PRADEEP KUMAR AND ANOTHER versus POST MASTER GENERAL AND OTHERS on 7 February 2022

[2022] 19 S.C.R. 583

PRADEEP KUMAR AND ANOTHER

v.

POST MASTER GENERAL AND OTHERS

(Civil Appeal Nos. 8775-8776 of 2016)

FEBRUARY 07, 2022

[L. NAGESWARA RAO, SANJIV KHANNA AND,

B. R. GAVAI, JJ.]

Negotiable Instruments Act, 1881: ss. 4, 78, 82 – Kisan VikasPatra Rules, 1988 – rr. 14, 15, 19 Government Savings CertificateAct, 1959 s. 12 – Kisan Vikas Patras – Discharge of certificate –Appellants during the years 1995 and 1996 purchased Kisan VikasPatras-‘KVPs’ in joint names from various post offices, of combinedface value on maturity Rs. 32.60 lacs – However, the KVPs wereencashed by one service agent allegedly acting on behalf ofappellants at a different post offices before the maturity date at alower value after the stipulated/lock-in period of holding – Sum ofRs. 25,54,000/- paid by the sub post master, Post Office-respondentno. 4 in cash to the service agent, who cheated the appellants andpocketed the entire amount – Consumer complaint by the appellants– NCDRC, while accepting some negligence on part of respondentsin making the payment, dismissed the complaint against therespondents holding that they had acted in accordance with rr. 14and 15 of the 1988 Rules, since there was no rule at the time ofencashment that the KVPs had to be paid by cheque and could notbe encashed in cash – However, the service agent, was held liableto pay Rs. 25,54,000/– with interest @ 9% pa – On appeal, held:Post office/bank can be held liable for the fraud or wrongs committedby its employees – Respondents will be held liable for the acts ofSub Post Master during the course of his employment – Paymentwas made in violation of the statutory mandate of s.10 and, thus,there is no valid discharge under clause (c) to s. 82 – Furthermore,the service agent not being a ‘holder’, payment to her is not a validdischarge u/s.78 rw s.8 – Respondents would have avoided theliability and claimed valid discharge if they had accepted the KVPswith the identity slip or if they had made payment by cross cheque,in which case, they would have satisfied the condition that they hadmade payment in good faith and there was no negligence, a

A

B

CD

EF

G

H

Arequirement of clause (c) to s. 82 rw s.10 – Respondent Nos. 1 to 4would be jointly and severally liable to pay the maturity value ofthe KVPs as on the date the KVPs were presented to the post officefor encashment – Also appellants entitled to compensation of Rs.1,00,000/-, as also costs.

BAllowing the appeals, the Court

HELD: 1.1 In the impugned judgment, the NCDRC, whileaccepting that some negligence could be attributed to therespondents in making the payment, dismissed the complaintagainst the respondents holding that they had acted in accordanceCwith rules 14 and 15 of the 1988 rules. Rule 19, requiring paymentby cheque when discharge value is more than Rs. 20,000/–, cameinto force and is effective from 28-29th August 2001, whereas inthe present case, the KVPs were encashed at an earlier point oftime. Further, the appellants had not been truthful as it was difficultto fathom as to why they had signed and acknowledged paymentDon the backside of the KVPs and thereafter the KVPs were givento an unknown agent. The appellants, having done so, acted withopen eyes and at their own peril and risk. [Para 9][592-E-F]

1.2 KVPs issued by the post office are a promissoryinstrument as defined by Section 4 of the Negotiable InstrumentsEAct. Section 13 of the NI Act states that a negotiable instrumentmay be payable either to order or to bearer. Sections 15 and 16of the NI Act define ‘indorsement’, ‘indorsee’, ‘indorser’ and‘indorsement in blank’ and ‘in full’. [Para 12][593-C-D; 594-B]

1.3 On a harmonious reading of Sections 8 and 78, it followsFthat payment made to a person in possession of the instrument,but not entitled to receive or recover the amount due thereon inhis name, is not a valid discharge. [Para 15][595-G]

1.4 As per Section 9, a ‘holder in due course’ is a personwho for consideration has become a possessor of the instrumentGif payable to a bearer or if payable to the order to the personmentioned, i.e. the payee, or becomes the indorsee thereof.Holder in due course means the original holder or a transfereein good faith, who has acquired possession of the negotiable H

instrument for consideration, without having sufficient cause tobelieve that there was any defect in the title of the person fromwhom he has derived the title. Negotiation in case of transfershould be before the amount mentioned in the negotiableinstrument becomes payable. Clause(g) to Section 118 states thatunless contrary is proved the ‘holder’ of a negotiable instrumentis presumed to be a ‘holder in due course’. But the provisoqualifies the presumption, where the instrument has beenobtained from its lawful owner or a person in lawful custody thereofby means of an offence or fraud or has been obtained from themaker or acceptor thereof by means of an offence or fraud or byan unlawful consideration. In such cases the burden of provingthat the ‘holder’ is a ‘holder in due course’ lies on the personclaiming to be so. [Para 16][596-C-F]

1.5 When payment is made in accordance with the apparenttenor of the instrument in good faith and without negligence to aperson in possession thereof, it is payment in due course. Therequirement in Section 10 that the payment should be in bothgood faith and without negligence is cumulative. Thus, mere goodfaith is not sufficient. Consequently, Section 3(22) of the GeneralClauses Act, 1897, which defines ‘good faith’ as an act donehonestly, whether done negligently or not, is not sufficient to holdthat the payment made was ‘payment in due course’ under the NIAct. Ascertainment of whether the act of payment is in good faithand without negligence is by examination of the circumstances inwhich payment is made. In other words, antecedent and presentcircumstances should not afford a reasonable ground for believingthat the person to whom payment is made is not entitled to receivepayment of the amount mentioned. While it would not be advisableor feasible to strait-jacket the circumstances, albeit value of theinstrument, other facts that would raise doubts about the reliabilityand identity of the person entitled to receive payment andgenuineness of the instrument in the payer’s mind are relevantconsiderations.[Para 17][597-B-E]

1.6 Presumption under clause (g) to Section 118 would notapply as the service provider is not an indorsee and theinstrument was in the name of the appellants. Further, the service AB

C

D

E

F

G

Aprovider was not a ‘holder in due course’, as obtained possessionof the instrument by means of an offence or fraud. However,Section 78 uses the expression ‘holder’ and not ‘holder in duecourse’. The service provider was not the ‘holder’ as definedunder Section 8 of the NI Act. She was not entitled to sue themaker, acceptor or indorser of the instrument of the amount dueBthereon in her name. Further as elucidated below are primarilypredicating the decision on the application of clause(c) to Section82 read with Section 10of the NI Act as the KYPs were bearerinstruments. The respondent can claim discharge under Section82(c) of the NI Act by showing that they had complied with theCrequirements of Section 10, that is, they had acted in good faithand without negligence [Para 22][602-A-D]

1.7 It appears to be the stand of the respondents, thoughnot specifically stated and argued, that the KVPs were bearerinstruments and hence encashable by the bearer of the

Dinstrument. This stand of the respondents, is partially correct asKVPs are encashable in terms of the 1988 Rules. KVPs are bearerinstruments with conditions to be satisfied before payment is madeto the ‘physical holder’ and presenter of the instrument forencashment, an aspect we would elaborate. The respondents arenot under an obligation to honour KVPs unless the conditionsEspecified are satisfied. However, once it is accepted that the KVPsare bearer instruments, the maker, i.e. the respondents, wouldbe discharged when they make payment in terms of clause(c)to Section 82 of the NI Act, that is, ‘payment made in due course’as defined by Section 10 of the Act. For clarity, if the KVPs areFheld to be payable to order, then the maker, that is, therespondents, would be discharged from liability in termsof Section 78 of the NI Act when they make payment to the‘holder’, which as per Section 8 of the Act means a person who isentitled to possession of the instrument and is also entitled to sue to recover the amount from the maker of the instrument.GThe respondents as the maker of KVPs have not discharged theliability in terms of Section 78 as payment to R was not made tothe ‘holder’ of the KVPs. R not entitled to sue the maker, acceptoror indorser of the instrument for the recovery of the amount duethereon in her name. The KVPs were not indorsed in favour ofHR. [Para 28][604-F-G; 605-A-D]

1.8 The Rule 11 of 1988 Rules states that a certificate shallbe encashable at the post office which issued it. However, a KVPcan also be encashed at any other post office if the Officer–in–charge of that post office is satisfied, on production of the identityslip or on verification from the post office of issue, that the personpresenting the certificate for encashment is entitled toencashment. Thus, it cannot be said that the KVPs are simplebearer instruments payable to anyone who presents the same forencashment and discharge. [Para 29][606-B-C]

1.9 There is nothing on record to suggest that the Officer–incharge of the post office was satisfied on the production of theidentity slip or on verification from the post office of issue thatthe person presenting the certificate for encashment is entitledthereto. Thus, there was violation of Rules 9 and 11 of the 1988Rules. [Para 33][612-C]

