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Monday, April 7, 2014

SEC. 138 OF N.I.ACT - whether the post-dated cheques issued by the appellants (hereinafter referred to as ‘purchasers’) as an advance payment in respect of purchase orders could be considered in discharge of legally enforceable debt or other liability, and, if so, whether the dishonour of such cheques amounts to an offence under Section 138 of the Negotiable Instruments Act, 1881 (for short, ‘the N.I. Act’). The Delhi High Court in the impugned order has held that to be so. - APEX COURT HELD THAT if a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, in our considered view, the cheque cannot be said to have been drawn for an existing debt or liability.If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138. = M/s. Indus Airways Pvt. Ltd. & Ors. … Appellants Versus M/s. Magnum Aviation Pvt. Ltd. & Anr. … Respondents = 2014 ( April. Part ) http://judis.nic.in/supremecourt/filename=41392

    SEC. 138 OF N.I.ACT - whether  the  post-dated  cheques  issued  by   the appellants (hereinafter referred to as ‘purchasers’) as an  advance  payment in respect of purchase orders could be considered in  discharge  of  legally enforceable debt or other liability, and, if so, whether  the  dishonour  of such cheques amounts to an offence  under  Section  138  of  the  Negotiable Instruments Act, 1881 (for short, ‘the N.I. Act’).  The Delhi High Court  in
the impugned order has held that to be so. - APEX COURT HELD THAT  if a cheque is issued as an  advance  payment  for  purchase  of  the goods and for any reason purchase  order  is  not  carried  to  its  logical conclusion either because of its cancellation or otherwise and  material  or goods for which purchase order was placed is not supplied by  the  supplier, in our considered view, the cheque cannot be said to have been drawn for  an existing debt or liability.If  at
the time of entering into a contract, it is one of  the  conditions  of  the contract that the purchaser has to pay the amount in advance  and  there  is breach of such condition then purchaser may have to make good the loss  that might have occasioned to the seller but that  does  not  create  a  criminal liability under Section 138.   

   whether  the  post-dated  cheques  issued  by   the
appellants (hereinafter referred to as ‘purchasers’) as an  advance  payment
in respect of purchase orders could be considered in  discharge  of  legally
enforceable debt or other liability, and, if so, whether  the  dishonour  of
such cheques amounts to an offence  under  Section  138  of  the  Negotiable
Instruments Act, 1881 (for short, ‘the N.I. Act’).  The Delhi High Court  in
the impugned order has held that to be so. = 

   19.         The above reasoning of the Delhi High Court  is  clearly  flawed
inasmuch as it failed to keep in mind the  fine  distinction  between  civil
liability and criminal liability under Section 138 of the N.I. Act.  
 If  at
the time of entering into a contract, it is one of  the  conditions  of  the
contract that the purchaser has to pay the amount in advance  and  there  is
breach of such condition then purchaser may have to make good the loss  that
might have occasioned to the seller but that  does  not  create  a  criminal
liability under Section 138. 
For a criminal liability to be made  out  under
Section 138, there should be legally enforceable  debt  or  other  liability
subsisting on the date of drawal of the cheque. 
We are unable to accept  the
view of the Delhi High Court that the issuance  of  cheque  towards  advance
payment at the time of  signing  such  contract  has  to  be  considered  as
subsisting liability and dishonour of such  cheque  amounts  to  an  offence
under Section 138 of the N.I.  Act.   
The  Delhi  High  Court  has  traveled
beyond the scope of Section 138 of the N.I. Act by holding that the  purpose
of enacting Section 138 of the  N.I.  Act  would  stand  defeated  if  after
placing orders and  giving  advance  payments,  the  instructions  for  stop
payments are issued and orders are cancelled.  
In  what  we  have  discussed
above, if a cheque is issued as an  advance  payment  for  purchase  of  the
goods and for any reason purchase  order  is  not  carried  to  its  logical
conclusion either because of its cancellation or otherwise and  material  or
goods for which purchase order was placed is not supplied by  the  supplier,
in our considered view, the cheque cannot be said to have been drawn for  an
existing debt or liability.

20.         In our opinion, the view taken by Andhra Pradesh High  Court  in
Swastik Coaters2, Madras High Court in Balaji Seafoods4, Gujarat High  Court
in Shanku Concretes3 and Kerala High Court in Ullas5  is  the  correct  view
and accords with the scheme of Section 138 of the N.I. Act.

