SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV SINGH versus THE STATE OF JHARKHAND & ANR. on 28 October 2021

SUPREME COURT REPORTS

[2021] 10 S.C.R.

ASRIPATI SINGH (SINCE DECEASED) THROUGH HIS SONGAURAV SINGH

v.

THE STATE OF JHARKHAND & ANR.

B(Criminal Appeal Nos. 1269-1270 of 2021)

OCTOBER 28, 2021

[M. R. SHAH AND A. S. BOPANNA, JJ.]

Negotiable Instruments Act, 1882: s.138 – Respondent no.2obtained financial assistance of Rs.2 crore from the appellant dueCto previous acquaintance and assured that the amount would bereturned in June/July 2015 – Towards the same, cheques werehanded over to appellant – Based on assurance of payment,appellant presented the cheques for realisation in October 2015,however same were dishonoured on account of insufficiency ofDfunds – Appellant filed complaint under s.420 IPC and also unders.138 NI Act – Respondent no.2 on appearance filed dischargeapplication before trial court which was rejected – High Court,however, set aside the order of trial court – Hence instant appeal –Held: Mere dishonourment of the cheque cannot be construed asan act on the part of the respondent No.2 of deliberate intention toEcheat and the mens rea in that regard cannot be gathered from thepoint the amount was received – In the facts and circumstances ofthe instant case, there was no sufficient evidence to indicate thatthe offence under s.420 IPC was made out – However, on dishonourof cheques, the consequences contemplated under the NegotiableFInstruments Act would befall on respondent No.2 – Respondent No.2may have the defence in the proceedings which will be a matter fortrial – In any event, the respondent No.2 in the fact situation cannotmake a grievance with regard to the cognizance being taken by theMagistrate or the rejection of the petition seeking discharge at thisstage – Penal Code, 1860 – s.420.G

Negotiable Instruments Act, 1882: s.138 – Claim ofrespondent no.2-drawer that the cheque was towards towards“security” and the same could not have been treated a a chequeissued towards the discharge of legally recoverable debt andtherefore, complaint under s.138 was not maintainable – Held: AH

SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAVSINGH v. THE STATE OF JHARKHAND

cheque issued as security pursuant to a financial transaction cannotbe considered as a worthless piece of paper under everycircumstance – ‘Security’ in its true sense is the state of being safeand the security given for a loan is something given as a pledge ofpayment – It is given, deposited or pledged to make certain thefulfilment of an obligation to which the parties to the transactionare bound – If in a transaction, a loan is advanced and the borroweragrees to repay the amount in a specified time frame and issues acheque as security to secure such repayment; if the loan amount isnot repaid in any other form before the due date or if there is noother understanding or agreement between the parties to defer thepayment of amount, the cheque which is issued as security wouldmature for presentation and the drawee of the cheque would beentitled to present the same – On such presentation, if the same isdishonoured, the consequences contemplated under s.138 and theother provisions of N.I. Act would flow.

Partly allowing the appeal, the Court

Conclusion

Partly allowing the appeal, the Court

HELD: 1.1 There is no error in the conclusion reached bythe High Court that no case punishable under Section 420 IPCcan be made out in these facts. This is due to the fact that evenas per the case of the appellant, the amount advanced by theappellant is towards the business transaction and a loan agreementhad been entered into between the parties. Under the loanagreement, the period for repayment was agreed and the chequehad been issued to ensure repayment. It is no doubt true that thecheques when presented for realisation were dishonoured. Themere dishonourment of the cheque cannot be construed as anact on the part of the respondent No.2 with a deliberate intentionto cheat and the mens rea in that regard cannot be gathered fromthe point the amount had been received. In the present facts andcircumstances, there is no sufficient evidence to indicate theoffence under Section 420 IPC is made out and therefore on thataspect, there is no reason to interfere with the conclusion reachedby the High Court. [Para 11][125-H; 126-A-D]

1.2 The High Court has itself arrived at the conclusion thatthe instant case becomes a simpliciter case of non-refunding ofloan which cannot be a basis for initiating criminal proceedings.

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AThe conclusion to the extent of holding that it would not constitutean offence of cheating, would be justified. However, when theHigh Court itself has accepted the fact that it is a case of non-refunding of the loan amount, the first aspect that there is a legallyrecoverable debt from the respondent No.2 to the appellant isprima-facie established. [Para 12][126-D-E]B

Sampelly Satyanarayana Rao v. Indian RenewableEnergy Development Agency Ltd. [2016] 6 SCR 531;M/s. Womb Laboratory Pvt. Ltd. v. Vijay Ahuja and Anr.(Criminal Appeal No.1382-1383 of 2019) – relied on.

