaint, principally on the ground that the amount stated to be advanced to the accused had not been shown in the Income Tax returns of the complainant. The aggrieved complainant had preferred the appeal under Section 378(4) of the Code of Criminal Procedure, 1973 before ld Single Judge and ld Single judge was confronted with the decisions in Krishna P. Morajkar Versus Joe Ferrao & Another [2013 Cr.L.J. (NOC) 572], Bipin Mathurdas Thakkar Versus Samir & Another [2015 SCC OnLine Bom 305] and Pushpa Sanchalal Kothari Versus Aarti Uttam Chavan [2021(5) Mh.L.J. 121]. In the aforesaid judgments by the co-ordinate bench and it was held that even if the amount in question is not reflected in the Income Tax returns of the complainant, the same would not be of much consequence in the proceedings under Section 138 of the Act of 1881. The learned Single Judge then referred to the decision in Sanjay Mishra Versus Kanishka Kapoor @ Nikki & Another [2009(4) Mh.L.J. 155] delivered by another co-ordinate bench to the effect that the amount not disclosed in the Income Tax returns by the complainant could not be stated to be an amount due towards a legally enforceable liability. Since, the ld single judge was unable to agree with what was held in Krishna P. Morajkar, Bipin Mathurdas Thakkar, and Pushpa Sanchalal Kothari (supra) and expressed his agreement with the view taken in Sanjay Mishra (supra). Aws there were divergent views by observing as to whether the benefit of law by invoking Sections 138 to 147 of the Act of 1881, a complainant could be permitted to recover unaccounted cash when such transaction is prohibited by Section 269-SS of the Income Tax Act, 1961 (for short, ‘the Act of 1961’). This was done owing to the fact that it was felt that the issue was of seminal importance, having wide ramifications and thus, the aforesaid question was framed for the answer from the Division Bench

The learned Single Judge in Sanjay Mishra (supra) had relied upon the judgment of the Hon’ble Supreme Court in Krishna Janardhan Bhat (supra) to hold that the alleged liability to repay an unaccounted cash amount that was not disclosed in the Income Tax returns could not be said to be a legally recoverable liability. He therefore submitted that in view of the judgment in Rangappa Versus Sri Mohan [(2010) 11 SCC 441], there being a presumption in favour of the holder of the cheque, it was for the accused to rebut the statutory presumption to enable the Court to hold that there was no legally enforceable liability. Mere absence of the amount advanced/lent to the drawer of the cheque being shown in the Income Tax returns would not be of such importance so as to preclude the holder of the cheque from seeking to recover such liability.  

                        CONTENTIONS of appellant

(i)     Acceptance of an amount exceeding Rupees Twenty Thousand in cash, the provisions of Section 269-SS of the Act of 1961 would be violated by the drawer of the cheque-accused and not the payee thereof-complainant.

(ii)    The breach of statutory provisions ought not to benefit the drawer by holding such amount to be not a legally enforceable liability. In such circumstances, it could not be said that the amount in question that had been advanced was under a void transaction.

(iii) The reliance was placed on the decisions in M/s Gujarat Travancore Agency, Cochin Versus Commissioner of Income Tax, Kerala [(1989) 3 SCC 52], Hiten P. Dalal Versus Bratindranath Banerjee [(2001) 1 SCC 16] and Commissioner of Income Tax, Delhi Versus Atul Mohan Bindal [(2009) 9 SCC 589].

(iv)  The aspect, whether the accused had rebutted the presumption ought to be examined and the complainant could not be non-suited on the ground that as the amount advanced was not reflected in the Income Tax returns, it was a liability that could not be legally enforced.

                                CONTENTIONS OF RESPONDENT

(i)     The question as referred for being answered was required to be answered in the negative, as the view as taken in Krishna Janardhan Bhat (supra) as followed by the learned Single Judge in Sanjay Mishra (supra) ought to be accepted. It is so, because, the object behind that view was to prevent the recovery of such amount that was stated to have been advanced without being reflected in the Income Tax returns of the complainant.

