TaxTMI 
TaxTMI 
2021 (12) TMI 175
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....590/ 2019 and the Managing Director SLP (Crl) 6995/2019 of a company by the name of R.L. Steels & Energy Limited "Company". 2. The background in which the controversy has arisen needs to be noticed. On 19 December 2015, a Letter of Intent was issued by the company to the second respondent for providing uninterrupted power supply at the plant of the company situated at Aurangabad in Maharashtra. Clause (k) of the Letter of Intent envisages that all payments would be made within sixty days through a Letter of Credit "LC" to be opened by the company. On 29 April 2016, an email was addressed by the company stating that payment security would be by cheque for an amount equivalent to the quantum of energy to be scheduled for forty-five days. Payments for monthly billing were to be made by LC within seven days of the receipt of bills. This was agreed upon in a communication dated 30 April 2016 addressed on behalf of the second respondent. On 30 June 2016, the company addressed a communication to the second respondent that it was issuing two cheques "only for security deposit" and that the cheques were to be deposited "after getting confirmation only". The details of the cheques were : ....
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....pany was stated to have been informed of this position in an exchange of emails in spite of which, it is alleged that it failed to provide LCs in the correct format. 7. On 4 August 2016, the second respondent raised a provisional bill for Rs. 1,77,56,157/- for electricity supplied during the period from 1 July 2016 to 31 July 2016. On 27 August 2016, an invoice for Rs. 1,66,48,028/- was issued for power supply during the month of July 2016. On 1 September 2016, an invoice was raised in the amount of Rs. 2,17,24,875/- for power supplied during August 2016. On 1 October 2016, an invoice was raised in the amount of Rs. 2,19,18,186/- for power supplied during September 2016. 8. On 20 October 2016, the company terminated its agreement with the second respondent. The cheque which was issued by the company was deposited on 28 August 2017. On 18 September 2017, a legal notice was issued by the second respondent to the appellants alleging the commission of offences under Section 138 of the NI Act. It was alleged in the notice that according to the ledger maintained by the second respondent in its books of account, a sum of Rs. 6,02,91,089/- remained outstanding. The notice alleged tha....
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....mes to be a security towards payment. This is evident from the endorsement made on the reverse of the cheque in the amount of Rs. 2,67,84,000/- dated 28 August 2017, and is buttressed by the stipulation under PSA that payment was to take place by means of LC. A suit has been instituted by the company against the second respondent in the court of the Civil Judge, Senior Division, RCS 15/2017 in which the defence in the written statement is that: a. There was a default by the company in the payment of electricity consumption charges from July to September 2016; and b. Though the company had issued LC to cover the dues of the electricity bills/ invoices, it had intentionally avoided to furnish them in terms of the draft LCs' furnished by the bankers of the company. In the suit instituted by the second respondent against the company, being CS 236/2019 before the High Court of Judicature at Madras, the pleading in paragraph 8 of the plaint is that the cheques were issued by way of security: "8. As agreed between the parties, the Defendant thereafter by its issued two cheques bearing Nos.013287 & 013286 of amount of Rs. 1,33,92,000/- (One Crore Thirty Three Lak....
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....ugh the contract was terminated on 20 October 2016 by the company, the cheques were presented to the bank only on 31 August 2017; (ii) The fact that the cheques were issued towards security for payment is evident from the endorsement on the reverse of the cheques and from the admission in paragraph 8 of the plaint instituted by the second respondent in the High Court of Madras; (iii) Under the terms of the PSA, payment was envisaged to be made through LC and not by cheque; (iv) A civil suit has been instituted by the second respondent for the recovery of its dues; (v) MSEDCL has raised an additional charge which has been occasioned by the default of the second respondent; and (vi) Apart from the bald statement that the Directors are in-charge of and responsible for the management of the company, no specific role has been ascribed to them in the plaint so as to invoke the doctrine of vicarious liability. 15. On the other hand, Mr. Mohit Mathur and Ms. Rebecca John, learned senior counsel appearing on behalf of the second respondent have submitted that: (i) The High Court has noted in the impugned judgment that there is no disp....