CSudhir Kr. Bhalla v. Jagdish Chand and Others 2008 7SCC 137 : [2008] 7 SCR 459 – held inapplicable Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd.(2014) 12 SCC 539: [2014] 5 SCR 56 – referred to.

2.1 When a cheque is issued even though as ‘security’,Dthe consequence flowing therefrom is also known to the drawerof the cheque and if the cheque is presented and dishonoured,the holder of the cheque/drawee would have the option of initiatingthe civil proceedings for recovery or the criminal proceedingsfor punishment in the fact situation, but in any event, it is not forEthe drawer of the cheque to dictate terms with regard to the natureof litigation. [Para 17][130-D-E]

2.2 If the above principle is kept in view, under the loanagreement in question the respondent No.2 though had issuedthe cheques as security, he had also agreed to repay the amountFduring June/July 2015, the cheque which was held as securitywas presented for realization on 20.10.2015 which is after theperiod agreed for repayment of the loan amount and the loanadvanced had already fallen due for payment. Therefore, primafacie the cheque which was taken as security had matured forpayment and the appellant was entitled to present the same. OnGdishonour of such cheque the consequences contemplated underthe Negotiable Instruments Act had befallen on respondent No.2.Respondent No.2 may have the defence in the proceedings whichwill be a matter for trial. In any event, respondent No.2 in thefact situation cannot make a grievance with regard to thecognizance being taken by the Magistrate or the rejection of theH

petition seeking discharge at this stage. [Para 18][130-F-H;131-A]

petition seeking discharge at this stage. [Para 18][130-F-H;131-A]

3.1 The notice as issued indicates that the appellant has atthe very outset after the cheque was dishonoured, intimated therespondent no.2 that he had agreed to clear the loan by June/July 2015 after which the appellant had presented the cheque forencashment on 26.10.2015 and the assurance to repay has notbeen kept up. In the said circumstance, the cheque though issuedas security at the point when the loan was advanced, it was issuedas an assurance to repay the amount after the debt becomes duefor repayment. The loan was in subsistence when the chequewas issued and had become repayable during June/July 2015 andthe cheque issued towards repayment was agreed to be presentedthereafter. If the amount was not paid in any other mode beforeJune/July 2015, it was incumbent on the respondent No.2 toarrange sufficient balance in the account to honour the chequewhich was to be presented subsequent to June/July 2015.[Paras 20, 21][131-G-H; 132-A]

3.2 These aspects would prima-facie indicate that there wasa transaction between the parties towards which a legallyrecoverable debt was claimed by the appellant and the chequeissued by the respondent No.2 was presented. On such chequebeing dishonoured, cause of action had arisen for issuing a noticeand presenting the criminal complaint under Section 138 of N.I.Act on the payment not being made. The further defence as towhether the loan had been discharged as agreed by respondentNo.2 and in that circumstance the cheque which had been issuedas security had not remained live for payment subsequent theretoetc. at best can be a defence for the respondent No.2 to be putforth and to be established in the trial. In any event, it was not acase for the Court to either refuse to take cognizance or todischarge the respondent No.2 in the manner it has been doneby the High Court. Therefore, though a criminal complaint underSection 420 IPC was not sustainable in the facts and circumstancesof the instant case, the complaint under section 138 of the N.IAct was maintainable and all contentions and the defencewere to be considered during the course of the trial. [Para 22][132-B-E]

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ACase Law Reference

BCRIMINAL APPELLATE JURISDICTION: Criminal AppealNos.1269-1270 of 2021.

From the Judgment and Order dated 17.12.2019 of the High Courtof Jharkhand at Ranchi in Cr. M.P. No.2635 of 2017 and 2655 of 2017.

M. C. Dhingra, Rajeev Ranjan Tewari, Gaurav Dhingra, VikrantCYadav, Ghanshyam Chaudhary, Aviral Saxena, Raghvendra Shukla, Advs.for the Appellant.

Rajiv Singh, AAG, Keshav Murthy, Ashwin Vaish, Raj KishorChoudhary, Shakeel Ahmed, Ms. Malvika Raghavan, Ms. GirjeshChaturvedi, Anupam Bhati, Vinod Pandey, Vishnu Sharma, Abhishek,DAdvs. for the Respondents.

