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Supreme Court On Essential Ingredients of Section138 of N.I.Act

Essential ingredient via Juristic Or Natural Person,   for attracting a liability under  Section 138 of N.I.Act,1881

The first and foremost essential ingredient for attracting a liability under  Section 138 of N.I.Act,1881 is

a) that the person who is to be made liable should be the drawer of the cheque and

b) should have drawn the cheque 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 discharge, in whole or part, of any debt or other liability

The Honourable Apex Court dealt with the same issue in the case of Krishna Texport and Capital Markets Ltd. v. Ila A. Agrawal & Ors, (AIR 2015 SC 2091), has held as under-

“The notice under Section 138 is required to be given to the ‘drawer’ of the cheque so as to give the drawer an opportunity to make the payment and escape the penal consequences. No other person is contemplated by Section 138 as being entitled to be issued such notice. The plain language of Section 138 is very clear and leaves no room for any doubt or ambiguity. There is nothing in Section 138 which may even remotely suggest the issuance of notice to anyone other than the drawer.”

The court further proceeded to check as to offence, u/s 138,  is only attributable to human beings or to juristic person also . (for ease of understanding the paragraph is divided into various sections )

"The learned counsel for the respondents has relied upon the case of Anil Hada v. Indian Acrylic Ltd., (2000) 1 SCC 1, wherein this Court held – “Normally an offence can be committed by human beings who are natural persons. Such offence can be tried according to the procedure established by law. But there are offences which could be attributed to juristic person also. If the drawer of a cheque happens to be a juristic person like a body corporate it can be prosecuted for the offence under Section 138 of the Act.

"Now there is no scope for doubt regarding that aspect in view of the clear language employed in Section 141 of the Act. In the expanded ambit of the word ‘company’ even firms or any other associations of persons are included and as a necessary adjunct thereof a partner of the firm is treated as director of that company.” (Emphasis supplied) “Thus when the drawer of the cheque who falls within the ambit of Section 138 of the Act is a human being or a body corporate or even firm, prosecution proceedings can be initiated against such drawer.

"In this context the phrase ‘as well as’ used in Sub-section (1) of Section 141 of the Act has some importance. The said phrase would embroil the persons mentioned in the first category within the tentacles of the offence on a par with the offending company. Similarly the words ‘shall also’ in Sub- section (2) are capable of bringing the third category persons additionally within the dragnet of the offence on an equal par.

"The effect of reading Section 141 is that when the company is the drawer of the cheque such company is the principal offender under Section 138 of the Act and the remaining persons are made offenders by virtue of the legal fiction created by the legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons can also become liable for the offence.”

The said ratio was further reiterated in the recent decision of Apex Court, decided on 16th September 2015,  in the matter of Jitendra Vora vs Bhavana Y.Shah & Ors .The said order is reproduced herein below .


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IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO.1001 OF 2010

JITENDRA VORA …APPELLANT

VERSUS

BHAVANA Y. SHAH & ANR. …RESPONDENTS

JUDGMENT

Pinaki Chandra Ghose, J.

This appeal is directed against the judgment and order dated 1st April,
2009 passed by the High Court of Judicature at Bombay in Criminal
Application No.940 of 2008 whereby the High Court has rejected the prayer
for leave to appeal against the judgment of the Trial Court.
The brief facts of this case are as follows: The appellant supplied
goods to M/s. Shah Agencies. The 1st and 2nd

respondents carried their
business in the names of M/s. Shah Enterprises and M/s. Shah Agencies. In
part discharge of the liability of M/s. Shah Agencies, two cheques for Rs.
5 lakhs each, both dated 20th August, 2000, drawn on the Vysya Bank Ltd.,
S.P. Road, Secunderabad, signed by Respondent No.2 as Power of Attorney
Holder of Respondent No.1, were issued on an account maintained by M/s.
Shah Enterprises.

On presentation, both the cheques were dishonoured due to insufficient
balance in the account of M/s. Shah Enterprises. A demand notice dated 8th
March, 2001 was served upon respondent Nos.1 & 2 which was duly received by
them on 13th March, 2001. The respondents failed and neglected to comply
with the said notice of demand. Hence, a complaint was lodged before the
Metropolitan Magistrate, 28th Court, Esplanade, Mumbai. The said complaint
was numbered as CC No.505/S/01 dated 17th April, 2001. The said complaint
was lodged against the accused respondents describing accused No.1 as the
Proprietor of M/s. Shah Enterprises and accused No.2 as Power of Attorney
Holder of the said M/s. Shah Enterprises. The Trial Court acquitted the
respondents on the ground that the appellant did not institute the case
against the partnership firm i.e. M/s. Shah Enterprises.