(iii) As the provisions of the Act of 1961 is violated, the complainant could not seek to take advantage of the situation in such manner.

(iv)  Reliance was placed on the judgment of the Hon’ble Supreme Court in Rajaram Sriramulu Naidu (Since deceased) through L.Rs. Versus Maruthachalam (Since deceased) through L.Rs. [2023 Live Law (SC) 46] and Criminal Appeal No.268 of 2011 [Dilip Virumal Ahuja Versus Rekha Vithal Patil & Another].

(v)   It was open for the accused to rely upon the material submitted by the complainant for raising a probable defence and rebutting the presumption, absence of disclosing the amount advanced/lent in the Income Tax returns was a material circumstance going to the root of the matter and was sufficient to rebut the presumption in that regard.

 

The Division bench, in order to find answer to the references had deemed it expedient to reproduce the Section 118 of the Act of 1881 reads as under :

“118. Presumptions as to negotiable instruments. –

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, when 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 a negotiable instrument was made before its maturity;

(e) as to order of endorsements. – 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: Provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence 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.”

Sections 138 and 139 of the Act of 1881 read as under :

“138. Dishonour of cheque for insufficiency, etc., of funds in the account. –

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this Section shall apply unless –

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice.

Explanation. – For the purposes of this Section, “debt or other liability” means a legally enforceable debt or other liability. 139. Presumption in favour of holder. – 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.”

 

Section 269-SS of the Act of 1961 reads as under :

“Mode of taking or accepting certain loans, deposits and specified sum. 269-SS. –

No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], if, –

(a) the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or

(b) on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or

(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is twenty thousand rupees or more: Provided that the provisions of this section shall not apply to any loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by, (a) (b) the Government; any banking company, post office savings bank or co-operative bank; (c) any corporation established by a Central, State or Provincial Act;

(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);

(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: Provided further that the provisions of this Section shall not apply to any loan or deposit or specified sum, where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income and neither of them has any income chargeable to tax under this Act:

[Provided also that the provisions of this section shall have effect, as if for the words “twenty thousand rupees”, the words “two lakh rupees” had been substituted in the case of any deposit or loan where, –

(a) such deposit is accepted by a primary agricultural credit society or a primary co-operative agricultural and rural development bank from its member; or

(b) such loan is taken from a primary agricultural credit society or a primary co-operative agricultural and rural development bank by its member.]

Explanation. – For the purposes of this section, –

(i) “banking company” means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

[(ii) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;

] (iii) “loan or deposit” means loan or deposit of money;

(iv) “specified sum” means any sum of money receivable, whether an advance or otherwise, in relative to transfer of an immovable property, whether or not the transfer takes place.]”

The provisions of Sections 118, 138 and 139 of the Act of 1881 have been considered in various decisions of the Hon’ble Supreme Court. In Hiten P. Dalal (supra) it was held that Sections 138 and 139 require that the Court “shall presume” the liability of the drawer of the cheque. In every case where the factual basis for raising of the presumption is established, it is obligatory for the Court to raise this presumption. In Rajaram Sriramulu Naidu (supra) after referring to a recent decision in Basalingappa Versus Mudibasappa [(2019) 5 SCC 418] it has been observed that once the execution of the cheque is admitted, Section 139 of the Act of 1881 mandates a presumption that the cheque was for a discharge of any debt or other liability. The said presumption is a rebuttable presumption and the onus is on the accused to raise a probable defence. It is open for the accused to rely upon the evidence led by him or he can also rely on the material submitted by the complainant for raising a probable defence. The facts in Rajaram Sriramulu Naidu (supra) indicate that the complainant had failed to declare in his Income Tax returns that he had lent an amount of Rupees Three Lakhs to the accused. The accused examined the Income Tax Officer who produced the certified copies of the complainant’s Income Tax returns for the relevant period. On that premise the trial Court held that from the income shown in the Income Tax returns it was clear that the complainant did not have financial capacity to lend the money in question.