The Judgment of the Court was delivered by

A. S. BOPANNA, J.

1. The appellant is before this Court assailing the order datedE17.12.2019 passed by the High Court of Jharkhand at Ranchi in CriminalM.P. No.2635 of 2017 and Criminal M.P. No.2655 of 2017. Through thesaid order, the High Court has allowed the said Crl.Miscellaneous Petitionsand has set aside the orders dated 04.07.2016 and 13.06.2019 passed bythe Judicial Magistrate First Class, Palamau in Complaint Case No.1833Fof 2015. The learned Judicial Magistrate by the order dated 04.07.2016had taken cognizance of the offence alleged against the respondent No.2herein. By the order dated 13.06.2019 the learned Judicial Magistratehad rejected the petition filed by the respondent No.2 seeking dischargein the said criminal complaint.

G2. The brief facts leading to the present case as pleaded is thatthe appellant and the respondent No.2 are known to each other inasmuchas the respondent No.2 and the daughter of the appellant were pursuingtheir education together in London. On their return to India, the respondentNo.2 had settled in Bangalore and due to the earlier acquaintance, thecordial relationship amongst the families had continued. The respondentHNo.2 on learning that the appellant was involved in business, had approached him at Daltonganj and sought financial assistance to thetune of Rs.1 crore so as to enable the respondent No.2 to invest thesame in his business. Since the respondent No.2 had assured that thesame would be returned, the appellant placed trust in him and the appellantclaims to have advanced further sum and in all a total sum of Rs.2crores during the periods between January 2014 to July 2014. The saidamount was paid to respondent No.2 by transferring from the accountof appellant’s daughter and also from the account of the appellant.Towards the said transaction, four agreements are stated to have beenentered acknowledging the receipt of the loan. The said agreementswere reduced into writing on non-judicial stamp papers bearing No.B489155, B489156, B489157 and B489159.

3. The respondent No.2 assured that the amount would be returnedduring June/July 2015. Towards the same, three cheques amounting toRs.1 crore was handed over to the appellant. Thereafter, three morecheques for Rs.1 crore was also given. The appellant is stated to havemet respondent No.2 during July 2015 when the respondent No.2 assuredthat the amount will be repaid during October 2015. Based on suchassurance, the appellant presented the cheques for realisation on20.10.2015. On presentation, the said cheques were returned due to‘insufficient funds’ in the bank account of respondent No.2. The appellanttherefore got issued a legal notice as contemplated under Section 138 ofthe Negotiable Instruments Act (“N.I. Act” for short). Since therespondent No.2 had taken the money on the assurance that the samewould be returned but had deceived the appellant, the appellant contendedthat the respondent No.2 had cheated him and accordingly the complaintwas filed both under Section 420 of IPC as also Section 138 of N.I. Act.

The appellant had submitted the sworn statement of himself andwitnesses. The learned Judicial Magistrate through the order dated04.07.2016 took cognizance and issued summons to the respondent No.2.

4. The respondent No.2 on appearance filed a miscellaneouspetition seeking discharge from the criminal proceeding, which wasrejected by the order dated 13.06.2019. It is in that background, therespondent No.2 claiming to be aggrieved by the order dated 04.07.2016and 13.06.2019 approached the High Court in the said criminalmiscellaneous petitions. The High Court, through the impugned orderhas allowed the petitions filed by the respondent No.2. The appellanttherefore claiming to be aggrieved is before this Court in these appeals.

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A5. We have heard Mr. M.C. Dhingra, learned counsel for theappellant, Mr. Raj Kishor Choudhary, learned counsel for the respondentNo.1, Mr. Keshav Murthy, learned counsel for respondent No.2 andperused the appeal papers.

