The Punjab & Haryana High Court has affirmed that a conviction under Section 138 of the Negotiable Instruments Act may be set aside even at the appellate stage if the parties arrive at a genuine compromise, reinforcing the civil nature of the offence and the statutory right to compound it without temporal restriction.
Background & Facts
The Dispute
The petitioner, Isha Arora, was convicted and sentenced under Section 138 of the Negotiable Instruments Act, 1881, for issuing a cheque that was dishonoured. The cheque, bearing No. 564150 and dated 25.06.2008, was issued for Rs. 3,50,000 in discharge of a lawful liability towards the complainant, Dharam Pal. Upon presentation, the cheque was returned by the bank with the remark "Effects not clearer, present again". Despite issuance of a legal notice, the petitioner failed to make payment within the statutory 15-day period, triggering criminal proceedings.
Key Facts
- Cheque issued: 25.06.2008
- Cheque dishonoured: Date not specified, but notice issued thereafter
- Legal notice sent: Date not specified in judgment, but acknowledged as issued
- Trial commenced: Proceedings initiated under Section 138 NI Act
- Trial Court judgment: 06/07.03.2014 - Conviction and sentence of one year rigorous imprisonment and Rs. 4 lakh compensation
- Appeal filed: By petitioner against conviction
- Sessions Court judgment: 08.01.2019 - Appeal dismissed, conviction and sentence upheld
- Revision petition filed: Before Punjab & Haryana High Court
- Compromise reached: After 12 years of litigation, full payment made by petitioner
- Petitioner’s financial condition: Described as poor, with difficulty in arranging funds
Procedural History
- 25.06.2008: Cheque issued by petitioner to respondent
- Date unknown: Cheque dishonoured; bank returned it with remark "Effects not clearer, present again"
- Date unknown: Legal notice issued under Section 138 NI Act
- 06/07.03.2014: Trial Court (Judicial Magistrate Ist Class, Jagadhari) convicted petitioner and sentenced him to one year rigorous imprisonment and Rs. 4 lakh compensation
- 08.01.2019: Sessions Judge, Yamuna Nagar, dismissed petitioner’s appeal, upholding conviction and sentence
- 277 CRR-213-2019: Revision petition filed before Punjab & Haryana High Court
- 05.05.2026: Judgment delivered by High Court
The Parties' Positions
For the Petitioner: Counsel submitted that the entire amount of Rs. 3,50,000 has been fully paid to the complainant in terms of a compromise. He emphasized that the dispute is civil in nature, the parties have settled, and the petitioner has endured 12 years of litigation under severe financial hardship. He prayed for compounding of the offence and waiver of compounding fees.
For the Respondent (Legal Representatives): No objection to compounding of the offence. Counsel affirmed that payment has been made and expressed willingness to accept the compromise.
Relief Sought
The petitioner sought compounding of the offence under Section 147 of the NI Act, setting aside the conviction and sentence passed by the trial and appellate courts, and waiver of compounding fees due to his indigent financial condition.
The Legal Issue
Can a conviction under Section 138 of the Negotiable Instruments Act be set aside on compounding of the offence at the appellate stage, even after the accused has been convicted and sentenced?
Arguments Presented
For the Petitioner
Counsel relied on multiple judgments of the Supreme Court to argue that Section 147 of the NI Act permits compounding at any stage of proceedings, including after conviction and appeal. He cited B.V. Seshaiah v. State of Telangana, K. Subramanian v. R. Rajathi, K.M. Ibrahim v. K.P. Mohammed, and Damodar S. Prabhu v. Sayed Babalal H. to establish that the nature of the offence is civil, the law encourages settlement, and no statutory bar exists against compounding at the appellate or revision stage. He further submitted that the petitioner had fulfilled the substantive condition of payment and that the purpose of the statute - ensuring credibility of financial transactions - had been achieved.
For the Respondent
The legal representatives of the respondent did not oppose the prayer for compounding. They confirmed that the amount due had been paid in full and expressed no objection to the petitioner’s request to end the litigation.
The Court's Analysis
The Court undertook a detailed examination of the statutory framework under Section 147 of the NI Act and the Supreme Court’s jurisprudence on compounding. It noted that Section 147 creates a non-obstante clause, overriding the general provisions of Section 320 CrPC, and explicitly permits compounding of offences under Section 138 at any stage. The Court emphasized that the Supreme Court has consistently held that the offence under Section 138 is primarily civil in nature, designed to protect commercial confidence, not to impose punitive sanctions.
"This Court has noted that the object of the statute was to facilitate smooth functioning of business transactions... the provision is necessary as in many transactions’ cheques were issued merely as a device to defraud the creditors... at the same time, it was also noted that nature of offence under Section 138 primarily related to a civil wrong and the 2002 amendment specifically made it compoundable."
The Court further relied on Damodar S. Prabhu, which explicitly held that "there is no stage prescribed for compounding of offence under Section 147 of the Act" and that compounding is permissible even after appellate proceedings have concluded. The Court rejected the notion that conviction or sentence creates an irreversible bar to compounding, observing that the legislature’s intent was to encourage settlement and reduce litigation burden on courts.
The Court acknowledged the petitioner’s financial hardship and the 12-year pendency of the case, noting that the complainant had no grievance and had accepted payment. It held that the ends of justice would be best served by allowing compounding, as the underlying civil debt had been discharged.
The Verdict
The revision petition was allowed. The High Court set aside the conviction and sentence passed by the trial court dated 06/07.03.2014 and affirmed by the Sessions Court on 08.01.2019. The petitioner was acquitted of the charge under Section 138 of the NI Act. The Court permitted compounding of the offence but declined to waive the compounding fee entirely. Instead, it directed the petitioner to deposit Rs. 10,000 as costs with the Haryana State Legal Services Authority on or before 20.05.2026. A compliance report was to be submitted by the Authority within one week of deposit.
What This Means For Similar Cases
Compounding Is Permissible at Any Stage
- Practitioners may now file compounding applications even after conviction and appeal, provided payment has been made and the complainant consents
- The burden shifts to the prosecution to show that the compromise is not bona fide - mere delay or conviction does not disqualify compounding
- Courts must prioritize the statutory intent of Section 147 over procedural technicalities
Financial Hardship May Reduce Costs, Not Waive Them
- Courts may reduce compounding fees based on financial hardship, as done here, but outright waiver is not guaranteed
- The Rs. 10,000 cost imposed reflects judicial discretion under Damodar Prabhu to balance equity with procedural integrity
- Practitioners should document financial hardship with affidavits or income proof when seeking fee reduction
Settlement Overrides Conviction in NI Act Cases
- A genuine compromise, coupled with payment, renders the criminal proceeding redundant
- The acquittal is not a finding of innocence but a recognition that the statutory purpose has been fulfilled
- This judgment reinforces that Section 138 is not a tool for punishment but for enforcement of civil liability
