Cheque Holder’s Failure To Record Loan In Books Not Ground To Dismiss Complaint U/S 138 NI Act: Bombay High Court

THE HIGH COURT OF JUDICATURE AT BOMBAY NAGPUR BENCH, NAGPUR
CRIMINAL APPEAL NO. 795/2018
(PRAKASH MADHUKARRAO DESAI VERSUS DATTATRAYA SHESHRAO DESAI)

CORAM : A. S. CHANDURKAR AND MRS VRUSHALI V. JOSHI, JJ.
JUNE 13, 2023 DATE ON WHICH ORDER IS PRONOUNCED : AUGUST 19, 2023

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 

6. At the outset, we may state that the question as framed deserves to be segregated in two parts for the reason that failure to record a transaction in the books of account and/or the Income Tax returns of the holder of the cheque and violation of Section 269-SS of the Act of 1961 are independent and distinct acts. Both can arise either together or independently. Hence, the question as framed is modified to read as under:-
“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 ?
7. With a view to answer the aforesaid question, we may note the relevant statutory provisions that having bearing on the question to be answered :-
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.”
8. 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) the Government;
(b) 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;

9 APEAL795-18.odt
(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.]”
9. 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. The accused further examined the Officers from the Bank to substantiate his defence. 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. The Hon’ble Supreme Court observed that the defence raised by the appellant

10 APEAL795-18.odt
satisfied the standard of preponderance of probabilities. It therefore did not interfere with the acquittal of the accused.
Though the learned counsel for the accused sought to rely upon the aforesaid decision to urge that absence of the income being disclosed in the Income Tax returns was sufficient to hold that the debt was not legally enforceable, we do not find that this is the ratio in Rajaram Sriramulu Naidu (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. On the contrary 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.

Relevant Paras:

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).
18. 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) with utmost respect stands overruled.

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judgment 138 NI act CRIMINAL APPEAL NO. 795:2018 (PRAKASH MADHUKARRAO DESAI VERSUS DATTATRAYA SHESHRAO DESAI) Bombay High Court The Law literates Vaibhav Tomar

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HIGH COURT OF JUDICATURE AT BOMBAY BENCH AT NAGPUR

Anuradha Kapoor & Ors Vs State of Maharashtra & Ors 

CORAM: ANIL L. PANSARE, JUSTICE 
Date of Reserving : 02.11.2023
Date of Pronouncement : 29.11.2023

Hon’ble Bombay High Court has held that trial court can allow compounding of offenses under Section 138 of the Negotiable Instruments Act without the complainant’s explicit consent, provided the accused applies for it and the complainant is adequately compensated. The applicants/original accused in Criminal Complaint filed by the non-applicant no.2-Company under Section 138 of the Negotiable Instruments Act, 1881 (in short, “NI Act”) are aggrieved by the order dated 03.11.2022 passed by the learned 2nd Additional Chief Judicial Magistrate, Nagpur (in short, ‘Magistrate’), whereby the applicants’ application seeking compounding of the offence upon full payment of cheque amount has been rejected. According to the applicants, the order suffers from non-consideration of the law laid down by the Hon’ble Supreme Court, in the case of Damodar S. Prabhu vs. Sayed Babalal : (2010) Vol.5 SCC 663 and Meters and Instruments Private Limited vs. Kanchan Mehta : (2018) Vol.1 SCC 560.

Relevant Paras:

21. The question, therefore, is whether the present case is an appropriate case where the consent of non-applicant no.2 for compounding the offence, could be ignored. The answer is as follows :
In Damodar’s case, the first guideline i.e. guideline stipulated in para (i) reads as under :
“(a) That directions can be given that the Writ of Summons be suitably modified making it clear to the accused that he could make an application for compounding of the offences at the first or second hearing of the case and that if such an application is made, compounding may be allowed by the court without imposing any cost on the accused.”
The guideline clearly stipulates that when writ of summons is issued, the accused is made to know that he could make an application for compounding the offence at the first or second date of hearing of the case and that if such an application is made, the compounding may be allowed by the Court without imposing any costs on the accused. Thus, the accused is made to believe that if he files an application for compounding offence at the initial stage of the case, the compounding will not only be allowed but will be allowed without imposing costs. The question, therefore is, if the accused in response to the writ of summons files application for compounding offence, can the Court or will it be appropriate for the Court to reject the application on the ground of absence of consent of the complainant, particularly when the accused is not put to notice that compounding will be allowed only if thecomplainant extends his consent. To my mind, in normal circumstances, when the application for compounding offences u/s 138 of the NI Act is made at the initial stage of the case and if the complainant is duly compensated, the trial Court will be fully justified in compounding the offence without consent of the complainant.
22. The purpose behind the intimation to the accused that he could make an application for compounding is to encourage settlement, considering the nature of dispute u/s 138 of the N.I. Act. Para Nos. 12 and 13 in Damodar’s case on this aspect, is relevant which read thus:
“12. It is evident that the permissibility of the compounding of an offence is linked to the perceived seriousness of the offence and the nature of the remedy provided. On this point we can refer to the following extracts from an academic commentary (Cited from: K.N.C. Pillai R.V. Kelkar’s Criminal Procedure, 5th edn. (Lucknow :Eastern Book Company ,2008)

. Similarly, in the case of Vijay Kumar Gupta vs. State Government of NCT Delhi in Criminal Misc. No.2289/2013 dated 09.03.2017, the High Court of Delhi in paragraph no.7 has observed thus:-

“7. Looking into the facts and circumstances of the case and the fact that the petitioners have paid the loan/ settlement amount to the Respondent No.2 and nothing remains to be adjudicated further, to remove the hurdle in the personal life of the present petitioners for leading better and peaceful life and to meet the ends of justice, I deem it appropriate to quash the FIR No. 1087/2003, under Section 406, 420, 468, 471 of the Indian Penal Code, 1860 registered at Police Station Parliament Street, Delhi qua against the petitioners, namely Vijay Kumar Gupta, Rajkumar Sharma and Vinod Choudhary only to the extent of their role in commission of the alleged offence.” applicant/respondent no.2 has opposed piecemeal compromise by contending that such compounding is an exception and may be permissible where the complainant has given consent to the compromise and not otherwise. He submits that in Gaganpal Singh Ahuja’s case (supra) piecemeal compounding was recognised because the complainant has given consent to compounding the offence. However, in the present case, the complainant has not given such consent and, therefore, the said judgment will not be applicable to the facts of the present case. As regards Vijay Kumar’s case (supra), the learned Senior Counsel submits Mr. Anand Jaiswal, the learned Senior Counsel for the non-that the judgment relates to quashing of first information report and not compounding of offence.

36. To my mind, the ratio decidendi in the above cases is that in appropriate cases, a piecemeal compromise and compounding is permissible. The non-applicant is getting adequate compensation. In the circumstances, having given my thoughtful consideration to the attending circumstances, the request to compound the offence will have to be allowed.

37. The present case appears to me to be a fit case where powers under Section 482 of the Code must be exercised, considering the peculiar facts and circumstances of the case. Hence, following order is passed:-

ORDER
i) The Criminal Application No.566/2023 is allowed.
ii) The impugned order dated 03.11.2022 passed by learned ACMM
in SCC No. 6061/2018 is set aside. Offence punishable under Section 138 of the NI Act against the applicants stands compounded, subject to applicants depositing in the trial Court, by way of demand draft, an amount of Rs. 15,00,000/- (Rupees fifteen lakhs) along with interest at the rate of 9% from 23rd December, 2017 to 11th December, 2018 as also Rs. 25,000/- towards cost of litigation within fifteen working days from the date of this judgment, which amount the non-applicant no.2 shall be entitled to withdraw.
iii) The applicants shall stand discharged on the day the aforesaid demand draft is deposited in the trial Court.
iv) No cost is payable to the District Legal Services Authority for the reason that the application for compounding offence has been filed at the initial stage.