6. The learned counsel for the appellant would contend that theBrespondent No.2 taking advantage of the acquaintance with the familyof the appellant, had borrowed the amount which was to be repaid andthe cheque issued was towards discharge of the said amount. In the saidcircumstance, when the cheques issued was for discharge of the legallyrecoverable debt and it had been dishonoured, the provisions of Section138 of N.I. Act would get attracted. Therefore, the complaint filed byCthe appellant is in accordance with law. It is his further contention that inthe present case since respondent No.2 had gained the confidence ofthe appellant due to the acquaintance with his daughter and in thatcircumstance when the amounts which had been taken by him earlierhad been repaid so as to gain the confidence and having receivedDsubstantial amount had at that stage not made arrangement for sufficientfunds in the bank despite having issued the cheques to assure payment,the same would amount to the respondent No.2 cheating the appellantby design and therefore would attract Section 420 IPC. It is contendedthat towards the amount received, the same had been acknowledged bysubscribing the signature to the loan agreement. Further, when thereEwas an undertaking to repay the same, the cheque was issued towardssuch discharge of legally recoverable debt and the cheque on presentationafter the agreed due date for repayment of the loan was dishonoured,the same would constitute an offence. In that regard, it is contended thatthe learned Judicial Magistrate having taken note of the complaint andFthe sworn statements recorded by the appellant and his witnesses hadtaken cognizance and issued summons. In such event, the order passedby the learned Judicial Magistrate for taking cognizance and also toreject the discharge petition filed by the respondent No.2 was inaccordance with law. It is contended that the learned Judge of the HighCourt had in fact committed an error in arriving at the conclusion thatGthe cheque issued by the respondent No.2 was towards ‘security’ andthat the same could not have been treated as a cheque issued towardsthe discharge of legally recoverable debt. It is contended that the learnedJudge has proceeded at a tangent and committed an error and as suchthe order passed by the High Court calls for interference.H

7. To contend that the cheque issued towards discharge of theloan and presented for recovery of the same cannot be construed asissued for ‘security’ has relied on the decision of this Court in the caseof Sampelly Satyanarayana Rao vs. Indian Renewable EnergyDevelopment Agency Ltd., (Criminal Appeal No.867 of 2016) and inM/s Womb Laboratory Pvt. Ltd. vs. Vijay Ahuja and Anr. (CriminalAppeal No.1382-1383 of 2019). Hence, it is contended that theobservation contained in the order of the High Court that a cheque issuedtowards security cannot attract the provision of Section 138 of N.I. Actis erroneous and the reference made by the High Court to the decisionin Sudhir Kr. Bhalla vs. Jagdish Chand and Others 2008 7 SCC 137is without basis. The learned counsel therefore contends that the orderpassed by the High Court is liable to be set aside and the criminal complaintbe restored to file to be proceeded in accordance with law.

8. Mr. Keshav Murthy, learned counsel for respondent No.2 wouldcontend that the learned Judicial Magistrate without application of mindto the fact situation had taken cognizance and issued summons and hadnot appropriately considered the case put forth by the respondent No.2seeking discharge. He would contend that the High Court on the otherhand, has taken note of the entire gamut of the case and has arrived atthe conclusion that the offence alleged both under Section 420 IPC andSection 138 of the N.I. Act has not been made out. It is contended thatthe claim for the sum of Rs. 2 crores as made in the complaint is withoutbasis. It is his case that the respondent No.2 has issued a comprehensivereply disputing the claim put forth by the appellant. It is contended thatfrom the very complaint and the statement of witnesses recorded by thelearned Judicial Magistrate it is evident that no criminal offence is madeout in the instant case. Even if the case as put forth in the complaint istaken note, at best the transaction can be considered as an advancementof loan for business purpose and even if it is assumed that the saidamount was not repaid it would only give rise to civil liability and theappellants could have only filed a civil suit for recovery of the loan. Thestatement of the witnesses, more particularly the daughter of thecomplainant would indicate the long-standing relationship between theparties and also the monetary transaction which in any event does notconstitute a criminal offence. It is contended that under any circumstance,the offence as alleged under Section 420 of IPC cannot be sustained.Insofar as the offence alleged against the respondent No.2 under section138 of N.I. Act, the same would also not be sustainable when the AB

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Acomplainant himself has relied on the loan agreement wherein referenceis made to the cheque being issued as security for the loan. The learnedcounsel contends that the High Court in fact has taken note of theseaspects, proceeded in its correct perspective and has arrived at a justconclusion, which does not call for interference. He therefore, contendsthat the above appeals be dismissed.B