1.10 The NCDRC had been rather harsh in holding thatthe appellants were silent and, therefore, guilty of negligence.The finding overlooks that no one would like to avail services ofa stranger or an agent if the work, that is, transfer of KVPcertificates, could be otherwise handled and done with ease.Further, no one would like to lose money to a stranger.Necessarily, the appellants had remained in touch with R but weregiven the impression that the exercise is complex and would taketime. Further they had belief that the post office would take careof their interest, act in good faith and would not be negligent.[Para 35][615-G-H; 616-A]

1.11 The payment was made in violation of the statutorymandate of Section 10 of the NI Act and, therefore, there is novalid discharge under clause (c) to Section 82 of the NI Act.Further, R not being a ‘holder’, payment to her is not a validdischarge under Section 78 read with Section 8 of the NI Act. Therespondents would have avoided the liability and claimed validdischarge if they had accepted the KVPs with the identity slip orif they had made payment by cross cheque, in which case, theywould have satisfied the condition that they had made payment ingood faith and there was no negligence, a requirement of clause(c) to Section 82 read with Section 10 of the NI Act.[Para 36][616-B-C]

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

A1.12 The respondent no. 4 is not a third person but an officerand an employee of the Post Office. Post Office, as an abstractentity, functions through its employees. Employees, asindividuals, are capable of being dishonest and committing actsof fraud or wrongs themselves or in collusion with others. Suchacts of bank/post office employees, when done during their courseBof employment, are binding on the bank/post office at the instanceof the person who is damnified by the fraud and wrongful acts ofthe officers of the bank/post office. Such acts of bank/post officeemployees being within their course of employment will give aright to the appellants to legally proceed for injury, as this is theirConly remedy against the post office. Thus, the post office, like abank, can and is entitled to proceed against the officers for theloss caused due to the fraud etc., but this would not absolve themfrom their liability if the employee involved was acting in thecourse of his employment and duties.The fraud was committedby M.K. Singh, respondent No. 4, in and during the course of hisDemployment. This is clear from the findings recorded in thedepartmental proceedings. [Para 37, 39][616-D-G; 617-C]

1.13 The respondents were faced with a difficult positionas they wanted to act against M.K. Singh, and at the same timealso protect themselves against any liability and claims of theEappellants. Faced with this dilemma, the respondents acted half-heartedly and took action in the proceedings initiated againstM.K. Singh, while they wanted to protect their commercialinterests and defend themselves against claims made by theappellants. The findings recorded in the inquiry report, whichFbecame the basis for the order of dismissal, which punishmentwas subsequently converted to compulsory retirement, would,in our opinion, equally apply to the encashment of all the KVPs.No valid distinction can be drawn between the case that becamethe subject matter of departmental enquiry and other cases of encashment of the KVPs. Hence, the post office/bank can be heldGliable for the fraud or wrongs committed by its employees.Accordingly, the respondents will be held liable for the acts ofM.K. Singh during the course of his employment. [Para 40][618-B-E]

H

1.14 The impugned order passed by the NCDRC dismissingthe consumer case filed by the appellants is set aside. The orderand directions against R remain undisturbed. The consumer caseis allowed by issuing the following directions that the respondentNos. 1 to 4 would be jointly and severally liable to pay the maturityvalue of the KVPs as on the date the KVPs were presented tothe post office for encashment, along with 7% simple interestper annum from the said date till the date of payment; that theappellants would be entitled to a compensation of Rs.1,00,000/-and costs of Rs. 10,000/-; and that the amounts as directed wouldbe paid within the stipulated period from the date ofpronouncement of this judgment. [Para 41][618-E-H]

Indian Overseas Bank v. Industrial Chain Concern(1990) 1 SCC 484 : [1989] 2 Suppl. SCR 27; KeralaState Co–operative Marketing Federation v. State Bankof India and Others (2004) 2 SCC 425 : [2004] 2 SCR1; PonnappaMoothan Sons, Palghat v. Catholic SyrianBank Limited and Others (1991) 1 SCC 113 : [1990] 1Suppl. SCR 542; Canara Bank v. Canara SalesCorporation and Others (1987) 2 SCC 666 : [1987] 2SCR 1138; Tai Hing Cotton Mill Ltd. v. Liu Chong HingBank Ltd. and Others (1985) 2 All ER 947; State Bankof India (Successor to the Imperial Bank of India) v.Smt. Shyama Devi (1978) 3 SCC 399 : [1978] 3 SCR1009 – referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.8775-8776 of 2016.

From the Judgment and Order dated 15.05.2015 of the NationalConsumer Disputes Redressal Commission at New Delhi in O.P. No.148

A

B

C

D

E

F

G

H

Aof 2001 and Order dated 10.07.2015 in RA No.136 of 2015 in OP No.148of 2001.

Aditya Kr. Choudhary, Gurmehar Uaan Singh, Vaibhav PrasadDeo, Saurav Kumar, Ms. Namita Choudhary, Advs. for the Appellants.

Vikramjit Banerjee, ASG, Nalin Kohli, Gurmeet Singh Makker,BMs. Rukhmini Bobde, Rajan Kr. Chourasia, Jitendra Mahapatra, A. K.Yadav, Kedar Nath Tripathy, Advs. for the Respondent.

The Judgment of the Court was delivered by SANJIV KHANNA, J.

The aforementioned civil appeals preferred by Pradeep KumarCand Raj Rani (hereinafter wherever required referred to as ‘theappellants’) assail the judgment dated 15[th] May 2015 passed by theNational Consumer Disputes Redressal Commission, New Delhi, the‘NCDRC’ for short, whereby their complaint registered as ConsumerCase No. 148 of 2001 against the Post Master General, U.P. Circle,DLucknow, Uttar Pradesh, Senior Superintendent of Posts, LucknowDivision, Post Master, Head Post Office Chowk, Lucknow and M.K.Singh, Sub-Post Master, Post Office, Yahiyaganj, Lucknow (hereinafterwherever required collectively referred to as ‘the respondents’) has beendismissed, albeit allowed and decreed against Rukhsana.

E2. The appellants during the years 1995 and 1996 had purchasedKisan Vikas Patras, ‘KVPs’ for short, in joint names from various postoffices located in the State of Uttar Pradesh in different denominationsand with varying dates of maturity. The combined face value on maturitywas Rs.32.60 lacs; however, the KVPs were encashable at the postoffices before the maturity date at a lower value after the stipulated/Flock-in period of holding.

E

3. As per the appellants, in the last week of February 2000, theyhad approached the Post Master, Head Post Office Chowk, Lucknow,with the request to transfer the KVPs to the Chowk Post Office,Lucknow. The appellants were asked to apply with the Chowk PostGOffice. They were informed that the transfer request would be allowedafter due verification of the KVPs and the identity/signatures on thetransfer application from the record with the issuing post office. Theprocess, they were forewarned, being time-consuming and cumbersomewould require several visits to the post office. The Post Master, HeadHPost Office Chowk, Lucknow had recommended that they take services of Rukhsana, an agent appointed by the State of Uttar Pradesh andassociated with the post office. As per the appellants, they were misledto believe that without the help of an agent like Rukhsana the transferwould not be possible and she would take care of their interest. Rukhsana,during the interaction, had informed the appellants that she had beenworking and associated with the post office for fifteen years, and beingaware of the procedures would get the transfer effected without difficulty.On 03.03.2000, Rukhsana came to the residence of the appellants, andas instructed, the appellants signed the original KVPs on the backsideand handed them over to Rukhsana. She also took the Monthly IncomeScheme (MIS) passbook stating that it was required to process thetransfer. Rukhsana executed a receipt and gave it to the appellantsconfirming receipt of the KVPs.

4. Rukhsana did not on her own revert to the appellants and whencontacted had assured them apropos the transfer. Meanwhile, appellantNo.1, i.e. Pradeep Kumar, had to leave Lucknow to join the official dutyin Motihari, Bihar. Raj Rani, the second appellant, remained in touchwith Rukhsana, who had informed that the process was taking time.

5. In June 2000, the appellants learnt that Rukhsana had cheatedseveral investors and had been arrested by the police. Thereupon, theappellants made enquiries and discovered that the KVPs had beenencashed from the Yahiyaganj Post Office and Lal Bagh Post Office. Asum of Rs. 25,54,000/- was paid in cash to Rukhsana, who had pocketedthe entire amount. The appellants state that their enquiries revealinvolvement of M.K. Singh, Sub-Post Master, Post Office, Yahiyaganj,the fourth respondent before us, who, contrary to the rules, had paid thematurity proceeds in cash and not by cheque in the names of the appellants.Underpinning the argument are the Kisan Vikas Patra Rules, 1988, ‘1988Rules’ for short, and the Post Office Saving Bank Manual (Volume II),which we will refer to and delineate later.

6. The appellants made several representations to which therespondents did not respond, whereupon they filed the aforesaid complaintunder the Consumer Protection Act before the NCDRC, praying thatthe respondents and Rukhsana should be directed to pay the appellantsRs. 25,54,000/- along with interest @ 18% per annum. Additional prayerwas for compensation of Rs. 1,00,000/- on account of the mental agonyand harassment along with interest @ 10% per annum and Rs.10,000/-by way of litigation expenses.

