Supreme Court overturns conviction under Section 138 of Negotiable Instruments Act: Rajaram vs. Maruthachalam (2023) INSC 26

Date of the Judgment: 18 January 2023
Citation: 2023 INSC 26
Judges: B.R. Gavai, J. and M.M. Sundresh, J.
Can a conviction under Section 138 of the Negotiable Instruments Act be sustained if the accused demonstrates a probable defense, even if the complainant claims the cheque was issued for a debt? The Supreme Court of India recently addressed this question, examining the interplay between criminal and civil liabilities in cases involving dishonored cheques and promissory notes. The court analyzed whether the High Court was right in reversing the trial court’s decision which had acquitted the accused in a cheque bounce case and also decreed the civil suit for recovery of money on the basis of promissory notes. This judgment was authored by Justice B.R. Gavai, with Justice M.M. Sundresh concurring.

Case Background

In 1992, Rajaram’s wife subscribed to a 5-year chit fund with Maruthachalam. Maruthachalam persuaded Rajaram to submit two blank, signed cheques as security, since his wife did not have a bank account. These cheques were drawn on Rajaram’s business account with Laxmi Vilas Bank Ltd. In 1995, Rajaram’s wife subscribed to another 5-year chit fund with Maruthachalam. By 1997, the bank account associated with the cheques was closed due to non-operation.

The first chit matured in 1997 and the second in 1999. Rajaram and his wife repeatedly asked Maruthachalam to release the chit amounts, but Maruthachalam did not. Instead, he promised to keep the amount as a deposit with interest. When Rajaram threatened legal action, Maruthachalam presented the cheques for encashment without informing Rajaram. Cheque No. 237954, dated 20th October 1999, was in favor of Nachimuthu (Maruthachalam’s brother-in-law) and Cheque No. 237956, dated 25th October 1999, was in favor of Maruthachalam. Both cheques, for Rs. 3,50,000 each, were dishonored on 14th November 1999 with the remark “account closed”.

Statutory notices were sent on 15th November 1999, which Rajaram replied to, denying any legally enforceable debt and claiming Maruthachalam owed him the chit amount with interest. Subsequently, Maruthachalam filed complaints under Section 138 of the Negotiable Instruments Act, which were dismissed by the Trial Court on 10th July 2001. Following this, Maruthachalam and Nachimuthu filed civil suits for recovery of money based on promissory notes.

Nachimuthu claimed Rajaram borrowed Rs. 3 Lakhs on 20th October 1998 and executed a promissory note, issuing a cheque on 20th October 1999 that was dishonored. Maruthachalam claimed a similar transaction for Rs. 3 Lakhs on 25th October 1998, with a dishonored cheque dated 20th October 1999. Both original suits were dismissed on 6th January 2004 and 29th July 2005, respectively, but were later decreed by the High Court on appeal.

Timeline:

Course of Proceedings

The Trial Court dismissed the criminal complaints filed under Section 138 of the Negotiable Instruments Act, finding that the accused had raised a probable defense. The High Court reversed this decision, convicting the accused. In the civil suits, the Trial Court initially dismissed the suits for recovery of money based on promissory notes. However, the High Court reversed these decisions as well, decreeing the suits in favor of the complainants. The present appeals before the Supreme Court challenge the High Court’s judgments in both the criminal and civil matters.

Legal Framework

The case revolves around Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of cheques for insufficient funds. It states that if a cheque is dishonored due to insufficient funds in the drawer’s account, the drawer is deemed to have committed an offense and can be punished with imprisonment or fine or both.

Section 118(a) of the Negotiable Instruments Act, 1881, establishes a presumption that every negotiable instrument was made for consideration. Section 139 of the same Act creates a presumption that the holder of a cheque received it for the discharge of a debt or liability. However, these presumptions are rebuttable.

The Supreme Court, in its analysis, also refers to the principles regarding the burden of proof in criminal cases, where the accused is presumed innocent until proven guilty beyond a reasonable doubt, and in civil cases, where decisions are based on the preponderance of probabilities.

Arguments

Appellant’s Submissions:

• The High Court erred in reversing the Trial Court’s well-reasoned judgments.
• Blank cheques issued in 1992 as security for chit funds were misused by the Respondents in 1999.
• In 1999, the Appellant was no longer the proprietor of M/s Brinda Engineering, and the bank account on which the cheques were drawn had closed in 1997 due to non-operation.
• The Respondents did not have the financial capacity to lend Rs. 3,00,000 each in 1998, when the promissory notes were allegedly executed.
• The Respondents’ claim that the money came from agricultural income is not supported by their Income Tax Returns from 1992-1999.
• Relied on the judgment of the Supreme Court in Basalingappa v. Mudibasappa [(2019) 5 SCC 418].

