2025 (5) TMI 928 - HC - Indian Laws

Accused acquitted in Section 138 case as handloom society not prosecuted for vicarious liability establishment

HP HC acquitted the accused in a Section 138 NI Act case involving dishonour of cheque with insufficient funds. The court held that lower courts erred in ... Dishonour of cheque with an endorsement of insufficient funds - Commission of an offence punishable under Section 138 of the Negotiable Instruments (NI) Act - failed to pay the amount despite the receipt of a valid notice of demand - misread and misappreciated the evidence and the statement of the accused recorded under Section 313 of Cr.P.C - cheque issued to M/S Chachoga Handloom Society and not to the bank - HELD THAT:- The learned Courts below erred in holding the accused liable for the commission of an offence punishable under Section 138 of the NI Act and sentencing him to undergo simple imprisonment for six months and to pay of ₹ 1.50 lacs, compensation. Hence, the judgments and order passed by the learned Court below are not sustainable. In view of the binding precedents of the Hon’ble Supreme Court, the prosecution of the Society is necessary before the accused can be held vicariously liable. Since Society has not been arrayed as the accused, therefore, the accused cannot be held vicariously liable. Thus, the learned Courts below erred in holding the accused liable for the commission of an offence punishable under Section 138 of the NI Act and sentencing him to undergo simple imprisonment for six months and to pay of ₹ 1.50 lacs, compensation. Hence, the judgments and order passed by the learned Court below are not sustainable. Consequently, the present petition is allowed and the petitioner/accused is acquitted of the commission of an offence punishable under Section 138 of the N I Act. The fine amount, if deposited by the accused, be refunded to him after the expiry of the statutory period of limitation in case no appeal is preferred, and in case of appeal, the same be dealt with as per orders of the Hon’ble Apex Court. In view of the provisions of Section 437-A of the Code of Criminal Procedure [Section 481 of Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS)], the petitioner/accused is directed to furnish his personal bond in the sum of ₹25,000/- with one surety in the like amount to the satisfaction of the learned Registrar (Judicial) of this Court/learned Trial Court, within four weeks, which shall be effective for six months with stipulation that in the event of Special Leave Petition being filed against this judgment, or on grant of the leave, the petitioner/accused, on receipt of notice(s) thereof, shall appear before the Hon’ble Supreme Court. 1. ISSUES PRESENTED and CONSIDERED- Whether the cheque issued by the accused was valid or materially altered, thereby affecting its enforceability under Section 138 of the Negotiable Instruments Act (NI Act).- Whether the accused can be held liable for the dishonour of the cheque issued on behalf of a cooperative society, without the society being arrayed as a party to the complaint.- Whether the learned Courts below erred in convicting and sentencing the accused under Section 138 of the NI Act despite the alleged material alteration and absence of the society as a party.- Whether the revisional jurisdiction of the High Court can be invoked to interfere with concurrent findings of fact recorded by the Trial Court and Appellate Court.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of the Cheque and Material AlterationRelevant legal framework and precedents: Section 138 of the NI Act penalizes dishonour of cheque issued for discharge of a legally enforceable debt or liability. Section 87 of the NI Act provides that any material alteration in a negotiable instrument renders it void against any party who did not consent to such alteration. The burden lies on the plaintiff/holder to prove that the instrument was not materially altered or that any alteration was with the consent of the drawer.Precedents including Narayan Prasad Rai v. Ghanshyamlal and C. Sonamuthu v. R. Barsha Beevi establish that material alteration includes changes that affect the legal character of the instrument, such as alterations in the payee's name, amount, or other essential terms, and such alteration voids the instrument unless made with consent of the parties.Court's interpretation and reasoning: The Court observed that the cheque (Ex. CW1/B) was issued in the name of 'Chahoga H/L Co-operative Society Ltd.' but the words 'KCC bank in the loan account' were added subsequently in different ink and handwriting, indicating an interpolation. The complainant's witness did not explain who made the addition.The Court relied on the principle that the burden to prove that the alteration was made by a stranger without consent rests on the holder of the cheque. Since no such proof was furnished, the presumption was that the alteration was made by the holder or with his consent, rendering the cheque void.The Court cited authoritative decisions holding that material alteration of the payee's name is a material alteration affecting the legal character of the instrument and its enforceability.Key evidence and findings: The cheque itself showed visible alteration. The complainant's witness failed to explain the origin of the added words. The accused admitted the cheque was issued as security to the cooperative society, not directly to the bank.Application of law to facts: The Court concluded that the material alteration in the cheque rendered it