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....ivate Limited (2014) 12 SCC 539. The issue in that case was whether the post-dated cheques which were issued by the appellants who were purchasers, as an advance payment in respect of purchase orders, could be considered to be in discharge of a legally enforceable debt or other liability and whether the dishonor of the cheques amounted to an offence under Section 138. The appellants had placed two purchase orders for the supply of aircraft parts with the first respondent and had issued two post-dated cheques as advance payment. The supplier received a letter from the purchasers cancelling the purchase and requesting the return of both the cheques. Following a notice by the suppliers, a complaint was instituted under Section 138 upon which cognizance was taken by the Magistrate and summons were issued. The High Court allowed a petition under Section 482 CrPC and set aside the order issuing process by construing the expression "discharge of any debt or other liability" in Section 138 holding that there must be a liability at the time of issuing the cheque 10 "138. Dishonour of cheque for insufficiency, etc., of funds in the account.-Where any cheque drawn by a person on an account ma....
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....o manner of doubt that to attract an offence under Section 138, there should be a legally enforceable debt or other liability subsisting on the date of drawal of the cheque. In other words, drawal of the cheque in discharge of an existing or past adjudicated liability is sine qua non for bringing an offence under Section 138. If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise, and material or goods for which purchase order was placed is not supplied, in our considered view, the cheque cannot be held to have been drawn for an existing debt or liability. The payment by cheque in the nature of advance payment indicates that at the time of drawal of cheque, there was no existing liability." 19. Drawing the distinction between civil and criminal liability, it was observed that if there is a breach in the condition of advance payment, it would not incur criminal liability under Section 138 of the NI Act since there is no legally enforceable debt or liability at the time when the cheque was drawn. The Court held that if at the time when a contrac....
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....ch weighed in the judgment of this Court. The Court adverted to the decision in HMT Watches v. MA Habida (2015) 11 SCC 776 to hold that whether the cheques were given as security constitutes the defense of the accused and is a matter of trial. The extract from the decision in HMT Watches which is cited in the decision in Indus Airways is thus: "10. Whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence of the parties. In our opinion, the High Court should not have expressed its view on the disputed questions of fact in a petition under Section 482 of the Code of Criminal Procedure, to come to a conclusion that the offence is not made out. The High Court has erred in law in going into the factual aspects of the matter which were not admitted between the parties. 22. In a more recent judgment of a two judge Bench in Sripati Singh v. State of Jharkhand 2021 SCC OnLine SC 1002, an order of the Magistrate taking cognizance and issuing summons on a complaint under Section 420 IPC and Section 138 of the NI Act was challenged befo....
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....ue is issued and is treated as 'security' towards repayment of an amount with a time period being stipulated for repayment, all that it ensures is that such cheque which is issued as 'security' cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security. Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. Therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. These are only the defences that would be available to the drawer of the cheque in a 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 as security can never be presented by the drawee of the cheque. If such is the understanding a cheque would also be reduced to an 'on demand promissory note' an....
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....must be presented to the bank within a period of six months from the date on which it is drawn or within its period of validity. Therefore, a cheque given as a gift and not for the satisfaction of a debt or other liability, would not attract the penal consequences of the provision in the event of its being returned for insufficiency of funds. Aiyar's Judicial Dictionary defines debt as follows: "Debt is a pecuniary liability. A sum payable or recoverable by action in respect of money demand." Lindey L.J in Webb v. Strention 1888 QBD 518 defined debt as "... a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro." The definition was adopted by this Court in Keshoram Industries v. CWT AIR 1966 SC 1370. Justice Mookerjee writing for a Full Bench of the Calcutta High Court in Banchharam Majumdar v. Adyanath Bhattacharjee (1909) ILR 36 Cal 936 adopted the definition provided by the Supreme Court of California in People v. Arguello 1869 37 Calif 524: "Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payab....
