SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV SINGHversusTHE STATE OF JHARKHAND & ANR.

116                      [2021]REPORTS
               SUPREME COURT   10 S.C.R. 116              [2021] 10 S.C.R.


A       SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON
                          GAURAV SINGH
                                        v.
                   THE STATE OF JHARKHAND & ANR.
B                  (Criminal Appeal Nos. 1269-1270 of 2021)
                              OCTOBER 28, 2021
                 [M. R. SHAH AND A. S. BOPANNA, JJ.]
             Negotiable Instruments Act, 1882: s.138 – Respondent no.2
      obtained financial assistance of Rs.2 crore from the appellant due
C
      to previous acquaintance and assured that the amount would be
      returned in June/July 2015 – Towards the same, cheques were
      handed over to appellant – Based on assurance of payment,
      appellant presented the cheques for realisation in October 2015,
      however same were dishonoured on account of insufficiency of
D     funds – Appellant filed complaint under s.420 IPC and also under
      s.138 NI Act – Respondent no.2 on appearance filed discharge
      application before trial court which was rejected – High Court,
      however, set aside the order of trial court – Hence instant appeal –
      Held: Mere dishonourment of the cheque cannot be construed as
      an act on the part of the respondent No.2 of deliberate intention to
E
      cheat and the mens rea in that regard cannot be gathered from the
      point the amount was received – In the facts and circumstances of
      the instant case, there was no sufficient evidence to indicate that
      the offence under s.420 IPC was made out – However, on dishonour
      of cheques, the consequences contemplated under the Negotiable
F     Instruments Act would befall on respondent No.2 – Respondent No.2
      may have the defence in the proceedings which will be a matter for
      trial – In any event, the respondent No.2 in the fact situation cannot
      make a grievance with regard to the cognizance being taken by the
      Magistrate or the rejection of the petition seeking discharge at this
      stage – Penal Code, 1860 – s.420.
G
            Negotiable Instruments Act, 1882: s.138 – Claim of
      respondent no.2-drawer that the cheque was towards towards
      “security” and the same could not have been treated a a cheque
      issued towards the discharge of legally recoverable debt and
      therefore, complaint under s.138 was not maintainable – Held: A
H
                                       116
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                    117
            SINGH v. THE STATE OF JHARKHAND

cheque issued as security pursuant to a financial transaction cannot     A
be considered as a worthless piece of paper under every
circumstance – ‘Security’ in its true sense is the state of being safe
and the security given for a loan is something given as a pledge of
payment – It is given, deposited or pledged to make certain the
fulfilment of an obligation to which the parties to the transaction
                                                                         B
are bound – If in a transaction, a loan is advanced and the borrower
agrees to repay the amount in a specified time frame and issues a
cheque as security to secure such repayment; if the loan amount is
not repaid in any other form before the due date or if there is no
other understanding or agreement between the parties to defer the
payment of amount, the cheque which is issued as security would          C
mature for presentation and the drawee of the cheque would be
entitled to present the same – On such presentation, if the same is
dishonoured, the consequences contemplated under s.138 and the
other provisions of N.I. Act would flow.
      Partly allowing the appeal, the Court                              D
      HELD: 1.1 There is no error in the conclusion reached by
the High Court that no case punishable under Section 420 IPC
can be made out in these facts. This is due to the fact that even
as per the case of the appellant, the amount advanced by the
appellant is towards the business transaction and a loan agreement       E
had been entered into between the parties. Under the loan
agreement, the period for repayment was agreed and the cheque
had been issued to ensure repayment. It is no doubt true that the
cheques when presented for realisation were dishonoured. The
mere dishonourment of the cheque cannot be construed as an
act on the part of the respondent No.2 with a deliberate intention       F
to cheat and the mens rea in that regard cannot be gathered from
the point the amount had been received. In the present facts and
circumstances, there is no sufficient evidence to indicate the
offence under Section 420 IPC is made out and therefore on that
aspect, there is no reason to interfere with the conclusion reached      G
by the High Court. [Para 11][125-H; 126-A-D]
      1.2 The High Court has itself arrived at the conclusion that
the instant case becomes a simpliciter case of non-refunding of
loan which cannot be a basis for initiating criminal proceedings.
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118            SUPREME COURT REPORTS                      [2021] 10 S.C.R.


