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TMI BlogJudgment of the Supreme Court in case of M/s. Indus Airways Pvt. Ltd. & Others Versus M/s. Magnum Aviation Pvt. Ltd. & Another needs a reconsideration on aspect of óther liability’’ of person who issued cheque as advance money, which dishonoured.X X X X Extracts X X X X X X X X Extracts X X X X ..... Judgment of the Supreme Court in case of M/s. Indus Airways Pvt. Ltd. & Others Versus M/s. Magnum Aviation Pvt. Ltd. & Another needs a reconsideration on aspect of óther liability’’ of person who issued cheque as advance money, which dishonoured. - By: - CA DEV KUMAR KOTHARI - Corporate Laws / IBC / SEBI - Dated:- 1-1-2015 - - Links and references: M/s. Indus Airways Pvt. Ltd. Others Versus M/s. Magnum Aviation Pvt. Ltd. Another 2014 (4) TMI 464 - SUPREME COURT Rulings affirmed by the Supreme Court: M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1996 (12) TMI 385 - ANDHRA PRADESH HIGH COURT], Balaji Seafoods M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1998 (10) TMI 528 - MADRAS HIGH COURT], Shanku Concretes Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [1999 (11) TMI 859 - GUJARAT HIGH COURT] Ullas Supply House, Represented by Managing Partner v. Ullas, Proprietor Bright Agencies and another;[ 2006 (5) TMI 471 - KERALA HIGH COURT] Rulings reversed by the Supreme Court: M/s. Indus Airways Pvt. Ltd. Others Versus M/s. Magnum Aviation Pvt. Ltd. Another 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 (4) TMI 464 - SUPREME COURT [In Criminal Appeal No. 830 of 2014 (Arising out of SLP (Crl.) No. 9752 of 2010) Decided vide judgment dated - 07 April 2014] Advance payments in contracts: Advance payment in contracts for purchase of goods or receiving services is a very common practice. The supplier of goods or service provider asks for advance for the following purposes: To ensure seriousness and commitment of the buyer/ customer/ client, To partly finance costs required in execution of contract, To reduce risks of cancellation of contract. The buyer may also prefer to pay advance for the following reasons: More committed supplier or service provider, For long-term relationship with supplier/ service provider, Reduced chances of breach of contract by supplier/ service provider, Payment of part consideration vis a vis no payment at all, of consideration naturally has difference in commercial world. In some situations advance is essential: In commercial world we find that in some situations advance payment is essential and is a common trade practice. Some examples are as follows: When special arrangements are req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be made for execution of contract and such special arrangement may not be very useful for other activities, When supplier/ service provider is also required to pay advances for execution of contract, As a general policy to execute contract only after receiving payment, In case of sellers market, receiving advance payment is order of the day and is common practice, When goods are not available off the shelf. Consideration for advance payment: In commercial world consideration or quid pro quo for making advance payment is well known. In course of negotiation of price and other terms and conditions the cost of finance made available by buyer to the seller is also considered. Sometime terms and conditions may provide for interest or discount or there can be a reduction in price. The buyer also knows such consideration whether it be specific, explicit or implied. Obligation or liability to pay advance: Once a party agrees to make advance payment he incurs commercial obligation, commitment and liability to pay such advance. In case he fails to pay agreed advance, there will be failure leading to breach of contract by the buyer. In some situations effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiveness of contract itself can be dependent on making of advance payment. If buyer fails to pay advance, the supplier may not be liable to execute the contract. Consequences of non-payment of agreed advance: Besides some of legal consequences, as discussed in earlier paragraph, in case buyer does not pay agreed advance money, the supplier may be helpless in execution of contract. In many situations, like long-term turn- key project, regular supply of specialised items, execution of contract involving large investment, etc. advance payment is very much essential. If the buyer fails to pay such advance, it may be difficult to execute contract. Enforceable debt or other liability: Commitment to pay an advance is definitely not a debt incurred or existing debt. However, it is definitely a commercial liability to pay advance, once an agreement has been entered into stipulating making of advance payment, the person who agrees to pay advance incurs commitment, obligation, and is liable to pay agreed advance amount as a step towards execution of contract or part of contract on his behalf. Cheque for loan : In case of money lending business, an agreement to disburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan is a commitment. Cheqe issued by money lender to the borrower is as per loan agreement. There is no debt due from borrower, or other liability of borrower. However, agreement for giving a loan is a commercial commitment and creates an obligation to disburse agreed loan on fulfilment of conditions to be met by the borrower. Therefore, when a money lender issues a cheque to the borrower, he issues cheque as per his commercial obligation, and therefore cheque is issued for an existing liability or obligation or commitment. Issuing