Security cheques can still trigger Section 138 liability when debt subsists and the presumption is unrebutted.

A cheque issued as security can still attract liability under Section 138 of the Negotiable Instruments Act, 1881 when the underlying debt subsists and the statutory presumption under Section 139 is not rebutted. The court found dishonour for insufficiency of funds, supported by notice, invoices, escrow-related correspondence, and acknowledgment of debt; the defence that liability had shifted to a third party was not proved because novation or complete discharge was not established. The conviction was upheld. The First Appellate Court could not enhance the default sentence in an appeal filed only by the accused, so that enhancement was set aside and the trial court sentence restored.

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Issues: (i) Whether the dishonour of the cheques attracted liability under Section 138 of the Negotiable Instruments Act, 1881 despite the defence that they were security cheques and that the underlying liability stood shifted to a third party; (ii) Whether the First Appellate Court could enhance the default sentence in an appeal filed by the accused.

Issue (i): Whether the dishonour of the cheques attracted liability under Section 138 of the Negotiable Instruments Act, 1881 despite the defence that they were security cheques and that the underlying liability stood shifted to a third party?

Analysis: The cheques were admitted to belong to the accused company and the signature of the second accused was admitted. Dishonour for insufficiency of funds was also undisputed. The Court found that the complainant had produced the legal notice, invoices, and the escrow arrangement, including the acknowledgment of debt reflected in the correspondence and the contemporaneous material. The defence that Yahoo Limited had taken over the entire liability was not proved, as no witness from that entity was examined and no material established novation or complete discharge of the accused's liability. The Court held that a cheque issued as security does not, by that fact alone, exclude the operation of Section 138 when the liability subsists and the cheque is presented on maturity. The presumption under Section 139 remained unrebutted on the facts.

Conclusion: The conviction under Section 138 of the Negotiable Instruments Act, 1881 was upheld.

Issue (ii): Whether the First Appellate Court could enhance the default sentence in an appeal filed by the accused?

Analysis: The appeal before the First Appellate Court had been filed only by the accused, and the complainant had not challenged the sentence. In that situation, the appellate court had no occasion to suo motu enhance the punishment. The Court held that the enhancement of the default sentence from three months to one year was not sustainable, though the conviction itself and the sentence imposed by the Trial Magistrate otherwise stood confirmed.

Conclusion: The enhancement of sentence by the First Appellate Court was set aside and the trial court sentence was restored.

Final Conclusion: The revision succeeded only to the limited extent of removing the appellate enhancement of sentence, while the finding of guilt under Section 138 and the substantive conviction were maintained.

Ratio Decidendi: In a prosecution under Section 138 of the Negotiable Instruments Act, 1881, a cheque issued as security can still attract liability if the underlying debt subsists and the statutory presumption is not rebutted; an appellate court cannot enhance sentence in an appeal filed only by the accused absent a challenge by the complainant.

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