A

B

C

D

E

F

G

H

A7. The respondents in the written statement contested thecomplaint. They had inter alia pleaded that the appellants, having signedthe KVPs in token of receipt of the discharge value, cannot complain.Rukhsana was not an agent appointed by the post office. The contractand understanding were between the appellants and Rukhsana, and thefraud having been committed by Rukhsana in her individual capacity, theBrespondents are not vicariously liable. Reference was made to theinstructions issued by the Ministry of Finance, Government of India videletter No. F3/37/91-NS II dated 8[th] November 1993, which we wouldallude to subsequently. M.K. Singh, Sub-Post Master, Post Office,Yahiyaganj, Lucknow filed a separate written statement pleading thatCthe complaint was not maintainable as he had paid the amount to theright person and there was a valid discharge. He had not violated thelaw. M.K. Singh referred to a criminal case already pending against himand that the consumer complaint was not maintainable.

8. Rukhsana, after entering appearance, did not file her defence.

DShe was proceeded ex parte. Rukhsana was prosecuted and convictedon the charges of cheating, criminal breach of trust, etc.

9. In the impugned judgment, the NCDRC, while accepting thatsome negligence could be attributed to the respondents in making thepayment, dismissed the complaint against the respondents holding thatEthey had acted in accordance with Rules 14 and 15 of the 1988 Rules.Rule 19, requiring payment by cheque when discharge value is morethan Rs. 20,000/-, came into force and is effective from 28-29[th] August2001, whereas in the present case, the KVPs were encashed at anearlier point of time. Further, the appellants had not been truthful as itwas difficult to fathom as to why they had signed and acknowledgedFpayment on the backside of the KVPs and thereafter the KVPs weregiven to an unknown agent. The appellants, having done so, acted withopen eyes and at their own peril and risk. The claim that the KVPs werehanded over to Rukhsana without transfer application is unbelievable asappellant No.1 is a well-educated person. The appellants had remainedGsilent for three months and did not make enquiries from the Post Office,Yahiyaganj located merely 800 metres from their residence. Theappellants being negligent, the complaint against the respondents, includingthe fourth respondent, was dismissed. Rukhsana, being a service provider,was held liable to pay Rs. 25,54,000/- with interest @ 9% per annumfrom the date of release of amount from the post office till the date ofH

realisation by the appellants. Rukhsana was also liable to pay Rs. 1,00,000/- as compensation and Rs. 10,000/- as litigation expenses. If the appellantsare unable to recover the amounts due from Rukhsana, they (theappellants) were at liberty to sue the state government for its omissionand commission in appointing Rukhsana as an agent.

10. Rukhsana has neither entered appearance before us to contestthis appeal nor has challenged the judgment allowing the complaint againsther, which has attained finality.

11. Section 3[1] of the Negotiable Instruments Act, 1881, ‘NI Act’for short, states that a ‘banker’ includes any person acting as a bankerand any post office savings bank. In terms of this section, a post officesavings bank is a banker under the NI Act.

12. KVPs issued by the post office are a promissory instrumentas defined by Section 4[2] of the NI Act, as it is an unconditional undertakingsigned by the maker to pay a certain sum of money to, or to the order ofa certain person, or the bearer of the instrument.[3] Section 13[4] of the NIAct states that a negotiable instrument may be payable either to order orto bearer. A negotiable instrument is payable to order, which is expressedto be so payable or which is expressed to be payable to a particular 1 3. Interpretation-clause.—In this Act— 4 * * * * * “Banker”.—5 [“banker” includesany person acting as a banker and any post office savings bank; 2 4. “Promissory note.”—A “Promissory note” is an instrument in writing (not being abank-note or a currency-note) containing an unconditional undertaking, signed by themaker, to pay a certain sum of money only to, or to the order of, a certain person, or tothe bearer of the instrument.

3 In the present case, we are not required to examine whether a KVP would be a ‘bill ofexchange’ in terms of Section 5 of the NI Act.

4 13. “Negotiable instrument”.— (1) A “negotiable instrument” means a promissorynote,bill of exchange or cheque payable either to order or to bearer.

Explanation (i).—A promissory note, bill of exchange or cheque is payable to the orderwhich is expressed to be so payable or which is expressed to be payable to a particularperson, and does not contain words, prohibiting transfer or indicating an intention thatit shall not be transferable.

Explanation (ii).—A promissory note, bill of exchange or cheque is payable to bearerwhich is expressed to be so payable or on which the only or last endorsement is anendorsement in blank.

Explanation (iii).—Where a promissory note, bill of exchange or cheque, either originallyor by endorsement, is expressed to be payable to the order of a specified person, andnot to him or his order, it is nevertheless payable to him or his order at his option.(2) A negotiable instrument may be payable to two or more payees jointly, or it may bemade payable in the alternative to one of two, or one or some of several payees.

A

B

C

D

E

F

G

H

Aperson but does not contain words prohibiting transfer or indicate anintention that the instrument shall not be transferable. It is an acceptedposition that KVPs are negotiable instruments in terms of Section 13 ofthe NI Act. Sections 15 and 16 of the NI Act define ‘indorsement’,‘indorsee’, ‘indorser’ and ‘indorsement in blank’ and ‘in full’. Indorsementfor the purpose of negotiation is made by the maker or holder of theBnegotiable instrument when he signs on the back or face of thereof, on aslip of paper annexed thereto or on a stamp paper for the purpose ofnegotiation. The person signing is called the indorser. If the instrument issigned by the indorser in his name only, it is an indorsement in blank. Ifthe indorser also specifies the person to whom payment is to be made,Cthe indorsement is said to be ‘in full’, and the person so specified iscalled the indorsee.

13. Sections 78 and 82 of the NI Act read:

“78. To whom payment should be made.—Subject to theprovisions of section 82, clause (c), payment of the amount dueDon a promissory note, bill of exchange or cheque must, in order todischarge the maker or acceptor, be made to the holder of theinstrument.”

xx

xxxx

E82. Discharge from liability.—The maker, acceptor or indorserrespectively of a negotiable instrument is discharged from liabilitythereon— (a) by cancellation.—to a holder thereof who cancelssuch acceptor’s or indorser’s name with intent to discharge him,and to all parties claiming under such holder; (b) by release.—toa holder thereof who otherwise discharges such maker, acceptorFor indorser, and to all parties deriving title under such holder afternotice of such discharge; (c) by payment.—to all parties thereto,if the instrument is payable to bearer, or has been indorsed inblank, and such maker, acceptor or indorser makes payment indue course of the amount due thereon.”

G14. Section 78 states that when payment is to be made to the‘holder’ of the instrument, which would include his accredited agentsuch as a banker acting as an agent for collection,[5] the maker or acceptor 5 See Maddali Tirumala Ananta Venkata Veeraraghavaswami v. Srimat KilambiMangamma and Another, AIR 1940 Mad. 90 and Raghubir Mahto v. Ramasray Bhagat,AIR 1939 Pat.347 and also pg. 533 of Bhashyam & Adiga on The NegotiableHInstruments Act, 22[nd] Edition (2019).

is discharged from liability. However, Section 78 is subject to and doesnot apply to payments covered under clause (c) to Section 82 of the NIAct. Clause (c) to Section 82 applies to an instrument payable to thebearer or has been indorsed in blank, and in such cases the maker,acceptor or indorser of a negotiable instrument is discharged from liabilitywhen such maker, acceptor or indorser makes ‘payment in due course’of the amount due thereon. The expressions ‘holder’ and ‘payment indue course’ are ‘terms of art’ as Section 8 defines the expression ‘holder’,whereas Section 10 defines the expression ‘payments in due course’.On a harmonious reading of Section 78 and clause (c) of Section 82, itfollows that different principles apply for discharge from liability whenthe negotiable instrument is payable to bearer or has been indorsed inblank, in which case payment must be made in terms of Section 10,whereas when the negotiable instrument is payable to order, the maker,acceptor or endorser would be discharged from liability when paymentis made to the ‘holder’ of the instrument.

15. Section 8 of the NI Act, defines the expression ‘holder’ as:

“8. “Holder”.—The “holder” of a promissory note, bill of exchangeor cheque means any person entitled in his own name to thepossession thereof and to receive or recover the amount duethereon from the parties thereto. Where the note, bill or cheque islost or destroyed, its holder is the person so entitled at the time ofsuch loss or destruction.”

The requirements of Section 8 are two-fold, and both requirementshave to be satisfied. A holder means a person (i) entitled to possessionof a promissory note, bill of exchange or a cheque, and (ii) entitled to suethe maker, acceptor or indorser of the instrument for the recovery of theamount due thereon in his name[6]. Thus, a person who is in possession ofthe instrument but has no right to recover the amount due thereon fromthe parties thereto is not a ‘holder’. On a harmonious reading of Sections8 and 78, it follows that payment made to a person in possession of theinstrument, but not entitled to receive or recover the amount due thereonin his name, is not a valid discharge.

