SUNIL TODI & ORS. versus STATE OF GUJARAT & ANR.

[2021] 9 S.C.R.

SUNIL TODI & ORS.

STATE OF GUJARAT & ANR.

(Criminal Appeal No. 1446 of 2021)

BDECEMBER 03, 2021

[DR. DHANANJAYA Y CHANDRACHUDAND A. S. BOPANNA, JJ.]

Negotiable Instruments Act, 1881 – ss.138, 141 – Code ofCriminal Procedure, 1973 – ss. 202, 203 and 482 – Dishonour ofCcheque issued by way of security – Power Supply Agreement (PSA)was entered into between the second respondent and the company– The PSA between the parties envisaged that the second respondentwould supply power to the company of which the appellants aredirectors etc. – The agreement postulated that payment for the powerDsupplied would be made by means of Letter of Credit (LCs) – Acheque post-dated 28.08.2017 in the amount of Rs.2,67,84,000/-was issued by the company in favour of the respondent, with thefollowing endorsement on its reverse, “to be deposited afterconfirmation only for security purpose” – The power supply hadcommenced on 01.07.2016 – Though, the LCs’ were provided, theyEwere allegedly not in form acceptable to the bankers of the secondrespondent – Bills were raised by the second respondent – Thecompany terminated its agreement with the second respondent –Cheque issued by the company was deposited – Cheque wasdishonoured with reason ‘payment stopped by drawer’ – AppellantsFalleged offence u/s. 138 of the N.I. Act – criminal complaint wasfiled by the second respondent – Magistrate issued summons to theappellants – Appellants filed petitions u/s.482 of Cr.P.C. – The HighCourt dismissed the petitions for quashing the complaint – Beforethe Supreme Court, the appellant contended that cheque was issuedfor the purpose of security and not for encashment – Held: TheGexplanation to s.138 of the NI Act provides that ‘debt or any otherliability’ means legally enforceable debt or other liability – Theterm debt also includes sum of money promised to be paid on afuture day by reason of present obligation – post-dated chequeissued after the debt has been incurred would be covered by thedefinition of ‘debt’ – However, if the sum payable depends on aH

contingent event, then it takes the color of debt only after thecontingency has occurred – Therefore, in the present case, debtwas incurred after the second respondent began supply of powerfor which payment was not made because of the non-acceptance ofthe LCs’ – The appellants do not dispute that prior to the terminationof the agreement, power was supplied for period of three monthsto the company – Once payments for electricity supply became duein terms of the PSA, and the company failed to discharge its dues,the second respondent was entitled in law to present the cheque forpayment – Merely labelling the cheque as security would notobviate its character as an instrument designed to meet legallyenforceable debt or liability, once the supply of power had beenprovided for which there were monies due and payable – There isno inflexible rule which precludes the drawee of cheque issuedas security from presenting it for payment in terms of the contract.Negotiable Instruments Act, 1881 – ss.138, 141 – Code ofCriminal Procedure, 1973 – ss. 202, 203 and 482 – Dishonourof cheque issued by way of security – Power Supply Agreement(PSA) was entered into between the second respondent and thecompany – cheque post-dated 28.08.2017 in the amount ofRs.2,67,84,000/- was issued by the company in favour of therespondent, with the following endorsement on its reverse, “to bedeposited after confirmation only for security purpose” – The powersupply had commenced – Bills were raised by the second respondent– The company terminated its agreement with the second respondent– Cheque issued by the company was deposited – Cheque wasdishonoured with reason ‘payment stopped by drawer’ – Appellantsalleged offence u/s. 138 of the N.I. Act – criminal complaint wasfiled by the second respondent – Magistrate issued summons to theappellants – The accused persons in the present case resided atAurangabad while the complaint u/s. 138 was filed before theMagistrate in Mundra – The argument of the appellants is that inthese circumstances, the Magistrate was duty bound to postponethe issuance of process and to either enquire into the case himselfor to direct an investigation either by police officer or by someother person – It was further contended that the summoning ordershowed non-application of mind – Held: Under Sub-Section (1) ofs.202, Magistrate upon the receipt of complaint of an offenceof which he/she is authorized to take cognizance is empowered to

Apostpone the issuance of process against the accused and either (i)enquire into the case; or (ii) direct an investigation to be made by apolice officer or by such other person as he thinks fit – If theMagistrate holds an inquiry himself, it is not compulsory that heshould examine witnesses and in suitable cases the Magistrate canexamine documents to be satisfied that there are sufficient groundsBfor proceeding u/s. 202 – In the present case, the Magistrate hasadverted to: (i) The complaint; (ii) The affidavit filed by thecomplainant; (iii) The evidence as per evidence list and; and (iv)The submissions of the complainant – The order passed by theMagistrate cannot be held to be invalid as betraying non-Capplication of mind – As it is settled that in determining the questionas to whether process is to be issued, the Magistrate has to besatisfied whether there is sufficient ground for proceeding and notwhether there is sufficient ground for conviction.

Dismissing the appeals, the CourtD

HELD: 1. In the present case, the Power Supply Agreement(PSA) between the parties envisaged that the second respondentwould supply power to the company of which the appellants aredirectors or as the case may be, managing director. Theagreement postulated that payment for the power supplied wouldEbe made by means of Letter of Credits (LCs). Though, the LCs’were provided, they were allegedly not in form acceptable tothe bankers of the second respondent. The appellants do notdispute that prior to the termination of the agreement, powerwas supplied for period of three months to the company. Inother words, the agreement for the supply of power was actedFupon and power was supplied to by the second respondent andconsumed by the company. [Para 23][1106-F-H]

2. The explanation to Section 138 of the NI Act providesthat ‘debt or any other liability’ means legally enforceable debtor other liability. The term debt also includes sum of moneyGpromised to be paid on future day by reason of presentobligation. post-dated cheque issued after the debt has beenincurred would be covered by the definition of ‘debt’. However,if the sum payable depends on contingent event, then it takesthe color of debt only after the contingency has occurred.

Therefore, in the present case, debt was incurred after thesecond respondent began supply of power for which payment wasnot made because of the non-acceptance of the LCs’. The issueto be determined is whether Section 138 only covers situationwhere there is an outstanding debt at the time of the drawing ofthe cheque or includes drawing of cheque for debt that isincurred before the cheque is encashed. [Para 25][1107-B-C;1108-A-C]

3. The object of the NI Act is to enhance the acceptabilityof cheques and inculcate faith in the efficiency of negotiableinstruments for transaction of business. The purpose of theprovision would become otiose if the provision is interpreted toexclude cases where debt is incurred after the drawing of thecheque but before its encashment. The true purpose of Section138 would not be fulfilled, if ‘debt or other liability’ is interpretedto include only debt that exists as on the date of drawing of thecheque. Moreover, Parliament has used the expression ‘debt orother liability’. The expression “or other liability’ must have ameaning of its own, the legislature having used two distinctphrases. The expression ‘or other liability’ has content whichis broader than ‘a debt’ and cannot be equated with the latter. Inthe present case, the cheque was issued in close proximity withthe commencement of power supply. The issuance of the chequein the context of commercial transaction must be understood inthe context of the business dealings. The issuance of the chequewas followed close on its heels by the supply of power. To holdthat the cheque was not issued in the context of liability whichwas being assumed by the company to pay for the dues towardspower supplied would be to produce an outcome at odds with thebusiness dealings. If the company were to fail to provide asatisfactory LC and yet consume power, the cheques were capableof being presented for the purpose of meeting the outstandingdues. [Para 26][1108-D-H]

4. Once payments for electricity supply became due interms of the PSA, and the company failed to discharge its dues,the second respondent was entitled in law to present the chequefor payment. Merely labelling the cheque as security would notobviate its character as an instrument designed to meet legally

Aenforceable debt or liability, once the supply of power had beenprovided for which there were monies due and payable. There isno inflexible rule which precludes the drawee of cheque issuedas security from presenting it for payment in terms of the contract.It all depends on whether legally enforceable debt or liabilityhas arisen. [Para 27][1109-B-D]B

5. Under Sub-Section (1) of Section 202, Magistrate uponthe receipt of complaint of an offence of which he/she isauthorized to take cognizance is empowered to postpone theissuance of process against the accused and either (i) enquireinto the case; or (ii) direct an investigation to be made by policeCofficer or by such other person as he thinks fit. The purpose ofpostponing the issuance of process for the purposes of an enquiryor an investigation is to determine whether or not there issufficient ground for proceeding. However, it is mandatory forthe Magistrate to do so in case where the accused is residingDat place beyond the area in which the Magistrate exercisesjurisdiction. The accused persons in the present case reside atAurangabad while the complaint under Section 138 was filedbefore the Magistrate in Mundra. The argument of the appellantsis that in these circumstances, the Magistrate was duty bound topostpone the issuance of process and to either enquire into theEcase himself or to direct an investigation either by police officeror by some other person. [Para 32][1111-E-H]