21.         The view taken by Delhi High Court is  plainly  wrong  and  does
not deserve acceptance.

22.         Criminal Appeal is, accordingly, allowed; the impugned  judgment
of Delhi High Court is set aside; and the order of  the  Sessions  Judge  is
restored.

2014 ( April. Part ) http://judis.nic.in/supremecourt/filename=41392
R.M. LODHA, SHIVA KIRTI SINGH
                                                   REPORTABLE


                        IN THE SUPREME COURT OF INDIA
                       CRIMINAL APPELLATE JURISDICTION


                    CRIMINAL  APPEAL NO.     830  OF 2014
                 (Arising out of SLP (Crl.) No.9752 of 2010)




M/s. Indus Airways Pvt. Ltd. & Ors.                      … Appellants

                                   Versus

M/s. Magnum Aviation Pvt. Ltd. & Anr.                    … Respondents


                                  JUDGMENT



R.M. LODHA, J.


            Leave granted.

2.          The only question that arises for consideration in  this  appeal
by  special  leave  is,  whether  the  post-dated  cheques  issued  by   the
appellants (hereinafter referred to as ‘purchasers’) as an  advance  payment
in respect of purchase orders could be considered in  discharge  of  legally
enforceable debt or other liability, and, if so, whether  the  dishonour  of
such cheques amounts to an offence  under  Section  138  of  the  Negotiable
Instruments Act, 1881 (for short, ‘the N.I. Act’).  The Delhi High Court  in
the impugned order has held that to be so.

3.          The brief facts are these:  On 19.02.2007  and  26.02.2007,  the
purchasers placed two purchase orders for supply of certain  aircraft  parts
with respondent No.1, M/s. Magnum Aviation Pvt. Ltd.  (hereinafter  referred
to as ‘supplier’).  In respect of  these  purchase  orders,  the  purchasers
also  issued  two  post-dated  cheques  dated  15.03.2007  for  a   sum   of
Rs.34,57,164/- and  20.03.2007  for  a  sum  of  Rs.15,91,820/-.   The  said
cheques were issued by way of advance payment for the purchase orders.   One
of the terms and conditions of the contract  was  that  the  entire  payment
would be given to the supplier in  advance.   The  supplier  says  that  the
advance payment was made by the purchasers as it had to  procure  the  parts
from abroad.

4.          These cheques got dishonoured when they were  presented  on  the
ground that the purchasers had stopped payment.

5.          It is not in dispute that the  supplier  received  letter  dated
22.03.2007  from  the  purchasers  cancelling  the   purchase   orders   and
requesting the supplier to return both the cheques.

6.          The supplier sent response to the  letter  dated  22.03.2007  on
23.03.2007 asking the purchasers as to when the supplier could  collect  the
payment.    Thereafter, on 12.04.2007, the supplier sent  a  notice  to  the
purchasers and then filed a complaint against the purchasers  under  Section
138 of the N.I. Act  before  the  Court  of  Additional  Chief  Metropolitan
Magistrate, New Delhi.

7.          On  22.05.2007,  the  concerned  Additional  Chief  Metropolitan
Magistrate took cognizance of the alleged offence and issued summons to  the
purchasers.

8.          The  purchasers  challenged  the  order  issuing  summons  in  a
revision petition under Section 397 of the Code of Criminal Procedure,  1973
(for short, ‘Code’).  The  Additional  Sessions  Judge,  after  hearing  the
parties, allowed the revision  petition  vide  order  dated  02.09.2008  and
quashed the process issued by the Additional Chief Metropolitan Magistrate.

9.          The supplier challenged the order  of  the  Additional  Sessions
Judge in a petition under Section 482 of the Code  before  the  High  Court.
The High Court allowed the petition, set aside the order of  the  Additional
Sessions Judge and restored the order of the Additional  Chief  Metropolitan
Magistrate issuing process to the purchasers.

10.         The Delhi High Court following  its  earlier  decision  in  Mojj
Engineering[1] held that the issuance of a cheque at  the  time  of  signing
such contract has to be  considered  against  a  liability,  as  the  amount
written in the cheque is payable by the person on the date mentioned in  the
cheque.

11.         Section 138 of the N.I. Act is as follows:
           “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  provisions  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.”

12.         The interpretation of the expression ‘for discharge of any  debt
or other liability’ occurring in Section 138 of the N.I. Act is  significant
and decisive of the matter.

