A) ABSTRACT / HEADNOTE

The Supreme Court examined whether the High Court erred in overturning the concurrent conviction of respondent no.2 under Section 138, Negotiable Instruments Act, 1881. The appellant had advanced a loan of Rs. 22,00,000 to the accused, for which a cheque was issued and subsequently dishonoured with the endorsement “payment stopped by drawer”.

Despite statutory notice, the accused neither replied nor repaid the amount. Both the Trial Court and the Appellate Court found the accused guilty, relying on the statutory presumptions under Sections 118 and 139 that favour the existence of a legally enforceable debt. The High Court, however, upset these findings by holding that the complainant had failed to establish the source of the funds.

The Supreme Court held that the High Court’s approach was erroneous since the complainant is not initially required to prove his financial capacity unless the accused raises a specific defence regarding such inability, which was absent in this case. The defence of a lost cheque was found untrustworthy because the police intimation was in fact made only in 2011, despite being back-dated.

The Court held that the complaint was also maintainable even though the Partnership Firm was not arrayed as an accused, as the signatory partner was the person in charge of the firm. While restoring the conviction, the Court modified the sentence by imposing only a fine considering the age of the accused.

Keywords: Section 138 NI Act; statutory presumption; financial capacity of complainant; stop payment; lost cheque; legally enforceable debt; partnership liability; signatory liability; burden of proof.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case arose out of a criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881, involving the dishonour of a cheque issued by respondent no.2, a partner in M/s Sun Enterprises. The central controversy concerned the High Court’s interference with concurrent findings of guilt recorded by the Trial Court and the Appellate Court.

The appellant alleged that a sum of Rs. 22,00,000 was advanced as a loan to the accused, who issued a cheque dated 17.03.2010, which was dishonoured with the remark “payment stopped by drawer”. Statutory notice was issued under Section 138 proviso (b), but received no reply.

The Trial Court convicted the accused on the strength of statutory presumptions under Sections 118 and 139, alongside the admission of signature on the cheque. The Appellate Court affirmed the conviction. However, the High Court in revision set aside the conviction by holding that the complainant failed to prove the source of funds and had not provided documentary evidence of withdrawal or lending.

The Supreme Court, therefore, examined whether such re-appreciation of evidence by the High Court was warranted in revisional jurisdiction, and whether the High Court had misapplied the law relating to the burden of proof in Section 138 prosecutions.

The Court revisited several earlier precedents including Bir Singh v. Mukesh Kumar, Kishan Rao v. Shankargouda, Rohitbhai Jivanlal Patel, and Tedhi Singh v. Narayan Dass Mahant to clarify the contours of statutory presumptions. The Court also addressed maintainability objections based on Section 141 and partnership liability, analysing Aneeta Hada, Aparna A Shah, S.M.S. Pharmaceuticals, and Sunita Palita.

D) FACTS OF THE CASE

The appellant and respondent no.2 had a financial transaction in which the appellant advanced Rs. 22,00,000 as a loan, based on an assurance that the amount would be returned. In discharge of this liability, the accused issued Cheque No. 726716 dated 17.03.2010, drawn on the Bank of Baroda. The appellant presented the cheque through his banker, IDBI Bank, on 07.05.2010, when it was dishonoured with the specific endorsement “payment stopped by drawer”.

Following the dishonour, a statutory notice dated 18.05.2010 was issued through registered post as required by Section 138 proviso (b). The accused did not respond to this notice nor did he make payment within the statutory period of 15 days. Consequently, Complaint Case No. 6650/2012 was filed.

During trial, the accused did not dispute his signature on the cheque but asserted that the cheque had been lost while travelling and that the stop-payment instruction was justified. He relied on an alleged missing-report dated 12.03.2010, though during cross-examination he admitted that the intimation was actually given to the police only in 2011. The Trial Court found this defence contrived and convicted the accused, sentencing him to one year simple imprisonment and fine of Rs. 35,00,000.

The Appellate Court upheld the conviction. In revision, however, the High Court held that the complainant had failed to prove his financial capacity or source of funds, and therefore acquitted the accused. The acquittal was challenged before the Supreme Court, leading to the present appeal.

E) LEGAL ISSUES RAISED

i. Whether the High Court erred in reversing concurrent findings of guilt under Section 138 of the Negotiable Instruments Act.
ii. Whether the complainant was required to prove his financial capacity at the threshold in the absence of a specific defence by the accused.
iii. Whether the defence of a “lost cheque” was credible in light of the evidence on record.
iv. Whether the complaint was maintainable without arraying the partnership firm (M/s Sun Enterprises) as an accused under Section 141 of the Act.
v. Whether the statutory presumptions under Sections 118 and 139 were correctly appreciated by the High Court.

