The collecting bank must demonstrate good faith and lack of negligence to claim protection under Sections 131 and 131-A of the Negotiable Instruments Act when handling altered instruments.

1.Canara Bank, Nalgonda, the defendant in the suit O.S.No.251 of 1979 on the file of the Subordinate Judge, Nalgonda, is in appeal against the judgment and decree dated 30.06.1987 passed therein. The Court below decreed the suit holding the defendant bank liable to pay a sum of Rs.5,71,999/- with interest and costs to the Nalgonda Co - operative Central Bank Limited, Nalgonda, the plaintiff therein.

2. For the sake of convenience the parties hereto shall be referred to as per their array before the trial Court.

3. The plaint averments are to the following effect :
The Suryapet Branch of the plaintiff bank issued two uncrossed demand drafts on 30.10.1976 in favour of one V. Ram Reddy and one V. Babu Rao respectively. The demand drafts bore Nos.2211 and 2212 and were for a sum of Rs.25/- each. These demand drafts were materially altered whereby the date of issue was shown as 02.11.1976, the payee was shown as M/s. Sudershan Trading Corporation (for short, 'STC') and the amount payable under demand draft No.2211 was shown to be Rs.14,500/- and the amount payable under demand draft No.2212 was shown to be Rs.35,500/-. The demand drafts were also crossed. Copies of these demand drafts were marked as Exs.A4 and A6.

4. The materially altered demand drafts were deposited for collection at the defendant bank on 03.11.1976 and 04.11.1976 by one Sunder Rao claiming to be the proprietor of STC. The plaintiff bank, upon enquiry, came to know that the said Sunder Rao opened an account with the defendant bank only on 2nd or 3rd of November 1976 in the name of STC claiming to be its proprietor. The plaintiff bank alleged that no enquiry or verification was made by the defendant bank about the creditworthiness and genuineness of STC or its alleged proprietor, Sunder Rao. The plaintiff bank further alleged that the defendant bank credited the amounts due under the materially altered demand drafts to the account of STC on 05.11.1976 and allowed withdrawal of cash to the extent of Rs.50,000/- from the said account under the cheques marked as Exs.B8 and B9, before the realization of the said amount from the plaintiffs bank.

5. The plaintiff bank alleged that this constituted a clear case of negligence on the part of the defendant bank, both in the opening of the account and also its operation.

6. The plaintiff bank admitted that in view of the presentation of the altered demand drafts by the defendant bank, the plaintiff bank paid the amounts due thereunder totaling Rs.50,000/- to the account of the defendant bank without knowing the truth of their alteration. The plaintiff bank came to know about the fraud in this regard only on 27.10.1977 when its internal audit detected the same. The plaintiff bank filed a complaint before the police authorities on 31.10.1977 and sued the defendant bank for recovery of Rs.49,950/- along with interest thereon quantified at Rs.7,249.19 ps. till the date of filing of the suit, future interest and for costs.

7. The defendant bank filed a written statement stating as follows :
The demand drafts bearing Nos.2211 and 2212 issued by the plaintiff bank were deposited for collection with the defendant bank on 03.11.1976 and 04.11.1976 by one Sunder Rao claiming to be the proprietor of STC, who had opened a current account with the defendant bank. Sunder Rao was introduced properly by another customer of the bank and thereupon an account was opened on 03.11.1976 in the name of STC, of which he claimed to be the proprietor. The defendant bank denied that it had not made any sort of enquiry or verification prior to the opening of this account.

8. The defendant bank asserted that as per the banking practice no d