6. Section 145 of the NI Act provides that evidence ofthe complainant may be given by him on affidavit, which shallbe read in evidence in an inquiry, trial or other proceedingFnotwithstanding anything contained in the CrPC. The ConstitutionBench held that Section 145 has been inserted in the Act, witheffect from 2003 with the laudable object of speeding up trials incomplaints filed under Section 138. Hence, the Court noted thatif the evidence of the complainant may be given by him on affidavit,Gthere is no reason for insisting on the evidence of the witnessesto be taken on oath. Consequently, it was held that Section 202(2)CrPC is inapplicable to complaints under Section 138 in respectof the examination of witnesses on oath. The Court held that theevidence of witnesses on behalf of the complainant shall be

permitted on affidavit. If the Magistrate holds an inquiry himself,it is not compulsory that he should examine witnesses and insuitable cases the Magistrate can examine documents to besatisfied that there are sufficient grounds for proceeding underSection 202. [Para 38][1118-A-D]

7. In the present case, the Magistrate has adverted to: (i)The complaint; (ii) The affidavit filed by the complainant; (iii) Theevidence as per evidence list and; and (iv) The submissions ofthe complainant. [Para 39][1118-E]

8. The order passed by the Magistrate cannot be held tobe invalid as betraying non-application of mind. In Dy. ChiefController of Imports & Exports v. Roshanlal Agarwal, this Courthas held that in determining the question as to whether processis to be issued, the Magistrate has to be satisfied whether thereis sufficient ground for proceeding and not whether there issufficient ground for conviction. Whether the evidence isadequate for supporting the conviction can only be determinedat the trial. [Para 40][1118-F-G]

9. The High Court did not quash the complaint against theappellants since it was prima facie established that they weretriable for dishonour of cheque. Section 141 of the NI Actstipulates that if company is alleged to have committed anoffence under Section 138, then every person who ‘was in chargeof, and responsible to, the company for the conduct of the businessof the company’ shall also be deemed guilty of the offence. Theproviso provides an exception if she proves that the offence wascommitted without her knowledge or that she had exercised duediligence. [Paras 41-42][1119-G-H; 1120-A]10. The test to determine if the Managing Director or aDirector must be charged for the offence committed by theCompany is to determine if the conditions in Section 141 of theNI Act have been fulfilled i.e., whether the individual was in-charge of and responsible for the affairs of the company duringthe commission of the offence. However, the determination ofwhether the conditions stipulated in Section 141 of the Act havebeen fulfilled is matter of trial. There are sufficient averments

Ain the complaint to raise prima facie case against them. It isonly at the trial that they could take recourse to the proviso toSection 141 and not at the stage of issuance of process.[Para 44][1122-D-E]

11. In the present case, it is evident that the principalBgrounds of challenge which have been set up on behalf of theappellants are all matters of defence at the trial. The Magistratehaving exercised his discretion, it was not open to the High Courtto substitute its discretion. The High Court has in carefullyconsidered judgment, analysed the submissions of the appellantsand for justifiable reasons has come to the conclusion that theyCare lacking in substance. [Para 45][1122-F]

HMT Watches v. MA Habida (2015) 11 SCC776 : [2015] 3 SCR 719; Mehmood UI Rehman v. KhazirMohammad Tunda (2015) 12 SCC 420 : [2015] 4 SCR841; Birla Corporation Ltd. v. Adventz Investments andDHoldings (2019) 16 SCC 610 : [2019] 7 SCR 655;Krishna Lal Chawla v. State of U.P (2021) 5 SCC 435: 2021 AIR 1381; Re: Expeditious Trial of Cases underSection 138 of N.I. Act 1881 Suo Motu Writ Petition(Crl) No. 2 of 2020, decided on 16 April 2021; SMSEPharmaceuticals v. Neeta Bhalla (2005) 8 SCC89 : [2005] 3 Suppl. SCR 371; Mainuddin Abdul SattarShaikh v. Vijay Salvi (2015) 9 SCC 622 : [2015] 6SCR 1033 – relied on.

Indus Airways Private Limited v. Magnum AviationPrivate Limited (2014) 12 SCC 539 : [2014] 5 SCR56; Sampelly Satyanarayana Rao v. Indian RenewableEnergy Development Agency Limited (2016) 10 SCC458 : [2016] 6 SCR 531; Sripati Singh v. State ofJharkhand 2021 SCC OnLine SC 1002; KeshoramIndustries v. CWT AIR 1966 SC 1370; M/s WombLaboratories Pvt Ltd v. Vijay Ahuja Criminal AppealNos 1382-1383 of 2019, decided on 11 September 2019;Vijay Dhanuka v. Najima Mamtaj (2014) 14 SCC 638 :[2014] 4 SCR 171; Pepsi Foods Ltd. v. Special JudicialMagistrate (1998) 5 SCC 749 : [1997] 5 Suppl. SCR12; Abhijit Pawar v. Hemant Madhukar Nimbalkar

(2017) 3 SCC 528 : [2016] 9 SCR 475; Dy. ChiefController of Imports & Exports v. Roshanlal Agarwal(2003) 4 SCC 139 : [2003] 2 SCR 621; Bhushan Kumarv. State (NCT of Delhi (2012) 5 SCC 424 : [2012] 2SCR 696; Sunil Bharati Mittal v. CBI (2015) 4 SCC609 : [2015] 1 SCR 377 – referred to.

Banchharam Majumdar v. Adyanath Bhattacharjee(1909) ILR 36 Cal 936 – referred to.

Lindey L.J in Webb v. Strention 1888 QBD 518; Peoplev. Arguello 1869 37 Calif 524 – referred to.

CRIMINAL APPELLATE JURISDICTION : Criminal AppealNo.1446 of 2021.

From the Judgment and Order dated 26.06.2019 of the High Courtof Gujarat at Ahmedabad in Special Criminal Application No.9754 of2017.

With

Criminal Appeal No.1447 of 2021.

Sidharth Luthra, Ms. Meenakshi Arora, Sr. Advs., Debmalya C.Banerjee, Samarjit Pattnaik, Rohan Sharma, Vikas Gogne, KartikBhatnagar, Puneet Relan, Irfan Muzamil, Rahul Totala, NicholasChoudhury, Ujjwal Singh, Anmol, Rahul Tyagi, M/s Karanjawala & Co.,Advs. for the Appellants.

BMohit Mathur, Ms. Rebecca John, Sr. Advs., Aman Gupta, Ms.Aastha Mehta, Ms. Deepanwita Priyanka, Ms. Prerna Mohapatra, Advs.for the Respondents.

The Judgment of the Court was delivered by

DR. DHANANJAYA Y CHANDRACHUD, J.C

1. Single Judge of the High Court of Gujarat dismissed thepetitions under Section 482 of the Code of Criminal Procedure, 1973[1],instituted by the appellants to quash the criminal complaint[2 ]instituted bythe second respondent for offences punishable under Section 138 of theNegotiable Instruments Act, 1881[3], and challenge an order of summonsDdated 3 November 2017 of the JMFC Mundra on the complaint. Thecomplaint arises from the dishonour of cheque in the amount ofRs.2,67,84,000/-. In the two appeals which arose from the order of theHigh Court, the appellants are respectively,four Directors[4] and theManaging Director[5] of company by the name of R.L. Steels & EnergyELimited[6].

2. The background in which the controversy has arisen needs tobe noticed. On 19 December 2015, Letter of Intent was issued by thecompany to the second respondent for providing uninterrupted powersupply at the plant of the company situated at Aurangabad in Maharashtra.FClause (k) of the Letter of Intent envisages that all payments would bemade within sixty days through Letter of Credit[7] to be opened by thecompany. On 29 April 2016, an email was addressed by the companystating that payment security would be by cheque for an amountequivalent to the quantum of energy to be scheduled for forty-five days.Payments for monthly billing were to be made by LC within seven days

G1"CrPC”2 CC No. 1220 of 20173"NI Act”4SLP (Crl) 6590/ 20195SLP (Crl) 6995/20196"Company”H7"LC”

of the receipt of bills. This was agreed upon in communication dated30 April 2016 addressed on behalf of the second respondent. On 30June 2016, the company addressed communication to the secondrespondent that it was issuing two cheques “only for security deposit”and that the cheques were to be deposited “after getting confirmationonly”. The details of the cheques were :

Cheque No.Amount01328713392000/-01328626784000/-

3. cheque post-dated 28 August 2017 in the amount ofRs.2,67,84,000/- was accordingly issued with the following endorsementon its reverse: “to be deposited after confirmation only for securitypurpose”. The power supply commenced from 1 July 2016. On 4 July2016, the company addressed communication to its banker, Karur VysyaBank, requesting to stop payment of the above two cheques. On 24 July2016, Power Supply Agreement[8] was entered into between the secondrespondent and the company. The agreement envisages that the companywould make payment to the second respondent on the tenthday of everycalendar month by LC. Clause 2.5.1 of the agreement stipulated thus:

“2.5.1 The Member Consumer shall on the date of execution ofthis Agreement or not later than 30 (thirty) days prior to the Dateof Commencement of Supply furnish to GENERATOR an BG/postdated cheque of 45 days energy bill, in form and substanceacceptable to the Generator, for an amount equal to energy chargepayable for the Contracted Capacity, from any Indian Bankacceptable to the Generator.”

