When is an Offence Committed Under Section 138 of the Negotiable Instruments Act, 1881?

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Chapter XVII of the Negotiable Instruments Act, 1881 (“Act”), including Sections 138 142, was introduced by the Parliament of India in 1988 in order to improve the acceptability of cheques by criminalizing the issuance of cheques by a person without sufficient funds in his bank account.

Position of law before and after the decision of the Apex Court in Dashrath Rupsingh Rathod v. State of Maharashtra and Anr.

In the landmark case of Dashrath Rupsingh Rathod v. State of Maharashtra and Anr. (“Dashrath”), a 3 judge bench of the Supreme Court of India extensively examined the ingredients of Section 138 of the Act, in order to evaluate the completion of commission of an offence under it. The Apex Court, in Dashrath, overruled its earlier decision on the same issue in Bhaskaran v. Sankaran Vaidhyan Balan[1] (“Bhaskaran”).

In Bhaskaran, a division bench of the Apex Court held that an offence under Section 138 of the Act can be said to be committed only if all the conditions mentioned in the main clause and the proviso to the main clause under section 138 of the Act, are satisfied. In criminal cases, in line with Section 178(d) of the Code of Criminal Procedure (“CrPC”), where the offence consists of several acts done in different local areas, it may be inquired to or tried by a court having jurisdiction over any of such local areas. Accordingly, in line with Section 178 of CrPC, it was decided in Bhaskaran that the jurisdiction for an offence under Section 138 of the Act will vest with courts where any of the events mentioned under Section 138, including the proviso thereto, have occurred.

However, it was observed that the decision in Bhaskaran was misused by the complainants to harass the accused by filing complaints at courts of places which are otherwise substantially unrelated to the offence. Accordingly, the Apex Court whittled down the ratio in Bhaskaran by giving primacy to (a) the situs of service of the notice on the accused over issuance of notice by the complainant under Section 138 of the Act[2] and (b) to the location of the bank on which the cheque is drawn over the collecting bank (inference from Ishar Alloy[3] as clarified in the Dashrath).

Having considered the preceding cases, the Apex Court in Dashrath created a distinction between the event of commission of offence and cognizance of such offence leading to prosecution. It was reasoned that Section 138 of the Act is structured in two parts – primary and proviso. Section 138 of the Act provides that an offence is deemed to be committed when the following conditions are met: (i) cheque is issued in discharge of a liability; (ii) cheque is presented to the bank; and (iii) the cheque is returned by the bank unpaid, due to insufficiency of funds in the bank account or it is in excess of the amount allowed to be paid from such bank account by an agreement with that bank. Additionally, the proviso (a) to (c) to Section 138 provide that nothing in Section 138 will apply till the following conditions are met: (i) the cheque is presented by the payee or holder in due course within the validity period; (ii) payee or the holder in due course has made a demand for the payment of the said amount of money to such drawer of the cheque by a written notice within the period of 30 days from receipt of information from the bank regarding return of the said cheque as unpaid and (iii) drawer of the cheque fails to make the payment to payee or holder in due course within 15 days of receipt of notice demanding payment from the payee or holder in due course.

In the instant matter, it was held by the Apex Court that an offence is deemed to be committed under Section 138 when the requirements as provided in the clause – as distinguished from the proviso – are completed, i.e. when the bank returns the cheque. The conditions in proviso to Section 138 of the Act merely postpone the prosecution of the offence till the additional conditions are met. It was reasoned that it is an established rule of construction that a proviso is limited to the subject-matter of the principal clause and merely qualifies the principal clause.

Keeping in mind the legal implications of such a decision, the Apex Court directed that all pending cases should be treated as follows: (a) where the proceedings are at the stage of recording of evidence under Section 145(2) of the Act or beyond, the cases shall be deemed to be transferred by the Apex Court from the court which ordinarily possesses territorial jurisdiction in line with Dashrath to court where it is presently pending; and (b) all other complaints to be returned and accordingly filed/refiled in the appropriate court within 30 days from date of return of the complaint.

The decision in Dashrath sought to protect the interests of justice and obviate misuse of the statute, by restricting the jurisdiction to try an offence under Section 138 of the Act to court of the place where the cheque is returned by the drawee bank.

Subsequent decisions on territorial jurisdiction of courts for offences under section 138 of the Act

 Cheques made payable at par at all branches of such bank have led to the courts introducing a fresh aspect in the determination territorial jurisdiction of courts for offences under Section 138 of the Act. In the case of Ramanbhai Mathurbai Patel v. State of Maharastra and Anr.[4] (“Ramanbhai”), a single Judge of the High Court of Bombay was faced with a situation wherein the accused had issued two cheques, drawn on the Gandhinagar branch of the State Bank of India and Bank of Maharashtra in Ahmedabad respectively. These cheques were payable at par at all branches of the respective banks. Accordingly, the payee sought to clear the cheques at the nearest available branch of both the banks in Mumbai and the same were dishonoured. The question was whether the courts in Mumbai or Ahmedabad will have jurisdiction to try the offences considering the cheque was payable at par at all branches of respective banks across India. It was noted that by issuing cheques payable at par at all branches, the drawer of the cheque had given the option to the bank of the payee to clear the cheque from the nearest branch of the drawee bank. Accordingly, vide an order dated 25 August 2014, it was held by the Bombay High Court that the courts in Mumbai will have the jurisdiction to try the offences under Section 138 of the Act as the cheques were dishonoured in Mumbai. The accused has filed a special leave petition before the Apex Court to appeal from the said order of the Bombay High Court in Ramanbhai.[5] Vide an order dated 16 December 2014, a 2 judge bench of the Apex Court has granted an interim stay on the order of the High Court of Bombay in Ramanbhai. The said special leave petition is presently pending before the Apex Court.