6 In the context of the present case, we need not examine the controversy and differenceof opinion on the issue of Benami owner, which aspect and issue have been the subjectmatter of several decisions, including Subba Narayana Vathiyar and Others v.Ramaswami Aiyyar (1907) 30 Mad. 88 (F.B.), Bacha Prasad v. Janki Rai and Others,AIR 1957 Pat. 380 and Bhagirath v. Gulab Kanwar, AIR 1956 Raj. 174.We express noopinion in the regard.

A

B

C

D

E

F

G

H

A16. Before we reproduce and refer to Section 10, distinction isrequired to be drawn between ‘holder’ and ‘holder in due course’, anexpression defined in Section 9 in the following manner:

“9. “Holder in due course”.—”Holder in due course” means anyperson who for consideration became the possessor of aBpromissory note, bill of exchange or cheque if payable to bearer,or the payee or indorsee thereof, if [7][payable to order,] before theamount mentioned in it became payable, and without havingsufficient cause to believe that any defect existed in the title ofthe person from whom he derived his title.”

As per Section 9, a ‘holder in due course’ is a person who forCconsideration has become a possessor of the instrument if payable to abearer or if payable to the order to the person mentioned, i.e. the payee,or becomes the indorsee thereof. Holder in due course means the originalholder or a transferee in good faith, who has acquired possession of thenegotiable instrument for consideration, without having sufficient cause Dto believe that there was any defect in the title of the person from whomhe has derived the title. Negotiation in case of transfer should be beforethe amount mentioned in the negotiable instrument becomes payable.Clause (g) to Section 118[8 ]states that unless contrary is proved the ‘holder’of a negotiable instrument is presumed to be a ‘holder in due course’.But the proviso qualifies the presumption, where the instrument has beenEobtained from its lawful owner or a person in lawful custody thereof bymeans of an offence or fraud or has been obtained from the maker oracceptor thereof by means of an offence or fraud or by an unlawfulconsideration. In such cases the burden of proving that the ‘holder’ is a‘holder in due course’ lies on the person claiming to be so.F17. This brings us to Section 10 of the NI Act, which defines theexpression ‘payment in due course’ and reads as follows:

7 Subs. by Act 8 of 1919. s. 2, for “payable to, or to the order of, a payee,”

8 “118. Presumptions as to negotiable instruments. — Until the contrary is proved, thefollowing presumptions shall be made:—Gxxxxxx“(g) that holder is a holder in due course:— that the holder of a negotiable instrument isa holder in due course:

provided that, where the instrument has been obtained from its lawful owner, or fromany person in lawful custody thereof, by means of an offence or fraud, or has beenobtained from the maker or acceptor thereof by means of an offence or fraud, or forunlawful consideration, the burden of proving that the holder is a holder in due courseHlies upon him.”

““Payment in due course” means payment in accordance withthe apparent tenor of the instrument in good faith and withoutnegligence to any person in possession thereof undercircumstances which do not afford a reasonable ground forbelieving that he is not entitled to receive payment of the amounttherein mentioned.”

When payment is made in accordance with the apparent tenor ofthe instrument in good faith and without negligence to a person inpossession thereof, it is payment in due course. The requirement in Section10 that the payment should be in both good faith and without negligenceis cumulative. Thus, mere good faith is not sufficient. Consequently,Section 3(22) of the General Clauses Act, 1897, which defines ‘goodfaith’ as an act done honestly, whether done negligently or not, is notsufficient to hold that the payment made was ‘payment in due course’under the NI Act. Ascertainment of whether the act of payment is ingood faith and without negligence is by examination of the circumstancesin which payment is made. In other words, antecedent and presentcircumstances should not afford a reasonable ground for believing thatthe person to whom payment is made is not entitled to receive paymentof the amount mentioned.[9] While it would not be advisable or feasible tostrait-jacket the circumstances, albeit value of the instrument, other factsthat would raise doubts about the reliability and identity of the personentitled to receive payment and genuineness of the instrument in thepayer’s mind are relevant considerations.

18. Elucidation on the aspect of care required to be exercised bythe bankers to seek statutory protection under Section 131[10] of the NIAct is to be found in Indian Overseas Bank v. Industrial Chain 9 Bank of Maharashtra v. M/s. Automotive Engineering Co., (1993) 2 SCC 97

10 131. Non-liability of banker receiving payment of cheque.— A banker who hasin good faith and without negligence received payment for a customer of a chequecrossed generally or specially to himself shall not, in case the title to the cheque provesdefective, incur any liability to the true owner of the cheque by reason only of havingreceived such payment.

Explanation I.— A banker receives payment of a crossed cheque for a customer withinthe meaning of this section notwithstanding that he credits his customer’s account withthe amount of the cheque before receiving payment thereof.Explanation II.—It shall be the duty of the banker who receives payment based on anelectronic image of a truncated cheque held with him, to verify the prima faciegenuineness of the cheque to be truncated and any fraud, forgery or tampering apparenton the face of the instrument that can be verified with due diligence and ordinary care.

A

B

C

D

E

F

G

H

AConcern,[11] wherein extensive reference has been made to the earliercase laws, Halsbury’s Laws of England and English decisions. Whendeciding whether the bank is negligent it is necessary to see whether therules or instructions of the bank are followed or not, though this may notalways be conclusive. Till an account is opened, banker and customerrelationship is not created, but once the account is opened contractualBrelationship is created. Moreover, mutual rights and obligations betweenthe banker and customer are also created under law. In case of fraudulentencashment of cheques, the collection and payment embraces the bank’sduty to the real owner, if the customer happens not to be the real owner.In such cases, the bank’s liability is protected on the satisfaction of theCconditions mentioned under Section 131 of the NI Act and not otherwise.This is so because the drawer of the cheque is not the customer of thebank while the payee is. Consequently, if there is anything to arousesuspicion regarding the cheque and the ownership of the customer, thebank may find itself beyond the protection of Section 131 of the NI Act.Suspicion may arise when the amount is very large, credibility and identityDof the customer is pied etc. Further, negligence may be established whencollection and payment is made contrary to the tenor of the instrument.Carelessness occurs when there is failure to pay due attention to theactual terms of the mandate. At the same time we must be realistic andpragmatic not to narrow down banker’s protection under Section 131 ofEthe NI Act to make the banker’s position vulnerable. This would bedisadvantageous to the expansion of banking business. Banking haspenetrated and is widespread and, therefore, precautions at one timemay not be a proper guide. Corresponding standard of reasonable careand not stricter liability is conducive and the correct test. The officers ofthe banks are not required to be amateur detectives, albeit they can beFattributed the degree of intelligence ordinarily required from a person intheir position. Therefore, microscopic examination of the cheque paid incollection may not ordinarily be necessary, but this may be required whenfacts are sufficient to raise reasonable ground to suspect that there maybe a wrongdoing.G19. Explanation II to Section 131 of the NI Act inserted witheffect from 6[th] February 2003 states that it is the duty of every bankerwho receives payment based on an electronic image of a truncatedcheque to verify the prima facie genuineness of the cheque, and exercise 11 (1990) 1 SCC 484H

11 (1990) 1 SCC 484H

due diligence and ordinary care to verify fraud, forgery or tamperingapparent on the face of the instrument. Therefore, the bank can escapeonly when the banker acts in good faith and without negligence. Thelatter is the sine qua non for a banker to get absolved under Section131 of the NI Act. Hence, to claim statutory protection the bank willhave to meet the statutory conditions, and the courts will not accept anyattempt to override and get over the obligation.

20. The judgment in Kerala State Co-operative MarketingFederation v. State Bank of India and Others,[12] with reference toSections 131 and 131A of the NI Act, which incorporate a general ruleprotecting the collecting banker against the true owner in the event thecustomer from whom the collecting bank collects the draft or chequehas no title or defective title, observes that the conditions for good faithand without negligence must be strictly complied with, and the onus ofproving that the banker had acted in good faith and without negligence ison the collecting bank. The standard of care to be exercised by thecollecting banker to escape the charge of negligence depends upon thegeneral practice of the bankers, which may change from time to time,further with the enormous spread of banking activities and cases decideda few decades ago may not probably offer unfailing guidance indetermining the question of negligence at a later point of time. The standardof care expected from a collecting banker does not require him to subjectthe cheque to a minute and microscopic examination, yet disregardingcircumstances about the cheque, which on the face of it gives rise tosuspicion, may amount to negligence on the part of the collecting banker.Further, the question of good faith and negligence is to be judged fromthe standpoint of the true owner towards whom the banker owes nocontractual liability but statutory duty by these provisions. It is a pricethat the banker pays for seeking protection under the statute fromotherwise more extensive liability the bank would be exposed to underthe common law. Another significant observation is that the allegation ofcontributory negligence against the paying banker could provide nodefence for the collecting banker who has not collected the amount ingood faith and without negligence. The aforesaid observations regardingSections 131 and 131A of the NI Act would be applied by us appropriatelyto the facts of the present case in terms of the mandate of Section 10 ofthe NI Act. We would, however, clarify that we have not pronounced onthe applicability of Section 131 to the KVPs as encashed.