a cheque is a serious aspect in commercial world: Issue of a cheque is a serious and vital aspect in commercial world. Once a party receives a cheque, he is satisfied that he will receive the money in due course on presentation of the cheque. In commercial world, cheque-in-hand is considered as equal to cash in hand available immediately or in due course depending on dating of cheque and agreed terms and conditions about presentation of cheque. Issue of cheque as advance money or loan as per agreement is a cheque issued against commercial commitment: When a cheque is issued by buyer as advan e payment to supplier or by money lender to mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y borrower, the cheque is definitely issued in discharge of an existing obligation or commitment which is in nature of liability to pay. Issue of cheque is primafacie indication of liability or obligation: In commercial world, issue of a cheque is a prima-facie indication of existing of an obligation to pay. The payment may not be against debt dues, it can be advance or loan. However, payment of cheque by drawee bank on presentation is equally important in all situation. Liability to pay advance as per contract is also a legally enforceable liability: As discussed earlier when a party to contract agrees to pay advance money, he makes a commitment to pay such advance money. The other party have a legal right to receive advance payment. Though there may not be an existing debt, but there is an existing obligation to pay advance and on non-payment of agreed advance money, the other party has right to get the same and it can be legally enforced. Facts before the Supreme Court: On 19.02.2007 and 26.02.2007, the purchasers placed two purchase orders for supply. The purchasers issued and handed over two post-dated cheques dated 15.03.2007 for a sum of ₹ 34,57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,164/- and dt. 20.03.2007 for a sum of ₹ 15,91,820/-. It is not disputed that the supplier received letter dated 22.03.2007 from the purchasers cancelling the purchase orders and requesting the supplier to return both the cheques. Thus it is clear that the purchaser communicated cancellation of orders after 32 days and 25 days after the date of contracts. This si a significant time gap in such contracts. Therefore, it cannot be said that the contract was cancelled immediately or shortly after entering into the contract. As per author, a significant point to note is that cancellation of contracts was communicated on 22.03.2007 that is seven days after the date of first cheque (15.03.2007) and two days after the date of second cheque (20.03.2007). And cancellation of orders or contract was communicated much after the dates of contracts. There is no claim or even allegation that in the meantime, the supplier failed to anything which he was required to do before he could present the cheques received as advance money. Therefore, it is clear that the supplier was not even requested to delay deposit of cheque, the cheques were held as cheque in due course on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written on the cheque, because till then there was no communication of cancellation of cheque. With respect, author feels that this importance point was not raised at all by the counsels of the suppliers. Section 138 of the NI Act considered by the Supreme Court is as follows (with highlights added by author): 138. Dishonour of cheque for insufficiency, etc., of funds in the account. - Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid , either because of 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, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in this section shall apply unless (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b ) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation. - For the purposes of this section, debt or other liability means a legally enforceable debt or other liability. Authors views: The words used are debt or other liability This means that it is not necessary that the amount covered by the cheque should only be against a debt , because otherwise there was no need to cover other liability . The use of word r between two words also indicate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both words are independent and convey different meanings. They are not dependent on each other. The expression other liability is much wider than a debt . In the context of the issuance of cheque or making of advance payment by other modes, the expression other liability really connotes any obligation or ny commitment or promise pursuant to which a person is required to make a payment. When an advance payment is agreed to be made, it is usually to be made immediately. Advance payment may be payable after some time, in some instalments and / or subject to some conditions to be full filled as might have been agreed. In absence of any such conditions, the advance payment is to be made immediately. Even if a post- dated cheque is issued , towards advance payment, then there is an obligation to pay advance, though the payment is deferred by mutual consent. It cannot be said that there is no obligation to make advance payment, even if a party has agreed to make advance payment. The obligation to pay advance money may disappear, only if the other party does not full fill its commitments as are required to be full filled before an advance payment can be made. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a cheque has been issued as advance payment to be made, it can be presumed that there is no condition applicable for making of advance payment. Merely because the cheque has been post-dated, it cannot be said that the receiver of cheque is under some obligation before he deposits the cheque. Accepting a post-dated cheque, in such circumstances, can only be construed as a concession given by the supplier to the buyer by agreeing advance payment on the date written on the cheque instead of receiving the release of funds immediately. If release of advance payment is subject to some conditions, then such conditions must be specified. As a general practice, it is noticed that if making of advance payment is subject to some conditions, then no buyer issues a cheque before those conditions are met by the supplier. The main issue before the Supreme Court: The main issue before the Supreme Court was whether dishonour of cheques in the given circumstances could amount to a criminal offence. The honourable Supreme court took view that the cheques issued as advance pursuant to contracts cannot be called as cheque issued against any debt or other liability. The Supreme Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the supplier has remedies against buyer under civil laws. However, criminal liability cannot be fastened in this case on the buyer who issued or drew cheque, towards advance payment. The observations and ruling of Delhi High Court, as reproduced in the reported judgment is reproduced with highlights added by author: 18. The reasoning of the Delhi High Court in the impugned order is as follows: 8. If at the time of entering into a contract it is one of the conditions of the contract that the purchaser has to pay the amount in advance then advance payment is a liability of the purchaser. The seller of the items would not have entered into contract unless the advance payment was made to him. A condition of advance payment is normally put by the seller for the reason that the purchaser may not later on retract and refuse to take the goods either manufactured for him or procured for him. Payment of cost of the goods in advance being one of the conditions of the contract becomes liability of the purchaser . The purchaser who had issued the cheque could have been asked to make payment either by draft or in cash. Since giving cheque is a mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of payment like any other mode of payment, it is normally accepted as a payment. The issuance of a cheque at the time of signing such contract has to be considered against a liability as the amount written in the cheque is payable by the person on the date mentioned in the cheque. Where the seller or manufacturer, on the basis of cheques issued, manufactures the goods or procures the goods from outside, and has acted upon the contract, the liability of the purchaser gets fastened, the moment the seller or manufacturer acts upon the contract and procures the goods. If for any reason, the seller fails to manufacture the goods or procure the goods it is only under those circumstances that no liability is created . However, where the goods or raw material has been procured for the purchaser by seller or goods have been manufactured by the seller, it cannot be said that the cheques were not issued against the liability. I consider that if the liability is not construed in this manner, the sole purpose of making dishonour of the cheque as an offence stands defeated. The purpose of making or enacting Section 138 of the N.I. Act was to enhance the acceptability of cheque in settlemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of commercial transactions, to infuse trust into commercial transactions and to make a cheque as a reliable negotiable instrument and to see that the cheques of business transactions are not dishonoured. The purpose of Negotiable Instrument Act is to make an orderly statement of rules of law relating to negotiable instruments and to ensure that mercantile instruments should be equated with goods passing from one hand to other. The sole purpose of the Act would stand defeated if after placing orders and giving advance payments, the stop payments are issued and orders are cancelled on the ground of pricing of the goods as was done in this case. The observations of the Supreme Court vide paragraph 19 onwards are analysed below by highlighting: 19. The above reasoning of the Delhi High Court is clearly flawed inasmuch as it failed to keep in mind the fine distinction between civil liability and criminal liability under Section 138 of the N.I. Act. If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138 . For a criminal liability to be made out under Section 138 , there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque. We are unable to accept the view of the Delhi High Court that the issuance of cheque towards advance payment at the time of signing such contract has to be considered as subsisting liability and dishonour of such cheque amounts to an offence under Section 138 of the N.I. Act . The Delhi High Court has traveled beyond the scope of Section 138 of t he N.I. Act by holding that the purpose of enacting Section 138 of the N.I. Act would stand defeated if after placing orders and giving advance payments, the instructions for stop payments are issued and orders are cancelled. In what we have discussed above, if a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our considered view, the cheque cannot be said to have been drawn for an existing debt or liability. 