TaxTMI 
TaxTMI 
2023 (7) TMI 294
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs herein are engaged in the business of manufacturing ornaments out of gold and diamonds. They specialise in manufacturing customised jewellery based upon orders from the customers. Respondent No. 2 is engaged in the business of trading bullion in exchange for new jewellery and making customised jewellery on order. 3. It is alleged that the petitioners and Respondent No. 2 entered into an agreement vis-à-vis a Memorandum of Understanding ('MOU') dated 16.02.2020, outlining the rights and liabilities of each party. In terms of the MoU, Respondent No. 2 is to supply 2000 grams of gold bullion (of 995 purity) in weight to be converted by the petitioners into gold/diamond jewellery/ornaments of 18k within a stipulated time period and a charge of Rs.10/- per gram of gold was agreed to be paid by Respondent No. 2 to the petitioners. 4. The said MOU was signed by Petitioner No. 3 (Accused no. 3 in the complaint), being one of the Directors (authorised signatory) of Petitioner No. 1 company. In terms thereof, Respondent No. 2 supplied the petitioners with gold bullion equivalent to 2000 grams (of 995 purity) in weight. The parties agreed on the job work charges at Rs.10 per gram ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- respectively hoping that the petitioners must have maintained the requisite funds, but the same were also returned unpaid vide separate return memos dated 31.12.2020 with remarks "Funds Insufficient". 11. Pursuant thereto, Respondent No. 2 again sent a legal notice dated 08.01.2021 which was served upon the petitioners through WhatsApp and email on 09.01.2021 and was sent through registered post on 12.01.2021, demanding the total cheques amount of Rs.70,00,000/- to be paid within 15 days from the date of receipt of the legal notice but the petitioners failed to make necessary payment thereby, causing wrongful gain to themselves and wrongful loss to the respondent. 12. The petitioners, in response to the aforesaid legal notices, sent a reply dated 12.01.2021. They denied the allegations and claimed that the cheques were given as security and not for the payment of any amount of money in discharge of any debt or other liability. 13. Consequently, Respondent No. 2 was constrained to file a complaint under 138 and 141 of the NI Act before the Court of learned Chief Metropolitan Magistrate, South East District, Saket Courts, New Delhi. After considering the material on record and p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2 to present the cheques for encashment. 22. He claimed that the present case is a business transaction for the return of bullion/jewellery. Accordingly, Respondent No. 2 is entitled to civil remedy, and criminal liability under Section 138 of the NI Act, is not made out. 23. He submitted that the entire complaint and legal notice are bereft of details and have failed to crystallize any amount of debt payable and make out the case as to how on 16.12.2020 or 30.12.2020, Respondent No. 2 was entitled to a sum of Rs.50 lakhs and Rs.70 lakhs respectively. 24. He submitted that Respondent No. 2 had also initiated other proceedings before different forums for the same transaction. Firstly, he filed a false arbitration claim to adjudicate the alleged dispute, which he failed to pursue. Secondly, Respondent No. 2 filed another petition under Arbitration & Conciliation Act, 1996 seeking interim relief, which was dismissed by the Court of Sh. Vinod Kumar, District Judge (Comm.), Rohini Courts, New Delhi. 25. He stated that the petitioner had filed a criminal complaint dated 20.07.2021 at PS Netaji Subhash Place, New Delhi, against Respondent No. 2 for misusing the MOU and cheques, fabri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urity cheques are issued is over, the security cheques become mature for presentation and would attract the offence stated under Section 138 of the NI Act. 32. He submitted that Respondent No. 2 is not bound to specify the subsisting liability. The burden of the same is on the accused to prove otherwise, and the onus cannot be shifted to the complainant. The said burden is further to be discharged by the complainant during the trial. The reliance is placed on M.M.T.C Ltd. and Anotherv. Medchl Chemicals & Pharma (P) Ltd. and Another :(2002) 1 SCC 234. 33. Learned counsel had further placed reliance upon the following judgments to advance his case: i. M/s Awadh Constructions v. M/s Amarpreet Shuttering. :Crl. M.C. No. 2840/2021. ii. State of Haryana and Ors. v. Bhajan Lal and Ors. :1992 Supp (1) SCC 335 iii. Sumit Bhasin v. State of NCT of Delhi &Anr. :Crl. M.C. No. 296 of 2021. ANALYSIS 34. The rival contentions raised by the counsels for the parties have been heard, and the material placed on record has been perused. 35. In the instant case, the Respondent No. 2/complainant had filed a complaint under Section 138 read with Section 141 of the NI Act on 09.02.2021. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Son Gaurav Singh v. State of Jharkhand and Another (supra), where the complainant allegedly advanced a loan to the accused, and the post-dated cheques presented for realization on non-payment of the loan were dishonoured, the Apex Court held as under: "9. In the light of the rival contentions, a perusal of the appeal papers would disclose that it is the very case of the appellant that he has advanced substantial amount of Rs. 2 crores to the respondent No. 2 by way of financial assistance for business purpose. While taking note of the nature of the transaction and also the proceedings initiated, it is necessary for us to remain conscious of the fact that the proceedings between the parties is at the preliminary stage and any conclusive findings rendered in relation to the dispute between the parties would affect their case if ultimately the appellants were to succeed herein and the criminal proceedings are to be restored for further progress. Therefore, what is necessary to be examined herein is, as to whether the appellant has prima facie established a transaction under which there is a legally recoverable debt payable to the appellant by the respondent No. 2 and as to whether ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed, the same would not constitute an offence of cheating. In this case also, I find that it is true case that the amount of loan has not been refunded, thus, this cannot come within the purview of cheating, though the complainant by suppressing the material facts, has tried to give a different colour. Thus, I find that no case punishable under Section 420 of the Penal Code, 1860 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 documents of the complainant cannot be brushed aside. As held earlier, supported by the decision of the Hon'ble Supreme Court in the case of "Sudhir Kumar Bhalla" (supra) a cheque given by way of security cannot attract Section 138 of the Negotiable Instruments Act. Since the cheques were given by way of security, which is evident from the complainant's documents (though this fact has also been suppressed in the complaint petition), I find that Section 138 of the Negotiable Instruments Act is also not attracted in this case." 11. In the background of what has been taken note by us and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ant a sum of Rs. 50 lakhs. Thus, the total of which would amount to Rs. 2 crores as contended by the appellant. Towards the promise to pay, the repayment agreed by the respondent 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 as security. The claim of the appellant has been negated by the High Court only due to the fact that the agreement indicates that the cheques have been given by way of security and the complainant has also stated this fact in the complaint. Though the High Court has taken note of the decision in the case of Sudhir Kumar Bhalla (supra) to hold that the cheque issued as security cannot constitute an offence, the same in our opinion does not come to the aid of the respondent No. 2. There is no categorical declaration by this Court in the said case that the cheque issued as security cannot be presented for realisation under all circumstances. The facts in the said case relate to the cheques being issued and there being alterations made in the cheques towards which there was also a counter complaint filed by the drawer of the cheque. Hence, the said decision cannot be a precedent to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elled and cheque issued towards advance payment for the purchase order was dishonoured. In that case, it was found that the cheque had not been issued for discharge of liability but as advance for the purchase order which was cancelled. Keeping in mind this fine but real distinction, the said judgment cannot be applied to a case of present nature where the cheque was for repayment of loan instalment which had fallen due though such deposit of cheques towards repayment' of instalments was also described as "security" in the loan agreement. In applying the judgment in Indus Airways (supra), one cannot lose sight of the difference between a transaction of purchase order which is cancelled and that of a loan transaction where loan has actually been advanced and its repayment is due on the date of the cheque. 13. Crucial question to determine applicability of Section 138 of the Act is whether the cheque represents discharge of existing enforceable debt or liability or whether it represents advance payment without there being subsisting debt or liability. While approving the views of different High Courts noted earlier, this is the underlying principle as can be discerned from discuss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow. 18. When a cheque 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent of debt has not arrived. In the instant facts, as noted, the repayment as agreed by the respondent No. 2 is during June/July 2015. The cheque has been presented by the appellant for realisation on 20.10.2015. As on the date of presentation of the cheque for realisation the repayment of the amount as agreed under the loan agreement had matured and the amount had become due and payable. Therefore, to contend that the cheque should be held as security even after the amount had become due and payable is not sustainable. Further, on the cheques being dishonoured the appellant had got issued a legal notice dated 21.11.2015 wherein inter-alia it has been stated as follows: "You request to my client for loan and after accepting your word my client give you loan and advanced loan and against that you issue different cheque all together valued Rs. One crore and my client was also assured by you will clear the loan within June/July 2015 and after that on 26.10.2015 my client produce the cheque for encashment in H.D.F.C. Bank all cheque bearing No. 402771 valued Rs. 25 Lakh, 402770 valued Rs. 25 lakh, 402769 valued Rs. 50 lakh, (total rupees one crore) and above numbered cheques was ret....