Respondent’s Submissions:

• The Appellant failed to prove that his wife subscribed to chit funds run by the Respondent.
• The Appellant did not produce any material to show that the cheques and promissory notes were issued only as security for a chit.
• No legal proceedings were initiated by the Appellant for the recovery of the alleged amount due.
• There was no reason for the Appellant to issue a blank cheque in 1992 for a chit to be subscribed in 1995.
• Even if amounts are not accounted for in Income Tax Returns, it is a matter between the defaulter and the Revenue Authority.
• Relied on the judgments of the Supreme Court in Bir Singh v. Mukesh Kumar [(2019) 4 SCC 197], Rohitbhai Jivanlal Patel v. State of Gujarat [(2019) 18 SCC 106] and Kalamani Tex and Anr v. P. Balasubramanian [(2021) 5 SCC 283].

Innovativeness of the argument: The appellant innovatively used the Income Tax Returns to show the lack of financial capacity of the complainant to lend the money.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues. However, the core issues that the court addressed were:

1. Whether the High Court was correct in reversing the Trial Court’s acquittal of the accused under Section 138 of the Negotiable Instruments Act?
2. Whether the High Court was justified in decreeing the civil suits for recovery of money based on promissory notes?
3. Whether the accused had successfully rebutted the presumption under Section 139 of the Negotiable Instruments Act?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The following authorities were considered by the court:

The following legal provisions were considered:

Judgment

The Supreme Court overturned the High Court’s decision in the criminal appeals, reinstating the Trial Court’s acquittal of the accused. However, in the civil appeals, the Supreme Court upheld the High Court’s decision to decree the suits, but modified the decree to the amount already deposited by the appellants in both the civil and criminal proceedings, along with the interest accrued.

The following table shows how the authorities were viewed by the Court:

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that the presumption under Section 139 of the Negotiable Instruments Act is rebuttable. The Court emphasized that the accused had successfully raised a probable defense by demonstrating the complainant’s lack of financial capacity and the circumstances surrounding the issuance of the cheques. This defense met the standard of “preponderance of probability”. The Court also highlighted the difference between the standards of proof in criminal and civil cases, explaining why the accused could be acquitted in the criminal case but still be held liable in the civil suit.

The court’s reasoning was heavily influenced by the factual circumstances of the case, particularly the evidence presented by the accused to rebut the presumption under Section 139 of the N.I. Act.

The court considered the evidence presented by the accused, including the Income Tax Returns of the complainant, and found that the accused had successfully raised a probable defense. The court also noted that the High Court had not justified interfering with the Trial Court’s finding of fact.

The Supreme Court quoted the following from the judgment:

“Once the execution of cheque is admitted Section 139 of the Act mandates a presumption that the cheque was for the discharge of any debt or other liability.”

“The presumption under Section 139 is a rebuttable presumption and the onus is on the accused to raise the probable defence. The standard of proof for rebutting the presumption is that of preponderance of probabilities.”

“In the present case, we are of the considered opinion that the defence raised by the appellant satisfies the standard of “preponderance of probability”.”

The Court did not discuss any alternative interpretations or minority opinions. The decision was unanimous.

The Supreme Court’s decision clarifies that while the presumption under Section 139 of the N.I. Act is a strong one, it is not absolute. The accused can rebut this presumption by presenting evidence that shows a probable defense, which meets the standard of “preponderance of probabilities”. This judgment reinforces the importance of considering the factual circumstances and evidence presented by the accused in cases involving dishonored cheques.

Key Takeaways

• A conviction under Section 138 of the Negotiable Instruments Act can be overturned if the accused presents a probable defense that meets the standard of “preponderance of probabilities”.
• The presumption that a cheque was issued for a debt or liability is rebuttable.
• Evidence of the complainant’s lack of financial capacity can be a valid defense.
• The standard of proof in criminal cases (beyond reasonable doubt) differs from that in civil cases (preponderance of probabilities).
• The court must consider the factual circumstances and evidence presented by the accused in cases involving dishonored cheques.

Directions

The Supreme Court directed that the respondents in both the Civil Appeals would be entitled to withdraw 50% of the amount each from the amount deposited in the Court with interest accrued up to date.

Development of Law

The ratio decidendi of this case is that the presumption under Section 139 of the Negotiable Instruments Act is rebuttable, and the accused can successfully rebut this presumption by presenting a probable defense that meets the standard of “preponderance of probabilities”. This judgment reinforces the principle that the accused can rely on the circumstances and evidence to rebut the presumption under Section 139 of the N.I. Act. There is no change in the previous position of law.

Conclusion

The Supreme Court’s judgment in Rajaram vs. Maruthachalam clarifies the scope of Section 138 of the Negotiable Instruments Act and the rebuttable nature of the presumption under Section 139. The Court emphasized that the accused can successfully rebut the presumption by showing a probable defense, thus highlighting the importance of considering the factual circumstances and evidence presented by the accused. While the Court overturned the High Court’s decision in the criminal appeals, it upheld the High Court’s decision in the civil appeals with modification, demonstrating the differing standards of proof in criminal and civil proceedings.