Cheque bouncing under S. 138 N.I. Act where cheque amount is more...

Cheque bouncing under S. 138 N.I. Act where cheque amount is more than liability

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Question: There was an MOU signed between A and B where A had to give a cheque as interest portion of borrowed money already returned and B had to return certain documents to A. The same was a part of a settlement arrived before the metropolitan magistrate. The cheque delivered by party A to party B for Rs. 1 Lakh bounced. The reason for bouncing was that party A insisted that the liability should be reduced to the extent of tax deductible at source as that was the legal liability for the interest. Party B however said that the cheque is fully encashable and if there is a legal liability beyond the cheque amount to deposit the tax, that should be deposited by party A and party B will refund it when it is adjusted in the tax account. The question is whether party A is punishable under the negotiable instrument act for bouncing the cheque in the given circumstances.

cheque1Answer: The basic issue in your case appears to be that the amount to be paid was Rs. 1 lakh on account of interest to be paid on the borrowed money that has already been returned. The cheque was issued for the said amount of Rs. 1 lakh. However, subsequently, A appears to have realised that he has to first deduct the TDS from the amount of interest to be paid to B. Presuming that TDS is deductible under Section 194A of Income Tax Act (i.e., Interest other than “Interest on Securities”), it would be at the rate of 10% of the interest income; so, it would be Rs. 10,000/-. Thus, contention of A is that he is required to pay to B only Rs. 90,000/- while Rs. 10,000/- will go towards the TDS to be deposited with the IT department.

Thus, the facts mentioned by you boil down to the following: a cheque amounting to Rs. 1,00,000/- has been issued to discharge the liability of Rs. 90,000/-. Here, I am presuming that it is a “liability” within the meaning of Section 138 of the Negotiable Instruments Act, since interest clause must have been a part of the agreement of the original loan agreement. Now, the question is whether bouncing of such cheque amounts to an offence.

Section 138 is applicable when the cheque is issued for “the discharge, in whole or in part, of any debt or other liability”. Here, the amount of the cheque is for the discharge of “whole” of the amount of liability, and in fact, the amount is more than the “whole” of the liability.

There is no decided case by the Supreme Court on similar facts, except one case that I’ll point out shortly (but which does not mention the facts fully).

I feel that the fact remains that the cheque was issued for discharge of the liability and the whole of the liability was to be discharged. However, subsequently, it turned out that the liability was a little less (i.e., excluding the TDS part). But, the fact remains that the liability was still there at the time of issuing the cheque or even when it bounced. Further, when the cheque was issued, it was apparently issued to discharge the full liability and A apparently did not know that TDS amount has to be reduced and he appears to have realised it later. Only subsequent change is that the liability is now a little less. But, the fact remains that the cheque was issued for discharging the liability and even if the TDS amount is excluded there was a legally enforceable liability. Therefore, I feel that a case under Section 138 is made out for the cheque dishonour. This is based on the limited facts mentioned by you and the way I have understood the limited facts.

In this regard, it may also be noted that Section 139 of the said Act raises a presumption that the cheque which has been dishonoured, had been issued for the discharge of any debt or other liability. Section 139 is reproduced as under:

139. Presumption in favour of holder.—It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability.”

Since the law raises this presumption against the accused in the case where a cheque is dishonoured, the burden would be on the accused to prove that such cheque was given only as a security and not for discharge of a debt or other liability.

Let me now point out the Supreme Court judgment in somewhat similar facts, though this judgment is not very detailed and full facts are not disclosed therein. In the case of V.G. Saraf & Sons v. H. Ranjith, (2009) 5 SCC 141 : 2009 Cri LJ 2788, the bill represented only for Rs 1,61,000 and that cheque was for a sum of Rs 1,86,606.95. It was pointed out that the evidence of the complainant was to the effect that the accused was liable to pay a sum of Rs 1,81,256.75 and the cash discount and the sales tax. Further facts are not mentioned in the judgment. The high court had acquitted the accused on these facts, but the Supreme Court set aside the conviction and remitted the case back to the high court to reconsider the matter afresh. As I mentioned above, this SC judgment is very sketchy and is not very helpful, but it does appear that the cheque was for an amount more than the bill amount and the acquittal was set aside to consider the case afresh. My efforts to get the high court judgment in this case were unsuccessful. In case I get more details, I’ll update my answer.

But, in view of what I have mentioned above, on the basis of limited information provided by you, I feel that since the cheque was meant to discharge the liability (though, later, it was found that the cheque amount was slightly more than the liability), bouncing of the cheque may attract offence under Section 138 N.I. Act. Rest, of course, depends on the courts deciding the case which will have full facts before them. You may also consult some good advocate with the detailed facts.

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