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.... transaction must be understood in the context of the business dealings. The issuance of the cheque was followed close on its heels by the supply of power. To hold that the cheque was not issued in the context of a liability which was being assumed by the company to pay for the dues towards power supplied would be to produce an outcome at odds with the business dealings. If the company were to fail to provide a satisfactory LC and yet consume power, the cheques were capable of being presented for the purpose of meeting the outstanding dues. 27. According to the complainant, the LCs' were not in a format agreed to by their bankers. The cheques which were initially towards security could not have been presented before the payments under the PSA fell due. Moreover, if the company were to discharge its liability to pay the outstanding dues under the power supply agreement through the agreed modality of an LC to the satisfaction of the second respondent's bankers, there would be no occasion to present the cheque thereafter. In other words, once payments for electricity supply became due in terms of the PSA, and the company failed to discharge its dues, the second respondent was entit....
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.... or otherwise or whether there was an outstanding liability is a question of fact which has to be determined at the trial on the basis of evidence. The rationale for this is that a disputed question of this nature cannot be resolved in proceedings under Section 482 CrPC, absent evidence to be recorded at the trial. 30. The submission which has been urged on behalf of the appellants, however, is that the fact that the cheques in the present case have been issued as a security is not in dispute since it stands admitted from the pleading of the second respondent in the suit instituted before the High Court of Madras. The legal requirement which Section 138 embodies is that a cheque must be drawn by a person for the payment of money to another "for the discharge, in whole or in part, of any debt or other liability'. A cheque may be issued to facilitate a commercial transaction between the parties. Where, acting upon the underlying purpose, a commercial arrangement between the parties has fructified, as in the present case by the supply of electricity under a PSA, the presentation of the cheque upon the failure of the buyer to pay is a consequence which would be within the contemplat....
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.... issuance of process for the purposes of an enquiry or an investigation is to determine whether or not there is sufficient ground for proceeding. However, it is mandatory for the Magistrate to do so in a case where the accused is residing at a place beyond the area in which the Magistrate exercises jurisdiction. The accused persons in the present case reside at Aurangabad while the complaint under Section 138 was filed before the Magistrate in Mundra. The argument of the appellants is that in these circumstances, the Magistrate was duty bound to postpone the issuance of process and to either enquire into the case himself or to direct an investigation either by a police officer or by some other person. Section 203 stipulates that if the Magistrate is of the opinion on considering the statement on oath, if any, of the complainant and of the witnesses, and the result of the enquiry or investigation if any under Section 202 that there is no sufficient ground for proceeding, he shall dismiss the complaint recording briefly his reasons for doing so. The requirement of recording reasons which is specifically incorporated in Section 203 does not find place in Section 202. Section 204 which....
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....to see that innocent persons are not harassed by unscrupulous persons, this clause seeks to amend sub-section (1) of Section 202 to make it obligatory upon the Magistrate that before summoning the accused residing beyond his jurisdiction he shall enquire into the case himself or direct investigation to be made by a police officer or by such other person as he thinks fit, for finding out whether or not there was sufficient ground for proceeding against the accused.' The use of the expression "shall" prima facie makes the inquiry or the investigation, as the case may be, by the Magistrate mandatory. The word "shall" is ordinarily mandatory but sometimes, taking into account the context or the intention, it can be held to be directory. The use of the word "shall" in all circumstances is not decisive. Bearing in mind the aforesaid principle, when we look to the intention of the legislature, we find that it is aimed to prevent innocent persons from harassment by unscrupulous persons from false complaints. Hence, in our opinion, the use of the expression "shall" and the background and the purpose for which the amendment has been brought, we have no doubt in our mind that inquiry....