4. The relevant terms of the Power Supply Agreement were asfollows:

(a)Letter of Credit - Under Clause 2.5, the company wasrequired to make payments for the power supply throughLCs’. Clause 2.6 envisages that the Company would issueGa LC in accordance with the requirements of the secondrespondent’s Bank;

(b)Payment Date and Delay Penalty– Under Clause 2.7, theCompanywas requiredto makepaymenton thetenth day

8"PSA”

Aof every month; in default of which late payment chargeof fifteen per cent per annum would be payable;

(c)Default in Payments – Clause 8.2 provided that partieswould be bound by the obligations even in the case of adispute, unless there was failure of payment withoutBjustification; and

(d)Entire Agreement – Clause 14 provided that the PSAshall represent the entire agreement, and supersede andextinguish any previous drafts, agreements orunderstandings.

5. On 10 August 2016, 12 September 2016 and 27 September2016, three LCs’ favouring the second respondent were issued by PunjabNational Bank at the behest of the company.

6. According to the complaint, the LCs’ provided by the companywere not in the format required by their bankers. The company wasDstated to have been informed of this position in an exchange of emails inspite of which, it is alleged that it failed to provide LCs in the correctformat.

7. On 4 August 2016, the second respondent raised provisionalbill for Rs.1,77,56,157/- for electricity supplied during the period from 1EJuly 2016 to 31 July 2016. On 27 August 2016, an invoice forRs.1,66,48,028/- was issued for power supply during the month of July2016. On 1 September 2016, an invoice was raised in the amount ofRs.2,17,24,875/- for power supplied during August 2016. On 1 October2016, an invoice was raised in the amount of Rs.2,19,18,186/- for powerFsupplied during September 2016.

8. On 20 October 2016, the company terminated its agreementwith the second respondent. The cheque which was issued by thecompany was deposited on 28 August 2017. On 18 September 2017, alegal notice was issued by the second respondent to the appellants allegingthe commission of offences under Section 138 of the NI Act. It wasGalleged in the notice that according to the ledger maintained by the secondrespondent in its books of account, sum of Rs.6,02,91,089/- remainedoutstanding. The notice alleged that the appellants had issued chequedated 28 August 2017 drawn on Karur Vysya Bank, Aurangabad whichhad been dishonoured for the reason of ‘payment stopped by drawer’.HA reply dated 5 October 2017, was addressed in response to the legal

notice. It was stated that the cheque that was issued was only for thepurpose of Security and not for encashment.

9. On 2 November 2017, criminal complaint was filed by thesecond respondent in the court of the Additional Chief Judicial Magistrate,Mundra against the appellants seeking issuance of summons andimposition of fine of Rs. 5,35,68,000. An affidavit was filed on 3 November2017, in support of the complaint. On 6 November 2017, the Magistrateissued summons to the appellants. The appellants instituted petitions underSection 482 of the CrPC for quashing of the criminal complaint.Simultaneously, the complainant filed Regular Civil Suit for recoveryof dues.

10. By the impugned judgment and order dated 24 June 2019, theHigh Court has dismissed the petitions for quashing the complaint.However, it allowed petition for quashing filed by nominee directorwho was not in-charge of the day-to-day management of the companyand by woman non-executive Director. The reasons that guided theHigh Court for dismissing the petitionareas follows:

(i)The issues pertaining to the issuance of cheques, non-payment of electricity charges, issuance of LCs, amongothers, are questions of fact. They will have to be decidedby the trial court;

(ii)The complaint appears to be genuine. The High Court cannotexercise its jurisdiction under Section 482 CrPC unless it isestablished that there was an ulterior motive behind theinitiation of criminal proceedings; and

(iii)Both civil and criminal proceedings are maintainable on thesame set of facts, as in this case.

11. Mr. Sidharth Luthra and Ms. Meenakshi Arora, learned seniorcounsel have appeared on behalf of the appellants in support of theappeals. Mr. Mohit Mathur and Ms Rebecca John, learned senior counselhave appeared on behalf of the second respondent. Ms. Aastha Mehta,learned counsel appeared on behalf of the State of Gujarat.

12. Mr. Sidharth Luthra, learned senior counsel has urged threesubmissions in support of the appeals:

(i)The cheques which were issued to the second respondentwere intended at all material times to be security towards

payment. This is evident from the endorsement made onthe reverse of the cheque in the amount of Rs.2,67,84,000/- dated 28 August 2017, and is buttressed by the stipulationunder PSA that payment was to take place by means ofLC. suit has been instituted by the company against thesecond respondent in the court of the Civil Judge, SeniorDivision, RCS 15/2017 in which the defence in the writtenstatement is that:

a.There was default by the company in the paymentof electricity consumption charges from July toSeptember 2016; and

b.Though the company had issued LC to cover thedues of the electricity bills/ invoices, it had intentionallyavoided to furnish them in terms of the draft LCs’furnished by the bankers of the company. In the suitinstituted by the second respondent against thecompany, being CS 236/2019 before the High Courtof Judicature at Madras, the pleading in paragraph 8of the plaint is that the cheques were issued by wayof security:

“8. As agreed between the parties, the Defendant thereafterby its issued two cheques bearing Nos.013287 & 013286of amount of Rs.1,33,92,000/- (One Crore Thirty ThreeLakhs and Ninety Two Thousand only) and Rs.2,67,84,000/- (Two Crores and Sixty Seven Lakhs and Eighty FourThousand Only) respectively as security deposit to thePlaintiff on the condition that the cheques were to bedeposited after obtaining permission. The Plaintiff statesthat the same was accepted, and the condition was furtherincorporated under Clause 2.5.1 of the PSA. The associatedcheques are filed herewith as Plaint Document No.5 (Colly).However, the Defendant subsequently vide letter dated04.07.2016 ordered their bank to stop payment of theircheques. The communication is filed herewith as PlaintDocument No.6.”

Consequently, since the cheques have been issued by way ofsecurity and were not intended to be deposited, the institution of acomplaint under Section 138 is an abuse of the process. Therefore,

the invocation of the jurisdiction under Section 482 CrPC isAjustified;

(ii)Section 202 CrPC envisages the postponement of theissuance of process where the accused resides beyond thejurisdiction of the territory of the court. Despite the clearprovisions of Section 202, no inquiry was carried out by theBMagistrate; and

(iii)The summoning order shows non-application of mindinasmuch as no reasons have been adduced by theMagistrate.

In this backdrop, the following sequence of events was emphasizedin the course of the submissions:

•10 August 2016 : issuance of LC;

•30 September 2016: complainant stopped the supply ofpower;

•20 October 2016: termination of the PSA by the company;

•30 June 2017: instructions issued to the bankers to stoppayment;

•31 August 2017: presentation of the cheques;

•2 November 2017: complaint under Section 138 filed;

•3 November 2017: affidavit filed in support of the complaint;and

•6 November 2017: summoning order issued.

13. On the basis of the above sequence of events, it has beensubmitted that recourse to the filing of complaint under Section 138 ofNI Act is an abuse of the process. In the course of evaluating thesubmissions, the line of precedent to which reference has been madewould be considered.

