Explanation under sec. 138 of Negotiable Instrument Act 1881

1. Section 138 under Negotiable
Instrument Act 1881
BY – RISHUB KAPOOR

2. DEFINITION
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3. CHEQUE
Cheque is an instrument in writing containing an unconditional order, addressed
to
a banker, sign by the person who has deposited money with the banker, requiring
him to pay on demand a certain sum of money only to or to the order of certain
person or to the bearer of instrument.
The main types of cheques are
• Bearer Cheque
• Order Cheque
• Uncrossed / Open Cheque
• Crossed Cheque
• Anti-Dated Cheque
• Post-Dated Cheque
• Stale Cheque
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4. Dishonoring a cheque under sec. 138 of negotiable
instrument act 1881
A Dishonored Cheque is a Cheque that is not credited by the
Bank for numerous reasons including.
1.The signature does not match
2.The account on which the cheque is drawn has
insufficient funds.
3.The date is invalid – i.e. the presentation of the cheque
after 3 months from the date on the cheque.
4.Account frozen by the government
5.Attachment order
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5. 5 Ingredients under sec.138
Five basic ingredients of section 138 which shall have to be fulfilled
for creating an offence for dishonor of a cheque
1. Drawing of the cheque
2. Presentation of the cheque to the bank
3. Returning the cheque unpaid by the drawee bank
4. Giving notice in writing to the drawer of the cheque demanding
payment of the cheque amount.
5. Failure of the drawer to make payment within 15 days of the
receipt of the notice.
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6. Procedure for filing a complaint under section 138
The Section 143 of the Negotiable Act( Power of Court to try
cases), post amendment by the legislature in the year 2001,
specifically provides for all offences under the Chapter are to
be tried by Judicial Magistrate of First Class in accordance
with the Summary Trial provisions of sections 262 to 265 of
CrPC.
 It has been provided for that in a case under the section 138
of the Act, the Magistrate is empowered to pass a sentence
of imprisonment or impose fine or both.
Subsequently, in the case of Rajesh Agarwal v. State and
Others, the Hon'ble Delhi High Court prescribed certain
guidelines with respect to the summary trial procedure which
would be followed with respect to offences under section
1386

7. The procedure for recovery of money in case
of dishonored cheque u/s 138 of NI act 1881
Under provisions of negotiable instruments act.sec.138 , a
legal notice on behalf of complainant is issued to the
defaulter whose cheque is dishonored . It should be issued
within 15 days of dishonor of cheque by registered post
The person who has issued cheque is directed to make the
payment of amount of dishonoured cheque within 15 days. In
case the said payment is made within 15 days of service of
notice then the matter ends.
But in case the said payment is not made within 15 days then
the complainant has to file a criminal case in the court within
30 days from the expiry of notice period of 15 days .
The court will hear arguments of complainant/ advocate for
complainant and issue process under section 138 of NI act.
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8. CONTD.
 The summons are sent under sec. 204 of CrPC 1973 and
served through police station where accused is residing.
 Police is limited to only service of summons and in case
accused remains absent on court date after service of
summons then only warrant is sent to police station to
produce accused in court.
 Accused has to submit surety with all surety documents
including ownership documents of house or land owned by
surety, his address proof including ration card, election
identity card, photo and address proof of surety and accused.
 On receiving summons from the court the accused and surety should remain
present in court with all abovementioned documents and court will accept the
surety and on signing bonds by accused and surety, the bail will be granted
and accused will be released by court.8

