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                       REPORTABLE

IN THE SUPREME COURT OF INDIA  

CRIMINAL APPELLATE JURISDICTION

CRIMINAL  APPEAL NO.   830      OF 2014   (Arising out of SLP (Crl.) No.9752 of 2010)

M/s. Indus Airways Pvt. Ltd. & Ors.       … Appellants

Versus

M/s. Magnum Aviation Pvt. Ltd. & Anr.            … Respondents

JUDGMENT   

R.M. LODHA, J.  

Leave granted.

2. The  only  question  that  arises  for  consideration  in  this  

appeal by special leave is, whether the post-dated cheques issued by  

the appellants (hereinafter referred to as ‘purchasers’) as an advance  

payment  in  respect  of  purchase  orders  could  be  considered  in  

discharge  of  legally  enforceable  debt  or  other  liability,  and,  if  so,  

whether the dishonour of such cheques amounts to an offence under  

Section 138 of the Negotiable Instruments Act, 1881 (for short, ‘the N.I.  

Act’).  The Delhi High Court in the impugned order has held that to be  

so.

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3. The brief facts are these:  On 19.02.2007 and 26.02.2007,  

the purchasers placed two purchase orders for supply of certain aircraft  

parts with respondent No.1, M/s. Magnum Aviation Pvt. Ltd. (hereinafter  

referred  to  as  ‘supplier’).   In  respect  of  these  purchase  orders,  the  

purchasers also issued two post-dated cheques dated 15.03.2007 for a  

sum of  Rs.34,57,164/-  and  20.03.2007  for  a  sum of  Rs.15,91,820/-.  

The  said  cheques  were  issued by  way  of  advance  payment  for  the  

purchase orders.  One of the terms and conditions of the contract was  

that the entire payment would be given to the supplier in advance.  The  

supplier says that the advance payment was made by the purchasers  

as it had to procure the parts from abroad.

4. These cheques got dishonoured when they were presented  

on the ground that the purchasers had stopped payment.

5. It  is not in dispute that the supplier  received letter dated  

22.03.2007  from the  purchasers  cancelling  the  purchase  orders  and  

requesting the supplier to return both the cheques.

6. The supplier sent response to the letter dated 22.03.2007  

on 23.03.2007 asking the purchasers  as  to  when the supplier  could  

collect the payment. Thereafter, on 12.04.2007, the supplier sent a  

notice  to  the  purchasers  and  then  filed  a  complaint  against  the  

purchasers  under  Section  138  of  the  N.I.  Act  before  the  Court  of  

Additional Chief Metropolitan Magistrate, New Delhi.

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7. On  22.05.2007,  the  concerned  Additional  Chief  

Metropolitan  Magistrate  took  cognizance  of  the  alleged  offence  and  

issued summons to the purchasers.

8. The purchasers challenged the order issuing summons in a  

revision petition under Section 397 of the Code of Criminal Procedure,  

1973 (for short, ‘Code’).  The Additional Sessions Judge, after hearing  

the parties,  allowed the revision petition  vide order dated 02.09.2008  

and quashed the process issued by the Additional Chief Metropolitan  

Magistrate.

9. The  supplier  challenged  the  order  of  the  Additional  

Sessions Judge in a petition under Section 482 of the Code before the  

High Court.  The High Court allowed the petition, set aside the order of  

the Additional Sessions Judge and restored the order of the Additional  

Chief Metropolitan Magistrate issuing process to the purchasers.

10. The Delhi High Court following its earlier decision in  Mojj   

Engineering1 held that the issuance of a cheque at the time of signing  

such contract has to be considered against a liability, as the amount  

written in the cheque is payable by the person on the date mentioned in  

the cheque.

11. Section 138 of the N.I. Act is as follows:

1 M/s. Mojj Engineering Systems Limited and others v. M/s. A.B. Sugars Ltd. [154 (2008) Delhi Law      Times 579]

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“138.  Dishonour  of  cheque  for  insufficiency,  etc.,  of  funds  in  the  account.  -  Where  any  cheque  drawn  by  a  person  on  an  account  maintained by him with a banker for payment of  any amount of money to another person from out  of  that account  for the discharge,  in whole or in  part, of any debt or other liability, is returned by the  bank  unpaid,  either  because  of  the  amount  of  money  standing  to  the  credit  of  that  account  is  insufficient to honour the cheque or that it exceeds  the amount arranged to be paid from that account  by  an  agreement  made  with  that  bank,  such  person  shall  be  deemed  to  have  committed  an  offence and shall,  without prejudice to any other  provisions  of  this  Act,  be  punished  with  imprisonment for a term which may be extended to  two years, or with fine which may extend to twice  the amount of the cheque, or with both:  

