The Madras High Court has clarified that in cases under Section 138 of the Negotiable Instruments Act, when an accused raises a specific defence that a cheque was handed over to a third party, the burden shifts to the accused to prove that defence by examining the third party. Failure to do so, despite the third party being available, renders the defence untenable and upholds conviction.
Background & Facts
The Dispute
The appellant, Y. Yonous, proprietor of M/s. Standard Service Point, filed a private complaint under Section 138 of the Negotiable Instruments Act, 1881 against the respondent, D. Chaithra, alleging dishonour of a cheque issued in discharge of a liability arising from a chit fund transaction. The cheque, dated 03.10.2015 and bearing No. 000121 for Rs. 3,67,000, drawn on Karur Vysya Bank, Attibele Branch, was presented twice and returned for insufficient funds on 27.10.2015 and 03.11.2015. A statutory notice under Section 138 was issued on 12.11.2015, which went unanswered.
Key Facts
- The appellant and respondent had known each other for 15 years.
- The appellant was a subscriber to a chit fund operated by the respondent and her husband, with monthly contributions of Rs. 25,000 over 20 months (total Rs. 5,00,000).
- Three months before maturity, the appellant became the successful bidder and was entitled to receive Rs. 3,67,000.
- The respondent issued the cheque (Ex.P1) as payment for the chit amount.
- The cheque was presented on 26.10.2015 and returned on 27.10.2015.
- The appellant re-presented the cheque on 02.11.2015; it was again returned on 03.11.2015.
- Legal notice (Ex.P4) was sent on 12.11.2015 via registered post; postal receipt (Ex.P5) and acknowledgment card (Ex.P6) were produced.
- The appellant examined himself as PW1, bank managers of Central Bank (PW2) and Karur Vysya Bank (PW3) as witnesses.
- Documentary evidence included Ex.P1 (cheque), Ex.P2 and P3 (bank return memos), Ex.P4 (notice), Ex.P5 and P6 (postal proof), Ex.P7 (appellant’s bank statement), Ex.P8 (respondent’s bank statement), and Ex.P9 and P10 (cheque return particulars).
- The respondent examined herself as DW1 and her relative Shilpa as DW2; no documents were marked by the defence.
Procedural History
- 30.01.2020: Judicial Magistrate, Fast Track Court, Hosur convicted the respondent under Section 138 NI Act and sentenced her to one year simple imprisonment and payment of Rs. 3,67,000 as compensation.
- 15.04.2021: Additional District Judge, Hosur, allowed the respondent’s appeal (Crl.A.No.30 of 2020), acquitting her on the ground that the appellant failed to examine Narayana Reddy, a third party alleged to have received the cheque.
- 25.02.2026: Judgment reserved by the Madras High Court.
- 17.03.2026: Judgment pronounced by Justice M. Nirmal Kumar.
The Parties' Positions
For the Appellant
The appellant contended that the cheque was issued in discharge of a legitimate liability arising from the chit fund transaction. He admitted to initially stating the cheque was for a loan, but clarified that the chit fund context was the true basis. He argued that the statutory presumptions under Sections 118 and 139 of the NI Act applied, and the respondent failed to rebut them. He further argued that the respondent’s defence - that the cheque was given to Narayana Reddy - was speculative and uncorroborated.
For the Respondent
The respondent claimed the cheque was a blank security cheque given to Narayana Reddy, a chit operator, for a separate chit transaction in 2012. She alleged the appellant had fraudulently filled in the amount and date. She also claimed she had repaid a separate Rs. 2,00,000 loan to the appellant and retrieved the security cheque for that transaction. She argued that the appellant’s inconsistent testimony and failure to examine Narayana Reddy rendered the prosecution case unreliable.
Relief Sought
The appellant sought setting aside of the lower appellate court’s order dated 15.04.2021, restoration of the trial court’s conviction and sentence, and direction for the respondent to undergo imprisonment and pay compensation.