9. CONTD.
 Then the complainant will file the affidavit for his evidence with all original
documents in support of his complaint. This is called exam in chief of
complainant. Then accused/his advocate will cross examine the complainant.
 Complainant can submit additional witnesses in support of complaint.
 Then once witnesses of complainant are over then statement of accused is
recorded under Sec.313 of CRPC .accused will be asked to give reply to the
questions and allegations against him .
 Then witnesses of accused to prove his innocence will be produced and the
evidence will be recorded by the court.
 Last stage is of arguments of advocate of complainant and argument of
advocate of accused
 Court will pass the judgment.
 In case accused is acquitted then matter ends
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10. The Trial procedure to be followed for
offences under section 138, would
thus be as under: (summary)
Step I: On the day complaint is presented, if the complaint is accompanied by
affidavit of complainant, the concerned Judicial Magistrate shall scrutinize
the complaint & documents and if commission of offence is made out, take
cognizance & direct issuance of summons of accused, against whom case is
made out.
Step II: If the accused appears, the Judicial Magistrate shall ask him to furnish
bail bond to ensure his appearance during trial and ask him to take notice
u/s 251 Cr. P.C. and enter his plea of defence and fix the case for defense
evidence, unless an application is made by an accused under section 145(2) of
NI Act for recalling a witness for cross examination on plea of defence.
Step III: If there is an application u/s 145(2) of NI Act for recalling a witness of
complainant, the court shall decide the same, otherwise, it shall proceed to
take defence evidence on record and allow cross examination of defence
witnesses by complainant.
Step IV: To hear arguments of both sides.
Step V: To pass order/judgment
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11. SETTLEMENT DURING TRIAL
The payment by the accused of the full cheque amount
during the pendency of trial under sec 138 does not
absolve the accused of his liability for the offence of
dishonor of cheque. However, the courts take a lenient
view in such cases and the accused is set free or
punished lightly.
The Delhi High Court has also held that if during the
pendency of a dispute under sec 138 NI Act the parties
enter into a settlement, it should be respected by the
courts as proceedings under sec 138 are quasi criminal in
nature.
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12. CASES (Jurisdiction)
K. BhaskaranVs. Sankaran Vaidhyan Balan and Anr.
SCR 271(Crl. A. No. 1015 of 1999)
It was held Under Section 177 of the Code(Crpc Act 1973) "every
offence shall ordinarily be inquired into and tried in a court within
whose jurisdiction it was committed.
"The locality where the bank (which dishonored the cheque) is
situated cannot be regarded as the sole criteria to determine the
place of offence..A place, for that purpose, would depend upon a
variety of factors. It can either be at the place where the drawer
resides or at the place where the payee resides or at the place
where either of them carries on business. Hence, the difficulty to
fix up any particular locality as the place of occurrence for the
offence under Section 138 of the Act."12

13. JURISDICTION under 138
Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.
In this case Hon'ble Supreme Court examined the question of
jurisdiction yet again under Section 138 of the Act.
Brief fact
Appellant, was from Chandigarh and had issued a cheque
which was returned dishonored, the cheque was issued in
Chandigarh to the complainant where he had a branch and
was actually present. Notice of payment for the
dishonored cheque was issued from the head office of the
complainant in Delhi to the accused office in Chandigarh.
Due to failure on the part of the drawer a complaint was
filed in Delhi.
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14. CONTD.
The Hon'ble Supreme Court held that:
A cause of action will not be triggered by issue of
statutory notice but only receipt/acceptance of notice
does.
Solely, the specific provisions of Section 138 will make or
build an offence and the proviso is merely a condition
required for taking cognizance.
A sole issue of notice or presentation of cheque can't give
or provide the court with territorial jurisdiction to try
offences under section 138 or it will unreasonably harass
the drawer.
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15. Distinction between K.Bhaskaran's Case and Harman's
Case- A slight distiction.
There exists conflict between the two decisions
inasmuch as in Bhaskaran's case (supra) it was held
that the expression "giving of notice" occurring in
proviso (b) to Section 138 of the NI Act means
"sending of notice" whereas in Harman's case (supra)
it was held that the said expression means "receipt of
notice". The Harman case has adopted a strict
approach towards territorial jurisdictions of court.
Later with the judgment of Dashrath Rupsingh Rathod
case these two cases are no longer valid.
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16. (Stoppage of cheque)
M/S. Modi Cements Ltd vs Shri Kuchil Kumar Nandi on 2 March, 1998
 The present proceedings arise out of a complaint filed by the appellant in the
Court of Chief Judicial Magistrate, Calcutta under Section 138 of the
Negotiable Instruments Act, 1981 against the respondent. the appellant in the
complaint that the respondent purchased material on credit against the
orders placed on behalf of his concerns. These orders were placed by the
respondent with the Calcutta office of the appellant and it was agreed that the
price of the consignments was to be paid by the respondent. The said cheques
as unpaid with an endorsements payment stopped by the drawer. A notice
under sec. 138 of NI ACT 1881 was issued.
 The respondent failed and neglected to make the payment of the amount of
the aforesaid three cheques within the stipulated period of 15 days. The
respondent filed 3 petition in High Court of Calcutta under sec. 482 of Crpc
1973 . the petition was accepted and complaints was quashed.
 Although later the appeal was made to supreme court and the order of high
court was set aside.
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17. Dashrath Rupsingh Rathod vs State Of
Maharashtra & Anr
(S.L.P.(Crl.)No.2077 of 2009) (juridiction)
 A three Judge Bench of the Supreme Court finally held that a
Complaint of Dis-honor of Cheque can be filed only to the Court
within whose local jurisdiction the offence was committed, which in
the present context is where the cheque is dishonored by the bank
on which it is drawn.
 The Court clarified that the Complainant is statutorily bound to
comply with Section 177 etc. of the CrPC and therefore the place or
situs where the Section 138 Complaint is to be filed is not of his
choosing.
 Additionally, in a move that will have significant and far-reaching
consequences, the Court also directed that pending cases in which the
accused had not been properly served would be returned to the
complainants for filing before the appropriate courts (i.e. having
territorial jurisdiction), which filing is required to be done within 30
days of return
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18. Jugal Kishore Sharma vs State And Ors.
( 2008 SCR 5480)
 A petition under Section 482 of the Code of Criminal Procedure, 1973 (Cr.PC)
seeking the quashing of a criminal complaint, the consequent FIR No. 204 of
2002 under Sections 420/468/471/34 IPC. The request for quashing was
opposed by the learned appellant on the grounds related to documents These
were:
 (a) an agreement to sell the property in question
 (b) a receipt for Rs. 5000 and
 (c) a pay-in slip on which the signature of the complainant was forged
 The court cannot be unmindful of the fact that in criminal cases there are only
two parties, viz., the accused and the State. When one of the parties i.e. State
is not agreeable to the quashing of the proceedings, and the evidence that has
been gathered supports the continuation of the trial for the offences of
forgery and use of forged documents under Sections 468 and 471 IPC
respectively, it would not be appropriate for this Court to exercise its
jurisdiction under Section 482 CrPC to quash the criminal proceedings only on
the ground that the accused and the complainant have settled their disputes.
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19. Yogendra Pratap Singh Vs. Savitri Pandey
(2012 SCR 605)
 The cheques issued by the respondent in favour of the appellant have been dishonored,
subsequent to which the appellant has served on the respondent, a notice as required
under Sec. 138 of the Negotiable Instruments Act, 1881. Further, the appellant has filed
a suit against the respondent . Further the respondent has not paid the amount even till
the date of the hearing i.e., date of taking cognizance.
 The question that has arisen is “can cognizance of an offence punishable under Section
138 of the Act be taken on the basis of a cause of action which has not yet accrued at
the time of making the complaint but has accrued at the time of taking cognizance.
 Further, if the answer to the above is no, then can a complaint be filed again in spite of
the fact that the period of 1 month as stipulated under Sec. 142 of the Act, has expired.”
Initially the Court of Additional Civil Judge, UP has taken cognizance of the case and
issued summons to the respondent.
 the respondent has assailed the order in a petition under Sec. 482 of the Code of
Criminal Procedure before the High Court of Allahabad which has quashed the
complaint on the ground that the complaint was premature. Then the appellant has
appealed against the order of the High Court in the Supreme Court which is the present
case
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20. CONTD.
 The complaint filed by the appellant is plainly
premature and a premature complaint is no
complaint in the eyes of law on the basis of which no
cognizance could be taken. However, there have been
different clarifications given earlier by the various
courts on the very matter, some supporting such
complaints and some against such complaints
Thus the apex court set side the decision of the high
court
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21. 1988 Amendment to Section 138
If a person issues a cheque and it got dishonored the
person is said to have done an Criminal offence
Whatever be the reason for the dishonor weather for
insufficiency of funds or whatever, the same does not
matter( stoppage of cheque)
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22. New Negotiable Instruments
(Amendment) Bill, 2015
Concerns had been raised by various stakeholders
(creditors, industry associations, financial institutions, etc)
expressing apprehensions that the DasrathRathod decision
will offer undue protection to defaulters at the expense of
the aggrieved complainant
It would ignore the current realities of cheque clearing
with the introduction of CTS (Cheque Truncation System)
i.e scanned copies are provided of the cheque.
Amendments under sec. 142(2) and insertion of sec. 142A
Both are regarding the jurisdiction of court within the local
limits.22