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....red to be passed at that stage. The Code of Criminal Procedure requires speaking order to be passed under Section 203 CrPC when the complaint is dismissed and that too the reasons need to be stated only briefly. In other words, the Magistrate is not to act as a post office in taking cognizance of each and every complaint filed before him and issue process as a matter of course. There must be sufficient indication in the order passed by the Magistrate that he is satisfied that the allegations in the complaint constitute an offence and when considered along with the statements recorded and the result of inquiry or report of investigation under Section 202 CrPC, if any, the accused is answerable before the criminal court, there is ground for proceeding against the accused under Section 204 CrPC, by issuing process for appearance. The application of mind is best demonstrated by disclosure of mind on the satisfaction. If there is no such indication in a case where the Magistrate proceeds under Sections 190/204 CrPC, the High Court under Section 482 CrPC is bound to invoke its inherent power in order to prevent abuse of the power of the criminal court. To be called to appear before the c....
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....lied his mind to the facts of the case and the law applicable thereto. The application of mind has to be indicated by disclosure of mind on the satisfaction. Considering the duties on the part of the Magistrate for issuance of summons to the accused in a complaint case and that there must be sufficient indication as to the application of mind and observing that the Magistrate is not to act as a post office in taking cognizance of the complaint, in Mehmood Ul Rehman [Mehmood Ul Rehman v. Khazir Mohammad Tunda, (2015) 12 SCC 420 : (2016) 1 SCC (Cri) 124]..." The above principles have been reiterated in the judgment in Krishna Lal Chawla v. State of U.P (2021) 5 SCC 435. 37. In this backdrop, it becomes necessary now to advert to an order dated 16 April 2021 of a Constitution Bench in Re: Expeditious Trial of Cases under Section 138 of N.I. Act 1881 Suo Motu Writ Petition (Crl) No. 2 of 2020, decided on 16 April 2021. The Constitution Bench notes "the gargantuan pendency of complaints filed under Section 138" and the fact that the "situation has not improved as courts continue to struggle with the humongous pendency". The court noted that there were seven major issues which aros....
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....S. Joseph v. Philips Carbon Black Ltd & Anr. where there was a discussion about the requirement of inquiry under Section 202 of the Code in relation to complaints filed under Section 138 but the question of law was left open. In view of the judgments of this Court in Vijay Dhanuka (supra), Abhijit Pawar (supra) and Birla Corporation (supra), the inquiry to be held by the Magistrate before issuance of summons to the accused residing outside the jurisdiction of the court cannot be dispensed with. The learned Amici Curiae recommended that the Magistrate should come to a conclusion after holding an inquiry that there are sufficient grounds to proceed against the accused. We are in agreement with the learned Amici." 38. Section 145 of the NI Act provides that evidence of the complainant may be given by him on affidavit, which shall be read in evidence in an inquiry, trial or other proceeding notwithstanding anything contained in the CrPC. The Constitution Bench held that Section 145 has been inserted in the Act, with effect from 2003 with the laudable object of speeding up trials in complaints filed under Section 138. Hence, the Court noted that if the evidence of the complainant may....
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....person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.] (2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.-For the purposes of this section, - (a) "company" means anybody corporate and includes a firm or other association of individuals; and (b) "director", in relation to a firm, means a partner in the firm." 42. Section 141 of the NI Act stipulates that if a company is alleged to have committed an offence under Section 138, then every person who '....
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....erson was responsible for the acts committed by or on behalf of the company." 43. In SMS Pharmaceuticals v. Neeta Bhalla (2005) 8 SCC 89, a three judge Bench while construing the provisions of Section 141 of the Negotiable Instruments Act 1881, has noted that the position of a Managing Director or a Joint Managing Director of a company is distinct since persons occupying that position are in charge of and responsible for the conduct of the business. It was observed that though there is a general presumption that the Managing Director and Joint Managing Director are responsible for the criminal act of the company, the director will not be held liable if he was not responsible for the conduct of the company at the time of the commission of the offence. The Court observed: "9. The position of a managing director or a joint managing director in a company may be different. These persons, as the designation of their office suggests, are in charge of a company and are responsible for the conduct of the business of the company. In order to escape liability such persons may have to bring their case within the proviso to Section 141(1), that is, they will have to prove that when ....