The Hon’ble Supreme Court in Dashrathbhai Trikambhai Patel versus Hitesh Mahendrabhai Patel & anr. (Criminal Appeal No.1497 of 2022)¹ dealt with the issue regarding whether the offence under Section 138 of the Negotiable Instruments Act, 1881 would deem to have been committed if the cheque which has been dishonoured does not represent the enforceable debt at the time of encashment.

The Appeal arises from a judgment dated 12th January 2022 of the High Court of Gujrat. The Hon’ble High Court dismissed an appeal against the judgment of the Learned Additional Chief Judicial Magistrate dated 30th August 2016 by which the first Respondent was acquitted of the offence under Section 138 of the Negotiable Instruments Act, 1881.

Facts

• On 16.01.2012 the Respondent/Accused borrowed a sum of Rs. 20,00,000/- from the Appellant/Complainant, and to discharge his liability, issued a cheque dated 17.03.2014 for the said amount.
   
• The said cheque was presented to the bank on 02.04.2014 and was dishonoured due to insufficient funds.
   
• The Appellant on 10.04.2014 issued a statutory notice under Section 138 of the Negotiable Instruments Act, 1881 calling the Respondent to pay the legally enforceable debt of Rs. 20,00,000/- within a period of 15 days.
   
• On 25.04.2014, the Respondent addressed a response to the statutory demand notice where he alleged the following:
  1. The Respondent and the Appellant are related to each other and the Appellant's son married the Respondent's sister.
  2. The Appellant lent the Respondent a loan of Rs. 40,00,000/- and there was an oral agreement between the parties that the Respondent shall pay Rs.1,00,000/- every three months by cheque and Rs. 80,000/- in cash to the Appellant. Two cheques were given to the Appellant for security and it was agreed between the parties that the Appellant would return both the cheques when the sum was paid in full;
  3. Thereafter the Appellant's son initiated divorce proceedings against the Respondent's sister however the dowry given at the time of the marriage is still in the possession of the Appellant.
  4. The cheques that were given as security to the Appellant were misused by him.
      
• On 12.05.2014, the Appellant filed a criminal complaint against the Respondent for the offence under Section 138 of the Negotiable Instruments Act, 1881.
   
• By a judgment dated 30.08.2014, the Learned Trial Court acquitted the Respondent of the said offence on the ground that the Respondent paid the Appellant a sum of Rs.4,09,3015/- between 08.04.2012 and 30.12.2013 partly discharging his liability in respect of the debt of Rs. 20,00,000/-.
   
• The Learned Trial Court observed that the Appellant had failed to prove that he was owed a legally enforceable debt of Rs. 20,00,000/-:
  
  “Therefore, the plaintiff’s complaint proved that the accused has paid Rs. 4,09,315/- out of the amount due as per fact. So that on the day the plaintiff deposited in the bank to recover a legal amount of Rs. 20,00,000/-/ The court believes that the prosecution has failed to prove that fact.”
  
  
• Thereafter the Appellant filed an appeal against the judgment of the Learned Trial Court before the Hon’ble High Court of Gujrat. The Hon’ble Gujrat High Court by its judgment dated 12.01.2022 dismissed the appeal, thereby upholding the judgment of the Learned Trial Court acquitting the first Respondent. The Hon’ble High Court affirmed the finding of fact by the Learned Trial Court that a part of the debt owed by the first Respondent to the Appellant was discharged and thus the notice of demand issued under Section 138 of the Act is not valid. In the course of the analysis, the following findings were entered:
  • The Appellant has in the course of his cross-examination accepted that the first Respondent had deposited Rs. 4,09,315/- in his account;
  • There is a statutory presumption that the sum drawn in the cheque is a debt or liability that is owed by the drawer of the cheque to the drawee. The part -payment made by the first Respondent ought to have been reflected in the statutory notice issued by the Appellant. The sum in the cheque is higher than the amount that was due to the
    Appellant. Thus, the statutory notice issued under Section 138 is not valid. It is an omnibus notice since it did not recognise the part-payment that was made; and
  • The cheque was a security for the money lent by the appellant. The undated cheque was presented to the bank without recognising the part payment that was already made.
     

• The Appellant challenged the judgment passed by the Hon’ble Gujrat High Court and the present appeal was filed before the Hon’ble Supreme Court.
  
  Observations
  The Hon’ble Division Bench observed that under Section 56 read with Section 15 of the Negotiable Instruments Act, 1881, an endorsement may be made by recording the part payment of the debt in the cheque or in a note appended to the cheque. When such an endorsement is made, the instrument could still be used to negotiate the balance amount. If the endorsed cheque when present for encashment of the balance amount is dishonoured, then the drawee can take recourse to the provisions of Section 138 of the Negotiable Act, 1881.
  
  Thus, when a part payment of the debt is made after the cheque was drawn but before the cheque was encashed, such payment must be endorsed on the cheque under Section 56 of the said Act. The cheque cannot be presented for encashment without recording the part payment. If the unendorsed cheque is dishonoured on presentation, the offence under Section 138 of the said act would not be attracted since the cheque does not represent a legally enforceable debt at the time of encashment.
  
  While reaching to this conclusion, the Hon’ble Division Bench laid specific emphasis on the wordings of Section 56 and Section 138 of the act and relied on various judgments including its own decision in Sunil Todi vs. State of Gujrat.²
  
  It further observed that the judgments passed by the Hon’ble Supreme Court on postdated cheques when read with the purpose of Section 138 indicate that an offence under the provision arises if the cheque represents a legally enforceable debt on the date of maturity. The offence under Section 138 is tipped by the dishonour of the cheque when it is sought to be encashed. The Hon’ble Division Bench further observed that though a post- dated cheque might be drawn to represent a legally enforceable debt at the time of its drawing, for the offence to be attracted, the cheque must represent a legally enforceable debt at the time of encashment. If there has been a material change in the circumstance such that the sum in the cheque does not represent a legally enforceable debt at the time of maturity or encashment, then the offence under Section 138 is not made out.
  
  Held
• For the commission of an offence under Section 138, the cheque that is dishonoured must represent a legally enforceable debt on the date of maturity or presentation.
• If the drawer of the cheque pays a part or whole of the sum between the period when the cheque is drawn and when it is encashed upon maturity, then the legally enforceable debt on the date of maturity would not be the sum represented on the cheque.
• When a part or whole of the sum represented on the cheque is paid by the drawer of the cheque, it must be endorsed on the cheque as prescribed in Section 56 of the Act. The cheque endorsed with the payment made may be used to negotiate the balance, if any. If the cheque that is endorsed is dishonoured when it is sought to be encashed upon maturity, then the offence under Section 138 will stand attracted.
• The Respondent has made part-payments after the debt was incurred and before the cheque was encashed upon maturity. The sum of rupees twenty lakhs represented on the cheque was not the ‘legally enforceable debt’ on the date of maturity. Thus, the Respondent cannot be deemed to have committed an offence under Section 138 of the Act when the cheque was dishonoured for insufficient funds.

Conclusion
In a nutshell, the Hon'ble Apex Court has observed that where part payments are made before the encashment of the cheque, the drawee must endorse the cheque and can use the said endorsed cheque as a way of negotiation for the balance amount, if any.

By - Soumya Kamat