Provided  that  nothing  contained  in  this  section shall apply unless –

(a) the  cheque  has  been  presented  to  the  bank  within  a  period  of  six  months  from the  date  on  which it is drawn or within the period of its validity,  whichever is earlier;

(b) the payee or the holder in due course of the  cheque, as the case may be, makes a demand for  the  payment  of  the  said  amount  of  money  by  giving  a  notice  in  writing,  to  the  drawer  of  the  cheque,  within  thirty  days  of  the  receipt  of  information  by  him  from the  bank  regarding  the  return of the cheque as unpaid; and

(c) the drawer of  such cheque fails  to  make the  payment of the said amount of money to the payee  or, as the case may be, to the holder in due course  of the cheque, within fifteen days of the receipt of  the said notice.  

Explanation.  -  For  the  purposes  of  this  section,  "debt or other liability" means a legally enforceable  debt or other liability.”

12. The interpretation of the expression ‘for discharge of any  

debt  or  other  liability’  occurring  in  Section  138  of  the  N.I.  Act  is  

significant and decisive of the matter.  

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13. The  explanation  appended  to  Section  138  explains  the  

meaning of  the expression ‘debt  or  other  liability’  for  the purpose of  

Section 138. This expression means a legally enforceable debt or other  

liability.  Section 138 treats dishonoured cheque as an offence, if the  

cheque has been issued in discharge of any debt or other liability. The  

explanation leaves no manner of doubt that to attract an offence under  

Section 138, there should be 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 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 exiting 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.

14. In  Swastik  Coaters2 ,  the  single  Judge  of  the  Andhra  

Pradesh High Court while considering the explanation to Section 138  

held:

“……..Explanation  to  Section  138  of  the  Negotiable Instruments Act clearly makes it clear  that  the  cheque  shall  be  relateable  to  an  enforceable liability or debt and as on the date of  

2 M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1997 Cri. L.J. 1942 (AP)]

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the  issuing  of  the cheque there was no existing  liability  in the sense that the title in the property  had not passed on to the accused since the goods  were not delivered. ……..”     

15. The Gujarat High Court in Shanku Concretes3 dealing with  

Section 138 of the N.I. Act held that to attract Section 138 of the N.I.  

Act,  there  must  be  subsisting  liability  or  debt  on  the  date  when the  

cheque was delivered.  The very fact that the payment was agreed to  

some  future  date  and  there  was  no  debt  or  liability  on  the  date  of  

delivery  of  the  cheques  would  take  the  case  out  of  the  purview  of  

Section 138 of  the N.I.  Act.    While holding so, Gujarat  High Court  

followed a decision of the Madras High Court in Balaji Seafoods4.

16. In Balaji Seafoods4, the Madras High Court held:

“Section  138  of  the  Negotiable  Instruments  Act  makes it clear that where the cheque drawn by a  person on an account  maintained by him with  a  banker  for  payment  of  any amount  of  money to  another  person  from out  of  that  account  for  the  discharge, in whole or in part, of any debt or other  liability,  is  returned  by  the  bank  unpaid,  either  because of the amount of money standing to the  credit of that account is insufficient to honour the  cheque or that it exceeds the amount arranged to  be paid from that account by an agreement made  with that  bank,  such person shall  be deemed to  have committed an offence under Section 138 of  the  Act.  The  explanation  reads  that  for  the  purposes  of  this  section,  ‘debt  or  other  liability’  means a legally enforceable debt or liability.”

3 Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [2000 Cri. L.J.1988 (Guj.)] 4 M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1999 (1) CTC 6]

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17. The  Kerala  High  Court  in Ullas5 had  an  occasion  to  

consider Section 138 of the N.I. Act. In that case, the post-dated cheque  

was issued by the accused along with the order for supply of goods.  

The supply of goods was not made by the complainant. The accused  

first instructed the bank to stop payment against the cheque and then  

requested the complainant  not  to present  the cheque as he had not  

supplied the goods. The cheque was dishonoured. The single Judge of  

the Kerala High Court held, “………Ext.P1 cheque cannot be stated to  

be one issued in discharge of  the liability  to the tune of  the amount  

covered by it, which was really issued, as is revealed by Ext. D1, as the  

price amount for 28 numbers of mixies, which the complainant had not  

supplied. …..”