F) PETITIONER / APPELLANT’S ARGUMENTS

The appellant argued that the High Court exceeded its revisional jurisdiction by re-appreciating evidence already concurrently analysed by two courts. It was contended that the accused admitted his signature on the cheque, which triggered the presumptions under Sections 118 and 139, and therefore the burden shifted entirely upon the accused to rebut the presumption of a legally enforceable debt.

Reliance was placed on Bir Singh v. Mukesh Kumar, Rajesh Jain v. Ajay Singh, Kishan Rao v. Shankargouda, and Uttam Ram v. Devinder Singh Hudan, all emphasising that once signature is admitted, the presumption of liability operates fully.

The appellant further submitted that the defence of cheque-loss was fabricated because the intimation to the police, though dated 12.03.2010, was actually submitted only in 2011, after dishonour of the cheque. The alleged missing-report was never converted into an FIR, reducing its reliability.

The High Court’s view regarding source-of-fund proof was criticised as being contrary to precedents such as Rohitbhai Jivanlal Patel, where the Supreme Court held that the complainant need not initially prove financial capacity unless specifically challenged by the accused.

G) RESPONDENT’S ARGUMENTS

The respondent argued that the High Court correctly found that the complainant failed to prove the withdrawal and payment of Rs. 22,00,000, because no bank statements, receipts, or accounting records were produced. It was submitted that the complainant lacked the financial capacity to lend such a sum, and thus the presumption under Section 139 stood rebutted.

The respondent relied on cases including John K John v. Tom Varghese, Krishna Janardhan Bhat v. Dattatraya G. Hegde, and G. Pankajakshi Amma v. Mathai Mathew, asserting that the presumption is rebuttable and that improbable transactions weaken the complainant’s case.

The respondent maintained that the cheque was in fact lost while travelling and that a missing-report was filed. It was also argued that the complaint was not maintainable since the cheque belonged to the partnership firm, M/s Sun Enterprises, which was not arrayed as an accused, invoking Aneeta Hada and Aparna A Shah. Without prejudice, the respondent pleaded that he was 58 years old with no antecedents, and sought leniency if the conviction was restored.

H) RELATED LEGAL PROVISIONS

i. Section 138, Negotiable Instruments Act, 1881 – Dishonour of cheque for insufficiency of funds.
ii. Section 139 – Presumption in favour of holder regarding legally enforceable debt.
iii. Section 118 – Presumptions as to negotiable instruments.
iv. Section 141 – Offences by companies / partnerships.
v. Section 142 – Conditions precedent for cognizance of offences under Section 138.

I) JUDGEMENT

The Supreme Court held that the High Court committed a manifest error by shifting the primary burden onto the complainant despite clear statutory presumptions supporting him. The Court reiterated that under Sections 118 and 139, once the execution of the cheque is admitted, the presumption of a legally enforceable debt arises, and the accused must rebut it through cogent evidence.

The High Court’s insistence on documentary proof of the complainant’s financial capacity was contrary to the legal position clarified in Tedhi Singh v. Narayan Dass Mahant and Rohitbhai Jivanlal Patel, where it was held that the complainant need not initially demonstrate capacity unless specifically disputed in the reply to statutory notice.

The Court scrutinised the defence of cheque-loss and found it suspect. The alleged intimation to police was in fact given in 2011, despite being back-dated to 12.03.2010, and the accused admitted this delay. The cheque was dishonoured on 07.05.2010, which rendered the purported explanation untenable. The Court held that such a defence lacked credibility and could not rebut the statutory presumption.

On the issue of maintainability, the Court harmonised Aneeta Hada, S.M.S. Pharmaceuticals, and Sunita Palita. It noted that the accused was both the signatory to the cheque and the person in charge of the partnership firm. Therefore, prosecution against him alone was maintainable even without impleading the firm under Section 141. The absence of specific pleadings disputing his role further substantiated this.

Accordingly, the Supreme Court restored the findings of guilt of the Trial Court and Appellate Court but modified the sentence. Considering the respondent’s age and mitigating factors, the Court imposed only a fine of Rs. 32,00,000, payable within four months, failing which the original sentence including imprisonment would revive.

a. RATIO DECIDENDI

The controlling legal principle laid down is that the initial burden of proving financial capacity does not lie on the complainant in a prosecution under Section 138 NI Act unless the accused, in his reply to the statutory notice, specifically challenges such capacity. This doctrinal reaffirmation is grounded in Tedhi Singh and Rohitbhai Jivanlal Patel, where the Court clarified that the statutory presumption under Sections 118 and 139 continues to operate until the accused successfully presents a probable defence.

The judgment further crystallises that the presumption encompasses the existence of a legally enforceable debt, and that mere assertions of cheque-loss or speculative allegations do not rebut the presumption unless supported by substantive evidence. The defence of cheque-loss in this case was found false due to contradictory evidence regarding the timing of the police intimation.