14. Ms. Meenakshi Arora, learned senior counsel submitted thata clear case for the invocation of the jurisdiction under Section 482 CrPCwas established for the following reasons:

(i)Though the contract was terminated on 20 October 2016by the company, the cheques were presented to the bankonly on 31 August 2017;

A(ii)The fact that the cheques were issued towards security forpayment is evident from the endorsement on the reverse ofthe cheques and from the admission in paragraph 8 of theplaint instituted by the second respondent in the High Courtof Madras;

B(iii)Under the terms of the PSA, payment was envisaged to bemade through LC and not by cheque;

(iv)A civil suit has been instituted by the second respondent forthe recovery of its dues;

(v)MSEDCL has raised an additional charge which has beenCoccasioned by the default of the second respondent; and

(vi)Apart from the bald statement that the Directors are in-charge of and responsible for the management of thecompany, no specific role has been ascribed to them in theplaint so as to invoke the doctrine of vicarious liability.D

15. On the other hand, Mr. Mohit Mathur and Ms. Rebecca John,learned senior counsel appearing on behalf of the second respondenthave submitted that:

(i)The High Court has noted in the impugned judgment thatthere is no dispute in regard to the liability of the companyEfor electricity supplied during the months of August,September and October 2016;

(ii)Though the PSA envisaged that payment would be madethrough LC, they could not be honoured because the LCwere not in format acceptable to the Bankers of the secondFrespondent;

(iii)The Law does not prohibit the invocation of Section 138 ofthe NI Act even in situation where the cheques havebeen issued initially as security;

G(iv)The summoning order of the Magistrate conforms to law.The complaint was instituted on 2 November 2017 and wasduly supported by an affidavit dated 3 November 2017. Asummoning order is not required to furnish detailed reasonsparticularly in case under Section 138 of the NI Act, havingdue regard to the summary nature of the proceedings; and

(v)The complaint spells out the role attributed to the DirectorsAand prima facie at this stage, the test of vicarious liability isduly met.

On the above premises, it has been submitted that there is noreason for this Court, to interfere with the judgment of the High Courtsince detailed reasons have been furnished by the High Court for rejectingthe petitions under Section 482 of the CrPC.

16. Ms. Aastha Mehta, learned counsel for the State of Gujarathas submitted that the trial has not proceeded since 2017 due to thependency of the proceedings before the High Court and this Court.Learned counsel urged that there is no ground to interfere with the orderof the High Court.

17. The issues which arise for our consideration are as follows:

(i)Whether the dishonor of cheque furnished as ‘security’is covered under the provisions of Section 138 of the NIAct;D

(ii)Whether the Magistrate, in view of Section 202 CrPC, oughtto have postponed the issuance of process; and

(iii)Whether prima facie case of vicarious liability is madeout against the appellants.

18. The first submission which has been urged on behalf of theappellants is that complaint under Section 138 of the NI Act would notbe maintainable since the cheque of Rs 2.67 crores was issued by wayof security and,is thus not against legally enforceable debt or liability.The appellant has placed reliance on the judgment of two judge Benchof this Court in Indus Airways Private Limited v. Magnum AviationPrivate Limited[9].The issue in that case was whether the post-datedcheques which were issued by the appellants who were purchasers, asan advance payment in respect of purchase orders, could be consideredto be in discharge of legally enforceable debt or other liability andwhether the dishonor of the cheques amounted to an offence underSection 138. The appellants had placed two purchase orders for thesupply of aircraft parts with the first respondent and had issued twopost-dated cheques as advance payment. The supplier received letterfrom the purchasers cancelling the purchase and requesting the return

Aof both the cheques. Following notice by the suppliers, complaintwas instituted under Section 138 upon which cognizance was taken bythe Magistrate and summons were issued. The High Court allowed apetition under Section 482 CrPC and set aside the order issuing processby construing the expression “discharge of any debt or other liability” inSection 138 holding that there must be liability at the time of issuing theBcheque[10]. In appeal, Justice R M Lodha writing for two-JudgeBenchallowed the appeal[11] observing:

“9. The Explanation appended to Section 138 explains the meaningof the expression “debt or other liability” for the purpose of Section138. This expression means legally enforceable debt or otherCliability. Section 138 treats dishonoured cheque as an offence, ifthe cheque has been issued in discharge of any debt or otherliability. The Explanation leaves no manner of doubt that to attractan offence under Section 138, there should be legally enforceabledebt or other liability subsisting on the date of drawal of the cheque.DIn other words, drawal of the cheque in discharge of an existing

10—"138. Dishonour of cheque for insufficiency, etc., of funds in the account.Where any cheque drawn by person on an account maintained by him with bankerfor payment of any amount of money to another person from out of that account forthe discharge, in whole or in part, of any debt or other liability, is returned by the bankunpaid, either because of the amount of money standing to the credit of that account isEinsufficient to honour the cheque or that it exceeds the amount arranged to be paid fromthat account by an agreement made with that bank, such person shall be deemed to havecommitted an offence and shall, without prejudice to any other provision of this Act, bepunished with imprisonment for 8 [a term which may be extended to two years’], orwith 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 period of six months from theFdate 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 ademand for the payment of the said amount of money by giving notice; in writing, tothe drawer of the cheque, 9 [within thirty days] of the receipt of information by himfrom 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 moneyto the payee or, as the case may be, to the holder in due course of the cheque, withinGfifteen days of the receipt of the said notice.Explanation.—For the purposes of this section, “debt of other liability” means alegally enforceable debt or other liability.”

11It was held that the view taken by the Andhra Pradesh High Court in SwastikCoaters v. Deepak Bros, 1997 Cri LJ 1942 (AP), the Gujarat High Court in ShankuConcreates v. State of Gujarat, 2000 Cro LJ 1988 (Guj), the Madras High Court inHBalaji Seafoods Exports v. Mac Industries, (1999) 1 CTC 6 (Mad).

or past adjudicated liability is sine qua non for bringing an offenceunder Section 138. If cheque is issued as an advance paymentfor purchase of the goods and for any reason purchase order isnot carried to its logical conclusion either because of its cancellationor otherwise, and material or goods for which purchase orderwas placed is not supplied, in our considered view, the chequecannot be held to have been drawn for an existing debt or liability.The payment by cheque in the nature of advance payment indicatesthat at the time of drawal of cheque, there was no existing liability.”

19. Drawing the distinction between civil and criminal liability, itwas observed that if there is breach in the condition of advance payment,it would not incur criminal liability under Section 138 of the NI Act sincethere is no legally enforceable debt or liability at the time when the chequewas drawn.The Court held that if at the time when contract is enteredinto, the purchaser has to pay an advance and there was breach ofthat condition, the purchaser may have to make good the loss to theseller, but this would not occasion criminal liability under Section 138.The issuance of cheque towards advance payment at the time of theexecution of the contract would not - in the view which has adopted inIndus Airways - be considered as subsisting liability so as to attractan offence under Section 138 upon the dishonor of the cheque.

20. later judgment of two judge Bench in SampellySatyanarayana Rao v. Indian Renewable Energy DevelopmentAgency Limited[12 ]considered the decision in Indus Airways. InSampelly, the appellant was the Director of company which wasengaged in power generation, while the respondent was governmententerprise engaged in renewable energy. The respondent agreed toadvance loan for setting up power project and the agreement envisagedthat post-dated cheques towards payment of installments of the loanswould be given by way of security. The cheques having been dishonored,complaints were instituted under Section 138 which led to quashingpetitions filed before the High Court. The submission which was urgedbefore this Court was that dishonor of the post-dated cheques given byway of security did not amount to legally enforceable debt or liabilityunder Section 138 in presentia. This Court held, after adverting to thedecision in Indus Airways that if on the date of the cheque, liability ordebt exists or the amount has become enforceable, Section 138 would

Astand attracted and not otherwise. The decision in Indus Airways wasdistinguished in Sampelly (supra) on the ground that in that case, thecheque had not been issued for discharge of liability but as advancefor purchase order which was cancelled. On the other hand, in Sampelly,the cheque was for the repayment of loan installment which had fallendue. The Court noted that though the deposit of cheques towards theBrepayment of installments was described as security in the loanagreement, the true test was whether the cheque was in discharge of anexisting enforceable debt or liability or whether it was towards an advancepayment without there being subsisting debt or liability.