A     The conclusion to the extent of holding that it would not constitute
      an offence of cheating, would be justified. However, when the
      High Court itself has accepted the fact that it is a case of non-
      refunding of the loan amount, the first aspect that there is a legally
      recoverable debt from the respondent No.2 to the appellant is
      prima-facie established. [Para 12][126-D-E]
B
            Sampelly Satyanarayana Rao v. Indian Renewable
            Energy Development Agency Ltd. [2016] 6 SCR 531;
            M/s. Womb Laboratory Pvt. Ltd. v. Vijay Ahuja and Anr.
            (Criminal Appeal No.1382-1383 of 2019) – relied on.
C           Sudhir Kr. Bhalla v. Jagdish Chand and Others 2008 7
            SCC 137 : [2008] 7 SCR 459 – held inapplicable
            Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd.
            (2014) 12 SCC 539: [2014] 5 SCR 56 – referred to.
             2.1 When a cheque is issued even though as ‘security’,
D     the consequence flowing therefrom is also known to the drawer
      of the cheque and if the cheque is presented and dishonoured,
      the holder of the cheque/drawee would have the option of initiating
      the civil proceedings for recovery or the criminal proceedings
      for punishment in the fact situation, but in any event, it is not for
E     the drawer of the cheque to dictate terms with regard to the nature
      of litigation. [Para 17][130-D-E]
            2.2 If the above principle is kept in view, under the loan
      agreement in question the respondent No.2 though had issued
      the cheques as security, he had also agreed to repay the amount
F     during June/July 2015, the cheque which was held as security
      was presented for realization on 20.10.2015 which is after the
      period agreed for repayment of the loan amount and the loan
      advanced had already fallen due for payment. Therefore, prima
      facie the cheque which was taken as security had matured for
      payment and the appellant was entitled to present the same. On
G     dishonour of such cheque the consequences contemplated under
      the Negotiable Instruments Act had befallen on respondent No.2.
      Respondent No.2 may have the defence in the proceedings which
      will be a matter for trial. In any event, respondent No.2 in the
      fact situation cannot make a grievance with regard to the
      cognizance being taken by the Magistrate or the rejection of the
H
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                  119
            SINGH v. THE STATE OF JHARKHAND

petition seeking discharge at this stage. [Para 18][130-F-H;           A
131-A]
      3.1 The notice as issued indicates that the appellant has at
the very outset after the cheque was dishonoured, intimated the
respondent no.2 that he had agreed to clear the loan by June/
July 2015 after which the appellant had presented the cheque for       B
encashment on 26.10.2015 and the assurance to repay has not
been kept up. In the said circumstance, the cheque though issued
as security at the point when the loan was advanced, it was issued
as an assurance to repay the amount after the debt becomes due
for repayment. The loan was in subsistence when the cheque
was issued and had become repayable during June/July 2015 and          C
the cheque issued towards repayment was agreed to be presented
thereafter. If the amount was not paid in any other mode before
June/July 2015, it was incumbent on the respondent No.2 to
arrange sufficient balance in the account to honour the cheque
which was to be presented subsequent to June/July 2015.                D
[Paras 20, 21][131-G-H; 132-A]
       3.2 These aspects would prima-facie indicate that there was
a transaction between the parties towards which a legally
recoverable debt was claimed by the appellant and the cheque
issued by the respondent No.2 was presented. On such cheque            E
being dishonoured, cause of action had arisen for issuing a notice
and presenting the criminal complaint under Section 138 of N.I.
Act on the payment not being made. The further defence as to
whether the loan had been discharged as agreed by respondent
No.2 and in that circumstance the cheque which had been issued
as security had not remained live for payment subsequent thereto       F
etc. at best can be a defence for the respondent No.2 to be put
forth and to be established in the trial. In any event, it was not a
case for the Court to either refuse to take cognizance or to
discharge the respondent No.2 in the manner it has been done
by the High Court. Therefore, though a criminal complaint under        G
Section 420 IPC was not sustainable in the facts and circumstances
of the instant case, the complaint under section 138 of the N.I
Act was maintainable and all contentions and the defence
were to be considered during the course of the trial. [Para 22]
[132-B-E]
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120             SUPREME COURT REPORTS                          [2021] 10 S.C.R.