Being aggrieved by the said order passed by the Metropolitan Magistrate,
the appellant filed an application for leave to appeal under sub-section
(4) of Section 378 of the Code of Criminal Procedure, 1973, before the
Bombay High Court. The High Court by its order dated April 1, 2009 held
that the applicant has not made out a case for grant of leave to appeal
under Section 378(4) Cr.P.C. and rejected the said application for leave to
appeal. The High Court held that the case made out in the complaint was
that the goods were sold and supplied to M/s. Shah Enterprises and the
liability was of M/s. Shah Enterprises. While in the affidavit in lieu of
examination-in-chief, the appellant herein came out with a case that the
liability was that of M/s. Shah Agencies as goods were sold and supplied to
M/s. Shah Agencies and it was not the case of the appellant that the
accused had agreed to take over and discharge the liabilities of M/s. Shah
Agencies.

The question which arose before us is whether the High Court was correct in
coming to such a conclusion. The High Court duly perused the complaint,
affidavit in lieu of examination-in-chief of the applicant, his cross-
examination and other material documents on record. From these documents it
appears that notice of demand had been addressed to the first respondent in
her capacity as a Proprietor of M/s. Shah Enterprises, and to the second
respondent in his capacity as the Power of Attorney Holder of M/s. Shah
Enterprises. In the notice itself it has been stated that the goods were
sold and supplied to the Proprietor of M/s. Shah Agencies. In the notice it
has been further stated that the appellant is engaged in business of
manufacturing and selling of synthetic Polymers/Resins and in response to
the orders from the 2nd respondent as Proprietor of Shah Agencies, the
applicant has supplied goods from time to time and the disputed cheques
were issued in discharge of the liabilities of such supply. The notice was
addressed to the Proprietor and the constituted Attorney of M/s. Shah
Enterprises, but there is no specific averment that the liability of M/s.
Shah Agencies was taken over by M/s. Shah Enterprises. In the complaint,
the first respondent was impleaded as Proprietor of M/s. Shah Enterprises
and the second respondent was impleaded as a Power of Attorney Holder of
M/s. Shah Enterprises.

After perusing the notice and the averments made in the complaint and the
examination-in-chief, the High Court found that the case made out by the
appellant/applicant in the aforesaid affidavit is that accused No.1 was one
of the partners of M/s. Shah Enterprises. It is not asserted that accused
No.2 is the partner of the said firm but what is stated is that accused
No.2 is the husband of accused No.1 and Power of Attorney Holder of M/s.
Shah Enterprises. After perusing the aforesaid facts, the High Court came
to the conclusion as follows:

“It is not the specific case of the applicant made out in the complaint
that the first accused in his capacity of proprietor of Shah Enterprises
and the second accused in his capacity of power of attorney of Shah
Enterprises had agreed to take over and discharge the liability of M/s.
Shah Agency. Reliance is placed by the applicant on the letter at Exh.P-5.
Apart from the fact that the said letter is no evidence to show that the
liability of Shah Agency was taken over by Shah Enterprises, as stated
earlier, the said case was never made out by the applicant in the
complaint. The said case made out in the complaint is that the liability is
of M/s. Shah Enterprises and not of M/s. Shah Agencies. The letter dated
7th December 2000 at Exh. P-5 is not signed by accused No.1 who according
to the applicant is the proprietor or partner of Shah Enterprises. The
letter has been sent by accused No.2 in his capacity as constituted
attorney of Shah Agencies. Therefore, the letter cannot be termed as a
document under which the liability of Shah Agencies was specifically agreed
to be taken over by the Shah Enterprises or by the accused Nos.1 and 2.”
In these circumstances, the High Court held that no case is made out for
grant of leave and rejected the application.