The Legal Issue
The central question was whether the burden to examine a third party (Narayana Reddy) lies on the accused when the accused raises a specific defence that the cheque was handed over to that third party, and whether the failure to do so, despite the third party being available, invalidates the statutory presumptions under Sections 118 and 139 of the Negotiable Instruments Act.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the respondent admitted the cheque’s issuance and signature, and failed to reply to the statutory notice. The defence that the cheque was given to Narayana Reddy was not merely speculative but required corroboration. DW2, the respondent’s relative, confirmed Narayana Reddy’s existence and availability. Under Section 139, the presumption of liability arises upon proof of issuance and dishonour. The respondent, by raising a specific defence, was obligated to prove it. Failure to examine Narayana Reddy, who was available and known to both parties, rendered the defence hollow. The lower appellate court erred in shifting the burden to the complainant to prove the absence of third-party involvement.
For the Respondent
The respondent’s counsel argued that the appellant’s testimony was inconsistent - first claiming a loan, then a chit transaction. The appellant admitted he intended to examine Narayana Reddy but did not. The respondent’s evidence, supported by DW2, established a plausible alternative explanation. The trial court had relied too heavily on statutory presumptions without examining the credibility of the complainant’s financial capacity or the possibility of cheque misuse. The lower appellate court correctly applied Chandrappa v. State of Karnataka and Basalingappa v. Mudibasappa, holding that where two reasonable conclusions are possible, acquittal must be upheld.
The Court's Analysis
The Court examined the interplay between statutory presumptions under Sections 118 and 139 of the Negotiable Instruments Act and the burden of proof when a specific defence is raised. It held that while the initial burden lies on the complainant to prove issuance and dishonour, once the accused raises a credible defence, the burden shifts to the accused to substantiate it.
"Once the respondent takes a specific stand that the cheque was given to Narayana Reddy and the said Narayana Reddy is very much available, it is for the respondent to examine Narayana Reddy to probablize her defence. But in this case, the respondent failed to do so."
The Court emphasized that DW2’s testimony confirmed Narayana Reddy’s existence and availability. The respondent’s failure to call him, despite his proximity and relevance, rendered her defence unproven. The Court distinguished this from mere suspicion, noting that a defence based on a third party’s involvement cannot be left uncorroborated when that party is accessible.
The Court rejected the lower appellate court’s reasoning that the complainant should have examined Narayana Reddy. It held that the complainant is not obligated to disprove every speculative defence raised by the accused. The burden to prove an affirmative defence rests squarely on the accused. The Court further noted that the respondent’s admission of receiving the statutory notice and her inaction against the appellant for alleged misuse further weakened her credibility.
The Court also dismissed the argument that the appellant’s inconsistent testimony invalidated the case. It held that a change in narrative from loan to chit fund, when explained as a clarification of context, does not amount to a material contradiction. The core fact - that the cheque was issued by the respondent and dishonoured - remained unchallenged.
The Verdict
The appellant succeeded. The Madras High Court set aside the judgment dated 15.04.2021 of the Additional District Judge, Hosur, and restored the conviction and sentence dated 30.01.2020 of the Judicial Magistrate, Fast Track Court, Hosur. The respondent is directed to undergo one year of simple imprisonment and pay Rs. 3,67,000 as compensation to the appellant. The trial court is directed to issue a conviction warrant. The respondent may approach the appellant for compounding the offence at any stage. The Legal Services Authority, Madras High Court, is directed to pay remuneration to Legal Aid Counsel Ms. R. Gayathri as per norms.
What This Means For Similar Cases
The Burden Shifts to the Accused When Raising a Third-Party Defence
- Practitioners must now argue that if an accused claims a cheque was given to a third party, the burden to prove that claim lies on the accused.
- Mere assertion that a third party was involved is insufficient; the accused must call that person as a witness.
- Failure to do so, especially when the third party is known and available, renders the defence legally untenable.
Statutory Presumptions Are Not Automatically Rebutted by Suspicion
- Courts will not accept speculative defences based on unexamined third parties.
- The presumption under Section 139 NI Act remains intact unless the accused provides credible, corroborated evidence.
- Inconsistent testimony by the complainant does not automatically invalidate the case if the core facts (issuance and dishonour) are proven.
Prosecution Need Not Disprove Every Alternative Theory
- The complainant is not required to investigate or disprove every possible alternative explanation raised by the accused.
- The onus is on the accused to substantiate their defence with evidence.
- Appellate courts must not substitute their own view of credibility for that of the trial court when the trial court’s findings are supported by evidence and statutory presumptions.