A                              Case Law Reference
      [2016] 6 SCR 531                  relied on                para 7
      [2008] 7 SCR 459                  held inapplicable        para 7
      [2014] 5 SCR 56                   referred to              para 14
B          CRIMINAL APPELLATE JURISDICTION: Criminal Appeal
      Nos.1269-1270 of 2021.
            From the Judgment and Order dated 17.12.2019 of the High Court
      of Jharkhand at Ranchi in Cr. M.P. No.2635 of 2017 and 2655 of 2017.
             M. C. Dhingra, Rajeev Ranjan Tewari, Gaurav Dhingra, Vikrant
C
      Yadav, Ghanshyam Chaudhary, Aviral Saxena, Raghvendra Shukla, Advs.
      for the Appellant.
            Rajiv Singh, AAG, Keshav Murthy, Ashwin Vaish, Raj Kishor
      Choudhary, Shakeel Ahmed, Ms. Malvika Raghavan, Ms. Girjesh
      Chaturvedi, Anupam Bhati, Vinod Pandey, Vishnu Sharma, Abhishek,
D
      Advs. for the Respondents.
            The Judgment of the Court was delivered by
            A. S. BOPANNA, J.
              1. The appellant is before this Court assailing the order dated
E     17.12.2019 passed by the High Court of Jharkhand at Ranchi in Criminal
      M.P. No.2635 of 2017 and Criminal M.P. No.2655 of 2017. Through the
      said order, the High Court has allowed the said Crl.Miscellaneous Petitions
      and has set aside the orders dated 04.07.2016 and 13.06.2019 passed by
      the Judicial Magistrate First Class, Palamau in Complaint Case No.1833
F     of 2015. The learned Judicial Magistrate by the order dated 04.07.2016
      had taken cognizance of the offence alleged against the respondent No.2
      herein. By the order dated 13.06.2019 the learned Judicial Magistrate
      had rejected the petition filed by the respondent No.2 seeking discharge
      in the said criminal complaint.

G            2. The brief facts leading to the present case as pleaded is that
      the appellant and the respondent No.2 are known to each other inasmuch
      as the respondent No.2 and the daughter of the appellant were pursuing
      their education together in London. On their return to India, the respondent
      No.2 had settled in Bangalore and due to the earlier acquaintance, the
      cordial relationship amongst the families had continued. The respondent
H     No.2 on learning that the appellant was involved in business, had
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                         121
   SINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

approached him at Daltonganj and sought financial assistance to the           A
tune of Rs.1 crore so as to enable the respondent No.2 to invest the
same in his business. Since the respondent No.2 had assured that the
same would be returned, the appellant placed trust in him and the appellant
claims to have advanced further sum and in all a total sum of Rs.2
crores during the periods between January 2014 to July 2014. The said
                                                                              B
amount was paid to respondent No.2 by transferring from the account
of appellant’s daughter and also from the account of the appellant.
Towards the said transaction, four agreements are stated to have been
entered acknowledging the receipt of the loan. The said agreements
were reduced into writing on non-judicial stamp papers bearing No.
B489155, B489156, B489157 and B489159.                                        C
       3. The respondent No.2 assured that the amount would be returned
during June/July 2015. Towards the same, three cheques amounting to
Rs.1 crore was handed over to the appellant. Thereafter, three more
cheques for Rs.1 crore was also given. The appellant is stated to have
met respondent No.2 during July 2015 when the respondent No.2 assured         D
that the amount will be repaid during October 2015. Based on such
assurance, the appellant presented the cheques for realisation on
20.10.2015. On presentation, the said cheques were returned due to
‘insufficient funds’ in the bank account of respondent No.2. The appellant
therefore got issued a legal notice as contemplated under Section 138 of
the Negotiable Instruments Act (“N.I. Act” for short). Since the              E
respondent No.2 had taken the money on the assurance that the same
would be returned but had deceived the appellant, the appellant contended
that the respondent No.2 had cheated him and accordingly the complaint
was filed both under Section 420 of IPC as also Section 138 of N.I. Act.
The appellant had submitted the sworn statement of himself and                F
witnesses. The learned Judicial Magistrate through the order dated
04.07.2016 took cognizance and issued summons to the respondent No.2.
       4. The respondent No.2 on appearance filed a miscellaneous
petition seeking discharge from the criminal proceeding, which was
rejected by the order dated 13.06.2019. It is in that background, the         G
respondent No.2 claiming to be aggrieved by the order dated 04.07.2016
and 13.06.2019 approached the High Court in the said criminal
miscellaneous petitions. The High Court, through the impugned order
has allowed the petitions filed by the respondent No.2. The appellant
therefore claiming to be aggrieved is before this Court in these appeals.
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122             SUPREME COURT REPORTS                          [2021] 10 S.C.R.