20. In our opinion, the view taken by Andhra Pradesh High Court in Swastik Coaters M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1996 (12) TMI 385 - ANDHRA PRADESH HIGH COURT], Madras High Court in Balaji Seafoods M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1998 (10) TMI 528 - MADRAS HIGH COURT], Gujarat High Court in Shanku Concretes Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [1999 (11) TMI 859 - GUJARAT HIGH COURT] and Kerala High Court in Ullas Supply House, Represented by Managing Partner v. Ullas, Proprietor Bright Agencies and another;[ 2006 (5) TMI 471 - KERALA HIGH COURT] is the correct view and accords with the scheme of Section 138 of the N.I. Act. 21. The view taken by Delhi High Court is plainly wrong and does not deserve acceptance. 22. Criminal Appeal is, accordingly, allowed; the impugned judgment of Delhi High Court is set aside; and the order of the Sessions Judge is restored. Authors point of views: As discussed earlier, with great respect to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsels who appeared before the honourable Supreme Court, author feels that the matter was not properly argued by the counsels of respondents, and ruling of the Supreme Court need a review. In view of author, making a commitment or promise to make an advance payment is creation of a liability to make a payment. When there is a liability to make a payment, and payment is made by a cheque, then Section 138 must be applicable. When a cheque is issued, a consideration can be presumed. As discussed by author, in the case before the Supreme Court, there appears no condition for making of advance payment. Advance payment was made by way of giving post-dated cheques, both the contracts were cancelled after a considerable period of time and both were cancelled, after the intended date of presentation of cheques. Therefore, dish-hour of such cheques, makes available remedy under Section 138 of the N.I. Act besides other remedies for losses and damages. The case would have been different only if contracts were cancelled immediately or in any case before the date of cheques. That being not the case, the holder of cheque must have all remedy under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 138 of NI Act 2014 (4) TMI 464 - SUPREME COURT M/s. Indus Airways Pvt. Ltd. Others Versus M/s. Magnum Aviation Pvt. Ltd. Another Criminal Appeal No. 830 of 2014 (Arising out of SLP (Crl.) No. 9752 of 2010) Dated - 07 April 2014 Dishonour of P.D. Cheques - Cheques received as advance payment - Whether the post-dated cheques issued by the appellants as an advance payment in respect of purchase orders could be considered in discharge of legally enforceable debt or other liability - Held that:- If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138. For a criminal liability to be made out under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque - issuance of cheque towards advance payment at the time of signing such contract has not to be considered as subsisting liability and dishonour of such cheque amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to an offence under Section 138 of the N.I. Act. The Delhi High Court has traveled beyond the scope of Section 138 of the N.I. Act by holding that the purpose of enacting Section 138 of the N.I. Act would stand defeated if after placing orders and giving advance payments, the instructions for stop payments are issued and orders are cancelled. If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, in our considered view, the cheque cannot be said to have been drawn for an existing debt or liability - Decided in favour of Appellant. Judgment / Order R. M. Lodha And Shiva Kirti Singh,JJ. JUDGMENT R. M. Lodha, J. Leave granted. 2. The only question that arises for consideration in this appeal by special leave is, whether the post-dated cheques issued by the appellants (hereinafter referred to as purchasers ) as an advance payment in respect of purchase orders could be considered in discharge of legally enforceable debt or other l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability, and, if so, whether the dishonour of such cheques amounts to an offence under Section 138 of the Negotiable Instruments Act, 1881 (for short, the N.I. Act ). The Delhi High Court in the impugned order has held that to be so. 3. The brief facts are these: On 19.02.2007 and 26.02.2007, the purchasers placed two purchase orders for supply of certain aircraft parts with respondent No.1, M/s. Magnum Aviation Pvt. Ltd. (hereinafter referred to as supplier ). In respect of these purchase orders, the purchasers also issued two post-dated cheques dated 15.03.2007 for a sum of ₹ 34,57,164/- and 20.03.2007 for a sum of ₹ 15,91,820/-. The said cheques were issued by way of advance payment for the purchase orders. One of the terms and conditions of the contract was that the entire payment would be given to the supplier in advance. The supplier says that the advance payment was made by the purchasers as it had to procure the parts from abroad. 4. These cheques got dishonoured when they were presented on the ground that the purchasers had stopped payment. 5. It is not in dispute that the supplier received letter dated 22.03.2007 from the purchasers cancelling t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purchase orders and requesting the supplier to return both the cheques. 6. The supplier sent response to the letter dated 22.03.2007 on 23.03.2007 asking the purchasers as to when the supplier could collect the payment. Thereafter, on 12.04.2007, the supplier sent a notice to the purchasers and then filed a complaint against the purchasers under Section 138 of the N.I. Act before the Court of Additional Chief Metropolitan Magistrate, New Delhi. 