21. Besides the distinguishing features which were noticed inCSampelly, there was another ground which weighed in the judgment ofthis Court. The Court adverted to the decision in HMT Watches v.MA Habida[13 ]to hold that whether the cheques were given as securityconstitutes the defense of the accused and is matter of trial. The extractfrom the decision in HMT Watches swhich is cited in the decision inDIndus Airways is thus:

“10. Whether the cheques were given as security or not, orwhether there was outstanding liability or not is question of factwhich could have been determined only by the trial court afterrecording evidence of the parties. In our opinion, the High CourtEshould not have expressed its view on the disputed questions offact in petition under Section 482 of the Code of CriminalProcedure, to come to conclusion that the offence is not madeout. The High Court has erred in law in going into the factualaspects of the matter which were not admitted between theparties.F

22. In more recent judgment of two judge Bench in SripatiSingh v. State of Jharkhand[14], an order of the Magistrate takingcognizance and issuing summons on complaint under Section 420 IPCand Section 138 of the NI Act was challenged before the High Court.There was transaction between the second respondent and theGcomplainant pursuant to which the appellant had advanced sums of money.Several cheques were handed over but they were dishonored onpresentation. The High Court allowed the petitions. An appeal was filedbefore this Court. Before this Court, the appellant urged that cheque

13 (2015) 11 SCC 776H14 2021 SCC OnLine SC 1002

issued towards discharge of the loan and presented for recovery couldnot be construed as security for the transaction. In appeal, this Courtnoted that there were four loan agreements under which the secondrespondent agreed to pay total sum of Rs 2 crores and six chequeswere issued as security. The High Court had held that since under theloan agreement the cheques were given by way of security, the complaintcould not be maintained. Justice AS Bopanna, speaking for the two judgebench, adverted to the earlier decision in Indus Airways and thedistinguishing features which were noticed in the decision in Sampelly.The Court held that where in the case of loan transaction, the borroweragrees to repay the amount in specified time frame and issues chequeas security to secure the repayment and the loan is not repaid, thecheque which is issued as security would mature for presentation. TheCourt observed:“17. cheque issued as security pursuant to financial transactioncannot be considered as worthless piece of paper under everycircumstance. ‘Security’ in its true sense is the state of being safeand the security given for loan is something given as pledge ofpayment. It is given, deposited or pledged to make certain thefulfilment of an obligation to which the parties to the transactionare bound. If in transaction, loan is advanced and the borroweragrees to repay the amount in specified timeframe and issues acheque as security to secure such repayment; if the loan amountis not repaid in any other form before the due date or if there is noother understanding or agreement between the parties to deferthe payment of amount, the cheque which is issued as securitywould mature for presentation and the drawee of the cheque wouldbe entitled to present the same. On such presentation, if the sameis dishonoured, the consequences contemplated under Section 138and the other provisions of N.I. Act would flow.”

Moreover, as the Court explained:

“18. When cheque is issued and is treated as ‘security’ towardsrepayment of an amount with time period being stipulated forrepayment, all that it ensures is that such cheque which is issuedas ‘security’ cannot be presented prior to the loan or the instalmentmaturing for repayment towards which such cheque is issued assecurity. Further, the borrower would have the option of repayingthe loan amount or such financial liability in any other form and in

Athat manner if the amount of loan due and payable has beendischarged within the agreed period, the cheque issued as securitycannot thereafter be presented. Therefore, the prior discharge ofthe loan or there being an altered situation due to which therewould be understanding between the parties is sine qua non tonot present the cheque which was issued as security. These areBonly the defences that would be available to the drawer of thecheque in proceedings initiated under Section 138 of the N.I.Act. Therefore, there cannot be hard and fast rule that chequewhich is issued as security can never be presented by the draweeof the cheque. If such is the understanding cheque would alsoCbe reduced to an ‘on demand promissory note’ and in allcircumstances, it would only be civil litigation to recover theamount, which is not the intention of the statute. When chequeis issued even though as ‘security’ the consequence flowingtherefrom is also known to the drawer of the cheque and in thecircumstance stated above if the cheque is presented andDdishonoured, the holder of the cheque/drawee would have theoption of initiating the civil proceedings for recovery or the criminalproceedings for punishment in the fact situation, but in any event,it is not for the drawer of the cheque to dictate terms with regardto the nature of litigation.”EThe complaint, insofar as it invoked the provisions of Section 138of the NI Act, was accordingly restored to the Judicial Magistrate toproceed in accordance with law.

23. In the present case, the PSA between the parties envisagedthat the second respondent would supply power to the company of whichFthe appellants are directors or as the case may be, managing director.The agreement postulated that payment for the power supplied wouldbe made by means of LCs. Though, the LCs’were provided, they wereallegedly not in form acceptable to the bankers of the second respondent.The appellants do not dispute that prior to the termination of theGagreement, power was supplied for period of three months to thecompany. In other words, the agreement for the supply of power wasacted upon and power was supplied to by the second respondent andconsumed by the company.

24. In Sampelly and Sripati Singh, post-dated cheques wereHissued as security for loan installments that were due. On the dateson

whichthe cheques were drawn, there was an outstanding debt. In thepresent case, the cheques were issued on 30 June 2016. The secondrespondent commenced the supply of electricity immediately from thenext day that is from 1 July 2016. The facts of this case are in contrastwith the facts in Indus Airways. In Indus Airways, since the purchaseagreement was cancelled, there was no outstanding liability incurredbefore the encashment of the cheque. The transaction between the partiesdid not go through as result of the cancellation of the purchase orders.

25. The explanation to Section 138 of the NI Act provides that‘debt or any other liability’ means legally enforceable debt or otherliability. The proviso to Section 138 stipulates that the cheque must bepresented to the bank within period of six months from the date onwhich it is drawn or within its period of validity. Therefore, chequegiven as gift and not for the satisfaction of debt or other liability,would not attract the penal consequences of the provision in the event ofits being returned for insufficiency of funds. Aiyar’s Judicial Dictionarydefines debt as follows: “Debt is pecuniary liability. sum payable orrecoverable by action in respect of money demand.” Lindey L.J in Webbv. Strention[15] defined debt as “… sum of money which is now payableor will become payable in the future by reason of presentobligation, debitum in praesenti, solvendum in futuro.” The definitionwas adopted by this Court in Keshoram Industries v. CWT[16]. JusticeMookerjee writing for Full Bench of the Calcutta High Court inBanchharam Majumdar v. Adyanath Bhattacharjee[17]adopted thedefinition provided by the Supreme Court of California in People v.Arguello[18]:

“Standing alone, the word ‘debt’ is as applicable to sum of moneywhich has been promised at future day as to sum now due andpayable. If we wish to distinguish between the two, we say of theformer that it is debt owing, and of the latter that it is debt due.In other words, debts are of two kinds: solvendum inpraesenti and solvendum in future … sum of money which iscertainly and in all events payable is debt, without regard to the

fact whether it be payable now or at future time. sum payable

151888 QBD 518

16AIR 1966 SC 1370

17 (1909) ILR 36 Cal 936

181869 37 Calif 524

Aupon contingency, however, is not debt or does not become adebt until the contingency has happened.”

Thus, the term debt also includes sum of money promised to bepaid on future day by reason of present obligation. post-datedcheque issued after the debt has been incurred would be covered by theBdefinition of ‘debt’. However, if the sum payable depends on contingentevent, then it takes the color of debt only after the contingency hasoccurred. Therefore, in the present case, debt was incurred after thesecond respondent began supply of power for which payment was notmade because of the non-acceptance of the LCs’. The issue to bedetermined is whether Section 138 only covers situation where thereCis an outstanding debt at the time of the drawing of the cheque or includesdrawing of cheque for debt that is incurred before the cheque isencashed.26. The object of the NI Act is to enhance the acceptability ofcheques and inculcate faith in the efficiency of negotiable instrumentsDfor transaction of business. The purpose of the provision would becomeotiose if the provision is interpreted to exclude cases where debt is incurredafter the drawing of the cheque but before its encashment. In IndusAirways, advance payments were made but since the purchaseagreement was cancelled, there was no occasion of incurring any debt.EThe true purpose of Section 138 would not be fulfilled, if ‘debt or otherliability’ is interpreted to include only debt that exists as on the date ofdrawing of the cheque. Moreover, Parliament has used the expression‘debt or other liability’. The expression “or other liability’ must have ameaning of its own, the legislature having used two distinct phrases. Theexpression ‘or other liability’ has content which is broader than ‘aFdebt’ and cannot be equated with the latter. In the present case, thecheque was issued in close proximity with the commencement of powersupply. The issuance of the cheque in the context of commercialtransaction must be understood in the context of the business dealings.The issuance of the cheque was followed close on its heels by the supplyGof power. To hold that the cheque was not issued in the context of aliability which was being assumed by the company to pay for the duestowards power supplied would be to produce an outcome at odds withthe business dealings. If the company were to fail to provide satisfactoryLC and yet consume power, the cheques were capable of being presentedfor the purpose of meeting the outstanding dues.H

27. According to the complainant, the LCs’ were not in formatagreed to by their bankers. The cheques which were initially towardssecurity could not have been presented before the payments under thePSA fell due. Moreover, if the company were to discharge its liability topay the outstanding dues under the power supply agreement through theagreed modality of an LC to the satisfaction of the second respondent’sbankers, there would be no occasion to present the cheque thereafter.In other words, once payments for electricity supply became due interms of the PSA, and the company failed to discharge its dues, thesecond respondent was entitled in law to present the cheque for payment.Merely labelling the cheque as security would not obviate its characteras an instrument designed to meet legally enforceable debt or liability,once the supply of power had been provided for which there were moniesdue and payable. There is no inflexible rule which precludes the draweeof cheque issued as security from presenting it for payment in terms ofthe contract. It all depends on whether legally enforceable debt orliability has arisen.