After considering all this evidence, the trial Court found that the case of the complainant that he had given a loan to the accused from his agricultural income was unbelievable. The defence raised by the accused was found to be a possible defence and the accused was held entitled to the benefit of doubt. On this principle the trial court held that the accused had rebutted the presumption and acquitted him.

According to the Division bench in Prakash Madhukar Rao Desai (Supra), the acquittal of the accused was not on the ground that the amount advanced by the complainant was not disclosed in the Income Tax returns and hence the debt was not legally recoverable. The Hon’ble Supreme Court has referred to the presumption under Section 139 of the Act of 1881 that when the execution of the cheque is admitted the same mandates the presumption that the cheque was for the discharge of any debt or other liability. The acquittal of the accused was because the defence raised by him satisfied the standard of preponderance of probabilities that the complainant had no capacity to lend the amount of Rupees Three Lakhs to the accused.   

In Asstt. Director of Inspection Investigation Versus A.B. Shanthi [(2002) 6 SCC 259] the constitutional validity of Sections 269-SS and 271-D of the Act of 1961 was challenged. While considering the said challenge it was observed that the object of introducing Section 269-SS was to ensure that a tax payer is not allowed to give false explanation for his unaccounted money and if he has given false entries in his account he cannot escape by giving false explanation for the same. The object sought to be achieved was to eradicate the evil practice of making of false entries in the account books and later giving explanation for the same. The validity of Section 269-SS of the Act of 1961 was thus upheld and it was held that the same was neither violative of Article 14 of the Constitution of India nor that it was enacted without legal competence. Conversely, while, considering the challenge to Section 271-D of the Act of 1961 reference was made to Section 273-B that provides that notwithstanding anything contained in the provisions of Section 271-D, no penalty would be imposable on the person or the assesse as the case may be for any failure referred to in the said provision if it was proved that there was reasonable cause for such failure. If the assesse was able to prove that there was reasonable cause for failure to take a loan otherwise than by account payee cheque or account payee demand draft then penalty may not be levied.

The consensus appears to be on the aspect that if there was a genuine and bona fide transaction and if for any reason the taxpayer could not get a loan or deposit by account-payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power.” The challenge to the validity of Section 271-D of the Act of 1961 was also turned down.

It is thus clear that acceptance of an amount exceeding Rupees Twenty Thousand in cash attracts penalty under Section 271-D of the Act of 1961 but such acceptance does not nullify the transaction. In fact, the penalty can be waived on showing reasonable cause.

Hence, violation of Section 269-SS by the drawer of the cheque would not render the amount in question non-recoverable.

The judgment in Krishna Janardhan Bhat (supra) was considered by the Larger Bench of three learned Judges of the Hon’ble Supreme Court in Rangappa (supra) and after referring to its earlier decision especially in M.M.T.C. Ltd. Versus Chico Ursula D’Souza [(2002) 1 SCC 234], it was observed in paragraph 26 as under: -

“26. In light of these extracts, we are in agreement with the respondent claimant that the presumption mandated by Section 139 of the Act does indeed include the existence of a legally enforceable debt or liability. To that extent, the impugned observations in Krishna Janardhan Bhat may not be correct. However, this does not in any way cast doubt on the correctness of the decision in that case since it was based on the specific facts and circumstances therein. As noted in the citations, this is of course in the nature of a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested. However, there can be no doubt that there is an initial presumption which favours the complainant.”

