The Karnataka High Court has reaffirmed that a surrender deed documenting crystallized liability, coupled with the issuance of signed cheques, establishes a legally enforceable debt under Section 138 of the Negotiable Instruments Act, even where the underlying transaction spans years. The judgment underscores that mere denial of execution, without forensic or documentary rebuttal, cannot override statutory presumptions.
Background & Facts
The Dispute
The dispute arose from a commercial lease arrangement between the complainant, Dyani Antony Paul, owner of an industrial unit named 'Prem Prasad Bottling' in Mangaluru, and the accused, Anil Hegde, who leased the unit for business operations. The accused defaulted on lease rentals and other financial obligations, leading to the surrender of the unit and execution of a deed of surrender on 18.01.2019, which crystallized the total liability at Rs. 5,15,73,798/-. To discharge this liability, the accused issued two cheques: No. 968221 dated 01.02.2019 for Rs. 3,00,00,000/- and No. 968224 dated 26.02.2019 for Rs. 2,15,73,798/-. Both cheques were dishonored for insufficient funds.
Key Facts
- The complainant owned the industrial premises bearing Door No. 6-54, Sy. No. 40/5(P) and 40/8, Idya Village, Mangaluru, as per registered sale deeds dated 10.08.2012 and 28.06.2013.
- The accused was not the owner of the premises; he was a tenant under lease agreements (Ex.P-11 and Ex.P-12) executed on 01.04.2015 and 01.04.2016.
- On 18.01.2019, the accused executed a surrender deed (Ex.P-9) returning the unit and its machinery to the complainant, acknowledging a total liability of Rs. 5,15,73,798/- comprising Rs. 2,20,00,000/- as a hand loan, Rs. 80,00,000/- as arrears, and Rs. 2,15,73,798/- as other dues.
- The accused signed Ex.P-9 and his wife, Smt. Shilpa A. Hegde, witnessed it.
- The accused had previously admitted in his Income Tax Returns for A.Y. 2015-16 (Ex.P-20) that he owed Rs. 1,90,70,000/- to the complainant.
- The accused claimed the cheques were issued as security for a loan of Rs. 1,85,00,000/- taken between 2012 and 2016, and that he had repaid it by selling properties to the complainant.
- The accused produced sale deeds (Ex.D-2 and Ex.D-3) showing property transfers, but these showed payments made by the complainant to the accused’s mother and sister, not as repayment of debt.
- The accused never challenged the authenticity of Ex.P-9, Ex.P-11, or Ex.P-12 through handwriting experts or witnesses.
- The accused did not file any FIR or complaint against the complainant for alleged misuse of blank cheques or stamp papers.
- The Enforcement Directorate (ED) had initiated proceedings against the complainant (Ex.D-6), but the accused himself had stated in that proceeding that the complainant had invested Rs. 1,85,00,000/- in his business.
Procedural History
- 18.01.2019: Surrender deed (Ex.P-9) executed.
- 01.02.2019 & 26.02.2019: Cheques issued and later dishonored.
- 15.03.2019: Legal notice issued.
- 16.03.2019: Notice served on accused.
- 28.03.2019: Accused’s reply notice received.
- 09.08.2021: Trial Court (JMFC IV, Mangaluru) convicted accused under Section 138 NI Act; imposed fine of Rs. 6,08,57,000/- with default sentence of two years.
- 01.04.2023: First Appellate Court (I Additional District & Sessions Judge, Mangaluru) upheld conviction but reduced default sentence to six months.
- 12.06.2023: Criminal Revision Petition No. 782/2023 filed by complainant challenging sentence reduction.
- 12.06.2023: Criminal Revision Petition No. 858/2023 filed by accused challenging conviction.
- 16.04.2026: Judgment delivered by Karnataka High Court.
Relief Sought
The complainant sought restoration of the original two-year default sentence. The accused sought acquittal on grounds that no legally enforceable debt existed and that the cheques were issued as security, not for discharge of liability.
The Legal Issue
The central question was whether a surrender deed documenting a crystallized liability, supported by signed cheques and corroborated by Income Tax Returns, constitutes a legally enforceable debt under Section 138 of the Negotiable Instruments Act, even if the underlying transaction occurred years earlier, and whether the accused’s claim of issuing blank cheques as security suffices to rebut the statutory presumption under Section 139.
Arguments Presented
For the Appellant/Petitioner (Accused)
Counsel contended that the surrender deed (Ex.P-9) was fabricated and that the cheques were issued as security for a loan of Rs. 1,85,00,000/- taken between 2012 and 2016, which had been repaid through sale of properties. He argued that the ED proceedings (Ex.D-6) and the accused’s IT returns (Ex.P-20) showed a liability of only Rs. 1,90,70,000/-, contradicting the Rs. 5,15,73,798/- claimed. He further asserted that the complainant had misused blank cheques and stamp papers, and that the First Appellate Court erred in reducing the sentence, as it undermined the complainant’s right to recover compensation.