9. In the light of the rival contentions, a perusal of the appealpapers would disclose that it is the very case of the appellant that he hasadvanced substantial amount of Rs. 2 crores to the respondent No.2 byway of financial assistance for business purpose. While taking note ofthe nature of the transaction and also the proceedings initiated, it isCnecessary for us to remain conscious of the fact that the proceedingsbetween the parties is at the preliminary stage and any conclusive findingsrendered in relation to the dispute between the parties would affect theircase if ultimately the appellants were to succeed herein and the criminalproceedings are to be restored for further progress. Therefore, what isDnecessary to be examined herein is, as to whether the appellant hasprima facie established a transaction under which there is a legallyrecoverable debt payable to the appellant by the respondent No.2 and asto whether the cheques in question relating to which the complaint hasbeen filed by the appellant is issued towards discharge of such legallyrecoverable debt. In that regard, what is necessary to be considered isEalso as to whether the cheques in question are still to be considered onlyas ‘security’ for the said amount and whether it was not liable to bepresented for recovery of the legally recoverable debt. The questionwhich would also arise for consideration is as to whether the complaintfiled by the appellant should be limited to a proceeding under SectionF138 of N.I. Act or on the facts involved, whether the invoking of Section420 IPC was also justified.

10. While considering the above aspects, it is evident that thelearned Magistrate having referred to the complaint and sworn statementof the complainant and the witnesses has taken cognizance, issuedGsummons and has consequently arrived at the conclusion that the dischargeas sought by the respondent No.2 cannot be accepted. The High Courton the other hand having referred to the rival contentions has concludedas follows:- “20. From the aforesaid facts and from the documents of theHcomplainant, this Court finds that long standing ‘business SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAVSINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

transaction and inability of refunding a loan has been given a colourof criminal offence of cheating punishable under Section 420 ofthe Indian Penal Code. A breach of trust with mens rea gives riseto a criminal prosecution. In this case when I go through theevidence before charge of the complainant and the documents ofthe complainant, I find that there were long standing businesstransactions between the parties. Since 2011 money was advancedby the complainant and his family members to the accused andthe complainant witness admits that money was also transferredfrom the account of the accused to the account of daughter of thecomplainant. From the evidence, I find that there is no material tosuggest existence of any mens rea. Thus, this case becomes acase of simplicitor case of non-refunding of loan, which cannotbe a basis for initiating criminal proceeding. The Hon’ble SupremeCourt in the case of Samir Sahay alias Sameer Sahay versusState of UP & Anr. reported in (2018) 14 SCC 233 held thatwhen the dispute between the parties was ordinarily a civil disputeresulting from a breach of contract on the part of the appellant bynon-refunding of amount advanced, the same would not constitutean offence of cheating. In this case also, I find that it is true casethat the amount of loan has not been refunded, thus, this cannotcome within the purview of cheating, though the complainant bysuppressing the material facts, has tried to give a different colour.Thus, I find that no case punishable under Section 420 of theIndian Penal Code can be made out in this case.

21. Further, I find that it is the documents of the complainant,which show that the cheques were given by way of security.Even if I do not believe the statement of the accused, the documentsof the complainant cannot be brushed aside. As held earlier,supported by the decision of the Hon’ble Supreme Court in thecase of “Sudhir Kumar Bhalla” (supra) a cheque given by way ofsecurity cannot attract Section 138 of the Negotiable InstrumentsAct. Since the cheques were given by way of security, which isevident from the complainant’s documents (though this fact hasalso been suppressed in the complaint petition), I find that Section138 of the Negotiable Instruments Act is also not attracted in thiscase.”

11. In the background of what has been taken note by us and theconclusion reached by the High Court, insofar as the High Court arriving A

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Aat the conclusion that no case punishable under Section 420 IPC can bemade out in these facts, we are in agreement with such conclusion. Thisis due to the fact that even as per the case of the appellant the amountadvanced by the appellant is towards the business transaction and a loanagreement had been entered into between the parties. Under the loanagreement, the period for repayment was agreed and the cheque hadBbeen issued to ensure repayment. It is no doubt true that the chequeswhen presented for realisation were dishonoured. The meredishonourment of the cheque cannot be construed as an act on the partof the respondent No.2 with a deliberate intention to cheat and the mensrea in that regard cannot be gathered from the point the amount hadCbeen received. In the present facts and circumstances, there is nosufficient evidence to indicate the offence under Section 420 IPC ismade out and therefore on that aspect, we see no reason to interferewith the conclusion reached by the High Court.