A           5. We have heard Mr. M.C. Dhingra, learned counsel for the
      appellant, Mr. Raj Kishor Choudhary, learned counsel for the respondent
      No.1, Mr. Keshav Murthy, learned counsel for respondent No.2 and
      perused the appeal papers.
             6. The learned counsel for the appellant would contend that the
B     respondent No.2 taking advantage of the acquaintance with the family
      of the appellant, had borrowed the amount which was to be repaid and
      the cheque issued was towards discharge of the said amount. In the said
      circumstance, when the cheques issued was for discharge of the legally
      recoverable debt and it had been dishonoured, the provisions of Section
      138 of N.I. Act would get attracted. Therefore, the complaint filed by
C
      the appellant is in accordance with law. It is his further contention that in
      the present case since respondent No.2 had gained the confidence of
      the appellant due to the acquaintance with his daughter and in that
      circumstance when the amounts which had been taken by him earlier
      had been repaid so as to gain the confidence and having received
D     substantial amount had at that stage not made arrangement for sufficient
      funds in the bank despite having issued the cheques to assure payment,
      the same would amount to the respondent No.2 cheating the appellant
      by design and therefore would attract Section 420 IPC. It is contended
      that towards the amount received, the same had been acknowledged by
      subscribing the signature to the loan agreement. Further, when there
E
      was an undertaking to repay the same, the cheque was issued towards
      such discharge of legally recoverable debt and the cheque on presentation
      after the agreed due date for repayment of the loan was dishonoured,
      the same would constitute an offence. In that regard, it is contended that
      the learned Judicial Magistrate having taken note of the complaint and
F     the sworn statements recorded by the appellant and his witnesses had
      taken cognizance and issued summons. In such event, the order passed
      by the learned Judicial Magistrate for taking cognizance and also to
      reject the discharge petition filed by the respondent No.2 was in
      accordance with law. It is contended that the learned Judge of the High
      Court had in fact committed an error in arriving at the conclusion that
G
      the cheque issued by the respondent No.2 was towards ‘security’ and
      that the same could not have been treated as a cheque issued towards
      the discharge of legally recoverable debt. It is contended that the learned
      Judge has proceeded at a tangent and committed an error and as such
      the order passed by the High Court calls for interference.
H
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                           123
   SINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

       7. To contend that the cheque issued towards discharge of the            A
loan and presented for recovery of the same cannot be construed as
issued for ‘security’ has relied on the decision of this Court in the case
of Sampelly Satyanarayana Rao vs. Indian Renewable Energy
Development Agency Ltd., (Criminal Appeal No.867 of 2016) and in
M/s Womb Laboratory Pvt. Ltd. vs. Vijay Ahuja and Anr. (Criminal
                                                                                B
Appeal No.1382-1383 of 2019). Hence, it is contended that the
observation contained in the order of the High Court that a cheque issued
towards security cannot attract the provision of Section 138 of N.I. Act
is erroneous and the reference made by the High Court to the decision
in Sudhir Kr. Bhalla vs. Jagdish Chand and Others 2008 7 SCC 137
is without basis. The learned counsel therefore contends that the order         C
passed by the High Court is liable to be set aside and the criminal complaint
be restored to file to be proceeded in accordance with law.
       8. Mr. Keshav Murthy, learned counsel for respondent No.2 would
contend that the learned Judicial Magistrate without application of mind
to the fact situation had taken cognizance and issued summons and had           D
not appropriately considered the case put forth by the respondent No.2
seeking discharge. He would contend that the High Court on the other
hand, has taken note of the entire gamut of the case and has arrived at
the conclusion that the offence alleged both under Section 420 IPC and
Section 138 of the N.I. Act has not been made out. It is contended that
the claim for the sum of Rs. 2 crores as made in the complaint is without       E
basis. It is his case that the respondent No.2 has issued a comprehensive
reply disputing the claim put forth by the appellant. It is contended that
from the very complaint and the statement of witnesses recorded by the
learned Judicial Magistrate it is evident that no criminal offence is made
out in the instant case. Even if the case as put forth in the complaint is      F
taken note, at best the transaction can be considered as an advancement
of loan for business purpose and even if it is assumed that the said
amount was not repaid it would only give rise to civil liability and the
appellants could have only filed a civil suit for recovery of the loan. The
statement of the witnesses, more particularly the daughter of the
complainant would indicate the long-standing relationship between the           G
parties and also the monetary transaction which in any event does not
constitute a criminal offence. It is contended that under any circumstance,
the offence as alleged under Section 420 of IPC cannot be sustained.
Insofar as the offence alleged against the respondent No.2 under section
138 of N.I. Act, the same would also not be sustainable when the                H
124            SUPREME COURT REPORTS                          [2021] 10 S.C.R.