28. At this stage, it would be instructive to note the order of twojudge Bench of this Court in M/s Womb Laboratories Pvt Ltd v.Vijay Ahuja[19]. In that case, the High Court had quashed proceedingsinitiated against the first respondent for offences punishable under Section138 of the NI Act merely on the basis of the assertion in the complaintthat “security cheques were demanded” in response to which theaccused had issued three signed blank cheques with the assurance thatif the amount was not returned, the cheques could be encashed. TheHigh Court held that the cheques were given only by way of securityand therefore not towards the discharge of debt or liability on the basisof which the complaint was quashed. Allowing the appeal by the drawee,this Court observed:

“5. In our opinion, the High Court has muddled the entire issue.The averment in the complaint does indicate that the signedcheques were handed over by the accused to the complainant.The cheques were given by way of security, is matter ofdefence. Further, it was not for the discharge of any debt or anyliability is also matter of defence. The relevant facts tocountenance the defence will have to be proved - that such securitycould not be treated as debt or other liability of the accused. That

19 Criminal Appeal Nos 1382-1383 of 2019, decided on 11 September 2019

1110SUPREME COURT REPORTS

Awould be triable issue. We say so because, handing over of thecheques by way of security per se would not extricate the accusedfrom the discharge of liability arising from such cheques.”

29. The order of this Court in Womb Laboratories holds thatthe issue as to whether the cheques were given by way of security is aBmatter of defence. This line of reasoning in Womb Laboratories is onthe same plane as the observations in HMT Watches, where it washeld that whether set of cheques has been given towards security orotherwise or whether there was an outstanding liability is question offact which has to be determined at the trial on the basis of evidence.The rationale for this is that disputed question of this nature cannot beCresolved in proceedings under Section 482 CrPC, absent evidence toberecorded at the trial.

30. The submission which has been urged on behalf of theappellants, however, is that the fact that the cheques in the present casehave been issued as security is not in dispute since it stands admittedDfrom the pleading of the second respondent in the suit instituted beforethe High Court of Madras. The legal requirement which Section 138embodies is that cheque must be drawn by person for the paymentof money to another “for the discharge, in whole or in part, of any debtor other liability’. cheque may be issued to facilitate commercialEtransaction between the parties. Where, acting upon the underlyingpurpose, commercial arrangement between the parties has fructified,as in the present case by the supply of electricity under PSA, thepresentation of the cheque upon the failure of the buyer to pay is aconsequence which would be within the contemplation of the drawer.The cheque, in other words, would in such an instance mature forFpresentation and, in substance and in effect, is towards legallyenforceable debt or liability. This precisely is the situation in the presentcase which would negate the submissions of the appellants.

31. The second submission which has been urged on behalf of theappellants turns upon Section 202 CrPC, which is extracted:G

“202. Postponement of issue of process.—(1) Any Magistrate,on receipt of complaint of an offence of which he is authorisedto take cognizance or which has been made over to him undersection 192, may, if he thinks fit, 1 [and shall, in case where theaccused is residing at place beyond the area in which heHexercises his jurisdiction,] postpone the issue of process against

the accused, and either inquire into the case himself or direct aninvestigation to be made by police officer or by such other personas he thinks fit, for the purpose of deciding whether or not there issufficient ground for proceeding:

Provided that no such direction for investigation shall be made,—(a) where it appears to the Magistrate that the offence complainedof is triable exclusively by the Court of Session; or (b) where thecomplaint has not been made by Court, unless the complainantand the witnesses present (if any) have been examined on oathunder section 200.

(2) In an inquiry under sub-section (1), the Magistrate may, if hethinks fit, take evidence of witnesses on oath: Provided that if itappears to the Magistrate that the offence complained of is triableexclusively by the Court of Session, he shall call upon thecomplainant to produce all his witnesses and examine them onoath.

(3) If an investigation under sub-section (1) is made by personnot being police officer, he shall have for that investigation allthe powers conferred by this Code on an officer in charge of apolice station except the power to arrest without warrant.”

32. Under Sub-Section (1) of Section 202, Magistrate upon thereceipt of complaint of an offence of which he/she is authorized totake cognizance is empowered to postpone the issuance of process againstthe accused and either (i) enquire into the case; or (ii) direct aninvestigation to be made by police officer or by such other person ashe thinksfit. The purpose of postponing the issuance of process for thepurposes of an enquiry or an investigation is to determine whether or notthere is sufficient ground for proceeding. However, it is mandatory forthe Magistrate to do so in case where the accused is residing at aplace beyond the area in which the Magistrate exercises jurisdiction.The accused persons in the present case reside at Aurangabad whilethe complaint under Section 138 was filed before the Magistrate inMundra. The argument of the appellants is that in these circumstances,the Magistrate was duty bound to postpone the issuance of process andto either enquire into the case himself or to direct an investigation eitherby police officer or by some other person. Section 203 stipulates that ifthe Magistrate is of the opinionon considering the statement on oath, if

Aany, of the complainant and of the witnesses, and the result of the enquiryor investigation if any under Section 202 that there is no sufficient groundfor proceeding, he shall dismiss the complaint recording briefly his reasonsfor doing so. The requirement of recording reasons which is specificallyincorporated in Section 203 does not find place in Section 202. Section204 which deals with the issuance of process stipulates that if in theBopinion of the Magistrate taking cognizance of an offence, there issufficient ground for proceeding, he may issue (a) in summons case, asummons for attendance of the accused; (b) in warrant case, warrantor if he thinks fit summons for the appearance of the accused. Theseproceedings have been interpreted in several judgments of this Court.CFor the purpose of the present case, some of them form the subjectmatter of the submissions by the appellants and the second respondent.33. The provisions of Section 202 which mandate the Magistrate,in case where the accused is residing at place beyond the area of itsjurisdiction, to postpone the issuance of process so as to enquire into theDcase himself or direct an investigation by police officer or by anotherperson were introduced by Act 25 of 2005 with effect from 23 June2006. The rationale for the amendment is based on the recognition byParliament that false complaints are filed against persons residing at faroff places as an instrument of harassment. In Vijay Dhanuka v. NajimaMamtaj[20], this Court dwelt on the purpose of the amendment to SectionE202, observing:

“11. Section 202 of the Code, inter alia, contemplates postponementof the issue of the process ‘in case where the accused is residingat place beyond the area in which he exercises his jurisdiction’and thereafter to either inquire into the case by himself or directFan investigation to be made by police officer or by such otherperson as he thinks fit. In the face of it, what needs ourdetermination is as to whether in case where the accused isresiding at place beyond the area in which the Magistrateexercises his jurisdiction, inquiry is mandatory or not.12. The words ‘and shall, in case where the accused is residingGat place beyond the area in which he exercises his jurisdiction’were inserted by Section 19 of the Code of Criminal Procedure(Amendment) Act (Central Act 25 of 2005) w.e.f. 23-6-2006.The aforesaid amendment, in the opinion of the legislature, wasessential as false complaints are filed against persons residing at

H20 (2014) 14 SCC 638

far-off places in order to harass them. The note for the amendmentreads as follows:

‘False complaints are filed against persons residing at far-off placessimply to harass them. In order to see that innocent persons arenot harassed by unscrupulous persons, this clause seeks to amendsub-section (1) of Section 202 to make it obligatory upon theMagistrate that before summoning the accused residing beyondhis jurisdiction he shall enquire into the case himself or directinvestigation to be made by police officer or by such other personas he thinks fit, for finding out whether or not there was sufficientground for proceeding against the accused.’

The use of the expression “shall” prima facie makes the inquiryor the investigation, as the case may be, by the Magistratemandatory. The word “shall” is ordinarily mandatory butsometimes, taking into account the context or the intention, it canbe held to be directory. The use of the word “shall” in allcircumstances is not decisive. Bearing in mind the aforesaidprinciple, when we look to the intention of the legislature, we findthat it is aimed to prevent innocent persons from harassment byunscrupulous persons from false complaints. Hence, in our opinion,the use of the expression “shall” and the background and thepurpose for which the amendment has been brought, we have nodoubt in our mind that inquiry or the investigation, as the case maybe, is mandatory before summons are issued against the accusedliving beyond the territorial jurisdiction of the Magistrate.”