13.         The explanation appended to Section 138 explains the meaning  of
the expression ‘debt or other liability’ for the  purpose  of  Section  138.
This expression  means  a  legally  enforceable  debt  or  other  liability.
Section 138 treats dishonoured cheque as an offence, if the cheque has  been
issued in discharge of any debt or other liability. The  explanation  leaves
no manner of doubt that to attract  an  offence  under  Section  138,  there
should be legally enforceable debt or  other  liability  subsisting  on  the
date of drawal of the cheque. In  other  words,  drawal  of  the  cheque  in
discharge of existing or past adjudicated liability  is  sine  qua  non  for
bringing an offence under Section 138. If a cheque is issued as  an  advance
payment for purchase of the goods and for any reason purchase order  is  not
carried to its logical conclusion either  because  of  its  cancellation  or
otherwise, and material or goods for which purchase order was placed is  not
supplied, in our considered view, the cheque cannot be  held  to  have  been
drawn for an exiting debt or liability. The payment by cheque in the  nature
of advance payment indicates that at the time of  drawal  of  cheque,  there
was no existing liability.

14.         In Swastik Coaters[2] , the single Judge of the  Andhra  Pradesh
High Court while considering the explanation to Section 138 held:
           “……..Explanation to Section 138 of  the  Negotiable  Instruments
           Act clearly makes it clear that the cheque shall  be  relateable
           to an enforceable liability or debt and as on the  date  of  the
           issuing of the cheque there was no  existing  liability  in  the
           sense that the title in the property had not passed  on  to  the
           accused since the goods were not delivered. ……..”


15.         The Gujarat High  Court  in  Shanku  Concretes[3]  dealing  with
Section 138 of the N.I. Act held that to attract Section  138  of  the  N.I.
Act, there must be subsisting liability or debt on the date when the  cheque
was delivered.  The very fact that the payment was  agreed  to  some  future
date and there was no debt or liability on  the  date  of  delivery  of  the
cheques would take the case out of the purview of Section 138  of  the  N.I.
Act.    While holding so, Gujarat High Court  followed  a  decision  of  the
Madras High Court in Balaji Seafoods[4].

16.         In Balaji Seafoods4, the Madras High Court held:

           “Section 138 of the Negotiable Instruments Act  makes  it  clear
           that where the 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 under  Section  138
           of the Act. The explanation reads that for the purposes of  this
           section, ‘debt or other liability’ means a  legally  enforceable
           debt or liability.”

17.         The Kerala High Court in Ullas[5] had an  occasion  to  consider
Section 138 of the N.I. Act. In that case, the post-dated cheque was  issued
by the accused along with the order for  supply  of  goods.  The  supply  of
goods was not made by the complainant.  The  accused  first  instructed  the
bank to stop payment against the cheque and then requested  the  complainant
not to present the cheque as he had not supplied the goods. The  cheque  was
dishonoured. The single Judge of the  Kerala  High  Court  held,  “………Ext.P1
cheque cannot be stated to be one issued in discharge of  the  liability  to
the tune of the amount covered  by  it,  which  was  really  issued,  as  is
revealed by Ext. D1, as the price amount for 28  numbers  of  mixies,  which
the complainant had not supplied. …..”