12. Having arrived at the above conclusion and also having takenDnote of the conclusion reached by the High Court as extracted above, itis noted that the High Court has itself arrived at the conclusion that theinstant case becomes a simpliciter case of non-refunding of loan whichcannot be a basis for initiating criminal proceedings. The conclusion tothe extent of holding that it would not constitute an offence of cheating,as already indicated above would be justified. However, when the HighECourt itself has accepted the fact that it is a case of non-refunding of theloan amount, the first aspect that there is a legally recoverable debt fromthe respondent No.2 to the appellant is prima-facie established. Theonly question that therefore needs consideration at our hands is as towhether the contention put-forth on behalf of respondent No.2 that anFoffence under Section 138 of the N.I. Act is not made out as thedishonourment alleged is of the cheques which were issued by way of‘security’ and not towards discharge of any debt.

13. In order to consider this aspect of the matter we have at theoutset taken note of the four loan agreements dated 13.08.2014 which isthe subject matter herein. Under each of the agreements, the promiseGmade by respondent No.2 is to pay the appellant a sum of Rs.50 lakhs.Thus, the total of which would amount to Rs.2 crores as contended bythe appellant. Towards the promise to pay, the repayment agreed by therespondent No.2 is to clear the total amount within June/July 2015. Para 5 of the loan agreement indicates that six cheques have been issued asHsecurity. The claim of the appellant has been negated by the High Court only due to the fact that the agreement indicates that the cheques havebeen given by way of security and the complainant has also stated thisfact in the complaint. Though the High Court has taken note of thedecision in the case of Sudhir Kumar Bhalla (supra) to hold that thecheque issued as security cannot constitute an offence, the same in ouropinion does not come to the aid of the respondent No.2. There is nocategorical declaration by this Court in the said case that the chequeissued as security cannot be presented for realisation under allcircumstances. The facts in the said case relate to the cheques beingissued and there being alterations made in the cheques towards whichthere was also a counter complaint filed by the drawer of the cheque.Hence, the said decision cannot be a precedent to answer the position inthis case and the High Court was not justified in placing reliance on thesame.

14. In fact, it would be apposite to take note of the decision of thisCourt in the case of Sampelly Satyanarayana Rao (supra) whereinthis Court while answering the issue as to what constitutes a legallyenforceable debt or other liability as contained in the Explanation 2 toSection 138 of N.I. Act has held as hereunder:-

“10. We have given due consideration to the submission advancedon behalf of the appellant as well as the observations of this Courtin Indus Airways (supra) with reference to the explanation toSection 138 of the Act and the expression “for discharge of anydebt or other liability” occurring in Section 138 of the Act. We areof the view that the question whether a post-dated cheque isfor “discharge of debt or liability” depends on the nature ofthe transaction. If on the date of the cheque liability or debtexists or the amount has become legally recoverable, theSection is attracted and not otherwise.

11. Reference to the facts of the present case clearly shows thatthough the word “security” is used in Clause 3.l (iii) of theagreement, the said expression refers to the cheques being towardsrepayment of instalments. The repayment becomes due underthe agreement, the moment the loan is advanced and the instalmentfalls due. It is undisputed that the loan was duly disbursed on28th February, 2002 which was prior to the date of thecheques. Once the loan was disbursed and instalments havefallen due on the date of the cheque as per the agreement, A

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Adishonour of such cheques would fall under Section 138 ofthe Act. The cheques undoubtedly represent the outstandingliability.

12. Judgment in Indus Airways (supra) is clearly distinguishable.As already noted, it was held therein that liability arising out ofBclaim for breach of contract under Section 138, which arises onaccount of dishonour of cheque issued was not by itself at parwith criminal liability towards discharge of acknowledged andadmitted debt under a loan transaction. Dishonour of cheque issuedfor discharge of later liability is clearly covered by the statute inquestion. Admittedly, on the date of the cheque there was a debt/Cliability in presenti in terms of the loan agreement, as against thecase of Indus Airways (supra), where the purchase order hadbeen cancelled and cheque issued towards advance payment forthe purchase order was dishonoured. In that case, it was foundthat the cheque had not been issued for discharge of liability butDas advance for the purchase order which was cancelled. Keeping D

in mind this fine but real distinction, the said judgment cannotbe applied to a case of present nature where the cheque wasfor repayment of loan instalment which had fallen due thoughsuch deposit of cheques towards repayment’ of instalmentswas also described as “security” in the loan agreement. In Eapplying the judgment in Indus Airways (supra), one cannotlose sight of the difference between a transaction of purchaseorder which is cancelled and that of a loan transaction whereloan has actually been advanced and its repayment is due onthe date of the cheque.