A     complainant himself has relied on the loan agreement wherein reference
      is made to the cheque being issued as security for the loan. The learned
      counsel contends that the High Court in fact has taken note of these
      aspects, proceeded in its correct perspective and has arrived at a just
      conclusion, which does not call for interference. He therefore, contends
      that the above appeals be dismissed.
B
             9. In the light of the rival contentions, a perusal of the appeal
      papers would disclose that it is the very case of the appellant that he has
      advanced substantial amount of Rs. 2 crores to the respondent No.2 by
      way of financial assistance for business purpose. While taking note of
      the nature of the transaction and also the proceedings initiated, it is
C     necessary for us to remain conscious of the fact that the proceedings
      between the parties is at the preliminary stage and any conclusive findings
      rendered in relation to the dispute between the parties would affect their
      case if ultimately the appellants were to succeed herein and the criminal
      proceedings are to be restored for further progress. Therefore, what is
D     necessary to be examined herein is, as to whether the appellant has
      prima facie established a transaction under which there is a legally
      recoverable debt payable to the appellant by the respondent No.2 and as
      to whether the cheques in question relating to which the complaint has
      been filed by the appellant is issued towards discharge of such legally
      recoverable debt. In that regard, what is necessary to be considered is
E     also as to whether the cheques in question are still to be considered only
      as ‘security’ for the said amount and whether it was not liable to be
      presented for recovery of the legally recoverable debt. The question
      which would also arise for consideration is as to whether the complaint
      filed by the appellant should be limited to a proceeding under Section
F     138 of N.I. Act or on the facts involved, whether the invoking of Section
      420 IPC was also justified.
             10. While considering the above aspects, it is evident that the
      learned Magistrate having referred to the complaint and sworn statement
      of the complainant and the witnesses has taken cognizance, issued
G     summons and has consequently arrived at the conclusion that the discharge
      as sought by the respondent No.2 cannot be accepted. The High Court
      on the other hand having referred to the rival contentions has concluded
      as follows:-
            “20. From the aforesaid facts and from the documents of the
H           complainant, this Court finds that long standing ‘business
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                          125
   SINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

      transaction and inability of refunding a loan has been given a colour    A
      of criminal offence of cheating punishable under Section 420 of
      the Indian Penal Code. A breach of trust with mens rea gives rise
      to a criminal prosecution. In this case when I go through the
      evidence before charge of the complainant and the documents of
      the complainant, I find that there were long standing business
                                                                               B
      transactions between the parties. Since 2011 money was advanced
      by the complainant and his family members to the accused and
      the complainant witness admits that money was also transferred
      from the account of the accused to the account of daughter of the
      complainant. From the evidence, I find that there is no material to
      suggest existence of any mens rea. Thus, this case becomes a             C
      case of simplicitor case of non-refunding of loan, which cannot
      be a basis for initiating criminal proceeding. The Hon’ble Supreme
      Court in the case of Samir Sahay alias Sameer Sahay versus
      State of UP & Anr. reported in (2018) 14 SCC 233 held that
      when the dispute between the parties was ordinarily a civil dispute
                                                                               D
      resulting from a breach of contract on the part of the appellant by
      non-refunding of amount advanced, the same would not constitute
      an offence of cheating. In this case also, I find that it is true case
      that the amount of loan has not been refunded, thus, this cannot
      come within the purview of cheating, though the complainant by
      suppressing the material facts, has tried to give a different colour.    E
      Thus, I find that no case punishable under Section 420 of the
      Indian Penal Code can be made out in this case.
      21. Further, I find that it is the documents of the complainant,
      which show that the cheques were given by way of security.
      Even if I do not believe the statement of the accused, the documents     F
      of the complainant cannot be brushed aside. As held earlier,
      supported by the decision of the Hon’ble Supreme Court in the
      case of “Sudhir Kumar Bhalla” (supra) a cheque given by way of
      security cannot attract Section 138 of the Negotiable Instruments
      Act. Since the cheques were given by way of security, which is
      evident from the complainant’s documents (though this fact has           G
      also been suppressed in the complaint petition), I find that Section
      138 of the Negotiable Instruments Act is also not attracted in this
      case.”
      11. In the background of what has been taken note by us and the
conclusion reached by the High Court, insofar as the High Court arriving       H
126             SUPREME COURT REPORTS                          [2021] 10 S.C.R.


A     at the conclusion that no case punishable under Section 420 IPC can be
      made out in these facts, we are in agreement with such conclusion. This
      is due to the fact that even as per the case of the appellant the amount
      advanced by the appellant is towards the business transaction and a loan
      agreement had been entered into between the parties. Under the loan
      agreement, the period for repayment was agreed and the cheque had
B
      been issued to ensure repayment. It is no doubt true that the cheques
      when presented for realisation were dishonoured. The mere
      dishonourment of the cheque cannot be construed as an act on the part
      of the respondent No.2 with a deliberate intention to cheat and the mens
      rea in that regard cannot be gathered from the point the amount had
C     been received. In the present facts and circumstances, there is no
      sufficient evidence to indicate the offence under Section 420 IPC is
      made out and therefore on that aspect, we see no reason to interfere
      with the conclusion reached by the High Court.
             12. Having arrived at the above conclusion and also having taken
D     note of the conclusion reached by the High Court as extracted above, it
      is noted that the High Court has itself arrived at the conclusion that the
      instant case becomes a simpliciter case of non-refunding of loan which
      cannot be a basis for initiating criminal proceedings. The conclusion to
      the extent of holding that it would not constitute an offence of cheating,
      as already indicated above would be justified. However, when the High
E     Court itself has accepted the fact that it is a case of non-refunding of the
      loan amount, the first aspect that there is a legally recoverable debt from
      the respondent No.2 to the appellant is prima-facie established. The
      only question that therefore needs consideration at our hands is as to
      whether the contention put-forth on behalf of respondent No.2 that an
F     offence under Section 138 of the N.I. Act is not made out as the
      dishonourment alleged is of the cheques which were issued by way of
      ‘security’ and not towards discharge of any debt.
             13. In order to consider this aspect of the matter we have at the
      outset taken note of the four loan agreements dated 13.08.2014 which is
G     the subject matter herein. Under each of the agreements, the promise
      made by respondent No.2 is to pay the appellant a sum of Rs.50 lakhs.
      Thus, the total of which would amount to Rs.2 crores as contended by
      the appellant. Towards the promise to pay, the repayment agreed by the
      respondent No.2 is to clear the total amount within June/July 2015. Para
      5 of the loan agreement indicates that six cheques have been issued as
H     security. The claim of the appellant has been negated by the High Court
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                          127
   SINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