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rge of a debt or liability on the basis of which the complaint was quashed. Allowing the appeal by the drawee, this Court observed: "5. In our opinion, the High Court has muddled the entire issue. The averment in the complaint does indicate that the signed cheques were handed over by the accused to the complainant. The cheques were given by way of security, is a matter of defence. Further, it was not for the discharge of any debt or any liability is also a matter of defence. The relevant facts to countenance the defence will have to be proved - that such security could not be treated as debt or other liability of the accused. That would be a triable issue. We say so because, handing over of the cheques by way of security per se would not extricate the accused from the discharge of liability arising from such cheques." 34. The order of this Court in Womb Laboratories holds that the issue as to whether the cheques were given by way of security is a matter of defence. This line of reasoning in Womb Laboratories is on the same plane as the observations in HMT Watches,, where it was held that whether a set of cheques has been given towards security or otherwise or whether there wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....heque is not a statutorily defined expression in the Act. There can be a situation where the cheques are given to provide an assurance or comfort to the drawee that in case of failure to pay the primary consideration on the due date, the security may be enforced. It held as under : "50. In Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd., IV (2014) SLT 321, the question that arose for consideration before the Supreme Court was, whether the post dated cheques issued by the appellants (purchasers) as an advance payment in respect of purchase orders could be considered in discharge of a legally enforceable debt or other liability and, if so, whether the dishonour of such cheques amount to an offence under Section 138 of NI Act. The appellants before the Supreme Court were the purchasers who had placed purchase orders and issued post dated cheques in favour of the respondent towards advance payment. One of the terms and conditions of the contract was that the entire payment would be made to the supplier in advance. The supplier claimed that the advance payment had to be made, as it had to procure the parts from abroad. The cheques were dishonoured upon presentation on the ground ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for "other liability". It is therefore, not necessary that when the cheques are issued, the drawer had any debt to discharge on the date of issuance. The debt or any liability is to exist when the cheque in question is presented for encashment. 45. The Hon'ble Apex Court in the case of M.M.T.C Ltd. and Another v. Medchl Chemicals & Pharma (P) Ltd. and Another (supra) held as under: "13. The learned Judge has next gone into facts and arrived at a conclusion that the cheques were issued as security and not for any debt or liability existing on the date they were issued. In so doing the learned Judge has ignored the well-settled law that the power of quashing criminal proceedings should be exercised very stringently and with circumspection. It is settled law that at this stage the Court is not justified in embarking upon an enquiry as to the reliability or genuineness or otherwise of the allegations made in the complaint. The inherent powers do not confer an arbitrary jurisdiction on the court to act according to its whim or caprice. At this stage the Court could not have gone into merits and/or come to a conclusion that there was no existing debt or liability." 46. As discussed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8 of the Negotiable Instruments Act. 33. A meaningful reading of the provisions of the Negotiable Instruments Act including, in particular, Sections 20, 87 and 139, makes it amply clear that a person who signs a cheque and makes it over to the payee remains liable unless he adduces evidence to rebut the presumption that the cheque had been issued for payment of a debt or in discharge of a liability. It is immaterial that the cheque may have been filled in by any person other than the drawer, if the cheque is duly signed by the drawer. If the cheque is otherwise valid, the penal provisions of Section 138 would be attracted." 49. The Hon'ble Supreme Court in a recent decision of S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan : 2022 SCC OnLine SC 1238, had held that the provisions contained in the NI Act create a statutory presumption of dishonesty, exposing a person to criminal liability if payment is not made within the statutory period even after issuance of notice. It further held that everything stated in the complaint is taken to be correct at the initial stages and the allegations made therein are to be liberally construed in favour of the complainant at the time of....