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13. Crucial question to determine applicability of Section 138of the Act is whether the cheque represents discharge ofexisting enforceable debt or liability or whether it representsadvance payment without there being subsisting debt orliability. While approving the views of different High CourtsGnoted earlier, this is the underlying principle as can bediscerned from discussion of the said cases in the judgmentof this Court.”

(emphasis supplied)

The said conclusion was reached by this Court while distinguishingHthe decision of this Court in the case of Indus Airways Pvt. Ltd. Vs.

Magnum Aviation Pvt. Ltd. (2014) 12 SCC 539 which was a casewherein the issue was of dishonour of post-dated cheque issued by wayof advance payment against a purchase order that had arisen forconsideration. In that circumstance, it was held that the same cannot beconsidered as a cheque issued towards discharge of legally enforceabledebt.

15. Further, this Court in the case of M/s Womb LaboratoriesPvt. Ltd. (supra) has held as follows:- “5. In our opinion, the High Court has muddled the entire issue.The averment in the complaint does indicate that the signedcheques were handed over by the accused to the complainant.The cheques were given by way of security, is a matter ofdefence. Further, it was not for the discharge of any debt or anyliability is also a matter of defence. The relevant facts tocountenance the defence will have to be proved- that such securitycould not be treated as debt or other liability of the accused. Thatwould be a triable issue. We say so because, handing over of thecheques by way of security per se would not extricate the accusedfrom the discharge of liability arising from such cheques.

6. Suffice it to observe, the impugned judgment of the High Courtcannot stand the test of judicial scrutiny. The same is, therefore,set aside.”

16. A cheque issued as security pursuant to a financial transactioncannot be considered as a worthless piece of paper under everycircumstance. ‘Security’ in its true sense is the state of being safe andthe security given for a loan is something given as a pledge of payment.It is given, deposited or pledged to make certain the fulfilment of anobligation to which the parties to the transaction are bound. If in atransaction, a loan is advanced and the borrower agrees to repay theamount in a specified timeframe and issues a cheque as security tosecure such repayment; if the loan amount is not repaid in any otherform before the due date or if there is no other understanding oragreement between the parties to defer the payment of amount, thecheque which is issued as security would mature for presentation andthe drawee of the cheque would be entitled to present the same. Onsuch presentation, if the same is dishonoured, the consequencescontemplated under Section 138 and the other provisions of N.I. Actwould flow.

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A17. When a cheque is issued and is treated as ‘security’ towardsrepayment of an amount with a time period being stipulated forrepayment, all that it ensures is that such cheque which is issued as‘security’ cannot be presented prior to the loan or the instalment maturingfor repayment towards which such cheque is issued as security. Further,the borrower would have the option of repaying the loan amount or suchBfinancial liability in any other form and in that manner if the amount ofloan due and payable has been discharged within the agreed period, thecheque issued as security cannot thereafter be presented. Therefore,the prior discharge of the loan or there being an altered situation due towhich there would be understanding between the parties is a sine quaCnon to not present the cheque which was issued as security. These areonly the defences that would be available to the drawer of the cheque ina proceedings initiated under Section 138 of the N.I. Act. Therefore,there cannot be a hard and fast rule that a cheque which is issued assecurity can never be presented by the drawee of the cheque. If such isthe understanding a cheque would also be reduced to an ‘on demandDpromissory note’ and in all circumstances, it would only be a civil litigationto recover the amount, which is not the intention of the statute. When acheque is issued even though as ‘security’ the consequence flowingtherefrom is also known to the drawer of the cheque and in thecircumstance stated above if the cheque is presented and dishonoured,Ethe holder of the cheque/drawee would have the option of initiating thecivil proceedings for recovery or the criminal proceedings for punishmentin the fact situation, but in any event, it is not for the drawer of thecheque to dictate terms with regard to the nature of litigation.

18. If the above principle is kept in view, as already noted, underFthe loan agreement in question the respondent No.2 though had issuedthe cheques as security, he had also agreed to repay the amount duringJune/July 2015, the cheque which was held as security was presentedfor realization on 20.10.2015 which is after the period agreed forrepayment of the loan amount and the loan advanced had already fallendue for payment. Therefore, prima facie the cheque which was takenGas security had matured for payment and the appellant was entitled topresent the same. On dishonour of such cheque the consequencescontemplated under the Negotiable Instruments Act had befallen onrespondent No.2. As indicated above, the respondent No.2 may havethe defence in the proceedings which will be a matter for trial. In anyevent, the respondent No.2 in the fact situation cannot make a grievanceH

with regard to the cognizance being taken by the learned Magistrate orthe rejection of the petition seeking discharge at this stage.