AB

C

D

E

F

G

H

A21. This Court in U. Ponnappa Moothan Sons, Palghat v.Catholic Syrian Bank Limited and Others,[13] has elaborately consideredand elucidated on Sections 9, 10 and clause (g) of Section 118 of the NIAct. English Law states that the holder in taking the instrument shouldact in good faith. When he has no knowledge of the defect in the titleand acts honestly, whether he is negligent or not, he is deemed to haveBacted in good faith. Indian law is stricter than the English law and requiresthe person to exercise due diligence, which means no person shouldtake a security of this kind from another without using reasonable caution.Delving on the words “sufficient cause to believe”[14] where lack of goodfaith and negligence is alleged, reference is made to Bhashyam andCAdiga on the Negotiable Instruments Act (15[th] Edition at page 171),which quotes a passage from Chalmer’s book ‘The law relating toNegotiable Instruments in British India’(4th Edition) and the legalposition explained by Chitty. The relevant passages and the conclusiondrawn by the Court in U. Ponnappa Moothan Sons, Palghat (supra)are as under:D“13. However, with regard to the legal importance of negligencein appreciating the principle of “sufficient cause to believe” apassage from Chalmers’ book “The Law Relating to NegotiableInstruments in British India” (4th Edn.) may usefully be noted:

“All the circumstances of the transactions whereby the holderEbecame possessed of the instrument have a bearing on thequestion whether he had “sufficient cause to believe” that anydefect existed.

It is left to the Court to decide, in any case where the holderhas been negligent in taking the instrument without close enquiryFas to the title of his transferor, whether such negligence is soextraordinary as to lead to the presumption that the holder hadcause to believe that such title was defective.”

(Emphasis supplied)

This view is more sound and logical. The legal position as explainedGby Chitty may be noted in this context which reads as under:

“While the doctrine of constructive notice does not apply inthe law of negotiable instruments the holder is not entitled todisregard a “red flag” which has raised his suspicions.”

13 (1991) 1 SCC 113H14 The expression “sufficient cause to believe” has been used in Section 9 of the NI Act.

We, therefore, modify the view taken by the Allahabad High Courtin Durga Shah case to the extent that though the failure to provebona fide or absence of negligence would not negative the claimof the holder to be a holder in due course, yet in the circumstancesof a given case, if there is patent gross negligence on his partwhich by itself indicates lack of due diligence, it can negative hisclaim, for he cannot negligently disregard a “red flag” whicharouses suspicion regarding the title. In this view of the matterwe hold that the decision in Raghavji case does not lay downcorrect law. We agree with the view taken by the Allahabad HighCourt with above modification.

xx xx xx

17. From the above discussion it emerges that the Indian definitionimposes a more stringent condition on the holder in due coursethan the English definition and as the learned authors have notedthe definition is based on Gill case. Under the Indian law, a holder,to be a holder in due course, must not only have acquired the bill,note or cheque for valid consideration but should have acquiredthe cheque without having sufficient cause to believe that anydefect existed in the title of the person from whom he derived histitle. This condition requires that he should act in good faith andwith reasonable caution. However, mere failure to prove bonafide or absence of negligence on his part would not negative hisclaim. But in a given case it is left to the Court to decide whetherthe negligence on the part of the holder is so gross and extraordinaryas to presume that he had sufficient cause to believe that suchtitle was defective. However, when the presumption in his favouras provided under S.118(g) gets rebutted under the circumstancesmentioned therein then the burden of proving that he is a ‘holderin due course’ lies upon him. In a given case, the Court, whileexamining these requirements including valid consideration mustalso go into the question whether there was a contract express orimplied for crediting the proceeds to the account of the bearerbefore receiving the same. The enquiry regarding the satisfactionof this requirement invariably depends upon the facts andcircumstances in each case. The words “without having sufficientcause to believe” have to be understood in this background.”

The Court also affirmed that the enquiry regarding satisfaction ofthe requirements invariably depends upon the facts and circumstancesof each case.

AB

C

D

EFG

H

A

A22. In our opinion, the presumption under clause (g) to Section118 would not apply as Rukhsana is not an indorsee and the instrumentwas in the name of the appellants. Further, Rukhsana is not a ‘holder indue course’, for she had, and the respondents accept, obtained possessionof the instrument from the lawful owners, i.e. the appellants, by meansof an offence or fraud. It is an admitted case of the parties that RukhsanaBwas convicted and sentenced for the fraud committed. However, Section78 uses the expression ‘holder’ and not ‘holder in due course’. Rukhsanawas not the ‘holder’ as defined under Section 8 of the NI Act. She wasnot entitled to sue the maker, acceptor or indorser of the instrument ofthe amount due thereon in her name. Further as elucidated below areCprimarily predicating our decision on the application of clause (c) to Section82 read with Section 10 of the NI Act as the KYPs were bearerinstruments. The respondent can claim discharge under Section 82(c) ofthe NI Act by showing that they had complied with the requirements ofSection 10, that is, they had acted in good faith and without negligence.D23. 1988 Rules have been issued in terms of the power conferred D23. 1988 Rules have been issued in terms of the power conferredon the Central Government under Section 12 of the Government SavingsCertificate Act, 1959 (for short, the “GSC Act”). The section states thatthe Central Government can make rules to carry out the purposes of theGSC Act and in particular the rules can be framed for issue and dischargeof such certificates, and transfer and conversion of saving certificatesEand fees to be levied in respect thereof. The ‘holder’ as defined in clause(a) in Section 2 in the GSC Act means an individual who holds the savingscertificate in accordance with the provisions of this Act and any rulesmade thereunder. Clause (d) to Section 2 defines ‘transfer’ as a transferinter vivos and does not include a transfer by operation of law.F

24. Section 4 of the GSC Act deals with holding of the savingscertificates by or on behalf of the minors; Section 5 deals with paymentwhere savings certificate is held by or on behalf of the minor; Section 6deals with nomination by holders of the savings certificates; and Section7 deals with payment of the savings certificates on death of a holder.GSections 4 and 6 of the GSC Act are non-obstante provisions that prevailnotwithstanding anything contained in any law for the time being in force.

25. However, what is important for us are Sections 8 and 11 ofthe GSC Act which read:

“8. Payment to be a full discharge.–– (1) Any payment madeHin accordance with the foregoing provisions of this Act to a minor or to his parent or guardian or to a nominee or to any other personshall be a full discharge from all further liability in respect of thesum so paid.

(2) Nothing in sub-section (1) shall be deemed to preclude anyexecutor or administrator or other representative of a deceasedholder of a savings certificate from recovering from the personreceiving the same under section 7 the amount remaining in hishands after deducting the amount of all debts or other demandslawfully paid or discharged by him in due course of administration.

(3) Any creditor or claimant against the estate of a holder of asavings certificate may recover his debt or claim out of the sumpaid under this Act to any person and remaining in his handsunadministered, in the same manner and to the same extent as ifthe latter had obtained letters of administration to the estate of thedeceased.

xx xx xx

11. Protection of action taken in good faith.-–– No suit orother legal proceeding shall lie against any officer of theGovernment or any prescribed authority in respect of anythingwhich is in good faith done or intended to be done under this Act.”

In our opinion, Sections 8 and 11 of the GSC Act have no applicationin the present case. Section 8 states that payment would be in fulldischarge when payment is made in accordance with the foregoingprovisions of the GSC Act, that is, payment, where the certificate is heldby or on behalf of the minor, in terms of Section 5 and payment on thedeath of a holder in terms of Section 7. The expressions ‘minor’, ‘hisparent’ or ‘guardian’ in Section 8 of the GSC Act are persons referredto in Section 5 of the GSC Act and the word ‘nominee’ and ‘any otherperson’ are persons referred to in Section 7 of the GSC Act. Theexpression ‘any other person’ in our opinion would refer to the personscovered by sub-section (5) to Section 7 of the GSC Act, which reads asunder:

“–7. Payment on death of holder.

xx xx xx

(5) Nothing contained in this section shall be deemed to requireany person to receive payment of the sum due on a savings A

B

C

D

E

F

G

H

Acertificate before it has reached maturity or otherwise than inaccordance with the terms of the savings certificate.”

26. Thus, sub-section (1) to Section 8 would come to the aid ofthe respondents only when the payment is made where the savingscertificate is held by or on behalf of the minor and to the nominee or toBa person mentioned in sub-section (5) of Section 7 on death of the holder.It is not a provision of general or universal application and does notdischarge the respondents of their liability when Sections 5 and 7 of theGSC Act do not apply. Section 8(1) does not protect payments not coveredand governed by Sections 5 and 7 of GSC Act. Sections 5 and 7 do notapply to the present case.

C

27. Similarly, Section 11 protects any officer of the Governmentor any prescribed authority in respect of anything done or intended to bedone under the GSC Act. The subject matter of the present proceedingsdoes not relate to anything which is done or intended to be done by therespondents under the GSC Act. No such plea or defence has beenDpleaded and raised by the respondents. Interestingly, Section 3[15] of theGSC Act states that notwithstanding anything contained in any otherlaw for the time being in force, no transfer of the savings certificateshall be valid unless it is made with previous consent in writing of the‘prescribed’ authority. The word ‘prescribed’ defined in Section 2(b)[16]Emeans prescribed by the rules under the GSC Act.