only due to the fact that the agreement indicates that the cheques have        A
been given by way of security and the complainant has also stated this
fact in the complaint. Though the High Court has taken note of the
decision in the case of Sudhir Kumar Bhalla (supra) to hold that the
cheque issued as security cannot constitute an offence, the same in our
opinion does not come to the aid of the respondent No.2. There is no
                                                                               B
categorical declaration by this Court in the said case that the cheque
issued as security cannot be presented for realisation under all
circumstances. The facts in the said case relate to the cheques being
issued and there being alterations made in the cheques towards which
there was also a counter complaint filed by the drawer of the cheque.
Hence, the said decision cannot be a precedent to answer the position in       C
this case and the High Court was not justified in placing reliance on the
same.
      14. In fact, it would be apposite to take note of the decision of this
Court in the case of Sampelly Satyanarayana Rao (supra) wherein
this Court while answering the issue as to what constitutes a legally          D
enforceable debt or other liability as contained in the Explanation 2 to
Section 138 of N.I. Act has held as hereunder:-
      “10. We have given due consideration to the submission advanced
      on behalf of the appellant as well as the observations of this Court
      in Indus Airways (supra) with reference to the explanation to            E
      Section 138 of the Act and the expression “for discharge of any
      debt or other liability” occurring in Section 138 of the Act. We are
      of the view that the question whether a post-dated cheque is
      for “discharge of debt or liability” depends on the nature of
      the transaction. If on the date of the cheque liability or debt
      exists or the amount has become legally recoverable, the                 F
      Section is attracted and not otherwise.
      11. Reference to the facts of the present case clearly shows that
      though the word “security” is used in Clause 3.l (iii) of the
      agreement, the said expression refers to the cheques being towards
      repayment of instalments. The repayment becomes due under                G
      the agreement, the moment the loan is advanced and the instalment
      falls due. It is undisputed that the loan was duly disbursed on
      28th February, 2002 which was prior to the date of the
      cheques. Once the loan was disbursed and instalments have
      fallen due on the date of the cheque as per the agreement,               H
128            SUPREME COURT REPORTS                          [2021] 10 S.C.R.


A           dishonour of such cheques would fall under Section 138 of
            the Act. The cheques undoubtedly represent the outstanding
            liability.
            12. Judgment in Indus Airways (supra) is clearly distinguishable.
            As already noted, it was held therein that liability arising out of
B           claim for breach of contract under Section 138, which arises on
            account of dishonour of cheque issued was not by itself at par
            with criminal liability towards discharge of acknowledged and
            admitted debt under a loan transaction. Dishonour of cheque issued
            for discharge of later liability is clearly covered by the statute in
            question. Admittedly, on the date of the cheque there was a debt/
C           liability in presenti in terms of the loan agreement, as against the
            case of Indus Airways (supra), where the purchase order had
            been cancelled and cheque issued towards advance payment for
            the purchase order was dishonoured. In that case, it was found
            that the cheque had not been issued for discharge of liability but
D           as advance for the purchase order which was cancelled. Keeping
            in mind this fine but real distinction, the said judgment cannot
            be applied to a case of present nature where the cheque was
            for repayment of loan instalment which had fallen due though
            such deposit of cheques towards repayment’ of instalments
            was also described as “security” in the loan agreement. In
E           applying the judgment in Indus Airways (supra), one cannot
            lose sight of the difference between a transaction of purchase
            order which is cancelled and that of a loan transaction where
            loan has actually been advanced and its repayment is due on
            the date of the cheque.
F           13. Crucial question to determine applicability of Section 138
            of the Act is whether the cheque represents discharge of
            existing enforceable debt or liability or whether it represents
            advance payment without there being subsisting debt or
            liability. While approving the views of different High Courts
G           noted earlier, this is the underlying principle as can be
            discerned from discussion of the said cases in the judgment
            of this Court.”
                                                           (emphasis supplied)
            The said conclusion was reached by this Court while distinguishing
H     the decision of this Court in the case of Indus Airways Pvt. Ltd. Vs.
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                         129
   SINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

