Analysis of Penalties under Section 138 NI Act: "Double the Amount of Cheque"

The Legal Framework and Judicial Application of Penalties under Section 138 of the Negotiable Instruments Act, 1881: An Analysis of Fines Extending to "Double the Amount of Cheque" in India

Introduction

Section 138 of the Negotiable Instruments Act, 1881 (hereinafter "NI Act") stands as a cornerstone in upholding the credibility of cheque transactions in India. Enacted to penalize the dishonour of cheques due to insufficiency of funds or exceeding arrangements, this provision aims to foster trust in commercial dealings. A significant aspect of Section 138 is its penal clause, which empowers courts to impose imprisonment for a term which may extend to two years, or a fine which may extend to twice the amount of the cheque, or both.[11], [12] This article undertakes a comprehensive analysis of the scope, interpretation, and application of the provision allowing for a fine up to "double the amount of cheque." It examines the statutory basis, the judicial discretion involved, the interplay with compensatory mechanisms under the Code of Criminal Procedure, 1973 (CrPC), and the impact of key judicial pronouncements, drawing extensively from the provided reference materials.

Statutory Framework

The primary provisions governing the penalty for cheque dishonour and the award of compensation are found in the NI Act and the CrPC.

Section 138, Negotiable Instruments Act, 1881

Section 138 of the NI Act stipulates that where a cheque drawn by a person for the discharge of any debt or other liability is returned unpaid due to insufficient funds or because it exceeds the arrangement with the bank, such person "shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extend to two years, or with fine which may extend to twice the amount of the cheque, or with both."[11], [12] This provision clearly establishes the maximum permissible fine, linking it directly to the value of the dishonoured cheque.

Section 357, Code of Criminal Procedure, 1973

Section 357 of the CrPC empowers courts to order compensation to victims of crime. Specifically:

  • Section 357(1) allows a court imposing a sentence of fine or a sentence (including a sentence of death or imprisonment) of which fine forms a part, to order the whole or any part of the fine recovered to be applied in payment to any person of compensation for any loss or injury caused by the offence.
  • Section 357(3) states that when a court imposes a sentence, of which fine does not form a part, the court may, when passing judgment, order the accused person to pay, by way of compensation, such amount as may be specified in the order to the person who has suffered any loss or injury by reason of the act for which the accused person has been so sentenced.

The interplay between Section 138 NI Act and Section 357 CrPC is crucial in determining how complainants are compensated from the fines imposed.[5], [6]

Section 143, Negotiable Instruments Act, 1881 and Section 29, CrPC

Section 143 of the NI Act, introduced by amendment, provides for summary trial of cases under Section 138 and empowers the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and a fine exceeding five thousand rupees. This provision, read with Section 138, clarifies that Magistrates trying Section 138 offences can impose the substantial fines contemplated therein, notwithstanding the general limitations on their fining powers under Section 29 of the CrPC.[2], [5] The Supreme Court in R. Vijayan v. Baby And Another[5] acknowledged that legislative amendments like Section 143(1) ameliorated some earlier limitations on Magistrates' fining powers.

Judicial Interpretation of "Twice the Amount of Cheque"

The judiciary has interpreted the phrase "fine which may extend to twice the amount of the cheque" with a view to achieving the dual objectives of Section 138: punitive action against the defaulter and compensatory relief to the complainant.[2]

The use of the words "may extend to" signifies that the quantum of fine is within the discretion of the court. This discretion, however, is to be exercised judiciously, considering the facts and circumstances of each case, including the cheque amount, the conduct of the parties, the duration of the default, and the harassment caused to the complainant. Several High Courts and the Supreme Court have affirmed sentences imposing fines equivalent to double the cheque amount. For instance, in Rohitbhai Jivanlal Patel v. State Of Gujarat And Another,[19] the Supreme Court upheld a High Court judgment imposing a fine to the extent of double the cheque amount in each of seven cases. Similarly, trial courts and appellate courts have often resorted to this quantum, as seen in cases like Roop Lal Petitioner v. Manoj Kumar And Another S[22] (trial court initially ordered fine double the amount) and Sri M. Janardhan Reddy v. The State of Telangana,[20], [21] where the revisional court enhanced the fine to double the cheque amount.

The legislative intent, as observed in Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. And Others,[7] is to ensure the credibility of negotiable instruments. The deterrent effect of a substantial fine, potentially up to twice the cheque amount, serves this purpose.