 

From the aforesaid it can be seen that in Rangappa (supra) it has been held that the presumption mandated by Section 139 of the Act of 1881 includes the existence of a legally enforceable debt or liability. The observations in Krishna Janardhan Bhat (supra) to that extent were held to be not correct. It has been further held that the offence made punishable by Section 138 of the Act of 1881 could be described as a regulatory offence as bouncing of a cheque was largely in the nature of a civil wrong whose impact was usually confined to the private parties involved in commercial transactions. Reverse onus clauses were stated to usually impose evidentiary burden and not a persuasive burden. If the accused is able to raise a probable defence that creates a doubt about the existence of a legally enforceable debt or liability, the prosecution could fail.

The decision in Rangappa (supra) is clear that the presumption mandated by Section 139 of the Act of 1881 includes the presumption as regards existence of a legally enforceable debt or liability. This presumption has been held to be in the nature of a reverse onus clause that has been included in furtherance of the legislative object of improving the credibility of the negotiable instruments. At the same time, it has been clarified that the said presumption is rebuttable and it would be open for the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested. It is thus clear that once the execution of the cheque/instrument is admitted, the initial presumption under Section 139 of the Act of 1881 favours the complainant that there exists a legally enforceable debt or liability. While rebutting such presumption it would always be open for the accused to raise all permissible defences including the defence that the complainant had failed to disclose the amount that has been stated to have been advanced/lent to the accused in his Income Tax returns.

The complaint which is otherwise maintainable under Section 138 of the Act of 1881 is not liable to be dismissed at the threshold only on the ground that the complainant had failed to disclose the amount mentioned in the cheque in his Income Tax returns. The presumption under Section 139 of the Act of 1881 being in the nature of an initial statutory presumption in favour of the complainant, it will have to be rebutted by the accused as any other legal presumption. It hardly needs any reiteration that the standard of proof for rebutting such presumption is on the basis of preponderance of probabilities.

 

The decisions in Krishna Janardhan Bhat and Rangappa (supra) were considered by the learned Single Judge in Krishna P. Morajkar (supra). It was observed that on the question of presumption about the existence of a legally enforceable debt or liability, the decision in Krishna Janardhan Bhat (supra) had been expressly overruled. Thereafter reference was made to Sections 269-SS and 273-B of the Act of 1961 and it was held that the restriction of cash advances was infact on the taker and not the person who makes the advance. The penalty for taking such advance or deposit in contravention of Section 269-SS was to be suffered by the one who took the advance and it was impermissible for invoking said provisions to prevent a person from recovering the advances that he has made. The decision in Sanjay Mishra (supra) was also cited but since the learned Single Judge therein had based his decision on Krishna Janardhan Bhat (supra) the same was excluded from consideration. The learned Single Judge then proceeded to decide the appeal on its merits and after setting aside the judgment of the appellate Court, the judgment of the trial Court convicting the accused was restored. The aforesaid decision in Krishna P. Morajkar has been followed in the subsequent decisions in Bipin Mathurdas Thakkar and Pushpa Sanchalal Kothari (supra). In Dilip Virumal Ahuja (supra) the acquittal of the accused was ordered as he had successfully rebutted the presumption under Section 139 of the Act of 1881. This was after considering the evidence led by the parties.

In Jayantilal M. Jain Vs. M/s. J.M.Sons & Others [(1991) 3 BCR 694], a learned Single Judge of the Court was seized with two summary suits based on a bill of exchange. While seeking leave to defend, a plea was raised by the defendants that the amount in question was not liable to be recovered since there was breach of provisions of Section 269-SS of the Act of 1961. On that premise bar under Section 23 of the Indian Contract Act, 1872 (for short, the Act of 1872) was also sought to be raised. The learned Single Judge relied upon earlier judgment in Civil Revision Application No.573 of 1990 where an identical plea was raised and it was held that the prohibition under Section 269-SS of the Act of 1961 was against taking or accepting any amount in cash and not against giving such amount in cash. It was held that the bar under Section 23 of the Act of 1872 was not attracted in such case.