7. On 22.05.2007, the concerned Additional Chief Metropolitan Magistrate took cognizance of the alleged offence and issued summons to the purchasers. 8. The purchasers challenged the order issuing summons in a revision petition under Section 397 of the Code of Criminal Procedure, 1973 (for short, Code ). The Additional Sessions Judge, after hearing the parties, allowed the revision petition vide order dated 02.09.2008 and quashed the process issued by the Additional Chief Metropolitan Magistrate. 9. The supplier challenged the order of the Additional Sessions Judge in a petition under Section 482 of the Code before the High Court. The High Court allowed the petition, set aside the order of the Additional Sessions Judge and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estored the order of the Additional Chief Metropolitan Magistrate issuing process to the purchasers. 10. The Delhi High Court following its earlier decision in Mojj Engineering M/s. Mojj Engineering Systems Limited and others v. M/s. A.B. Sugars Ltd. [154 (2008) Delhi Law Times 579] held that the issuance of a cheque at the time of signing such contract has to be considered against a liability, as the amount written in the cheque is payable by the person on the date mentioned in the cheque. 11. Section 138 of the N.I. Act is as follows: 138. Dishonour of cheque for insufficiency, etc., of funds in the account. - Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of 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, such person shall be deemed to have committed an offence and shall, without prejudice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation. - For the purposes of this section, debt or other liability means a legally enforceable debt or other liability. 12. The interpretation of the expression for discharge of any debt or other liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty occurring in Section 138 of the N.I. Act is significant and decisive of the matter. 13. The explanation appended to Section 138 explains the meaning of the expression debt or other liability for the purpose of Section 138. This expression means a legally enforceable debt or other liability. Section 138 treats dishonoured cheque as an offence, if the cheque has been issued in discharge of any debt or other liability. The explanation leaves no manner of doubt that to attract an offence under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque. In other words, drawal of the cheque in discharge of existing or past adjudicated liability is sine qua non for bringing an offence under Section 138. If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise, and material or goods for which purchase order was placed is not supplied, in our considered view, the cheque cannot be held to have been drawn for an exiting debt or liability. The payment by cheque in the nature of advance payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt indicates that at the time of drawal of cheque, there was no existing liability. 14. In Swastik Coaters M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1997 Cri. L.J. 1942 (AP)] , the single Judge of the Andhra Pradesh High Court while considering the explanation to Section 138 held: ..Explanation to Section 138 of the Negotiable Instruments Act clearly makes it clear that the cheque shall be relateable to an enforceable liability or debt and as on the date of the issuing of the cheque there was no existing liability in the sense that the title in the property had not passed on to the accused since the goods were not delivered. .. 15. The Gujarat High Court in Shanku Concretes Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [2000 Cri. L.J.1988 (Guj.)] dealing with Section 138 of the N.I. Act held that to attract Section 138 of the N.I. Act, there must be subsisting liability or debt on the date when the cheque was delivered. The very fact that the payment was agreed to some future date and there was no debt or liability on the date of delivery of the cheques would take the case out of the purview of Section 138 of the N.I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. While holding so, Gujarat High Court followed a decision of the Madras High Court in Balaji Seafoods M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1999 (1) CTC 6]. 16. In Balaji Seafoods M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1999 (1) CTC 6], the Madras High Court held: Section 138 of the Negotiable Instruments Act makes it clear that where the cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of 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, such person shall be deemed to have committed an offence under Section 138 of the Act. The explanation reads that for the purposes of this section, debt or other liability means a legally enforceable debt or liability. 17. The Kerala High Court in Ullas Supply House, Represented by Managi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Partner v. Ullas, Proprietor Bright Agencies and another; [2006 Cri. L.J. 4330 (Kerala)] had an occasion to consider Section 138 of the N.I. Act. In that case, the post-dated cheque was issued by the accused along with the order for supply of goods. The supply of goods was not made by the complainant. The accused first instructed the bank to stop payment against the cheque and then requested the complainant not to present the cheque as he had not supplied the goods. The cheque was dishonoured. The single Judge of the Kerala High Court held, Ext.P1 cheque cannot be stated to be one issued in discharge of the liability to the tune of the amount covered by it, which was really issued, as is revealed by Ext. D1, as the price amount for 28 numbers of mixies, which the complainant had not supplied. .. 