18.         The reasoning of the Delhi High Court in the impugned  order  is
as follows:
           “8.   If at the time of entering into a contract it  is  one  of
           the conditions of the contract that the purchaser has to pay the
           amount in advance then advance payment is  a  liability  of  the
           purchaser. The seller of the items would not have  entered  into
           contract unless the advance payment was made to him. A condition
           of advance payment is normally put by the seller for the  reason
           that the purchaser may not later on retract and refuse  to  take
           the goods either manufactured  for  him  or  procured  for  him.
           Payment of cost of  the  goods  in  advance  being  one  of  the
           conditions of the contract becomes liability of  the  purchaser.
           The purchaser who had issued the cheque could have been asked to
           make payment either by draft or in cash. Since giving cheque  is
           a mode of payment like any other mode of payment, it is normally
           accepted as a payment. The issuance of a cheque at the  time  of
           signing such contract has to be considered against  a  liability
           as the amount written in the cheque is payable by the person  on
           the  date  mentioned  in  the  cheque.  Where  the   seller   or
           manufacturer, on the basis of cheques issued,  manufactures  the
           goods or procures the goods from outside, and has acted upon the
           contract, the liability of  the  purchaser  gets  fastened,  the
           moment the seller or manufacturer acts  upon  the  contract  and
           procures the goods. If for  any  reason,  the  seller  fails  to
           manufacture the goods or procure the  goods  it  is  only  under
           those circumstances that no liability is created. However, where
           the goods or raw material has been procured for the purchaser by
           seller or goods have been manufactured by the seller, it  cannot
           be said that the cheques were not issued against the  liability.
           I consider that if  the  liability  is  not  construed  in  this
           manner, the sole purpose of making dishonour of the cheque as an
           offence stands defeated.  The  purpose  of  making  or  enacting
           Section 138 of the N.I. Act was to enhance the acceptability  of
           cheque in settlement of commercial transactions, to infuse trust
           into commercial transactions and to make a cheque as a  reliable
           negotiable instrument and to see that the  cheques  of  business
           transactions are not  dishonoured.  The  purpose  of  Negotiable
           Instrument Act is to make an orderly statement of rules  of  law
           relating to negotiable instruments and to ensure that mercantile
           instruments should be equated with goods passing from  one  hand
           to other. The sole purpose of the Act would  stand  defeated  if
           after placing orders  and  giving  advance  payments,  the  stop
           payments are issued and orders are cancelled on  the  ground  of
           pricing  of   the   goods   as   was   done   in   this   case.”



19.         The above reasoning of the Delhi High Court  is  clearly  flawed
inasmuch as it failed to keep in mind the  fine  distinction  between  civil
liability and criminal liability under Section 138 of the N.I. Act.   If  at
the time of entering into a contract, it is one of  the  conditions  of  the
contract that the purchaser has to pay the amount in advance  and  there  is
breach of such condition then purchaser may have to make good the loss  that
might have occasioned to the seller but that  does  not  create  a  criminal
liability under Section 138. For a criminal liability to be made  out  under
Section 138, there should be legally enforceable  debt  or  other  liability
subsisting on the date of drawal of the cheque. We are unable to accept  the
view of the Delhi High Court that the issuance  of  cheque  towards  advance
payment at the time of  signing  such  contract  has  to  be  considered  as
subsisting liability and dishonour of such  cheque  amounts  to  an  offence
under Section 138 of the N.I.  Act.   The  Delhi  High  Court  has  traveled
beyond the scope of Section 138 of the N.I. Act by holding that the  purpose
of enacting Section 138 of the  N.I.  Act  would  stand  defeated  if  after
placing orders and  giving  advance  payments,  the  instructions  for  stop
payments are issued and orders are cancelled.  In  what  we  have  discussed
above, if a cheque is issued as an  advance  payment  for  purchase  of  the
goods and for any reason purchase  order  is  not  carried  to  its  logical
conclusion either because of its cancellation or otherwise and  material  or
goods for which purchase order was placed is not supplied by  the  supplier,
in our considered view, the cheque cannot be said to have been drawn for  an
existing debt or liability.

20.         In our opinion, the view taken by Andhra Pradesh High  Court  in
Swastik Coaters2, Madras High Court in Balaji Seafoods4, Gujarat High  Court
in Shanku Concretes3 and Kerala High Court in Ullas5  is  the  correct  view
and accords with the scheme of Section 138 of the N.I. Act.

21.         The view taken by Delhi High Court is  plainly  wrong  and  does
not deserve acceptance.

22.         Criminal Appeal is, accordingly, allowed; the impugned  judgment
of Delhi High Court is set aside; and the order of  the  Sessions  Judge  is
restored.


                                                            …..………………………….J.
       (R.M. Lodha)


                                        …..………………………….J. (Shiva Kirti Singh)

New Delhi,
April 7, 2014.
-----------------------
[1]    M/s. Mojj Engineering Systems Limited and others v. M/s. A.B. Sugars
Ltd. [154 (2008) Delhi Law
         Times 579]
[2]    M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others;
[1997 Cri. L.J. 1942 (AP)]
[3]    Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and
another; [2000 Cri. L.J.1988 (Guj.)]
[4]    M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac
Industries Ltd.; [1999 (1) CTC 6]
[5]    Supply House, Represented by Managing Partner v. Ullas, Proprietor
Bright Agencies and another;
         [2006 Cri. L.J. 4330 (Kerala)]

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