18. The  reasoning  of  the  Delhi  High  Court  in  the  impugned  

order is as follows:

“8. If at the time of entering into a contract it is  one  of  the  conditions  of  the  contract  that  the  purchaser has to pay the amount in advance then  advance  payment  is  a  liability  of  the  purchaser.  The seller of the items would not have entered into  contract unless the advance payment was made to  him. A condition of advance payment is normally  put by the seller for the reason that the purchaser  may  not  later  on  retract  and  refuse  to  take  the  goods either manufactured for him or procured for  him.  Payment  of  cost  of  the  goods  in  advance  being  one  of  the  conditions  of  the  contract  becomes liability of the purchaser. The purchaser  who  had  issued  the  cheque  could  have  been  asked to make payment either by draft or in cash.  Since giving cheque is a mode of payment like any  other mode of payment, it is normally accepted as  

5 Supply House, Represented by Managing Partner v. Ullas, Proprietor Bright Agencies and another;     [2006 Cri. L.J. 4330 (Kerala)]

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a payment. The issuance of a cheque at the time  of  signing  such  contract  has  to  be  considered  against  a  liability  as  the  amount  written  in  the  cheque  is  payable  by  the  person  on  the  date  mentioned  in  the  cheque.  Where  the  seller  or  manufacturer,  on  the  basis  of  cheques  issued,  manufactures  the  goods  or  procures  the  goods  from outside, and has acted upon the contract, the  liability  of  the  purchaser  gets  fastened,  the  moment the seller or manufacturer acts upon the  contract and procures the goods. If for any reason,  the seller fails to manufacture the goods or procure  the goods it is only under those circumstances that  no liability is created. However, where the goods  or  raw  material  has  been  procured  for  the  purchaser  by  seller  or  goods  have  been  manufactured by the seller, it cannot be said that  the cheques were not issued against the liability. I  consider that if the liability is not construed in this  manner, the sole purpose of making dishonour of  the  cheque  as  an  offence  stands  defeated.  The  purpose of making or enacting Section 138 of the  N.I.  Act  was  to  enhance  the  acceptability  of  cheque in settlement of commercial  transactions,  to infuse trust into commercial transactions and to  make a cheque as a reliable negotiable instrument  and  to  see  that  the  cheques  of  business  transactions are not dishonoured. The purpose of  Negotiable Instrument Act  is  to  make an orderly  statement  of  rules  of  law  relating  to  negotiable  instruments  and  to  ensure  that  mercantile  instruments should be equated with goods passing  from one hand to other. The sole purpose of the  Act  would  stand  defeated  if  after  placing  orders  and giving advance payments, the stop payments  are issued and orders are cancelled on the ground  of pricing of the goods as was done in this case.”  

19. The  above  reasoning  of  the  Delhi  High  Court  is  clearly  

flawed inasmuch as it failed to keep in mind the fine distinction between  

civil liability and criminal liability under Section 138 of the N.I. Act.  If at  

the time of entering into a contract,  it  is one of the conditions of the  

contract that the purchaser has to pay the amount in advance and there  

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is breach of such condition then purchaser may have to make good the  

loss that might have occasioned to the seller but that does not create a  

criminal liability under Section 138. For a criminal liability to be made  

out under Section 138, there should be legally enforceable debt or other  

liability subsisting on the date of drawal of the cheque. We are unable to  

accept the view of the Delhi High Court that the issuance of cheque  

towards advance payment at the time of signing such contract has to be  

considered  as  subsisting  liability  and  dishonour  of  such  cheque  

amounts to an offence under Section 138 of the N.I. Act.  The Delhi  

High Court has traveled beyond the scope of Section 138 of the N.I. Act  

by  holding  that  the purpose of  enacting  Section  138 of  the  N.I.  Act  

would  stand  defeated  if  after  placing  orders  and  giving  advance  

payments, the instructions for stop payments are issued and orders are  

cancelled.  In what we have discussed above, 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 by the supplier, in our considered view,  

the cheque cannot be said to have been drawn for an existing debt or  

liability.           

20. In  our  opinion,  the  view  taken  by  Andhra  Pradesh  High  

Court  in  Swastik  Coaters2,  Madras  High  Court  in  Balaji  Seafoods4,  

Gujarat  High  Court  in  Shanku  Concretes3 and  Kerala  High  Court  in  

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Ullas5 is the correct view and accords with the scheme of Section 138 of  

the N.I. Act.   

21. The view taken by Delhi High Court is plainly wrong and  

does not deserve acceptance.

22. Criminal  Appeal  is,  accordingly,  allowed;  the  impugned  

judgment of Delhi High Court is set aside; and the order of the Sessions  

Judge is restored.

        …..………………………….J.          (R.M. Lodha)

 …..………………………….J. (Shiva Kirti Singh)

New Delhi, April 7, 2014.

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