34. This Court has held that the Magistrate is duty bound to applyhis mind to the allegations in the complaint together with the statementswhich are recorded in the enquiry while determining whether there is aprima facie sufficient ground for proceeding. In Mehmood UIRehman v. Khazir Mohammad Tunda[21], this Court followed thedictum in Pepsi Foods Ltd. v. Special Judicial Magistrate[22], andobserved that setting the criminal law in motion against person is aserious matter. Hence, there must be an application of mind by theMagistrate to whether the allegations in the complaint together with thestatements recorded or the enquiry conducted constitute violation oflaw. The Court observed:

21 (2015) 12 SCC 420

22 (1998) 5 SCC 749

“20. The extensive reference to the case law would clearly showthat cognizance of an offence on complaint is taken for the purposeof issuing process to the accused. Since it is process of takingjudicial notice of certain facts which constitute an offence, therehas to be application of mind as to whether the allegations in thecomplaint, when considered along with the statements recordedor the inquiry conducted thereon, would constitute violation oflaw so as to call person to appear before the criminal court. It isnot mechanical process or matter of course. As held by thisCourt in Pepsi Foods Ltd. v. Judicial Magistrate [Pepsi FoodsLtd. v. Judicial Magistrate, (1998) 5 SCC 749 : 1998 SCC (Cri)1400] to set in motion the process of criminal law against personis serious matter.”

“22. The steps taken by the Magistrate under Section 190(1)(a)CrPC followed by Section 204 CrPC should reflect that theMagistrate has applied his mind to the facts and the statementsand he is satisfied that there is ground for proceeding further inthe matter by asking the person against whom the violation of lawis alleged, to appear before the court. The satisfaction on theground for proceeding would mean that the facts alleged in thecomplaint would constitute an offence, and when considered alongwith the statements recorded, would, prima facie, make theaccused answerable before the court. No doubt, no formal orderor speaking order is required to be passed at that stage. TheCode of Criminal Procedure requires speaking order to be passedunder Section 203 CrPC when the complaint is dismissed andthat too the reasons need to be stated only briefly. In other words,the Magistrate is not to act as post office in taking cognizanceof each and every complaint filed before him and issue processas matter of course. There must be sufficient indication in theorder passed by the Magistrate that he is satisfied that theallegations in the complaint constitute an offence and whenconsidered along with the statements recorded and the result ofinquiry or report of investigation under Section 202 CrPC, if any,the accused is answerable before the criminal court, there is groundfor proceeding against the accused under Section 204 CrPC, byissuing process for appearance. The application of mind is best

demonstrated by disclosure of mind on the satisfaction. If there isno such indication in case where the Magistrate proceeds underSections 190/204 CrPC, the High Court under Section 482 CrPCis bound to invoke its inherent power in order to prevent abuse ofthe power of the criminal court. To be called to appear before thecriminal court as an accused is serious matter affecting one’sdignity, self-respect and image in society. Hence, the process ofcriminal court shall not be made weapon of harassment.”

These decisions were cited with approval in Abhijit Pawar v.Hemant Madhukar Nimbalkar[23]. After referring to the purposeunderlying the amendment of Section 202, the Court observed:

“25. … the amended provision casts an obligation on the Magistrateto apply his mind carefully and satisfy himself that the allegationsin the complaint, when considered along with the statementsrecorded or the enquiry conducted thereon, would prima facieconstitute the offence for which the complaint is filed. Thisrequirement is emphasised by this Court in recentjudgment Mehmood Ul Rehman v. Khazir MohammadTunda [Mehmood Ul Rehman v. Khazir Mohammad Tunda,(2015) 12 SCC 420 : (2016) 1 SCC (Cri) 124]…”

35.While noting that the requirement of conducting an enquiry ordirecting an investigation before issuing process is not an empty formality,the Court relied on the decision in Vijay Dhanuka which had held thatthe exercise by the Magistrate for the purpose of deciding whether ornot there is sufficient ground for proceeding against the accused is nothingbut an enquiry envisaged under Section 202 of the Code.

36. In Birla Corporation Ltd. v. Adventz Investments andHoldings[24], the earlier decisions which have been referred to abovewere cited in the course of the judgment. The Court noted:

“26. The scope of enquiry under this section is extremely restrictedonly to finding out the truth or otherwise of the allegations madein the complaint in order to determine whether process should beissued or not under Section 204 CrPC or whether the complaintshould be dismissed by resorting to Section 203 CrPC on thefooting that there is no sufficient ground for proceeding on the

23 (2017) 3 SCC 528

24 (2019) 16 SCC 610

basis of the statements of the complainant and of his witnesses, ifany. At the stage of enquiry under Section 202 CrPC, theMagistrate is only concerned with the allegations made in thecomplaint or the evidence in support of the averments in thecomplaint to satisfy himself that there is sufficient ground forproceeding against the accused.”

Hence, the Court held:

“33. The order of the Magistrate summoning the accused mustreflect that he has applied his mind to the facts of the case andthe law applicable thereto. The application of mind has to beCindicated by disclosure of mind on the satisfaction. Consideringthe duties on the part of the Magistrate for issuance of summonsto the accused in complaint case and that there must be sufficientindication as to the application of mind and observing that theMagistrate is not to act as post office in taking cognizance ofthe complaint, in Mehmood Ul Rehman [Mehmood UlDRehman v. Khazir Mohammad Tunda, (2015) 12 SCC 420 :(2016) 1 SCC (Cri) 124]…”

The above principles have been reiterated in the judgment inKrishna Lal Chawla v. State of U.P[25].

E37. In this backdrop, it becomes necessary now to advert to anorder dated 16 April 2021 of Constitution Bench in Re: ExpeditiousTrial of Cases under Section 138 of N.I. Act 1881[26]. The ConstitutionBench notes “the gargantuan pendency of complaints filed under Section138” and the fact that the “situation has not improved as courts continueto struggle with the humongous pendency”. The court noted that thereFwere seven major issues which arose from the responses filed by theState Governments and the Union Territories including in relation to theapplicability of Section 202 of the CrPC. Section 143 of the NI Actprovides that Sections 262 to 265 of the CrPC (forming part of ChapterXXI dealing with summary trials) shall apply to all trials for offencesGpunishable under Section 138 of the NI Act. On the scope of the inquiryunder Section 202 CrPC in cases under Section 138 of the NI Act, therewas divergence of view between the High Courts. Some High Courtshad held that it was mandatory for the Magistrate to conduct an inquiry

25(2021) 5 SCC 435.H26 Suo Motu Writ Petition (Crl) No. 2 of 2020, decided on 16 April 2021

under Section 202 CrPC before issuing process in complaints filed underSection 138, while there were contrary views in the other High Courts.In that context, the Court observed:

“10. Section 202 of the Code confers jurisdiction on the Magistrateto conduct an inquiry for the purpose of deciding whether sufficientgrounds justifying the issue of process are made out. Theamendment to Section 202 of the Code with effect from23.06.2006, vide Act 25 of 2005, made it mandatory for theMagistrate to conduct an inquiry before issue of process, in acase where the accused resides beyond the area of jurisdiction ofthe court. (See: Vijay Dhanuka & Ors. v. Najima Mamtaj & Ors.1 , Abhijit Pawar v. Hemant Madhukar Nimbalkar and Anr. andBirla Corporation Limited v. Adventz Investments and HoldingsLimited & Ors.). There has been divergence of opinion amongstthe High Courts relating to the applicability of Section 202 in respectof complaints filed under Section 138 of the Act. Certain casesunder Section 138 have been decided by the High Courts upholdingthe view that it is mandatory for the Magistrate to conduct aninquiry, as provided in Section 202 of the Code, before issuanceof process in complaints filed under Section 138. Contrary viewshave been expressed in some other cases. It has been held thatmerely because the accused is residing outside the jurisdiction ofthe court, it is not necessary for the Magistrate to postpone theissuance of process in each and every case. Further, it has alsobeen held that not conducting inquiry under Section 202 of theCode would not vitiate the issuance of process, if requisitesatisfaction can be obtained from materials available on record.

11. The learned Amici Curiae referred to judgment of this Courtin K.S. Joseph v. Philips Carbon Black Ltd & Anr. where therewas discussion about the requirement of inquiry under Section202 of the Code in relation to complaints filed under Section 138but the question of law was left open. In view of the judgments ofthis Court in Vijay Dhanuka (supra), Abhijit Pawar (supra) andBirla Corporation (supra), the inquiry to be held by the Magistratebefore issuance of summons to the accused residing outside thejurisdiction of the court cannot be dispensed with. The learnedAmici Curiae recommended that the Magistrate should come to aconclusion after holding an inquiry that there are sufficient grounds

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1118SUPREME COURT REPORTS

[2021] 9 S.C.R.

Ato proceed against the accused. We are in agreement with thelearned Amici.”