Magnum Aviation Pvt. Ltd. (2014) 12 SCC 539 which was a case                  A
wherein the issue was of dishonour of post-dated cheque issued by way
of advance payment against a purchase order that had arisen for
consideration. In that circumstance, it was held that the same cannot be
considered as a cheque issued towards discharge of legally enforceable
debt.
                                                                              B
      15. Further, this Court in the case of M/s Womb Laboratories
Pvt. Ltd. (supra) has held as follows:-
      “5. In our opinion, the High Court has muddled the entire issue.
      The averment in the complaint does indicate that the signed
      cheques were handed over by the accused to the complainant.             C
      The cheques were given by way of security, is a matter of
      defence. Further, it was not for the discharge of any debt or any
      liability is also a matter of defence. The relevant facts to
      countenance the defence will have to be proved- that such security
      could not be treated as debt or other liability of the accused. That
      would be a triable issue. We say so because, handing over of the        D
      cheques by way of security per se would not extricate the accused
      from the discharge of liability arising from such cheques.
      6. Suffice it to observe, the impugned judgment of the High Court
      cannot stand the test of judicial scrutiny. The same is, therefore,
      set aside.”                                                             E

        16. A cheque issued as security pursuant to a financial transaction
cannot be considered as a worthless piece of paper under every
circumstance. ‘Security’ in its true sense is the state of being safe and
the security given for a loan is something given as a pledge of payment.
It is given, deposited or pledged to make certain the fulfilment of an        F
obligation to which the parties to the transaction are bound. If in a
transaction, a loan is advanced and the borrower agrees to repay the
amount in a specified timeframe and issues a cheque as security to
secure such repayment; if the loan amount is not repaid in any other
form before the due date or if there is no other understanding or             G
agreement between the parties to defer the payment of amount, the
cheque which is issued as security would mature for presentation and
the drawee of the cheque would be entitled to present the same. On
such presentation, if the same is dishonoured, the consequences
contemplated under Section 138 and the other provisions of N.I. Act
would flow.                                                                   H
130             SUPREME COURT REPORTS                           [2021] 10 S.C.R.


A             17. When a cheque is issued and is treated as ‘security’ towards
      repayment of an amount with a time period being stipulated for
      repayment, all that it ensures is that such cheque which is issued as
      ‘security’ cannot be presented prior to the loan or the instalment maturing
      for repayment towards which such cheque is issued as security. Further,
      the borrower would have the option of repaying the loan amount or such
B
      financial liability in any other form and in that manner if the amount of
      loan due and payable has been discharged within the agreed period, the
      cheque issued as security cannot thereafter be presented. Therefore,
      the prior discharge of the loan or there being an altered situation due to
      which there would be understanding between the parties is a sine qua
C     non to not present the cheque which was issued as security. These are
      only the defences that would be available to the drawer of the cheque in
      a proceedings initiated under Section 138 of the N.I. Act. Therefore,
      there cannot be a hard and fast rule that a cheque which is issued as
      security can never be presented by the drawee of the cheque. If such is
      the understanding a cheque would also be reduced to an ‘on demand
D
      promissory note’ and in all circumstances, it would only be a civil litigation
      to recover the amount, which is not the intention of the statute. When a
      cheque is issued even though as ‘security’ the consequence flowing
      therefrom is also known to the drawer of the cheque and in the
      circumstance stated above if the cheque is presented and dishonoured,
E     the holder of the cheque/drawee would have the option of initiating the
      civil proceedings for recovery or the criminal proceedings for punishment
      in the fact situation, but in any event, it is not for the drawer of the
      cheque to dictate terms with regard to the nature of litigation.
              18. If the above principle is kept in view, as already noted, under
F     the loan agreement in question the respondent No.2 though had issued
      the cheques as security, he had also agreed to repay the amount during
      June/July 2015, the cheque which was held as security was presented
      for realization on 20.10.2015 which is after the period agreed for
      repayment of the loan amount and the loan advanced had already fallen
      due for payment. Therefore, prima facie the cheque which was taken
G     as security had matured for payment and the appellant was entitled to
      present the same. On dishonour of such cheque the consequences
      contemplated under the Negotiable Instruments Act had befallen on
      respondent No.2. As indicated above, the respondent No.2 may have
      the defence in the proceedings which will be a matter for trial. In any
      event, the respondent No.2 in the fact situation cannot make a grievance
H
SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV                         131
   SINGH v. THE STATE OF JHARKHAND [A. S. BOPANNA, J.]

