Section 138 of the Negotiable Instruments Act, 1881 provides for a punishment if a person who has issued a cheque is unable to clear the cheque and the said cheque gets dishonored. A criminal case is made against the person who had issued the cheque (drawer) for issuing a cheque and fraudulently not having sufficient funds in his account or for a stop payment direction to the bank. The maximum punishment in such cases is upto 2 years imprisonment, or fine amounting to double the cheque amount, or both. The intent of the legislature behind such an offence was that if a person has issued a cheque for payment to somebody, in that case he should respect such action and if he fails to make the payment due to insufficiency of funds then he would be criminally tried.
In various cases, the cheque has been lost / stolen by someone and then because the cheque was not credited and the payment was not made by the bank in favor of the person who had presented the cheque to the bank, in such a case will the offence still be made under the provisions of Section 138 of the Negotiable Instruments Act, 1881?
According to Section 138 of the Negotiable Instruments Act,
“138. Dishonour of cheque for insufficiency, etc. of funds in the account.—Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless—
(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice.
Explanation.—For the purposes of this section, ‘debt or other liability’ means a legally enforceable debt or other liability.”
On a simple reading of the above section, we can understand from the said provision that a legal fiction has been created that the person who had drawn the cheque is presumed to have committed an offence under the act in the said circumstances. However, “A legal fiction, as is well known, although is required to be given full effect, has its own limitations. It cannot be taken recourse to for any purpose other than the one mentioned in the statute itself”. On this aspect, the Supreme Court has observed in the case of State of A.P. v. A.P. Pensioners’ Assn.  that,
“30. … In other words, all the consequences ordinarily flowing from a rule would be given effect to if the rule otherwise does not limit the operation thereof. If the rule itself provides a limitation on its operation, the consequences flowing from the legal fiction have to be understood in the light of the limitations prescribed. Thus, it is not possible to construe the legal fiction as simply as suggested by Mr Lalit.”
The Supreme Court in the case of Raj Kumar Khurana v. State of (NCT OF DELHI) and Another, had decided whether if a cheque is lost or reported stolen, can a case of cheque bouncing under 138 NI Act be still made, and observed that,
“Section 138 of the Act moreover provides for a penal provision. A penal provision created by reason of a legal fiction must receive strict construction. (See R. Kalyani v. Janak C. Mehta and DCM Financial Services Ltd. v. J.N. Sareen) Such a penal provision, enacted in terms of the legal fiction drawn would be attracted when a cheque is returned by the bank unpaid. Such non-payment may either be:
(i) because of the amount of money standing to the credit of that account is insufficient to honour the cheque, or
(ii) it exceeds the amount arranged to be paid from that account by an agreement made with that bank.
Before a proceeding thereunder is initiated, all the legal requirements therefor must be complied with. The court must be satisfied that all the ingredients of commission of an offence under the said provision have been complied with.”
The Supreme Court further observed that since the parameters for invoking the provisions of Section 138 NI Act are limited, the Bank’s refusal to honor the cheque is not mischief as per the provisions of Section 138 NI Act.
Thus, as per the Supreme Court, if it can be proved that the cheque was reported stolen or lost and the same was intimated to the bank and / or to the police, a complaint under Section 138 NI Act cannot be made out as there has to be a strict interpretation that has to be given to the provisions of Section 138 because of the legal fiction that has been made in it.
 (2009) 6 SCC 72
 (2005) 13 SCC 161
 (2009) 1 SCC 516
 (2008) 8 SCC 1
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