void and unenforceable under the NI Act.Treatment of competing arguments: The complainant argued the cheque was issued to discharge the society's liability and that the accused, as Director, was liable. However, the Court emphasized the absence of proof regarding the alteration and the legal effect of such alteration under Section 87.Conclusion: The cheque was materially altered and thus void, defeating the complainant's claim based on the cheque.Issue 2: Liability of the Accused in Absence of the Cooperative Society as a PartyRelevant legal framework and precedents: The accused was alleged to have issued the cheque on behalf of the cooperative society. The society is a juristic person under the Himachal Pradesh Co-operative Societies Act. The Supreme Court in Aneeta Hada v. Godfather Travels & Tours (P) Ltd. held that prosecution of Directors or officers under Section 138 read with Section 141 of the NI Act is not maintainable unless the company or juristic person itself is also arraigned as an accused. This principle was reiterated in Charanjit Pal Jindal v. L.N. Metalics and Himanshu v. B. Shivamurthy.Court's interpretation and reasoning: The Court noted that the complaint did not allege that the loan was taken individually by the accused but rather that the cheque was issued in the name of the cooperative society. The society was not made a party to the proceedings. The Courts below erroneously held the accused liable as Director or authorised signatory without arraigning the society, which is impermissible under binding Supreme Court precedents.Key evidence and findings: The accused admitted the cheque was issued as security to the cooperative society. Witnesses confirmed the accused's role in the society but the society itself was not a party to the complaint. The complaint's pleadings were inconsistent in alleging individual liability of the accused.Application of law to facts: The Court applied the principle that vicarious liability under Section 141 of the NI Act requires the principal offender (the company or society) to be prosecuted first. Since the society was not arraigned, the accused could not be held liable.Treatment of competing arguments: The complainant contended the accused was liable as the Director and had issued the cheque to discharge the society's liability. The Court rejected this, relying on the strict construction of the law and binding precedents emphasizing the necessity of prosecuting the juristic entity first.Conclusion: The prosecution of the accused without arraigning the society was not maintainable, and the conviction and sentence were unsustainable.Issue 3: Scope of Revisional JurisdictionRelevant legal framework and precedents: Section 397 of the Criminal Procedure Code (CrPC) empowers the High Court to examine the legality or propriety of any order or proceeding of an inferior court. The revisional jurisdiction is limited to correcting patent errors, jurisdictional errors, or gross illegality and does not extend to reappreciation of evidence or acting as an appellate court.Supreme Court decisions in Malkeet Singh Gill v. State of Chhattisgarh and State of Gujarat v. Dilipsinh Kishorsinh Rao emphasize that revisional interference is warranted only in cases of well-founded error, absence of evidence, or perversity.Court's interpretation and reasoning: The Court acknowledged the concurrent findings of the Trial and Appellate Courts but held that the jurisdictional error of prosecuting the accused without arraigning the society was a patent error warranting interference in revision.Key evidence and findings: The Court found that the lower Courts did not consider the binding Supreme Court precedents on the necessity of arraigning the juristic person before prosecuting its officers.Application of law to facts: The revisional Court exercised its jurisdiction to correct the jurisdictional error, despite concurrent findings on other factual aspects.Treatment of competing arguments: The complainant argued against interference in revision, relying on concurrent findings. The Court distinguished this by emphasizing the legal and jurisdictional error in prosecuting the accused alone.Conclusion: The revisional Court was justified in setting aside the conviction and sentence on the ground of jurisdictional error.3. SIGNIFICANT HOLDINGS- 'Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto.'- 'The burden of proving how the alterations were made in the document lies on the plaintiff, and in the absence of any proof, it should be presumed that they were made by him or by his next friend, who was in custody of the document.'- 'For maintaining the prosecution under Section 141 of the Act, arraigning of a company [or society] as an accused is imperative.'- 'The High Court in criminal revision against conviction is not supposed to exercise the jurisdiction like the appellate court, and the scope of interference in revision is extremely narrow... There has to be a well-founded error which is to be determined on the merits of individual cases.'- The Court held: 'The learned Courts below erred in holding the accused liable for the commission of an offence punishable under Section 138 of the NI Act and sentencing him... Such an error can be corrected in the exercise of revisional jurisdiction.'- Final determination: The accused was acquitted of the offence under Section 138 of the NI Act due to (i) material alteration in the cheque rendering it void, and (ii) absence of prosecution of the cooperative society, rendering the accused's liability untenable.