Conviction u/s 138 of NIA

Source: Supreme Court  

Why in News? 

Recently, Justices Aravind Kumar and Sandeep Mehta held that that a conviction under Section 138 of the Negotiable Instruments Act,1881 (NI Act) cannot be sustained once the complainant signs a compromise deed acknowledging full settlement, setting aside a High Court order that had dismissed the accused's application for modification. 

• The Supreme Court held this in the case of Gian Chand Garg v. Harpal Singh & Anr. (2025). 

What was the Background of Gian Chand Garg v. Harpal Singh & Anr. (2025) ? 

• Harpal Singh filed a complaint under NI Act against Gian Chand Garg, alleging that the appellant had borrowed a sum of Rs. 5,00,000/-. 
• For repayment of the borrowed amount, the appellant issued a cheque (Ex. C-1) which, upon presentation, was returned with the endorsement "funds insufficient" (Ex. C-2). 
• The complainant issued a legal notice (Ex. C-4) to the appellant as required under the statutory provisions. 
• The complaint was filed before the jurisdictional Magistrate under Section 138 of the NI Act. 
• After trial, the appellant was convicted by the Judicial Magistrate First Class (JMFC) in Criminal Case No. 90 of 2009 vide order dated 21.04.2010. The appellant was sentenced to undergo simple imprisonment for six months and pay a fine of Rs. 1,000/- with a default sentence of fifteen days' simple imprisonment. 
• The Additional Sessions Judge affirmed the conviction in Criminal Appeal No. 67 of 2010 vide order dated 14.09.2010. Subsequently, the Punjab and Haryana High Court dismissed the revision petition in Criminal Revision Petition No. 2563 of 2010 vide order dated 27.03.2025. 
• After the dismissal of the revision petition, both parties entered into a compromise/settlement agreement on 06th April 2025. Under this settlement, the complainant indicated no objection to the appellant seeking acquittal. 
• The compromise was reached in consideration of:  
  • Two Demand Drafts bearing numbers 004348 dated 04th April 2025 and 004303 dated 11.02.2025 for Rs. 2.5 lakhs each. 
  • Three cheques bearing numbers 354412 dated 10th May 2025, 354413 dated 10.06.2025, and 354414 dated 10.07.2025 of Rs. 1 lakh each. 
• The appellant filed an application (CRM No. 15127/2025) seeking modification of the High Court's order dated 27th March 2025, but the High Court dismissed this application on 09th April 2025 on grounds of non-maintainability. 
• Consequently, the appellant approached the Supreme Court through Special Leave Petition (Criminal) No. 8050 of 2025. 

What were the Court’s Observations? 

• The Supreme Court observed that the offence under Section 138 of the Negotiable Instruments Act is primarily a civil wrong that has been clothed with criminal consequences to strengthen the credibility of negotiable instruments. 
• The Court noted that Section 147 of the NI Act, inserted by the 2002 amendment, specifically makes the offence under Section 138 compoundable, allowing parties to settle disputes at any stage of proceedings. 
• The Court reiterated the characterization of Section 138 offences as "Civil Sheep in Criminal Wolf's Clothing," indicating that while the provision carries criminal sanctions, the underlying disputes are essentially of a private civil nature. 
• The Court observed that when parties voluntarily enter into compromise agreements, they do so with open eyes, understanding the risks and benefits. Such settlements subsume the original complaint and cannot be reversed by pursuing both the original and subsequent complaints. 
• The Court noted that when parties enter into agreements to compound offences and save themselves from litigation processes, courts cannot override such compounding and impose their will against the parties' voluntary decision. 
•  The Court observed that once a complainant signs a compromise deed accepting an amount in full and final settlement of the disputed sum, the proceedings under Section 138 of the NI Act cannot sustain, and concurrent convictions must be set aside. 
• The Court emphasized that the legislature, through Section 147 of the NI Act, has expressly permitted compounding of such offences notwithstanding the provisions of the Code of Criminal Procedure, 1973, especially when parties have voluntarily arrived at a compromise. 
• The Court specifically noted that the compromise in this case was entered into without any coercion, voluntarily, and at the complainant's own will, making it legally binding and effective. 

What is Section 138 of NI Act ? 

About:  

• Section 138 creates an offence when a cheque drawn by a person on his account with a banker for payment to another person is returned unpaid due to insufficient funds or exceeding the agreed overdraft limit, making the drawer liable for criminal prosecution. 
• The drawer shall be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both such imprisonment and fine. 
• The cheque must be presented to the bank within six months from the date it is drawn or within the period of its validity, whichever is earlier, failing which no offence under this section can be constituted. 
• The payee or holder in due course must give a written notice to the drawer demanding payment within thirty days of receiving information from the bank regarding the cheque's dishonour for the offence to be established. 
• The drawer must be given fifteen days from receipt of the demand notice to make payment, and only upon failure to pay within this period does the criminal liability crystallize under Section 138. 
• The section applies only to cheques issued for discharge of legally enforceable debt or other liability, ensuring that the provision covers genuine commercial transactions and not gratuitous payments. 

Case Laws: 

• M/s. Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2018): 
  • The Court held that the offence under Section 138 of the NI Act is mainly a civil wrong and has been made specifically compoundable by Section 147 of the NI Act inserted by the 2002 amendment. The object of the statute was to facilitate smooth functioning of business transactions as dishonour of cheque causes incalculable loss to the payee and affects credibility of business transactions. 
• P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021): 
  • The Court characterized the offence under Section 138 NI Act as a "Civil Sheep in Criminal Wolf's Clothing." Issues agitated by parties under this provision are of private nature which are brought within the sweep of criminal jurisdiction to strengthen the credibility of negotiable instruments. 
• M/s. Gimpex Private Limited v. Manoj Goel (2021): 
  • When parties voluntarily enter into a compromise agreement, they cannot be allowed to reverse the effects by pursuing both the original complaint and subsequent complaint arising from non-compliance. The settlement agreement subsumes the original complaint, and complainants enter into settlements with open eyes undertaking associated risks. 
• B.V. Seshaiah v. State of Telangana & Anr. (2023): 
  • When parties enter into an agreement and compound the offence, they do so to save themselves from the process of litigation. Courts cannot override such compounding and impose their will against the parties' voluntary decision when the law allows such compounding.