Security cheque defence under Section 138 NI Act fails; Himachal Pradesh High Court dismisses revision

Security cheque defence under Section 138 NI Act fails; Himachal Pradesh High Court dismisses revision

The High Court of Himachal Pradesh has dismissed Baldev Singh's criminal revision against his conviction under Section 138 of the Negotiable Instruments Act, 1881. Justice Rakesh Kainthla, sitting at Shimla, upheld the concurrent findings of the trial court and the first appellate court that a ₹1,00,000 cheque issued by Singh was dishonoured for insufficient funds, and that his "security cheque" defence did not rebut the statutory presumption of a legally enforceable debt.

The dispute and two rounds of conviction

Rahul Bhardwaj complained that Singh, who traded as M/s B.S. Trading Co., owed him ₹1,00,000 from business dealings. A cheque drawn on Punjab National Bank, Patta Mehlog, was returned unpaid with the endorsement “funds insufficient.” A statutory demand notice was served, but no payment followed.

The Additional Chief Judicial Magistrate, Kasauli, convicted Singh in March 2021 and sentenced him to three months' simple imprisonment, directing him to pay ₹1,25,000 as compensation—with one month's additional imprisonment in default. The Sessions Judge, Solan, dismissed Singh's appeal in December 2021, leading to the revision before the High Court.

“Proprietary concern is nothing but an individual trading under a trade name”

One of Singh's main grounds was that the complaint had been filed against M/s B.S. Trading Co. Ltd. and himself, but no notice of accusation was put to the company. The High Court rejected this, holding that B.S. Trading Co. was a sole proprietary concern, not a separate juristic person.

Referencing Shankar Finance & Investments v. State of A.P. , the court observed: "There is no distinction in law between a proprietary concern and an individual trading under a trading name." It followed that the proprietor alone could be arrayed, and the absence of a separate notice or conviction of the proprietorship firm did not invalidate Baldev Singh's conviction.

Presumptions do the heavy lifting

The court clarified that once the accused admitted issuing a signed cheque, Sections 118(a) and 139 of the NI Act presume that the cheque was drawn for consideration and was issued in discharge of a legally enforceable debt. Quoting * Rangappa v. Sri Mohan , the High Court noted that earlier observations in Krishna Janardhan Bhat v. Dattatraya G. Hegde*—suggesting the existence of a debt was not part of the presumption—were not correct.

The burden therefore shifted to Singh. His bare statement under Section 313 CrPC that the cheque was only security did not discharge that burden, especially since he led no defence evidence. Relying on Sumeti Vij v. Paramount Tech Fab Industries , the court said a Section 313 statement is not substantive evidence of defence.

Security cheques are not worthless paper

The court also rejected the "security cheque" defence as a matter of law. Sripati Singh v. State of Jharkhand and Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited establish that a cheque given as security for a financial transaction can be presented once the underlying debt matures; its dishonour attracts Section 138. As the High Court put it, a security cheque "cannot be considered a worthless piece of paper under every circumstance."

The complainant was also not required to prove the source of funds or provide bills for the goods supplied at the threshold. Once the presumption arose, it was for the accused to prove the contrary. The bank's return memo was presumed correct, and the service of the statutory notice was not effectively challenged.

Key observations

> The statement of the accused recorded under Section 313 of the Code is not substantive evidence of defence, but only an opportunity for the accused to explain the incriminating circumstances appearing in the prosecution's case against the accused.

> Once the execution of a cheque is admitted, the presumption under Section 118 of the NI Act that the cheque was drawn for consideration and the presumption under Section 139 of the NI Act that the holder received it in discharge of a legally enforceable debt arises against the accused.

> In view of the above, the present revision petition fails and is dismissed.

Sentence and compensation upheld

Finally, the High Court found nothing excessive about the sentence. It cited Kalamani Tex v. P. Balasubramanian for the norm of imposing fines up to twice the cheque amount with 9% simple interest. Since the cheque was issued in September 2017 and sentence was passed in April 2021, interest at 9% on ₹1,00,000 would be about ₹27,000. The compensation award of ₹1,25,000 was therefore within reasonable bounds, and the default sentence was valid under K.A. Abbas v. Sabu Joseph and R. Mohan v. A.K. Vijaya Kumar .

The revision was dismissed and the records of the lower courts were ordered to be sent back.