Interplay with Compensation under Section 357 CrPC

A significant aspect of the fine imposed under Section 138 NI Act is its frequent direction as compensation to the complainant under Section 357(1) CrPC. This aligns with the compensatory objective of the statute.

The Supreme Court in R. Vijayan v. Baby And Another[5] provided critical clarification on this interplay. It held that compensation under Section 357(3) CrPC is applicable when the sentence does not include a fine. Since Section 138 NI Act typically involves a sentence of fine (or imprisonment and fine), compensation to the complainant is usually channelled from this fine under Section 357(1) CrPC. The Court noted that the fine under Section 138 NI Act can be substantial (up to twice the cheque amount), and this amount can be used for compensating the complainant. The judgment also implicitly recognized that the specific power under Section 138 NI Act (and Section 143 NI Act) allows Magistrates to impose fines for Section 138 offences that may exceed their general fining powers under Section 29 CrPC.

In Suganthi Suresh Kumar v. Jagdeeshan,[6] the Supreme Court emphasized the court's power to award adequate compensation. It held that even a Magistrate of the First Class could award compensation in Section 138 NI Act cases for amounts exceeding the erstwhile general limit of Rs. 5,000 under Section 29 CrPC, by invoking Section 357(3) CrPC (if no substantial fine was part of the sentence for compensatory purpose) or by levying the fine permissible under Section 138 NI Act and directing it as compensation under Section 357(1) CrPC. The Court remitted the case for passing an appropriate sentence, underscoring that an order to pay compensation can be enforced by a sentence in default of payment.[6]

The Supreme Court's approach in Kaushalya Devi Massand v. Roopkishore Khore[1] is particularly noteworthy. In this case, where the cheque was for Rs. 2 lakhs and the Magistrate had imposed a fine of Rs. 4 lakhs as compensation, the Supreme Court, while upholding the High Court's order, further increased the compensation payable by an additional Rs. 2 lakhs. This resulted in a total compensation of Rs. 6 lakhs, which is thrice the cheque amount, indicating the Court's commitment to ensuring substantial justice and adequate compensation, potentially encompassing interest and costs, even if it seemingly exceeds the "twice the amount" stipulation for the fine component itself. This highlights the expansive compensatory powers available, particularly at the appellate stage.

The Punjab & Haryana High Court in Ajay Bansal v. Nirmal Jain[18] specifically considered whether the trial court should normally award compensation to the extent of double the dishonoured cheque amount, reflecting the judicial trend towards ensuring full restitution.

The Calcutta High Court in Ramendra Nath Shit v. State[24], [25] observed that while a Magistrate exceeding general fining limits (in older contexts) might err if termed purely as 'fine', the court was competent to award any amount as 'compensation', highlighting the importance of how such orders are framed.

Issues and Considerations

Several issues arise in the application of the "double the amount of cheque" provision.

Discretion and Quantum of Fine

While the maximum fine is stipulated, the actual amount is discretionary. Courts are expected to provide reasons if a significantly lower or the maximum fine is imposed. The objective is not merely punitive but also to ensure that the complainant is adequately compensated for the loss, including potential interest and litigation costs.

Impact of Part Payment

An interesting question arises when part payment is made by the drawer after issuing the cheque but before its presentation. The Delhi High Court in Alliance Infrastructure Project Pvt. Ltd. And Ors. v. Vinay Mittal[8] opined that the expression "amount of money" in Section 138 NI Act could, in such scenarios, refer to the amount remaining payable after part payment. If this interpretation is adopted, the offence under Section 138 would be for the reduced amount, and consequently, the maximum fine of "twice the amount" would be calculated on this reduced sum. The court reasoned that the legislature would not intend to penalize a person for failing to arrange funds for an amount greater than what is actually due. This must be distinguished from the requirement of the statutory notice under proviso (b) to Section 138, which, as held in Gopa Debi Ojha v. Surjit Paul & Anr.,[9] must demand the cheque amount.

Encouragement for Compounding Offences

The potential for a substantial fine, up to double the cheque amount, often acts as an impetus for the accused to seek compounding of the offence. The Supreme Court in Damodar S. Prabhu v. Sayed Babalal H.[3] laid down guidelines to encourage early compounding, including a graded cost scheme. In M/S. Meters And Instruments Private Limited & Anr. v. Kanchan Mehta,[2] the Court endorsed the closure of proceedings if the accused pays the cheque amount with interest and costs, thereby facilitating quicker resolution and ensuring compensation to the complainant, often making the full "double the amount" penalty unnecessary if settlement occurs.