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Anuradha Kapoor & Ors vs State Of Maharashtra

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Preeti vs State CRLMC 1219/20 02/11/22 [ KANTA JJ ] [ DELHI HIGH COURT ]

• Section 482 CRPC NI ACT Sections 138 and 141 Summoning order Quashing of Dishonour of cheque Petitioner, Independent/Non-Executive Director in accused company at time of commission of offence Plea of Held, director of company not in charge or responsible for conduct of business of company at relevant time, will not be liable On facts, perusal of Form No. DIR-12 shows that petitioner was independent director at time of commission of offence – Petitioner could held vicariously liable only if shown that she was in charge of and responsible for conduct of business of company at time of commission of offence Nothing can be inferred from complaint filed – Petition allowed

Relevant Paras

14. Recently, the Apex Court in Sunita Palita & ors. v. Panchami Stone Quarry 2022 SCC OnLine SC 945, in regard to fixation of vicarious liability on directors of a company under Section 141 of Negotiable Instruments Act, 1881, has held that:

“42. A Director of a company who was not in charge or responsible for the conduct of the business of the company at the relevant time, will not be liable under those provisions. As held by this Court in, inter alia, S.M.S. Pharmaceuticals Ltd. (supra), the liability under Section 138/141 of the NI Act arises from being in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed, and not on the basis of merely holding a designation or office in a company. It would be a travesty of justice to drag Directors, who may not even be connected with the issuance of a cheque or dishonour thereof, such as Director (Personnel), Director (Human Resources Development) etc. into criminal proceedings under the NI Act, only because of their designation.
43. Liability depends on the role one plays in the affairs of a com- pany and not on designation or status alone as held by this Court in S.M.S. Pharmaceuticals Ltd. (supra). The materials on record clearly show that these Appellants were independent, non-executive Directors of the company. As held by this Court in Pooja Ravinder Devidasani v. State of Maharashtra and Anr. (supra) a non-Executive Director is not involved in the day-to-day affairs of the company or in the running of its business. Such Director is in no way responsible for the day-to-day running of the Accused Company. Moreover, when a complaint is filed against a Director of the company, who is not the signatory of the dishonoured cheque, specific averments have to be made in the pleadings to substantiate the contention in the complaint, that such Director was in charge of and responsible for conduct of the business of the Company or the Company, unless such Director is the designated Managing Director or Joint Managing Director who would obviously be responsible for the company and/or its business and affairs.
*** 46. As held by this Court in National Small Industries Corporation Ltd. v. Harmeet Singh Painta quoted with approval in the subsequent decision of this Court in Pooja Ravinder Devidasani v. State of Maharashtra and Anr. (supra)the impleadment of all Directors of an Accused Company on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company, without anything more, does not fulfil the requirements of Section 141 of the NI Act…”

17. Coming to the facts of the present case, a perusal of Form No. DIR-12, dated 16.01.2017, of the accused company K.S. Oils Limited shows that the petitioner was an independent director at the time of commission of the offence. In view of Section 141 of Negotiable Instruments Act, 1881 and Section 149 of Companies Act, 2013 petitioner could have been held vicariously liable only if it was shown that she was incharge of and was responsible for the conduct of the business of the company at the time of commission of offence, and not otherwise
18. As per settled legal propositions, it was to be specifically averred in the complaint as to how the petitioner, being an independent director, was incharge of day to day affairs of the company as well as the conduct of business. However, nothing of this sort can be inferred from the complaint filed before the learned Trial Court. The relevant para of the complaint casting allegations against all the directors of the accused company is as under:
“2. That Accused No.l Is a company registered under the provisions of the Companies Act 1956. Accused Nos. 2 to 14are the Directors of the Company who were incharge of managing the day to day affairs of the Company. All the accused nos. 2 to 14 were at the helm of affairs of the Company at the time of Its dealing with the Complainant and/or at the time when the subject matter SI cheques were issued to the Complainant and at the time of dishonour of cheques.
3. That in or around August 2012, Accused No.l acting through the Accused persons approached the Complainant and expressed its intention to import Crude Palm Oil through the Complainant, while making assurances to the Complainant that you were in sound financial position assuring the Complainant of timely payment against such imports. That since the quantities of Import was huge, several rounds of meetings took place between the representatives of the Complainant and Accused persons. Each of the accused persons had been dealing with the Complainant on behalf of Accused No.l…”

24. In view thereof, the impugned order dated 28.11.2018 passed by the learned MM-04, Patiala House Courts, New Delhi in CC No.16201/2017 is thus, quashed to the extent of issuing of summons to the present petitioner for alleged commission of the offence punishable under Section 138 of the Negotiable Instruments Act, 1881.

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