23. Purpose of Amendments
These provisions were incorporated with a view to
encourage the culture of use of cheques and
enhancing the credibility of the instrument.
The larger objective is to protect the interest of
honest people dealing in cheques.
 DRAWER BEWARE
 Because, by the said amendment the DISHONOURED
CHEQUE is being TREATED as a CRIMINAL OFFENCE
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24. Punishment
Section 138 provides for the punishment for dishonor
of cheque
Imprisonment for a term which may extend to TWO
year, or with fine which may extend to TWICE the
amount of the cheque, or with both.
Although it’s a Bailable offence .
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25. Order 37 Of Civil Procedure Code
, SUMMARY TRIALS
 Order 37 CPC is one of the best provisions in the hands of a proposed Plaintiff,
wanting to institute a Civil Suit. Broadly it states as under:
Rule 1, Sub-Rule 2 makes it applicable to all suits upon bills of exchange,
hundies and promissory notes or the ones in which a Plaintiff seeks only to
recover a debt or liquidated demand in money payable on a written contract,
an enactment, where the sum to be recovered .
 Under Order 37, there are two stages of getting the Suit decreed. One is at
the stage of Rule 2(3) and the other is at the stage of Rule 2(6).
Rule 2(3) states the procedure for appearance of Defendant which is within 10
days from the service of the summons on him, supported by an Affidavit;
verifying the cause of action.
Rule 2(6) states that in case the Defendant does not apply for a leave to
defend, (a) the Plaintiff shall be entitled to judgment immediately or (b) the
Court may direct the Defendant to give such security as it may deem fit.
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