A learned Single Judge of the Delhi High Court in Sheela Sharma vs. Mahendra Pal [2016 ACD 1022] while considering similar contentions raised in defence in proceedings under Section 138 of the Act of 1881 has referred to the decision of this Court in Jayantilal M. Jain (supra) and after referring to various other decisions held that the transaction in question would not be hit if the bar under Section 269-SS of the Act of 1961 was attracted. A learned Single Judge of the Madras High Court in K.T.S.Sharma Versus Subramanian [2001(4) CTC 486] has considered similar contentions based on Section 269-SS of the Act of 1961, Section 23 of the Act of 1872 as well as the doctrine of ‘pari delicto’. It was held therein that violation of Section 269-SS attracts penalty under Section 271D, the object is to protect the Revenue and the contract cannot be regarded as prohibited by implication. The doctrine of ‘pari delicto’ would not be attracted so as to make the contract void if it was not the object of the parties at the time when the transaction was entered into to circumvent or defeat the provisions of the Act of 1961.

In Mohammed Iqbal & Others vs. Mohammed Zahoor [ILR 2007 Karnataka 3614] it has been held that Section 269-SS does not declare all transactions of loan by cash in excess of Rs.20,000/- as invalid, illegal or null and void. Referring to the decision in Assistant Director of Inspection Investigation (supra), it was observed that the object behind introducing the said provision was to curb and unearth black money. Referring to the provisions of Section 271-D and Section 273-B of the Act of 1961, it was observed that even though contravention of Section 269-SS resulted in a stiff penalty being imposed on the person taking the loan or deposit, the rigor of Section 271D was whittled down by Section 273B on the proof of bona fides. Hence such transactions could not be declared to be illegal, void and unenforceable. Similar view has been taken by the learned Single Judge of the Himachal Pradesh High Court in Criminal Appeal No.295 of 2017 (Surinder Singh Versus State of H. P. & Another) decided on 03.11.2017. These decisions have been thereafter followed by the said High Courts in their subsequent decisions. 17. It can thus be said that the validity of Section 269-SS of the Act of 1961 having been upheld in Assistant Director, Inspection Investigation (supra), breach thereof being subjected to penalty under Section 271-D with a further provision for waiving the penalty under Section 273-B of the Act of 1961, it will have to be held that such transaction in violation of Section 269-SS of the Act of 1961 at the behest of the drawer of a cheque cannot be treated as null and void. Similar is the case when there is an omission of any entry relevant for computation of total income of such person to evade tax liability under Section 271-AAD of the Act of 1961. Such person, assuming him to be the payee/holder in due course, is liable to be visited by penalty as prescribed. Such act is not treated to be statutorily void. We may in this context refer to paragraph 4 of the decision in M/s Gujarat Travancore Agency, Cochin (supra) wherein reference has been made to the following statement in Corpus Juris Secundum, Volume 85 page 580, paragraph 1023 : A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of a criminal penal laws.” Further, in Atul Mohan Bindal (supra), the penalty referred to in Section 271(1)(c) of the Act of 1961 has been referred to as a civil liability and not one which is criminal or quasi-criminal in nature.

Thus, in the light of statutory presumption under Sections 118 and 139 of the Act of 1881, it would be for the accused to rebut such presumption in the light of what has been held in Rangappa (supra).

In view of the aforesaid discussion, it is held that a transaction not reflected in the books of accounts and/or Income Tax returns of the holder of the cheque in due course can be permitted to be enforced by instituting proceedings under Section 138 of the Act of 1881 in view of the presumption under Section 139 of the Act of 1881 that such cheque was issued by the drawer for the discharge of any debt or other liability, execution of the cheque being admitted. Violation of Sections 269-SS and/or Section 271-AAD of the Act of 1961 would not render the transaction unenforceable under Section 138 of the Act of 1881. The decisions in Krishna P. Morajkar, Bipin Mathurdas Thakkar and Pushpa Sanchalal Kothari (supra) lay down the correct position and are thus affirmed. The decision in Sanjay Mishra (supra) stands overruled.

                                        ------

Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com