Relevance of Material Alteration

If a cheque is found to be materially altered without the consent of the drawer, it may be rendered void under Section 87 of the NI Act.[13], [14], [15], [16] In such cases, the very foundation of a Section 138 prosecution might be challenged, thereby obviating the question of penalty. However, filling in blanks like date or amount with due authority may not always constitute material alteration.[17]

Prosecution of Sick Industrial Companies

The Supreme Court in Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. And Others[7] clarified that proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) do not automatically bar prosecution under Section 138 of the NI Act. Thus, a company declared sick under SICA can still face penalties, including fines up to double the cheque amount, although the execution of such fines might be subject to SICA provisions like Section 22-A concerning asset disposal.

Analysis of Key Judicial Pronouncements

Certain judgments have been particularly influential in shaping the understanding and application of the "double the amount of cheque" penalty.

Rohitbhai Jivanlal Patel v. State Of Gujarat And Another (2019)[19]

In this case, the Supreme Court affirmed the High Court's decision to convict the appellant under Section 138 NI Act and sentence him to simple imprisonment for one year with a fine to the extent of double the amount of each dishonoured cheque (Rs. 3 lakhs each, fine of Rs. 6 lakhs each). A substantial portion of the fine (Rs. 5.5 lakhs in each case) was ordered as compensation to the complainant. This judgment underscores the apex court's endorsement of imposing the maximum permissible monetary penalty to serve both punitive and compensatory ends, particularly where the accused's defence is not found credible and the presumption of legally enforceable debt is not rebutted.

R. Vijayan v. Baby And Another (2011)[5]

This judgment is pivotal for its clarification of the interplay between Section 138 NI Act and Section 357 CrPC. The Supreme Court explained that compensation under Section 357(3) CrPC (when fine is not part of the sentence) is distinct from compensation awarded out of a fine imposed under Section 357(1) CrPC. Given that Section 138 NI Act prescribes a sentence of fine (or imprisonment and fine), the fine so levied (up to twice the cheque amount) can be directed as compensation to the complainant under Section 357(1) CrPC. The Court also acknowledged that legislative amendments, such as Section 143(1) of the NI Act, empowered Magistrates to impose higher fines in Section 138 cases, effectively overriding the general limitations under Section 29 CrPC for such offences. This ensures that the compensatory object of Section 138 is not hindered by procedural limitations on fining powers.

Kaushalya Devi Massand v. Roopkishore Khore (2011)[1]

The Supreme Court, in this case, enhanced the compensation payable to the appellant. The original cheque amount was Rs. 2 lakhs, and the trial Magistrate had sentenced the respondent to pay a fine of Rs. 4 lakhs as compensation. The Supreme Court increased the compensation by a further sum of Rs. 2 lakhs. This meant the total compensation amounted to Rs. 6 lakhs (Rs. 4 lakhs originally + Rs. 2 lakhs additional), which is thrice the cheque amount. This decision is significant as it demonstrates the Supreme Court's willingness to go beyond the "twice the amount of cheque" limit when considering overall compensation, possibly to account for prolonged litigation, accrued interest, and costs, thereby ensuring complete justice to the aggrieved complainant. It implies that while the "fine" component under Section 138 NI Act might be capped at twice the cheque amount, the overall "compensation" in the broader sense, especially when determined by appellate courts, can be structured to provide more comprehensive relief.

Suganthi Suresh Kumar v. Jagdeeshan (2002)[6]

The Supreme Court, in this case, set aside a High Court order that did not adequately consider compensation. The total cheque amount involved was Rs. 4,50,000, but the Magistrate had imposed a nominal fine of Rs. 5,000 in each of the two cases along with imprisonment till the rising of the court. The Supreme Court emphasized that courts should make liberal use of Section 357(3) CrPC (the context suggests ensuring adequate compensation, whether via fine under S.138 directed as compensation under S.357(1) or a separate order if the fine is nominal or not imposed for that specific purpose). It held that a Magistrate of the First Class has the power to award compensation for cheques exceeding the then general fining limit of Rs. 5,000, by virtue of the special provisions of the NI Act. The case was remitted for passing an appropriate sentence, highlighting that an order for compensation can be enforced by a default sentence of imprisonment. This judgment reinforces that the quantum of compensation in Section 138 cases should be meaningful and not constrained by outdated general limitations on magisterial fining powers.

