The High Court of Himachal Pradesh has affirmed that a cheque issued as security for a financial obligation remains fully liable under Section 138 of the Negotiable Instruments Act if dishonoured, provided the statutory presumptions are not rebutted. The judgment underscores the critical burden on the accused to lead evidence or rely on available materials to challenge the presumption of lawful debt, and reinforces that inaction or failure to adduce proof is fatal to any defence.
Background & Facts
The Dispute
The dispute arose from the sale of a second-hand truck bearing registration No. HR-46C-7177. The complainant, Parvesh Kumar, had financed the truck through Shri Ram Finance Company. Due to financial difficulties, he sought to sell the vehicle. In December 2015, the accused, Karan Pal, approached him for purchase. On 18.12.2015, the parties entered into an oral and implied agreement under which the accused agreed to assume the outstanding loan installments payable to the finance company. As part of this arrangement, the accused issued a cheque bearing No. 429111 for Rs. 3,50,000, drawn on State Bank of Patiala, Branch Paonta Sahib, in favour of the complainant.
Key Facts
- The truck was purchased by the complainant for Rs. 5,72,000 and sold to the accused for Rs. 6,50,000
- The accused made no upfront payment; payment was to be made through monthly installments to the finance company
- The complainant had already paid Rs. 1,50,000 to the finance company on behalf of the accused for unpaid installments
- The cheque was presented for encashment on 21.07.2016 and dishonoured on 22.07.2016 with the remark "funds insufficient"
- A legal notice dated 10.08.2016 was sent via registered post and received by the accused
- The accused did not respond to the notice or make payment within the statutory 15-day period
- The complainant filed a complaint under Section 138 NI Act on 15.01.2017
Procedural History
- 15.01.2017: Complaint filed before Judicial Magistrate First Class, Court No. 2, Paonta Sahib (Criminal Case No. 28 of 2017)
- 10.06.2019: Trial Court convicted the accused under Section 138 NI Act and sentenced him to two years simple imprisonment and Rs. 3,90,000 compensation
- 13.06.2019: Sentence order passed
- 20.04.2023: Additional Sessions Judge, Sirmour, dismissed the appeal (Criminal Appeal No. 74-N/10 of 2019), upholding conviction
- 08.04.2026: Criminal Revision Petition No. 270 of 2023 dismissed by High Court of Himachal Pradesh
The Parties' Positions
For the Accused (Petitioner): Contended that the cheque was issued solely as security and not for discharge of an existing debt. Asserted that payments were being made directly to the finance company and that the cheque was to be encashed only if installments were defaulted. Claimed the trial court failed to appreciate the nature of the transaction.
For the Complainant (Respondent): Maintained that the cheque was issued as part of a binding commercial transaction to secure payment of the truck’s price. Argued that the accused’s failure to pay installments triggered the cheque’s maturity, and its dishonour constituted a clear violation of Section 138.
Relief Sought
The petitioner sought quashing of the conviction and sentence, arguing that the courts below erred in applying Section 138 to a security cheque and in failing to appreciate the absence of a legally enforceable debt.
The Legal Issue
The central question was whether a cheque issued as security for a financial obligation can attract criminal liability under Section 138 of the Negotiable Instruments Act upon dishonour, and whether the statutory presumptions under Sections 118 and 139 can be rebutted without leading any evidence.
Arguments Presented
For the Appellant/Petitioner
The petitioner’s counsel argued that the cheque was issued as a contingent security, not for an existing debt, and therefore did not satisfy the requirement of a "legally enforceable debt or liability" under Section 138. Relied on the accused’s statement under Section 313 Cr.P.C. and the unproduced written agreement dated 18.12.2015 to suggest the cheque was conditional. Contended that the trial court erred in rejecting the application under Section 391 Cr.P.C. to summon witnesses to prove the security nature of the cheque. Invoked Sripati Singh v. State of Jharkhand to argue that security cheques are not per se exempt, but insisted the prosecution failed to prove an enforceable debt.