Subsequently in Smt. Sangita Shah v. State of Maharashtra and Anr.[6] (“Sangita ”), a single Judge of the Bombay High Court (Nagpur Bench) also examined the question of whether the offence under Section 138 of the Act takes place at the branch of the drawee bank where payment is sought by the payee or the original branch where the account of the drawer is maintained, in the case of a cheque made payable at par at branches all over India. The court highlighted the distinction between (a) the branch of the bank which processes the payment and (b) the original branch of the bank which physically holds the funds of the drawer and which gives its approval for payment to the former branch. Vide an order dated 13 January 2015, it was held that the former branch is merely a processing or facilitating branch and the latter branch which physically holds the funds of the drawer is the drawee bank. Accordingly, it was held that irrespective of the location of the branch where the payee seeks to clear the cheque, the court of the place where original branch of the bank is located will have jurisdiction to try the offence under Section 138 of the Act. The order of the Bombay High Court (Napur Bench) in Sangita does not refer to the decision of the co-ordinate bench of Bombay High Court in Ramanbhai and the pending appeal from the same before the Apex Court. As a result, the order in Sangita appears to be per incuriam and to that extent it cannot be considered a reliable authority in law.

Conflict between the decisions of the Apex Court in Dashrath and Yogendra Pratap Singh v. Savitiri Pandey and Anr.

In Yogendra Pratap Singh v. Savitri Pandey and Anr. (“Yogendra ”), a 3 judge bench of the Apex Court primarily considered the question of whether cognizance of an offence can be taken on the basis of a complaint before the expiry of 15 day period as stipulated in proviso (c) to Section 138 of the Act. In this light, the Apex Court examined the provisions of Section 138 of the Act to ascertain when an offence is said to be completed under it. The Apex Court held that the an offence under Section 138 of the Act is only made effective when the conditions mentioned in main section as well as the three conditions mentioned in provisos to Section 138 of the Act are completed. As a result, it was held that cognizance of an offence cannot be taken on the basis of a complaint before the expiry of 15 day period as stipulated in proviso (c) to Section 138 of the Act. Further, the Apex Court directed that all the pending pre-mature complaints under Section 138 of the Act are to be returned and refiled within 30 days of the date of decision in Yogendra.

While deciding the Yogendra, the learned 3 judge bench of the Apex Court did not refer to the earlier decision of the co-ordinate bench of the Apex Court in Dashrath. The ratio decidendi in Yogendra contradicts the ratio decidendi in Dashrath as the latter, unlike the former, does not include the conditions mentioned in provisos to Section 138 of the Act as necessary ingredients of the offence. Accordingly, a division bench of the Apex Court in M/s Goyal MG Gases Pvt. Ltd. Etc. v. IND Synergy Ltd. & Ors. Etc.[7], vide an order dated 13 January 2015, has referred the decision in Yogendra to another bench of 3 learned judges of the Apex Court.

Concluding Remarks

It is evident that there is a lack of clarity on the point of when an offence is said to be committed under Section 138 of the Act as well as the courts of appropriate jurisdiction to file a complaint for the same. The courts have moved from a complainant-friendly approach in Bhaskaran to an accused-centric approach in Dashrath and Yogendra by interpreting the provisions of Section 138 of the Act to protect the accused from misuse of territorial jurisdiction of courts and filing of pre-mature complaints under Section 138 of the Act. The provisions of Section 138 of the Act are drafted such that both interpretations of the said section provided in Dashrath and Yogendra are acceptable. It appears to be the need of the hour that the position of law on determination of courts of appropriate jurisdiction as well as completion of commission of an offence under Section 138 of the Act is finalized by the way of a legislative enactment.

In any event, as pointed out by the Apex Court in the Dashrath, creditors are required to be diligent on this count and insist that the cheques in question be made payable at a place of the creditor’s convenience.

Sachin Mandlik is a Partner, Vishal Shriyan is a Senior Associate and Aakashi Lodha is an Associate at Khaitan & Co.

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[1] (1999) 7 SCC 510

[2] Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd. (2009) 1 SCC 720.

[3] Ishar Alloy Steels Ltd. v. Jayaswals Neco Ltd. (2001) 3 SCC 609.

[4] MANU/MH/1374/2014.

[5] SLP (Criminal) No. 7251 of 2014.

[6] MANU/MH/0040/2015.

[7] SLP (Criminal) Nos. 134-170/2015.