28. Before we advert to the aspect of standard of care requiredto be exercised by the post office under the 1988 Rules while encashingKVPs or other instruments, we would like to briefly consider whetherthe KVPs in question were bearer instruments or payable to order. ItFappears to be the stand of the respondents, though not specifically statedand argued, that the KVPs were bearer instruments and hence encashableby the bearer of the instrument. This stand of the respondents, in ouropinion, is partially correct as KVPs are encashable in terms of the 1988Rules. KVPs are bearer instruments with conditions to be satisfied beforepayment is made to the ‘physical holder’ and presenter of the instrumentGfor encashment, an aspect we would elaborate. The respondents are 15 3. Restrictions on transfer of savings certificate.–Notwithstanding anythingcontained in any law for the time being in force, no transfer of a savings certificate,whether made before or after the commencement of this Act, shall be valid unless it hasbeen made with the previous consent in writing of the prescribed authority.16 2(b) “prescribed” means prescribed by rules made under this Act;H

not under an obligation to honour KVPs unless the conditions specifiedare satisfied. However, once we accept the position that KVPs arebearer instruments, the maker, i.e. the respondents, would be dischargedwhen they make payment in terms of clause (c) to Section 82 of the NIAct, that is, ‘payment made in due course’ as defined by Section 10 ofthe Act. For clarity, we would also state that if the KVPs are held to bepayable to order, then the maker, that is, the respondents, would bedischarged from liability in terms of Section 78 of the NI Act when theymake payment to the ‘holder’, which as per Section 8 of the Act meansa person who is entitled to possession of the instrument and is also entitledto sue to recover the amount from the maker of the instrument. Therespondents as the maker of KVPs have not discharged the liability interms of Section 78 as payment to Rukhsana was not made to the ‘holder’of the KVPs. To repeat, Rukhsana was not entitled to sue the maker,acceptor or indorser of the instrument for the recovery of the amountdue thereon in her name. The KVPs were not indorsed in favour ofRukhsana.

29. To decide whether the KVPs were simple bearer instrumentsor a bearer instrument with conditions, it is essential to glean the relevant1988 Rules. These Rules are also relevant when we examine the questionof good faith and negligence. Rule 11 of the 1988 Rules, which relates tothe place of encashment, postulates as under:

“11. Place of encashment:- A certificate shall be encashable atthe Post Office of its issue: - Provided that a certificate may beencashed at any other Post Office if the officer-in-charge of thatPost Office is satisfied on production of identity slip or onverification from the Post Office of issue that the person presentingthe certificate for encashment is entitled thereto.”

Rule 11 refers to the identity slip which is issued in terms of Rule9 and reads:

“9. Identity slip:- (1) if a request for the issue of an identity slipis made at any time by holder or holders of a certificate, an identityslip shall be issued to such holder or holders on his or their signingthe identity slip.

(2) The identity slip shall be surrendered at the time of the finaldischarge of the certificate or in case of its loss, a declaration ofsuch loss shall be furnished to the Post Office.”

A

B

C

D

E

F

G

H

ATherefore, in terms of Rule 9, an identity slip is to be issued to theholder or the holders of the certificate when they request to the saideffect when and after the KVPs are issued. The holder/holders have tosign the identity slip. Sub-rule (2) to Rule 9 states that the identity slipshall be surrendered at the time of final discharge of the certificate, or incase of loss, a declaration of the said loss shall be furnished to the postBoffice. Rule 11 states that a certificate shall be encashable at the postoffice which issued it. However, a KVP can also be encashed at anyother post office if the Officer-in-charge of that post office is satisfied,on production of the identity slip or on verification from the post office ofissue, that the person presenting the certificate for encashment is entitledCto encashment. Thus, it cannot be said that the KVPs are simple bearerinstruments payable to anyone who presents the same for encashmentand discharge.

30. Rule 13 deals with premature encashment and prescribes inthe table the amount payable, albeit we need not reproduce the saidDrule, for even in such cases, Rule 11 read with Rule 9 will apply.Significantly, the respondents have issued Post Office Bank Manual(Volume II), which vide clauses 23(1) and 23(2) mandate as under:

“ENCASHMENT OF CERTIFICATE

23(1) A certificate may be presented for encashment at any PostEOffice in India doing S.B. work. If it neither stands registered atthe office nor is it accompanied by an Identity slip, the holder willbe requested to make an application expressing his desire to encashthe certificate at that office giving therein the name of the PostOffice at which it stands registered, the full particulars of theFcertificate, viz., the serial number with the prefixed letters, dateof issue and the registration number and the full name and addressas given in the application for purchase. Below his signature shouldbe given his present address. The particulars of the certificateshall be verified by the Postmaster from the original certificatewhich shall be returned to the holder for presentation after aboutGa week. The application thus obtained shall be date-stamped andsent to the office of registration for verification and return within3 days. The office at which payment is desired by the holdershould remind the office of registration if no reply is receivedwithin a week. In the meantime enquiries may be made at thelocal address about the identity of the applicant. On receipt back E

G

H

of the application from the office of registration, the holder will beinformed of the fact and requested to present the certificate forencashment. For revised procedure in such cases see rule 31.The certificate to be encashed should be examined to see:

(a) whether the period of non-encashability has expired. In thefollowing circumstances, however, a certificate may be encashedbefore the expiry of the period of non-encashability :-

(i) On the death of the holder or both of the holders in case ofjoint holders;

(ii) On forfeiture by a pledgee being gazetted, GovernmentOfficer;

(iii) When the holding is in excess of the prescribed limits;

(iv) When the certificate has been issued in contravention ofthe Rules;

(v) When ordered by a Court of law; and

(vi) On the death of one of the joint holders in case of KVPand N.S.C. (VIII-Issue)

(b) That the name of the holder, the number of the certificate anddate of its issue appearing in the application or the identity slip,corresponds with the entries on the certificate;

(c) That the certificate is not the one which has been reported aslost or stolen before issue from Post Offices in the PostmasterGeneral’s Circulars; (d) That the certificate has not been attached by a Court of law; (e) That the identity slip if issued to the holder is surrendered, andit is in prescribed form. In case the identity slip is one on whichthe specimen signature of the holder is pasted, it should be carefullyscrutinized to see that the specimen signature is not a substitutedone and the stamp impression on it is intact; (f) That the certificate is not the one in lieu of which a duplicatehas been issued; (g) If full maturity value is claimed, the correctness of the date ofmaturity should be verified with reference to the Date Stamp and A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

the date of issue noted on the certificate and the application or theidentity slip; and (h) That the certificate has not been reported at any time by theholder as having been lost, stolen or destroyed. In such casesprocedure laid down in Note 2 below Sub-Rule(2) of Rule 43 willbe followed.

Note: Procedure for encashment of saving certificatesaccompanied by Identity Slips in office other than the office ofregistration :-

In case the holder presents Identity Slip, prior verification fromthe office of registration is not necessary. A reference may bemade to the office of registration/issue to reconfirm the identityof the holder/genuineness of the Identity Slips. No undueharassment of delay should be caused to a bonafide investor/holder.If National Savings Certificates are presented for encashmentwith Identity Slip at an office other than office of registrationafter one year from the date of maturity of the certificate, areference may be made to the office of registration for priorverification, if Postmaster considers it necessary.

(2) If the counter Assistant is satisfied on all the above points, hewill calculate the amount payable and then ask the holder to signthe endorsement on the certificate “Received payment ofRs..............” in words and figures in his presence. If the certificateis presented for encashment through a messenger, theendorsement should have been signed already and the certificateaccompanied by a letter of authority containing the specimensignature of the messenger. It should be seen whether thesignature below the endorsement and the letter of authority if any,agrees with that on the application or the identity slip. Thecertificate will then be placed before the Postmaster who willsatisfy himself about the authenticity of the certificate and thetitle of the holder. He will also ensure that the examination of thecertificate has been carried out in the manner prescribed and thatthe amount payable as noted on the certificate is correct. He willthen pass order ‘Pay’ under his signature at a suitable place abovethe place for the holder’s signature to authorize payment. Paymentwill then be made by the counter Assistant. When payment is made to a messenger, his signature or thumb impression must betaken in addition to the signature of the holder, below the holder’sendorsement, “Received payment of Rs.................”. In case thesignature of the holder below the endorsement does not agreewith that on record, payment will be made only after the holderhas been identified and his signature has been attested by theidentifier (other than the agent or messenger of the holder) who isknown to the post office or by anyone of the following indicatedat items (i) to (v) below with whose signature and seal of officethe post office is familiar or on production of any proof mentionedin item (vi) below:

(i) District organizers of the National Savings Organization;

(ii) Justice of Peace, Magistrates (including honorary Magistrates)and Judges;

(iii) Members of Parliament or a Legislative Assembly/Council,Presidents of Municipalities Local Bodies and Sarpanches ofPanchayats;

(iv) Principals of colleges and Head of high schools recommendedby the Education Secretary or Directors of Public Institutions;

(v) A Government officer under his seal of office; and

(vi) A Postal identity card, a passport or any other identity cardcontaining holder’s photograph issued by a proper authority. Theparticulars of such a proof having been produced should berecorded on the certificate under the signature of the supervisingofficer.