Conclusion

The provision in Section 138 of the Negotiable Instruments Act, 1881, allowing for a fine up to "twice the amount of the cheque," serves as a critical tool for ensuring the efficacy of cheque transactions in India. It embodies both a punitive measure against the drawer of a dishonoured cheque and a compensatory mechanism for the payee. Judicial interpretation has consistently leaned towards utilizing this provision to provide substantial relief to complainants, often directing the entirety of the fine, or a significant portion thereof, as compensation. Landmark judgments, including those by the Supreme Court in Rohitbhai Jivanlal Patel,[19] R. Vijayan,[5] Kaushalya Devi Massand,[1] and Suganthi Suresh Kumar,[6] have progressively clarified the scope of this power, its interplay with Section 357 CrPC, and the discretion vested in courts. While judicial discretion is paramount, the overarching aim remains to uphold the sanctity of negotiable instruments and to ensure that victims of cheque dishonour are adequately and expeditiously compensated. The potential for a significant monetary penalty also encourages the compounding of offences, leading to faster dispute resolution. The legal framework, as interpreted and applied by the Indian judiciary, thus provides a robust response to the menace of cheque bouncing, with the "double the amount of cheque" provision at its punitive and compensatory core.

References

  1. Kaushalya Devi Massand v. Roopkishore Khore . (2011 SCC 4 593, Supreme Court Of India, 2011)
  2. M/S. Meters And Instruments Private Limited & Anr. v. Kanchan Mehta (2017 SCC ONLINE SC 1197, Supreme Court Of India, 2017)
  3. Damodar S. Prabhu v. Sayed Babalal H. . (2010 SCC 5 663, Supreme Court Of India, 2010)
  4. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. And Others (2001 SCC 6 463, Supreme Court Of India, 2001)
  5. R. Vijayan v. Baby And Another (2012 SCC 1 260, Supreme Court Of India, 2011)
  6. Suganthi Suresh Kumar v. Jagdeeshan . (2002 SCC 2 420, Supreme Court Of India, 2002)
  7. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. And Others (2000 SCC 2 745, Supreme Court Of India, 2000)
  8. Alliance Infrastructure Project Pvt. Ltd. And Ors. v. Vinay Mittal . (Delhi High Court, 2010)
  9. Gopa Debi Ojha v. Surjit Paul & Anr. (Calcutta High Court, 1995)
  10. J. Veeraraghavan v. Lalith Kumar (Madras High Court, 1994)
  11. B.S. Bhasi v. K.M. Purushotham Das (Kerala High Court, 2017)
  12. Indorama Synthetics (I) Ltd., Nagpur v. State Of Maharashtra And Others (Bombay High Court, 2016)
  13. M/S ANIL AGRO INDUSTRIES AND ANR v. M/S BHODAY STEEL ROLLING MILLS (Punjab & Haryana High Court, 2023)
  14. Bhaskaran Chandrasekharan v. Radhakrishnan (Kerala High Court, 1998)
  15. Avon Organics Ltd. v. Poineer Products Ltd. And Others (Andhra Pradesh High Court, 2003)
  16. Kailash Vati v. M/S. Ludhiana Beverages Pvt. Ltd. (Punjab & Haryana High Court, 2019)
  17. Abdulla v. Abdul Aziz (Kerala High Court, 2017)
  18. Ajay Bansal v. Nirmal Jain (2006 RCR CRI 1 849, Punjab & Haryana High Court, 2005)
  19. Rohitbhai Jivanlal Patel v. State Of Gujarat And Another (2019 SCC ONLINE SC 389, Supreme Court Of India, 2019)
  20. Sri M. Janardhan Reddy v. The State of Telangana, (Telangana High Court, 2022)
  21. P.Mittu Naik v. Mr. M.Janardhan Reddy (Telangana High Court, 2022)
  22. Roop Lal Petitioner v. Manoj Kumar And Another S (2013 SCC ONLINE HP 1242, Himachal Pradesh High Court, 2013)
  23. SHRAWAN S/O BAPURAO WAKDE v. MADANLAL S/O LAXMINARAYAN KHANDELWAL AND ANR (Bombay High Court, 2010)
  24. Ramendra Nath Shit v. State (Calcutta High Court, 2003) - First entry
  25. Ramendra Nath Shit v. State (Calcutta High Court, 2003) - Second entry
  26. Shaikh Jafar S/O Mohoddin Age 44 Years, Occupation: Business, R/O Bhisti Mohalla, Ahmedpur, Taluka Ahmedpur, District Latur v. 1) The State Of Maharashtra Through Police Station, Ahmedpur, Taluka Ahmedpur, District Latur. (Bombay High Court, 2014)