For the Respondent/State (Complainant)
Counsel argued that the surrender deed (Ex.P-9) was duly executed, signed by the accused and witnessed by his wife, and that the accused never challenged its authenticity. He emphasized that the accused’s silence during cross-examination, failure to produce rebuttal evidence, and admission of liability in IT returns established the debt. He relied on Kumar Exports v. Sharma Carpets and Bir Singh v. Mukesh Kumar to argue that a signed blank cheque, voluntarily handed over, attracts presumption under Section 139, and that mere denial without credible evidence cannot rebut it.
The Court's Analysis
The Court conducted a meticulous review of the documentary and oral evidence, focusing on the statutory presumptions under Section 118 and Section 139 of the Negotiable Instruments Act. It held that once the signature on the cheque is admitted, the burden shifts to the accused to rebut the presumption that the cheque was issued for discharge of a legally enforceable debt.
"Once the signature of accused on the cheque is established then the 'reverse onus' clause become operative. In such a situation the obligation shifts upon the accused to discharge the presumption imposed upon."
The Court found that the accused’s defense - that the cheques were issued as security for a loan of Rs. 1,85,00,000/- - was inconsistent with multiple pieces of evidence. The sale deeds (Ex.D-2 and Ex.D-3) showed payments made by the complainant to the accused’s family members, not as repayment of debt. The accused’s own IT returns (Ex.P-20) for A.Y. 2015-16 admitted a liability of Rs. 1,90,70,000/-, which he never cleared. The surrender deed (Ex.P-9) dated 18.01.2019, which crystallized the total liability at Rs. 5,15,73,798/-, was not disputed during cross-examination, nor was it challenged through forensic means.
The Court further held that the accused’s failure to file a criminal complaint against the complainant for alleged misuse of blank cheques, despite being a businessman with commercial acumen, rendered his defense implausible. The Court relied on Bir Singh v. Mukesh Kumar to affirm that a blank cheque voluntarily signed and handed over attracts presumption under Section 139, and that the accused must raise a probable defense meeting the standard of preponderance of probability - not mere possibility.
Crucially, the Court held that the surrender deed constituted a new enforceable contract under Section 25(3) of the Indian Contract Act, reviving a time-barred debt. The Court cited K.R. Sudhir v. K.S. Suresh Raju to conclude that a written promise to pay a time-barred debt, even without prior acknowledgment under Section 18 or 19 of the Limitation Act, creates a fresh, enforceable obligation.
"Even if there is no acknowledgement of debt or liability in terms of Sections 18 or 19 of the Limitation Act, if a new agreement comes into existence according to Section 25(3), it is a valid contract and thus a cheque issued in this connection, if dishonoured, attracts penal action under Section 138 of N.I.Act."
The Court declined to interfere with the First Appellate Court’s reduction of the default sentence from two years to six months, noting that the modification complied with Section 65 of the IPC and Section 386 of the CrPC, which prohibit enhancement of sentence in appeal. The Court emphasized that revisional jurisdiction cannot be used to reappreciate facts, citing Sanjabij Tari v. Kishore S. Borcar.
The Verdict
The accused’s revision petition was dismissed, upholding his conviction under Section 138 of the Negotiable Instruments Act. The complainant’s petition challenging the sentence reduction was also dismissed. The Court confirmed the sentence: a fine of Rs. 6,08,57,000/-, of which Rs. 6,08,50,000/- is payable as compensation to the complainant and Rs. 7,000/- to the State. In default of payment, the accused shall undergo simple imprisonment for six months. The Court clarified that serving the default sentence does not absolve the accused of the obligation to pay the fine.
What This Means For Similar Cases
Surrender Deeds Can Create Fresh Enforceable Debts
- Practitioners must treat signed surrender deeds or settlement agreements as potential triggers for Section 138 NI Act liability, even if the underlying debt is time-barred.
- A written promise to pay a time-barred debt under Section 25(3) of the Contract Act revives enforceability, making dishonored cheques issued under such agreements prosecutable.
Blank Cheques with Signature Attract Presumption
- Issuing blank cheques with signature, even as security, does not negate liability under Section 138.
- Mere assertion of misuse without filing an FIR or producing forensic evidence will not rebut the statutory presumption.
- The burden lies on the accused to prove the cheque was not issued for discharge of debt - not on the complainant to prove its purpose.
Silence and Non-Action Are Adverse Inferences
- Failure to challenge document authenticity through handwriting experts, or to file a complaint for alleged misuse, weakens the accused’s defense.
- Cross-examination silence on key documents like surrender deeds or lease agreements is treated as tacit admission.
- Income Tax Returns admitting liability are powerful corroborative evidence and cannot be ignored.