18. The reasoning of the Delhi High Court in the impugned order is as follows: 8. If at the time of entering into a contract it is one of the conditions of the contract that the purchaser has to pay the amount in advance then advance payment is a liability of the purchaser. The seller of the items would not have entered into contract unless the advance payment was made to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. A condition of advance payment is normally put by the seller for the reason that the purchaser may not later on retract and refuse to take the goods either manufactured for him or procured for him. Payment of cost of the goods in advance being one of the conditions of the contract becomes liability of the purchaser. The purchaser who had issued the cheque could have been asked to make payment either by draft or in cash. Since giving cheque is a mode of payment like any other mode of payment, it is normally accepted as a payment. The issuance of a cheque at the time of signing such contract has to be considered against a liability as the amount written in the cheque is payable by the person on the date mentioned in the cheque. Where the seller or manufacturer, on the basis of cheques issued, manufactures the goods or procures the goods from outside, and has acted upon the contract, the liability of the purchaser gets fastened, the moment the seller or manufacturer acts upon the contract and procures the goods. If for any reason, the seller fails to manufacture the goods or procure the goods it is only under those circumstances that no liability is created. However, where the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or raw material has been procured for the purchaser by seller or goods have been manufactured by the seller, it cannot be said that the cheques were not issued against the liability. I consider that if the liability is not construed in this manner, the sole purpose of making dishonour of the cheque as an offence stands defeated. The purpose of making or enacting Section 138 of the N.I. Act was to enhance the acceptability of cheque in settlement of commercial transactions, to infuse trust into commercial transactions and to make a cheque as a reliable negotiable instrument and to see that the cheques of business transactions are not dishonoured. The purpose of Negotiable Instrument Act is to make an orderly statement of rules of law relating to negotiable instruments and to ensure that mercantile instruments should be equated with goods passing from one hand to other. The sole purpose of the Act would stand defeated if after placing orders and giving advance payments, the stop payments are issued and orders are cancelled on the ground of pricing of the goods as was done in this case. 19. The above reasoning of the Delhi High Court is clearly flawed inasmuch as it failed to ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep in mind the fine distinction between civil liability and criminal liability under Section 138 of the N.I. Act. If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138. For a criminal liability to be made out under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque. We are unable to accept the view of the Delhi High Court that the issuance of cheque towards advance payment at the time of signing such contract has to be considered as subsisting liability and dishonour of such cheque amounts to an offence under Section 138 of the N.I. Act. The Delhi High Court has traveled beyond the scope of Section 138 of the N.I. Act by holding that the purpose of enacting Section 138 of the N.I. Act would stand defeated if after placing orders and giving advance payments, the instructions for stop payments are issued and orders are cancelled. In what we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed above, if a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, in our considered view, the cheque cannot be said to have been drawn for an existing debt or liability. 20. In our opinion, the view taken by Andhra Pradesh High Court in Swastik Coaters M/s. Swastik Coaters Pvt. Ltd v. M/s. Deepak Brothers and others; [1997 Cri. L.J. 1942 (AP)], Madras High Court in Balaji Seafoods M/s. Balaji Seafoods Exports (India) Ltd. and another v. Mac Industries Ltd.; [1999 (1) CTC 6], Gujarat High Court in Shanku Concretes Shanku Concretes Pvt. Ltd. and others v. State of Gujarat and another; [2000 Cri. L.J.1988 (Guj.)] and Kerala High Court in Ullas Supply House, Represented by Managing Partner v. Ullas, Proprietor Bright Agencies and another;[2006 Cri. L.J. 4330 (Kerala)] is the correct view and accords with the scheme of Section 138 of the N.I. Act. 21. The view taken by Delhi High Court is plainly wrong and does not deserve acceptance. 22. Criminal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal is, accordingly, allowed; the impugned judgment of Delhi High Court is set aside; and the order of the Sessions Judge is restored. DISHONOR OF CHEQUE FOR ADVANCE PAYMENT - Reply By Rahul Singhal as = Dear Sir,Thank you for sharing such an interesting article.Warm Regards,Rahul Singhal Dated: 2-1-2015 Reply By kailash singhal as = dear sir, still above case is good -- in case advance cheque given for procurement of goods , production of goods or services and another party has taken the effective steps and incurred huge money relating to that advance payment regards ca kc singhal , silvassa 9824102121 Dated: 3-1-2015 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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