with regard to the cognizance being taken by the learned Magistrate or        A
the rejection of the petition seeking discharge at this stage.
       19. In the background of the factual and legal position taken note
supra, in the instant facts, the appellant cannot be non-suited for
proceeding with the complaint filed under Section 138 of N.I. Act merely
due to the fact that the cheques presented and dishonoured are shown          B
to have been issued as security, as indicated in the loan agreement. In
our opinion, such contention would arise only in a circumstance where
the debt has not become recoverable and the cheque issued as security
has not matured to be presented for recovery of the amount, if the due
date agreed for payment of debt has not arrived. In the instant facts, as
noted, the repayment as agreed by the respondent No.2 is during June/         C
July 2015. The cheque has been presented by the appellant for realisation
on 20.10.2015. As on the date of presentation of the cheque for realisation
the repayment of the amount as agreed under the loan agreement had
matured and the amount had become due and payable. Therefore, to
contend that the cheque should be held as security even after the amount      D
had become due and payable is not sustainable. Further, on the cheques
being dishonoured the appellant had got issued a legal notice dated
21.11.2015 wherein inter-alia it has been stated as follows:-
       “You request to my client for loan and after accepting your word
       my client give you loan and advanced loan and against that you
       issue different cheque all together valued Rs. One crore and my        E
       client was also assured by you will clear the loan within June/July
       2015 and after that on 26.10.2015 my client produce the cheque
       for encashment in H.D.F.C. Bank all cheque bearing No.402771
       valued Rs. 25 Lakh, 402770 valued Rs.25 lakh, 402769 valued
       Rs. 50 lakh, (total rupees one crore) and above numbered cheques       F
       was returned with endorsement “In sufficient fund”. Then my
       client feel that you have not fulfil the assurance.”
       20. The notice as issued indicates that the appellant has at the
very outset after the cheque was dishonoured, intimated the respondent
no.2 that he had agreed to clear the loan by June/July 2015 after which
                                                                              G
the appellant had presented the cheque for encashment on 26.10.2015
and the assurance to repay has not been kept up.
       21. In the above circumstance, the cheque though issued as
security at the point when the loan was advanced, it was issued as an
assurance to repay the amount after the debt becomes due for repayment.
The loan was in subsistence when the cheque was issued and had become         H
132              SUPREME COURT REPORTS                           [2021] 10 S.C.R.


A     repayable during June/July 2015 and the cheque issued towards
      repayment was agreed to be presented thereafter. If the amount was
      not paid in any other mode before June/July 2015, it was incumbent on
      the respondent No.2 to arrange sufficient balance in the account to honour
      the cheque which was to be presented subsequent to June/July 2015.
B             22. These aspects would prima-facie indicate that there was a
      transaction between the parties towards which a legally recoverable
      debt was claimed by the appellant and the cheque issued by the respondent
      No.2 was presented. On such cheque being dishonoured, cause of action
      had arisen for issuing a notice and presenting the criminal complaint
      under Section 138 of N.I. Act on the payment not being made. The
C     further defence as to whether the loan had been discharged as agreed
      by respondent No.2 and in that circumstance the cheque which had
      been issued as security had not remained live for payment subsequent
      thereto etc. at best can be a defence for the respondent No.2 to be put
      forth and to be established in the trial. In any event, it was not a case for
D     the Court to either refuse to take cognizance or to discharge the
      respondent No.2 in the manner it has been done by the High Court.
      Therefore, though a criminal complaint under Section 420 IPC was not
      sustainable in the facts and circumstances of the instant case, the
      complaint under section 138 of the N.I Act was maintainable and all
      contentions and the defence were to be considered during the course of
E     the trial.
              23. In that view, the order dated 17.12.2019 passed by the High
      Court of Jharkhand in Cr.M.P No.2635 of 2017 with Cr.M.P No.2655 of
      2017 are set aside. Consequently, the order dated 04.07.2016 and
      13.06.2019 passed by the Judicial Magistrate are restored. The complaint
F     bearing C.C. No.1839 of 2015 and 1833 of 2015 are restored to the file
      of the Judicial Magistrate, limited to the complaint under Section 138 of
      N.I. Act to be proceeded in accordance with law.
              24. All contentions of the parties on merit are left open. We make
      it clear that none of the observations contained herein shall have a bearing
      on the main trial. The trial court shall independently arrive at its conclusion
G
      based on the evidence tendered before it.
              25. The appeals are allowed in part with no order as to costs.
              26. Pending application, if any, shall also stand disposed.


H     Devika Gujral                                              Appeal partly allowed.