Another key ratio concerns Section 141 liability of partnerships. The Court held that when the accused is both the signatory and the person in control of the firm, prosecution is maintainable even if the firm is not arraigned as an accused. This harmonises Aneeta Hada with the reasoning in Sunita Palita, emphasising that liability depends on role rather than designation alone. The Court thus clarified that signatory liability stands independently where the person is directly responsible for the transaction.

b. OBITER DICTA

The Court observed that while evidentiary standards under Section 138 resemble criminal proceedings, the nature of liability is quasi-civil, and therefore the strict proof demanded by the High Court was misplaced. This observation re-contextualises the objective of the NI Act as ensuring credibility of business transactions and preventing cheque dishonour abuse.

The Court also noted that complainants in money-lending settings may not always maintain formal records, especially in informal commercial relationships. Absence of such documentation cannot, in isolation, defeat statutory presumptions. This dictum indirectly underscores the Act’s purpose of balancing procedural rigour with commercial realities.

The Court additionally remarked that revisional courts must exercise restraint, intervening only where the findings of lower courts are perverse or unsupported by evidence. This highlights the limited scope of revisional jurisdiction and reinforces judicial discipline in interfering with concurrent findings.

c. GUIDELINES

i. In prosecutions under Section 138, complainants are not required to initially prove withdrawal of funds or financial capacity unless the accused specifically disputes capacity in the statutory reply.
ii. The statutory presumptions under Sections 118 and 139 must be given full effect once signature on the cheque is admitted.
iii. Defences such as “lost cheque” must be supported by contemporaneous documentary evidence; delayed or back-dated documents carry little probative value.
iv. Where the accused is the signatory and person in charge of a partnership, prosecution is maintainable even if the partnership firm is not arrayed as an accused, provided no contrary pleadings exist.
v. Revisional courts must avoid re-appreciating evidence unless findings of lower courts are perverse, illegal, or wholly unsupported.
vi. Absence of formal accounting records by the complainant cannot, by itself, defeat the statutory presumption unless supported by substantive rebuttal evidence by the accused.

I) CONCLUSION & COMMENTS

The Supreme Court’s judgment reiterates and strengthens the jurisprudence surrounding the statutory presumption under Sections 118 and 139, which has become the cornerstone of cheque dishonour prosecutions. By rejecting the High Court’s insistence on proof of financial capacity at the threshold, the Court protected the efficacy of Section 138 a provision intended to safeguard commercial integrity. The reasoning aligns with earlier decisions affirming that the presumption is not a mere procedural formality but a substantive tool to prevent undue hardship to payees.

The Court’s treatment of partnership liability under Section 141 is noteworthy for its pragmatic approach. Instead of mechanically applying Aneeta Hada, the Court harmonised multiple authorities to recognise that a signatory who is also in charge of the firm bears independent liability. This development will likely guide future cases where procedural objections are raised to unsettle otherwise valid prosecutions.

The modified sentence also illustrates the Court’s emphasis on proportionality and the rehabilitative character of cheque dishonour offences, which are fundamentally economic wrongs rather than moral ones. The Court balanced deterrence with fairness, particularly considering the accused’s age and circumstances.

Overall, the judgment clarifies grey areas concerning financial-capacity proof, partnership liability, and the limits of revisional interference, thereby contributing significantly to the evolving landscape of NI Act jurisprudence.

J) REFERENCES

a. Important Cases Referred

i. Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197.
ii. Rajesh Jain v. Ajay Singh, (2023) 10 SCC 148.
iii. Kishan Rao v. Shankargouda, (2018) 8 SCC 165.
iv. Uttam Ram v. Devinder Singh Hudan, (2019) 10 SCC 287.
v. Rohitbhai Jivanlal Patel v. State of Gujarat, (2019) 18 SCC 106.
vi. Tedhi Singh v. Narayan Dass Mahant, (2022) 6 SCC 735.
vii. Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., (2012) 5 SCC 661.
viii. Aparna A Shah v. Sheth Developers Pvt. Ltd., (2013) 8 SCC 71.
ix. S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.
x. Sunita Palita v. Panchami Stone Quarry, (2022) 10 SCC 152.
xi. John K John v. Tom Varghese, (2007) 12 SCC 714.
xii. Krishna Janardhan Bhat v. Dattatraya G. Hegde, (2008) 4 SCC 54.
xiii. G. Pankajakshi Amma v. Mathai Mathew, (2004) 12 SCC 83.

b. Important Statutes Referred

i. Negotiable Instruments Act, 1881 – Sections 118, 138, 139, 141, 142.
ii. Code of Criminal Procedure, 1973 – Section 482 (revisional powers discussed).