2022 (1) TMI 100 - HC - Indian Laws

Dishonor of Cheque - insufficient funds - legally enforceable debt or not - acquittal of the accused - appellant collecting interest at 24% with monthly compounding, is correct or not - HELD THAT - The account statement produced as Ext.P10 would clearly indicate that every month interest was being added to the principal and the interest for the next month was calculated on the entire amount, including the previous arrears and the interest already added during the previous month. This method of computation is completely different from imposing penal interest upon an installment amount which contain interest element. There are no doubt that the method of computation adopted by the appellant herein is amounting to compounding of interest. In such circumstances, the finding of the trial court cannot be interfered with. As rightly found by the trial court, none of the documents produced in support of the case of the appellant provide for compounding interest to be collected from the accused person. Even as per the Ext.P11 promissory note and also as per the evidence of PW1 what was permissible is interest at the rate of 24% per annum. However, the cheque amount which tallies the final figure as shown in Ext.P10 account statement includes interest at compounding rates which was not authorised even as per the evidence adduced by the appellant himself. In such circumstances, the amount specified in Ext.P1 cheque cannot be treated as a legally enforceable debt so as to attract offence under Section 138 of Negotiable Instruments Act. Appeal dismissed - decided against appellant.

Summary

Issues:
1. Applicability of Section 138 of Negotiable Instruments Act
2. Legally enforceable debt and compounding of interest

Analysis:

Issue 1: Applicability of Section 138 of Negotiable Instruments Act
The appellant filed a complaint against the 1st respondent under Section 138 of the Negotiable Instruments Act. The complaint alleged that the respondent, as a guarantor, issued a cheque in discharge of a debt owed by a subscriber of a chit conducted by the company. The cheque was dishonored due to insufficient funds, leading to the complaint being filed. The trial court acquitted the respondent, leading to the appeal.

Issue 2: Legally enforceable debt and compounding of interest
The main contention raised by the appellant was regarding the computation of interest at 24% with monthly compounding, as per the statement of accounts. The trial court found this method impermissible based on the promissory note and evidence presented. The appellant relied on a Supreme Court judgment to argue that charging interest on monthly installments containing interest does not amount to compounding. However, the court held that the method of computation in this case, where interest was added monthly to the principal and calculated on the entire amount, constituted compounding of interest. The court found that the cheque amount included interest at compounding rates not authorized by the evidence. Therefore, the court concluded that the amount specified in the cheque was not a legally enforceable debt under Section 138 of the Negotiable Instruments Act.

In conclusion, the court dismissed the appeal and confirmed the acquittal of the respondent by the trial court, emphasizing that the method of interest computation amounted to compounding, making the debt not legally enforceable.