19. In the background of the factual and legal position taken notesupra, in the instant facts, the appellant cannot be non-suited forproceeding with the complaint filed under Section 138 of N.I. Act merelydue to the fact that the cheques presented and dishonoured are shownto have been issued as security, as indicated in the loan agreement. Inour opinion, such contention would arise only in a circumstance wherethe debt has not become recoverable and the cheque issued as securityhas not matured to be presented for recovery of the amount, if the duedate agreed for payment of debt has not arrived. In the instant facts, asnoted, the repayment as agreed by the respondent No.2 is during June/July 2015. The cheque has been presented by the appellant for realisationon 20.10.2015. As on the date of presentation of the cheque for realisationthe repayment of the amount as agreed under the loan agreement hadmatured and the amount had become due and payable. Therefore, tocontend that the cheque should be held as security even after the amounthad become due and payable is not sustainable. Further, on the chequesbeing dishonoured the appellant had got issued a legal notice dated21.11.2015 wherein inter-alia it has been stated as follows:-

“You request to my client for loan and after accepting your wordmy client give you loan and advanced loan and against that youissue different cheque all together valued Rs. One crore and myclient was also assured by you will clear the loan within June/July2015 and after that on 26.10.2015 my client produce the chequefor encashment in H.D.F.C. Bank all cheque bearing No.402771valued Rs. 25 Lakh, 402770 valued Rs.25 lakh, 402769 valuedRs. 50 lakh, (total rupees one crore) and above numbered chequeswas returned with endorsement “In sufficient fund”. Then myclient feel that you have not fulfil the assurance.”

20. The notice as issued indicates that the appellant has at thevery outset after the cheque was dishonoured, intimated the respondentno.2 that he had agreed to clear the loan by June/July 2015 after whichthe appellant had presented the cheque for encashment on 26.10.2015and the assurance to repay has not been kept up.

21. In the above circumstance, the cheque though issued assecurity at the point when the loan was advanced, it was issued as anassurance to repay the amount after the debt becomes due for repayment.The loan was in subsistence when the cheque was issued and had become A

B

C

D

E

F

G

H

Arepayable during June/July 2015 and the cheque issued towardsrepayment was agreed to be presented thereafter. If the amount wasnot paid in any other mode before June/July 2015, it was incumbent onthe respondent No.2 to arrange sufficient balance in the account to honourthe cheque which was to be presented subsequent to June/July 2015.

B22. These aspects would prima-facie indicate that there was atransaction between the parties towards which a legally recoverabledebt was claimed by the appellant and the cheque issued by the respondentNo.2 was presented. On such cheque being dishonoured, cause of actionhad arisen for issuing a notice and presenting the criminal complaintunder Section 138 of N.I. Act on the payment not being made. TheCfurther defence as to whether the loan had been discharged as agreedby respondent No.2 and in that circumstance the cheque which hadbeen issued as security had not remained live for payment subsequentthereto etc. at best can be a defence for the respondent No.2 to be putforth and to be established in the trial. In any event, it was not a case for Dthe Court to either refuse to take cognizance or to discharge therespondent No.2 in the manner it has been done by the High Court.Therefore, though a criminal complaint under Section 420 IPC was notsustainable in the facts and circumstances of the instant case, thecomplaint under section 138 of the N.I Act was maintainable and allcontentions and the defence were to be considered during the course ofEthe trial.

23. In that view, the order dated 17.12.2019 passed by the HighCourt of Jharkhand in Cr.M.P No.2635 of 2017 with Cr.M.P No.2655 of2017 are set aside. Consequently, the order dated 04.07.2016 and13.06.2019 passed by the Judicial Magistrate are restored. The complaintFbearing C.C. No.1839 of 2015 and 1833 of 2015 are restored to the fileof the Judicial Magistrate, limited to the complaint under Section 138 ofN.I. Act to be proceeded in accordance with law.

24. All contentions of the parties on merit are left open. We makeit clear that none of the observations contained herein shall have a bearingon the main trial. The trial court shall independently arrive at its conclusionGbased on the evidence tendered before it.

25. The appeals are allowed in part with no order as to costs.

26. Pending application, if any, shall also stand disposed.

HDevika Gujral