Learned counsel appearing on behalf of the appellant contended before us
that both the Courts below have failed to appreciate that the complaint was
essentially filed against the accused in their personal capacities since at
the time of filing of the complaint, the appellant believed that M/s. Shah
Enterprises was a proprietary concern of respondent No.1. He further
contended that respondent No.2 was a signatory of the cheques and he was
incharge of the affairs of M/s. Shah Enterprises. According to the learned
counsel, both the Courts adopted highly technical view of the matter. It is
not in dispute that the cheques were drawn from the account maintained with
M/s. Shah Enterprises. When this Court asked the learned counsel for the
appellant whether there is any liability of M/s. Shah Agency, then it was
submitted that the cheques were drawn by M/s. Shah Enterprises but the
liability, as would be evident from the examination-in-chief, is that of
M/s. Shah Agency. Learned counsel further submitted that Section 141 of the
Negotiable Instruments Act, 1881 (hereinafter referred to as ‘the NI Act’)
has no application because the partnership firm was not arrayed as an
accused. He further submitted that respondent No.2 is liable being a
signatory of both the cheques and he was incharge of M/s. Shah Enterprises.
On the contrary, it is submitted by the learned counsel appearing on behalf
of the respondents that both the Trial Court as well as the High Court
rightly came to the conclusion that the complaint was not maintainable
against the partnership firm since cheques were issued on behalf of the
first respondent. Furthermore M/s. Shah Enterprises was never given any
statutory notice nor it was arrayed as an accused before the Metropolitan
Magistrate. He further submitted that a three Judge Bench of this Court in
the case of Aneetha Hada vs. Godfather Travel and Tours Pvt. Ltd., (2012) 5
SCC 661, held that for maintaining the prosecution under the NI Act, the
company should be made a party irrespective of the fact that its Director
has been arrayed as an accused. Learned counsel for the respondents
further submitted that this appeal should be dismissed since the material
facts have been suppressed from the Court. The appellant ceased to be the
Proprietor of M/s. Satyen Polymer as per the deed of assignment cum
conveyance dated 3.4.2008. The said fact was deliberately suppressed from
the High Court as well as from the Trial Court. The appellant did not make
M/s. Shah Enterprises as a party on whose account the cheque was drawn.
Furthermore, M/s. Shah Enterprises had no outstanding liabilities. The
complainant himself admitted in his cross-examination that nothing was sold
to Shah Enterprises and at no point of time Shah Agencies has been
prosecuted. The appellant further admits that he has no account with Shah
Enterprises and he has running account with Shah Agencies. He also
admitted that the transactions and dealings with Shah Agencies are
reflected in the books of accounts. He further admitted that Shah
Enterprises is not liable to pay any amount M/s. Satyen Polymers, and there
were no transactions with Shah Enterprises. Learned counsel for the
respondents submitted that in these circumstances, this appeal should be
dismissed.

We have heard the learned counsel appearing for the parties and we have
perused the evidence placed before us. From a bare reading of Section 138
of the NI Act, the first and foremost essential ingredient for attracting a
liability under this Section is that the person who is to be made liable
should be the drawer of the cheque and should have drawn the cheque 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 discharge, in whole or part,
of any debt or other liability. In this context, this Court in the case of
Krishna Texport and Capital Markets Ltd. v. Ila A. Agrawal & Ors, (AIR 2015
SC 2091), has held as under-

“The notice under Section 138 is required to be given to the ‘drawer’ of
the cheque so as to give the drawer an opportunity to make the payment and
escape the penal consequences. No other person is contemplated by Section
138 as being entitled to be issued such notice. The plain language of
Section 138 is very clear and leaves no room for any doubt or ambiguity.
There is nothing in Section 138 which may even remotely suggest the
issuance of notice to anyone other than the drawer.”

The learned counsel for the respondents has relied upon the case of Anil
Hada v. Indian Acrylic Ltd., (2000) 1 SCC 1, wherein this Court held –
“Normally an offence can be committed by human beings who are natural
persons. Such offence can be tried according to the procedure established
by law. But there are offences which could be attributed to juristic person
also. If the drawer of a cheque happens to be a juristic person like a body
corporate it can be prosecuted for the offence under Section 138 of the
Act. Now there is no scope for doubt regarding that aspect in view of the
clear language employed in Section 141 of the Act. In the expanded ambit of
the word ‘company’ even firms or any other associations of persons are
included and as a necessary adjunct thereof a partner of the firm is
treated as director of that company.”
(Emphasis supplied)
Thus when the drawer of the cheque who falls within the ambit of Section
138 of the Act is a human being or a body corporate or even firm,
prosecution proceedings can be initiated against such drawer. In this
context the phrase ‘as well as’ used in Sub-section (1) of Section 141 of
the Act has some importance. The said phrase would embroil the persons
mentioned in the first category within the tentacles of the offence on a
par with the offending company. Similarly the words ‘shall also’ in Sub-
section (2) are capable of bringing the third category persons additionally
within the dragnet of the offence on an equal par. The effect of reading
Section 141 is that when the company is the drawer of the cheque such
company is the principal offender under Section 138 of the Act and the
remaining persons are made offenders by virtue of the legal fiction created
by the legislature as per the section. Hence the actual offence should have
been committed by the company, and then alone the other two categories of
persons can also become liable for the offence.”

In our opinion, the High Court has correctly come to the conclusion that
the liabilities of M/s. Shah Agencies were never taken over by M/s. Shah
Enterprises. Therefore, the reasoning given by the High Court, in our
opinion, is absolutely flawless and we find no ground to interfere with the
concurrent findings of the Trial Court and the High Court. Therefore, the
present appeal is devoid of any merit. Accordingly, this appeal is
dismissed.

…..……………………….J
(Pinkai Chandra Ghose)

…..……………………..J
(R.K. Agrawal)
New Delhi;
September 16, 2015


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by Anand Mishra, Founder Advocate, AMLEGALS

( The author is a leading advocate handling cases in Tribunals & High Courts of India. He can be contacted on anand@amlegals.com and for more pl referwww.amlegals.com )

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