For the Respondent/State
The State and complainant argued that the cheque was issued in the context of a commercial transaction where the accused undertook to pay installments. The dishonour, following a statutory notice, satisfied all ingredients of Section 138. Emphasized that the accused never disputed the signature on the cheque or receipt of notice. Highlighted that the accused had ample opportunity to lead evidence but chose not to, thereby failing to rebut the statutory presumptions under Sections 118 and 139. Relied on Laxmi Dyechem v. State of Gujarat to assert that the burden of raising a probable defence lies on the accused, and mere assertion without evidence is insufficient.
The Court's Analysis
The Court undertook a meticulous review of the evidence and legal principles governing Section 138. It noted that the accused admitted in his statement under Section 313 Cr.P.C. to the dishonour of the cheque due to insufficient funds and receipt of the legal notice. Crucially, he did not dispute the authenticity of the cheque or its issuance.
"No doubt, aforesaid presumption is rebuttable, but to rebut such presumption, accused either can refer to the documents and evidence led on record by the complainant or presumption can be rebutted by leading positive evidence, if any. However, in the instant case, despite sufficient opportunities, petitioner-accused failed to lead any evidence and as such, he otherwise failed to probablize the defence, sought to be raised by him, while deposing under Section 313 Cr.P.C."
The Court held that the presumption under Section 139 - that the cheque was issued for discharge of a lawful debt - was triggered upon proof of issuance and dishonour. The accused bore the burden to raise a probable defence, which could be done by relying on the complainant’s evidence or by adducing his own. The Court observed that the accused’s reliance on an unproduced written agreement, which he had in his possession since the outset, was insufficient. His failure to apply for summoning witnesses under Section 391 Cr.P.C. until late in the trial, and his subsequent abandonment of the application, demonstrated a lack of bona fide intent to substantiate his defence.
The Court affirmed the principle laid down in Sripati Singh v. State of Jharkhand: a cheque issued as security is not immune from prosecution under Section 138 if it is presented and dishonoured after the underlying obligation becomes due. The term "security cheque" is not statutorily defined but must be inferred from the transaction’s context. Here, the cheque was issued contemporaneously with the sale, and the accused’s failure to pay installments rendered the cheque mature for presentation.
The Court further emphasized the limited scope of revisional jurisdiction under Section 397 Cr.P.C., citing State of Kerala v. Puttumana Illath Jathavedan Namboodiri, and found no glaring error or miscarriage of justice warranting interference with the concurrent findings of the trial and appellate courts.
The Verdict
The petition was dismissed. The High Court upheld the conviction under Section 138 of the Negotiable Instruments Act and the sentence of two years simple imprisonment and compensation of Rs. 3,90,000. The petitioner was directed to surrender before the trial court within 15 days to serve the sentence. His bail bonds were cancelled, and all interim orders stood vacated.
What This Means For Similar Cases
Security Cheques Are Not Immune from Section 138
- Practitioners must advise clients that issuing a cheque as security for a loan or sale does not automatically exempt it from criminal liability under Section 138
- The critical factor is whether the underlying obligation was enforceable and whether the cheque was presented after the obligation matured
- Merely labelling a cheque as "security" is insufficient; the transaction’s substance governs liability
Failure to Lead Evidence Is Fatal
- Accused must actively rebut the presumption under Section 139 - either by cross-examining the complainant’s evidence or by adducing their own
- Relying on unproduced documents or unsworn assertions under Section 313 Cr.P.C. without supporting evidence will not suffice
- Applications under Section 391 Cr.P.C. must be filed promptly and substantiated; delay or abandonment weakens the defence
Statutory Presumptions Are Powerful but Rebuttable
- The burden of raising a probable defence lies on the accused, and the standard is preponderance of probabilities, not beyond reasonable doubt
- Courts will not re-appreciate evidence in revision unless a gross miscarriage of justice is evident
- Prosecution need not prove intent; only issuance, dishonour, and notice are required to trigger the presumption