The attestation should be in the following terms:

“The applicant is known to me and has signed/his thumb impressionhas been taken in my presence”.

The date of discharge and payment of interest of each certificatewill be entered against the entry relating to the certificate on thereverse of the application under the dated initials of thePostmaster.”

31. Letter No. 95-8/98-SB dated 18.08.1999 issued by the DirectorGeneral, Postal Services, states that any payment exceeding Rs.20,000/- is to be made by cheque. It reads:- A

B

C

D

E

F

G

H

A“The D.G posts has instructed that the discharge value of KisanVikas Patras exceeding Rs. 20,000 should be paid by cheque ratherthan by cash by the post offices in future.”

The impugned judgment, however, refers to the “Post Office SmallSavings Scheme” (Part one) written by Mr. A.N Dureja, AssistantBDirector General (Retd.), P&T Accounts and Finance Services, videRule 19, which reads:

“19. Payment of discharge value of Kisan Vikas Patras by cheque:-The discharge value of Kisan Vikas Patras if it is Rs.20,000/- ormore should be paid by cheque only by the post offices as providedCin Section 269-T of the Income Tax Act. [D.G Posts letter No. 5-20/UP-06/2000-INV dated 28/29.8.2001]”.”

Relying on this circular, the NCDRC held that the aforesaidstipulation had come into force with effect from 28/08/2001-29/08/2001.Impugned judgment does not refer to the letter No. 95-8/98-SP datedD18.08.1999 quoted above. To ascertain the correct position, we had askedthe learned counsel appearing for the respondents to state whether themandate issued vide letter No. 95-8/98-SB dated 18.08.1999 that thepayment for the discharge value of KVPs, if such value is Rs. 20,000/-or more, should be by cheque rather than by cash is correct. The learnedcounsel for the respondents took time but has not reverted, which weEtreat as an acknowledgement that the stand taken by the appellants iscorrect.

32. At this stage, it would be relevant to refer to Rules 14 and 15of the 1988 Rules, which read as under:

F“14. Discharge of certificate.–

(1) The person entitled to receive the amount due under a certificateshall, on its encashment, sign on back thereof in token of havingreceived the payment.

(2) In the case of a certificate purchased on behalf of a minorGwho has since attained majority, the certificate shall be signed bysuch a person himself; but his signature shall be attested either bythe person who purchased it on his behalf or by any other personwho is known to the Postmaster.

15. Responsibility of Post Office.–H

The Post Office shall not be responsible for any loss caused to aholder by any person obtaining possession of a certificate andfraudulently encashing it.”

A

While examining the said Rules, we shall also deal with theallegation of contributory negligence on the part of the appellants. Rule14(1) states that the person entitled to receive the amount due, on theencashment of the certificate, shall sign on the back thereof in token ofhaving received the payment. It prescribes a procedure for discharge ofthe instrument and the requirement of signature on the back of thecertificate by the person receiving the amount in token of having receivedthe payment. It is not the case of the respondents that the appellants hadreceived the payment. Rule 14(1), to our mind, has nothing to do withthe question of good faith and negligence on the part of the banker, thatis, the Post Office. Rule 14(1) would not absolve the Post Office fromthe statutory obligation and consequent liability in terms of clause (c) toSection 82 read with Section 10 of the NI Act. Rule 15 states that thePost Office shall not be responsible for any loss caused to the holder ifany other person obtains possession of the certificate and fraudulentlyencashes the same. Rule 15 does not absolve the respondents in case ofnegligence or absence of good faith. It applies when the post officeotherwise acts in accordance with law in good faith and withoutnegligence. Rule 15 would not protect when an officer of the post officeis involved or a perpetrator of the fraud.

B

C

D

E

33. When we turn to the facts of the present case and examinethe question of negligence (and also lack of good faith as indicated) onthe part of the respondents, the following factual matrix is established:

(i) The KVPs were in the name of the appellants.

F

(ii) The KVPs had not been endorsed in the name of Rukhsana,though the appellants had signed the same at the placementioned for discharge and payment of the KVPs.

(iii) The KVPs were not presented for encashment at the postoffice of its issue. In terms of Rule 11, the KVPs couldGhave been encashed at a post office other than the postoffice which issued them, only when the Officer-in-chargeof the post office is satisfied, on the production of the identityslip or on verification from the post office of issue, that the H

612SUPREME COURT REPORTS

Aperson presenting the KVPs for encashment is entitledthereto.

(iv) The KVPs, when presented, were without the identity slipof the appellants. As per the mandate of Rule 9, identityslip had to be surrendered at the time of discharge of theBcertificate or in case of loss, a declaration of such loss hadto be furnished to the post office. No declaration wasfurnished.

(v) There is nothing on record to suggest that the Officer-in-charge of the post office was satisfied on the production ofCthe identity slip or on verification from the post office ofissue that the person presenting the certificate forencashment, namely Rukhsana, is entitled thereto. Thus,there was violation of Rules 9 and 11 of the 1988 Rules. Italso follows that Rukhsana was not the ‘holder’.

D(vi)There is also violation of Clauses 23(1) and 23(2) of thePost Office Bank Manual (Volume 2), which have beenquoted above. Clause 23(1) states that when a KVP ispresented for encashment at any post office in India doingsavings bank work, but such KVP is not registered in thatpost office and not accompanied by an identity slip, theEholder will be required to make an application expressinghis desire to encash the KVP at such other post office andin the application state the name of the post office wherethe KVP stands registered, full particulars of the certificate,that is, the serial number, date of issue and the registrationFnumber. In addition, he is also required to give his full nameand address as given in the application for purchase. Theapplication should also state, below the presenter’s signature,his present address. In the present case, no writtenapplication was made by the appellants and filed along withthe certificates presented for encashment by Rukhsana.GRukhsana, as noticed above, is not the ‘holder’ of theinstrument which was issued in the name of the appellantswho were entitled to payment.

(vii) Clause 23(1) prescribes a detailed procedure for verificationby the post master when a KVP, not accompanied by identity H

slip, is presented for encashment at the post office otherthan the registered post office. It mandates that the presentershall make an application which shall be date stamped. Afterone week, the post master would return the originalcertificate to the holder for presentation. The verificationexercise includes ascertaining the authenticity of thesignature on the application with the signature of the personin whose name the certificate was issued. In case of amismatch, a detailed procedure for authentication ofsignature is prescribed.

(viii) The KVPs were in the name of the appellants. Rukhsanawas an agent appointed by the State of Uttar Pradesh forfacilitating the customers/holders of the savings instruments.Payment of huge amount of Rs. 25,54,000/- to Rukhsana incash by itself per se is an act of negligence. It indicateslack of bona fides and consequently absence of good faith.Further, this is a case of fraud by an officer of the postoffice. The payment in cash was contrary and in violationof letter No.95-8/98-SB dated 18.08.1989, which mandatesthat payments exceeding Rs.20,000/- should be paid bycheque and not in cash.

34. We would now examine the issue and question of contributorynegligence. Legal position on contributory negligence has been stated inKerala State Co-operative Marketing Association (supra). Exhaustivediscussion on the said aspect is to be found in Canara Bank v. CanaraSales Corporation and Others,[17 ]which was a case where forgedcheques were encashed and the customer had raised a claim amongstothers against its banker. The bank had raised the plea of negligence ofthe customer. On the aspect of civil obligation of a customer in terms ofbanking contract and in tort law, this decision approves the followingobservations made by the Privy Council in Tai Hing Cotton Mill Ltd. v.Liu Chong Hing Bank Ltd. and Others:[18]

“37. Then the Privy Council proceeded to consider the weightiersubmissions advanced by the bank (1) a wider duty on the part ofthe customer to act with diligence which must be implied into thecontract and alternatively that such a duty arises in tort from the 17 (1987) 2 SCC 666

18 (1985) 2 All ER 947

A

B

C

D

E

F

G

H

A

relationship between banker and customer. The Privy Councilparted company with the observation by the Court of Appeal hereand repelled the plea that it was necessary to imply into a contractbetween a banker and the customer a wider duty and that it wasnot a necessary incident of banker/customer relationship that thecustomer should owe his banker a wider duty of care. This duty isin the form of an undertaking by the customer to exercisereasonable care in executing his written orders so as not to misleadthe bank or to facilitate forgery. The Privy Council accepted thatan obligation should be read into the contract as the nature of thiscontract implicitly requires. In other words “the term sought to beimplied must be one without which the whole transaction wouldbecome futile and inefficacious”. After referring to some earlierdecisions, the Privy Council rejected the implied term submissionand set out the limits of the care of the customer and the functionsof the banks in the following words: (All ER p. 956)

B

C

D“One can fully understand the comment of Cons JA that thebanks must today look for protection. So be it. They canincrease the severity of their terms of business, and they canuse their influence, as they have in the past, to seek to persuadethe legislature that they should be granted by statute furtherprotection. But it does not follow that because they may needEprotection as their business expands the necessary incidentsof their relationship with their customer must also change. Thebusiness of banking is the business not of the customer but ofthe bank. They offer a service, which is to honour theircustomer’s cheques when drawn on an account in credit orFwithin an agreed overdraft limit. If they pay out on chequeswhich are not his, they are acting outside their mandate andcannot plead his authority in justification of their debit to hisaccount. This is a risk of the service which it is their businessto offer. The limits set to the risk in the Macmillan andGreenwood cases can be seen to be plainly necessary incidentsGof the relationship. Offered such a service, a customer mustobviously take care in the way he draws his cheque, and mustobviously warn his bank as soon as he knows that a forger isoperating the account.””

