S.138 NI Act: 'Referred to Drawer' Insufficient; Proof of Lack of Funds Essential for Conviction, High Court Affirms Acquittal. - 2024-01-09

High Court Upholds Acquittal in Cheque Bounce Case, Stresses Need to Prove "Insufficiency of Funds"

Mavelikkara: In a significant ruling concerning prosecutions under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), the High Court, presided over by Justice P.G. Ajithkumar , has dismissed an appeal filed by a complainant against the acquittal of an accused in a cheque dishonour case. The Court reiterated that merely because a cheque is returned with the remark "referred to drawer," it does not automatically prove the offence; the complainant must definitively establish that the dishonour was due to "insufficiency of funds" in the accused's account.

Background of the Dispute

The case originated from a complaint alleging that a cheque for Rs. 50,000, dated December 23, 2003, issued by the 1st respondent (accused) to the appellant (complainant) in discharge of a debt, was dishonoured upon presentation. The bank returned the cheque with the reason "referred to drawer," as per the return memo dated December 31, 2003 (Ext.P2). Despite a demand notice (Ext.P5) being sent and received, the accused allegedly failed to repay the amount, leading to prosecution.

The Judicial Magistrate of the First Class, Mavelikkara, had acquitted the 1st respondent by a judgment dated October 12, 2006, finding the evidence insufficient to prove an essential ingredient of the offence under Section 138 of the NI Act – that the cheque was dishonoured for want of sufficient funds. The complainant challenged this acquittal in the present appeal. The 1st respondent did not appear before the High Court despite being served notice.

Appellant's Contentions

The learned counsel for the appellant argued that the trial court erred in its finding. It was contended that since the demand notice (Ext.P5) explicitly stated that the cheque was returned due to "insufficiency of funds," the trial court should have accepted this as proof of the reason for dishonour. The appellant urged that the acquittal order be reversed.

High Court's Examination and Reasoning

Justice P.G. Ajithkumar meticulously examined the evidence and legal precedents to arrive at the decision.

The 'Referred to Drawer' Conundrum

The Court noted that the cheque return memo (Ext.P2) cited "referred to drawer" as the reason for return. While the demand notice (Ext.P5) subsequently claimed this meant insufficient funds, the trial court found no direct evidence to support this assertion.

The High Court referred to landmark decisions, including Laxmi Dyechem v. State of Gujarat and Ors. (2012 (13) SCC 375) and Rajan v. Sharafudheen (2003 (2) KLT 377) . The Court acknowledged:

"In Laxmi Dyechem the Apex Court held that even if the cheque was returned for the reasons such as, “account closed”, “payment stopped”, “referred to the drawer”, etc. the prosecution under Section 138 of the NI Act is legally possible. In Rajan (supra) this Court took a similar view."

However, the crucial caveat, as highlighted by the Court, was:

"But in both the cases it was further held that in order to sustain the charge, it shall be proved that the cheque was returned for insufficiency of funds with the account of the accused. Sufficiency of funds is a question of fact which is to be proved by adducing reliable evidence."

Burden of Proving Insufficient Funds

The judgment emphasized that Section 138 of the NI Act specifically penalizes cheque dishonour due to "the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank."

The Court found a critical lapse in the complainant's evidence:

"In this case, except stating that the cheque was issued by the 1st respondent knowing that there was no sufficient funds with his account, no evidence in that regard has been adduced. PW1 [the appellant] did not state before the court regarding that fact. He is not a competent witness also to prove that fact. No official from the bank was examined. No document evidencing that fact has been brought in evidence also."

Therefore, the appellant failed to discharge the burden of proving that the cheque was dishonoured specifically for want of sufficient funds.

Standard for Appeals Against Acquittal

The Court also elaborated on the established principles governing appeals against acquittal. Citing Chandrappa and Ors. vs. State of Karnataka (2007 (4) SCC 415) and other Supreme Court rulings, it observed:

"It is well-established that if two views are possible on the basis of evidence on record and one favourable to the accused has been taken by the Trial Court, it ought not to be disturbed by the appellate Court. So long as the view of the trial court can be said to be reasonably formed, regardless of whether the appellate court agrees with the same or not, the verdict of the trial court cannot be interdicted..."

The High Court concluded that the trial court's view was reasonably formed based on the evidence, or lack thereof, and was not perverse.

Decision and Implications

Upholding the trial court's findings, Justice P.G. Ajithkumar stated:

"Here, the appellant failed to prove the fact that the cheque was dishonoured for want of sufficient funds with the account of the 1st respondent. Therefore, it cannot be said that the view taken by the trial court is against the evidence, much less it is perverse."

Consequently, the appeal was dismissed, and the acquittal of the 1st respondent was affirmed. This judgment underscores the critical importance for complainants in cheque bounce cases to adduce concrete evidence, such as bank testimony or authenticated documents, to prove that the dishonour was due to insufficient funds, especially when the bank's return memo uses ambiguous terms like "referred to drawer." Mere assertion in a demand notice is not a substitute for such proof.