38. Section 145 of the NI Act provides that evidence of thecomplainant may be given by him on affidavit, which shall be read inevidence in an inquiry, trial or other proceeding notwithstanding anythingBcontained in the CrPC. The Constitution Bench held that Section 145has been inserted in the Act, with effect from 2003 with the laudableobject of speeding up trials in complaints filed under Section 138. Hence,the Court noted that if the evidence of the complainant may be given byhim on affidavit, there is no reason for insisting on the evidence of thewitnesses to be taken on oath. Consequently, it was held that SectionC202(2) CrPC is inapplicable to complaints under Section 138 in respectof the examination of witnesses on oath. The Court held that the evidenceof witnesses on behalf of the complainant shall be permitted on affidavit.If the Magistrate holds an inquiry himself, it is not compulsory that heshould examine witnesses and in suitable cases the Magistrate canDexamine documents to be satisfied that there are sufficient grounds forproceeding under Section 202.

39. In the present case, the Magistrate has adverted to:

(i)The complaint;

E(ii)The affidavit filed by the complainant;

(iii)The evidence as per evidence list and; and

(iv)The submissions of the complainant.

40. The order passed by the Magistrate cannot be held to beinvalid as betraying non-application of mind. In Dy. Chief ControllerFof Imports & Exports v. Roshanlal Agarwal[27], this Court has heldthat in determining the question as to whether process is to be issued,the Magistrate has to be satisfied whether there is sufficient ground forproceeding and not whether there is sufficient ground for conviction.Whether the evidence is adequate for supporting the conviction can onlyGbe determined at the trial.

[See also in this context the decision in Bhushan Kumar v. State(NCT of Delhi)[28]].

27(2003) 4 SCC 139H28(2012) 5 SCC 424

41. The High Court did not quash the complaint against theappellants since it was prima facie established that they were triablefor dishonour of cheque. Section 141 of the NI Act provides:

141. Offences by companies.—(1) If the person committing anoffence under section 138 is company, every person who, at thetime the offence was committed, was in charge of, and wasresponsible to, the company for the conduct of the business of thecompany, as well as the company, shall be deemed to be guilty ofthe offence and shall be liable to be proceeded against and punishedaccordingly:

Provided that nothing contained in this sub-section shall renderany person liable to punishment if he proves that the offence wascommitted without his knowledge, or that he had exercised alldue diligence to prevent the commission of such offence:

[Provided further that where person is nominated as Directorof company by virtue of his holding any office or employment inthe Central Government or State Government or financialcorporation owned or controlled by the Central Government orthe State Government, as the case may be, he shall not be liablefor prosecution under this Chapter.]

(2) Notwithstanding anything contained in sub-section (1), whereany offence under this Act has been committed by companyand it is proved that the offence has been committed with theconsent or connivance of, or is attributable to, any neglect on thepart of, any director, manager, secretary or other officer of thecompany, such director, manager, secretary or other officer shallalso be deemed to be guilty of that offence and shall be liable tobe proceeded against and punished accordingly.

Explanation.—For the purposes of this section, — (a) “company”means anybody corporate and includes firm or other associationof individuals; and (b) “director”, in relation to firm, means apartner in the firm.”

42. Section 141 of the NI Act stipulates that if company is allegedto have committed an offence under Section 138, then every personwho ‘was in charge of, and responsible to, the company for the conductof the business of the company’ shall also be deemed guilty of theoffence. The proviso provides an exception if she proves that the offence

Awas committed without her knowledge or that she had exercised duediligence. In Sunil Bharati Mittal v. CBI[29], threejudge Bench of thisCourt observed that the general rule is that criminal intent of group ofpeople who undertake business can be imputed to the Company but notthe other way around. Only two exceptions were provided to this generalrule: (i) when the individual has perpetuated the commission of offenceBand there is sufficient evidence on the active role of the individual; and(ii) the statute expressly incorporates the principle of vicarious liability.Justice Sikri writing for three-judge Bench observed:“43. Thus, an individual who has perpetrated the commission ofan offence on behalf of company can be made an accused,Calong with the company, if there is sufficient evidence of his activerole coupled with criminal intent. Second situation in which hecan be implicated is in those cases where the statutory regimeitself attracts the doctrine of vicarious liability, by specificallyincorporating such provision.

44. When the company is the offender, vicarious liability of theDDirectors cannot be imputed automatically, in the absence of anystatutory provision to this effect. One such example is Section141 of the Negotiable Instruments Act, 1881. In AneetaHada [Aneeta Hada v. Godfather Travels & Tours (P) Ltd.,(2012) 5 SCC 661 : (2012) 3 SCC (Civ) 350 : (2012) 3 SCC (Cri)E241] , the Court noted that if group of persons that guide thebusiness of the company have the criminal intent, that would beimputed to the body corporate and it is in this backdrop, Section141 of the Negotiable Instruments Act has to be understood. Sucha position is, therefore, because of statutory intendment making ita deeming fiction. Here also, the principle of “alter ego”, wasFapplied only in one direction, namely, where group of personsthat guide the business had criminal intent, that is to be imputed tothe body corporate and not the vice versa. Otherwise, there hasto be specific act attributed to the Director or any other personallegedly in control and management of the company, to the effectthat such person was responsible for the acts committed by orGon behalf of the company.”

43. In SMS Pharmaceuticals v. Neeta Bhalla[30], three judgeBench while construing the provisions of Section 141 of the NegotiableInstruments Act 1881, has noted that the position of Managing Director29(2015) 4 SCC 609H30 (2005) 8 SCC 89

or Joint Managing Director of company is distinct since personsoccupying that position are in charge of and responsible for the conductof the business. It was observed that though there is general presumptionthat the Managing Director and Joint Managing Director are responsiblefor the criminal act of the company, the director will not be held liable ifhe was not responsible for the conduct of the company at the time of thecommission of the offence. The Court observed:

“9. The position of managing director or joint managing directorin company may be different. These persons, as the designationof their office suggests, are in charge of company and areresponsible for the conduct of the business of the company. Inorder to escape liability such persons may have to bring their casewithin the proviso to Section 141(1), that is, they will have to provethat when the offence was committed they had no knowledge ofthe offence or that they exercised all due diligence to prevent thecommission of the offence.

Every person connected with the company shall not fall withinthe ambit of the provision. It is only those persons who were incharge of and responsible for the conduct of business of thecompany at the time of commission of an offence, who will beliable for criminal action. It follows from this that if director of acompany who was not in charge of and was not responsible forthe conduct of the business of the company at the relevant time,will not be liable under the provision. The liability arises frombeing in charge of and responsible for the conduct ofbusiness of the company at the relevant time when theoffence was committed and not on the basis of merelyholding designation or office in company. Conversely, aperson not holding any office or designation in company may beliable if he satisfies the main requirement of being in charge ofand responsible for the conduct of business of company at therelevant time.”

(emphasis supplied)

The same principle has been followed by Bench of two judgesin Mainuddin Abdul Sattar Shaikh v. Vijay Salvi[31] :

A“12. The respondent has adduced the argument that in thecomplaint the appellant has not taken the averment that the accusedwas the person in charge of and responsible for the affairs of theCompany. However, as the respondent was the Managing Directorof M/s Salvi Infrastructure (P) Ltd. and sole proprietor of M/sSalvi Builders and Developers, there is no need of specificBaverment on the point. This Court has held in National SmallIndustries Corpn. Ltd. v. Harmeet Singh Paintal [(2010) 3 SCC330 : (2010) 1 SCC (Civ) 677 : (2010) 2 SCC (Cri) 1113] , asfollows : (SCC p. 346, para 39)

“39. (v) If the accused is Managing Director or Joint ManagingCDirector then it is not necessary to make specific averment in thecomplaint and by virtue of their position they are liable to beproceeded with.”

44. The test to determine if the Managing Director or Directormust be charged for the offence committed by the Company is to

Ddetermine if the conditions in Section 141 of the NI Act have been fulfilledi.e., whether the individual was in-charge of and responsible for theaffairs of the company during the commission of the offence. However,the determination of whether the conditions stipulated in Section 141 ofthe MMDR Act have been fulfilled is matter of trial. There aresufficient averments in the complaint to raise prima facie case againstEthem. It is only at the trial that they could take recourse to the proviso toSection 141 and not at the stage of issuance of process.

45. In the present case, it is evident that the principal grounds ofchallenge which have been set up on behalf of the appellants are allmatters of defence at the trial. The Magistrate having exercised hisFdiscretion, it was not open to the High Court to substitute its discretion.The High Court has in carefully considered judgment, analysed thesubmissions of the appellants and for justifiable reasons has come to theconclusion that they are lacking in substance.

46. For the above reasons, we have come to the conclusion thatGthere is no merit in the appeals. The appeals shall stand dismissed.

47. Pending applications, if any, are disposed of.

Ankit Gyan

Appeals dismissed.