D

Significantly the judgment states that the bank, when it makesHpayment of a forged cheque, it cannot resist the claim of the customer with the defence of negligence on the customer’s part. The bank cansucceed on the plea of negligence of the customer when it establishesadoption, estoppel or rectification on the customer’s part. On the aspectwhen negligence constitutes estoppel, it was held:

“29… For negligence to constitute an estoppel it is necessary toimply the existence of some duty which the party against whomestoppel is alleged owes to the other party. There is a duty ofsorts on the part of the customer to inform the bank of theirregularities when he comes to know of it. But by mere negligenceone cannot presume that there has been a breach of duty by thecustomer to the bank. The customer should not by his conductfacilitate payment of money on forged cheques. In the absenceof such circumstances, mere negligence will not prevent acustomer from successfully suing the bank for recovery of theamount.”

On the question of acquiescence on part of the customer, CanaraBank (supra) holds:

“30. A case of acquiescence also cannot be flourished against theplaintiff. In order to sustain a plea of acquiescence, it is necessaryto prove that the party against whom the said plea is raised, hadremained silent about the matter regarding which the plea ofacquiescence is raised, even after knowing the truth of the matter.As indicated above, the plaintiff did not, during the relevant period,when these 42 cheques were encashed, know anything about thesinister design of the second defendant. If the bank had proved tothe satisfaction of the court that the plaintiff had with full knowledgeacknowledged the correctness of the accounts for the relevantperiod, a case of acquiescence against the plaintiff would beavailable to the bank. That is not the case here.”

35. In addition to the aforesaid legal position, we find that theNCDRC had been rather harsh in holding that the appellants were silentand, therefore, guilty of negligence. The finding overlooks that no onewould like to avail services of a stranger or an agent if the work, that is,transfer of KVP certificates, could be otherwise handled and done withease. Further, no one would like to lose money to a stranger. Necessarily,we would accept that the appellants had remained in touch with Rukhsanabut were given the impression that the exercise is complex and would A

B

C

D

E

F

G

H

Atake time. Further they had belief that the post office would take care oftheir interest, act in good faith and would not be negligent.

36. In the light of the aforesaid discussion, it can be concludedthat the payment was made in violation of the statutory mandate ofSection 10 of the NI Act and, therefore, there is no valid dischargeBunder clause (c) to Section 82 of the NI Act. Further, as held above,Rukhsana not being a ‘holder’, payment to her is not a valid dischargeunder Section 78 read with Section 8 of the NI Act. The respondentswould have avoided the liability and claimed valid discharge if they hadaccepted the KVPs with the identity slip[19] or if they had made paymentby cross cheque, in which case, they would have satisfied the conditionCthat they had made payment in good faith and there was no negligence,a requirement of clause (c) to Section 82 read with Section 10 of the NIAct.

37. Now, we advert to the second issue as to whether therespondents would be liable for the wrongs and act of M.K. Singh,Drespondent No. 4, in connivance or at the behest of Rukhsana. We beginby noting that M.K. Singh is not a third person but an officer and anemployee of the Post Office. Post Office, as an abstract entity, functionsthrough its employees. Employees, as individuals, are capable of beingdishonest and committing acts of fraud or wrongs themselves or inEcollusion with others.[20] Such acts of bank/post office employees, whendone during their course of employment, are binding on the bank/postoffice at the instance of the person who is damnified by the fraud andwrongful acts of the officers of the bank/post office. Such acts of bank/post office employees being within their course of employment will givea right to the appellants to legally proceed for injury, as this is their onlyFremedy against the post office. Thus, the post office, like a bank, canand is entitled to proceed against the officers for the loss caused due tothe fraud etc., but this would not absolve them from their liability if theemployee involved was acting in the course of his employment and duties.

38. This Court in State Bank of India (Successor to the ImperialGBank of India) v. Smt. Shyama Devi[21] held that for the employer to beliable, it is not enough that the employment afforded the servant or agent 19 In which case, Rukhsana would be a ‘holder’ under Section 8 of the NI Act and on theKVPs being indorsed in her favour, the respondents could not have denied payment toher under Section 78 of the NI Act.

20 See Punjab National Bank v. Smt. Durga Devi and Others (1977) SCC Online Del 93H21 (1978) 3 SCC 399

an opportunity of committing the crime, but what is relevant is whetherthe crime, in the form of fraud etc., was perpetrated by the servant/employee during the course of his employment. Once this is established,the employer would be liable for the employee’s wrongful act, even ifthey amount to a crime. Whether the fraud is committed during thecourse of employment would be a question of fact that needs to bedetermined in the facts and circumstances of the case.

39. In the context of the factual background of the present case,we have no doubt in our mind that the fraud was committed by M.K.Singh, respondent No. 4, in and during the course of his employment.This is clear from the findings recorded in the departmental proceedings,which are as follows:

“I have gone through the records of the case, enquiry report andother related documents of the case and have come to conclusionthat the charged official Shri M.K. Singh utterly failed to observethe Rule 23(1) of PO S.B. Manual Volume-II, i.e., procedure forencashment of certificates purchased from other than the officeof issue. The Enquiry Officer has also agreed in enquiry reportthat the procedure outlined in Rule-23(1) of PO SB Manual Vol-II was not followed. The Enquiry Officer has also agreed that theinvestor has not given any application NC-032 for transfer of KVPsas provided in Rule 37 (1) and Rule 37(5) of PO SB ManualVolume II and Rule 3(1) (ii) of CCS (Conduct) Rules 1964 asmentioned in Article-I of Memo of Charges.

The Enquiry Officer in his enquiry report has agreed that theinvestor is a literate person and thus the endorsement of investorat the time of payment of KVPs should have been obtained in thehandwriting of investor as provided in Rule 23(2) of SB ManualVol-II. Otherwise if it was encashed through messenger (NSAgent) / authority letter should be produced. The Enquiry Officerhas also agreed that the endorsement on KVPs at the time ofpayment was made by Smt. Rukhsana NS Agent. As such it isclear that the payment was made on the basis of already signedendorsement for receipt of payment. The charged official did notobserve the procedure outlined in Rule 23(2) of SB Man. Volume-II. Thus it was against the provisions of Rule 23(2) of SB ManualVolume-II and Rule-3(1)(ii) of CCS (Conduct) Rules 1964 asmentioned in article II of Memo of Charges.

AB

C

D

E

FG

H

AThe Enquiry Officer in his enquiry report has suspected whetherthe payment of KVP was made to the investor or not. Thus it wasagainst the provision of Rules 3(1)(i) and 3(1)(iii) of CCS (Conduct)Rules 1974 as mentioned in article-II of Memo of charges.”

40. On behalf of the respondents, it is urged that the aforesaidBobservations are limited and confined to only one KVP. In our opinion,this contention would not help the respondents since it is apparent to usthat the respondents were faced with a difficult position as they wantedto act against M.K. Singh, and at the same time also protect themselvesagainst any liability and claims of the appellants. Faced with this dilemma,the respondents acted half-heartedly and took action in the proceedingsCinitiated against M.K. Singh, while they wanted to protect theircommercial interests and defend themselves against claims made by theappellants. The findings recorded in the inquiry report, which becamethe basis for the order of dismissal, which punishment was subsequentlyconverted to compulsory retirement, would, in our opinion, equally applyDto the encashment of all the KVPs. No valid distinction can be drawnbetween the case that became the subject matter of departmental enquiryand other cases of encashment of the KVPs. Hence, the post office/bank can be held liable for the fraud or wrongs committed by itsemployees. Accordingly, the respondents will be held liable for the actsof M.K. Singh during the course of his employment.E

41. In view of the aforesaid findings, we allow these appeals andset aside the impugned order passed by the NCDRC dismissing theconsumer case filed by the appellants. The order and directions againstRukhsana remain undisturbed. We would allow the consumer case byissuing the following directions:F

(i) Respondent Nos. 1 to 4 would be jointly and severally liableto pay the maturity value of the KVPs as on the date theKVPs were presented to the post office for encashment,along with 7% simple interest per annum from the said datetill the date of payment.

G

(ii) The appellants would be entitled to a compensation of Rs.1,00,000/- and costs of Rs. 10,000/-.

(iii) The amounts as directed above would be paid within eightweeks from the date of pronouncement of this judgment.In case of failure to pay the compensation amount withinH

the aforesaid time, the respondents would be additionallyliable to pay simple interest @ 7% per annum on thecompensation amount of Rs.1,00,000/- from the date ofpronouncement of this judgment till the date of payment.

Nidhi Jain and Anurag Bhaskar

Appeals allowed.

(Assisted by : Priyanshu Agarwal, LCRA)

A

B

C

D

E

F

G

H