Loan Transaction Alone Cannot Establish Liability Under Section 138 NI Act: Punjab and Haryana High Court Acquits Accused Where Complainant Admitted Cheque Was Taken as Security

Case Name: Bhushan Manchanda v. State of Haryana and Another

Date of Judgment: 1 September 2026

Citation: CRR-2532-2008

Bench: Hon’ble Ms. Justice Mandeep Pannu

Held: The Punjab and Haryana High Court held that merely describing an instrument as a security cheque does not automatically place it beyond the scope of Section 138 of the Negotiable Instruments Act, 1881. Such a cheque may attract penal liability if, on the date of its presentation, the underlying liability has matured and remains legally enforceable. However, where the cheque was retained merely as security, the complainant must establish that a crystallised and legally enforceable liability existed when the cheque was presented.

The Court further held that the existence of an underlying loan transaction, by itself, is insufficient to establish that a particular cheque was issued towards the discharge of that liability. Once the complainant’s own witness admitted that the cheque had been obtained as security, and the accused produced material supporting the same defence in proceedings concerning other cheques forming part of the transaction, the accused had raised a probable defence and rebutted the statutory presumption under the Negotiable Instruments Act.

After the presumption stood rebutted, the burden shifted back to the complainant to prove that the security cheque had matured for presentation against a subsisting and legally enforceable liability. As the complainant failed to produce convincing evidence to establish this crucial requirement, the essential ingredients of the offence under Section 138 were not proved beyond reasonable doubt.

Summary: The petitioner, sole proprietor of M/s B.S. Handloom Industries, had obtained financial assistance from the Haryana Financial Corporation for running his business. The Corporation presented cheque No. 478856 dated 25 September 1998 for ₹50,000, which was dishonoured with the remarks “Exceeds Arrangement.” Following the petitioner’s failure to make payment despite service of a statutory notice, the Corporation instituted a complaint under Section 138 of the Negotiable Instruments Act.

The Judicial Magistrate First Class, Panipat, convicted the petitioner and sentenced him to six months’ rigorous imprisonment with a fine of ₹5,000. The Additional Sessions Judge, Panipat, subsequently dismissed his appeal and affirmed the conviction and sentence.

Before the High Court, the petitioner maintained that the disputed cheque was one of five cheques handed over to the Corporation only as security for the financial assistance and was not issued towards the discharge of any existing debt or legally enforceable liability. This defence received material support from the cross-examination of CW-1, the Corporation’s own witness, who admitted that the cheques had been obtained as security.

The petitioner also relied upon his acquittal in other complaints instituted by the Corporation concerning three other cheques forming part of the same transaction. The High Court observed that this material demonstrated that the security-cheque defence was consistent with the complainant’s evidence and was not an afterthought devised during the revision proceedings.

Referring to the principle governing security cheques, the Court explained that a security cheque may be presented when the underlying liability matures, but its dishonour does not attract Section 138 unless a legally enforceable liability existed on the date of presentation. The courts below had erroneously presumed that the disputed cheque represented an enforceable liability merely because the petitioner had obtained a loan from the Corporation. They failed to determine whether the particular cheque had, in fact, matured for presentation against a crystallised liability.

The Court concluded that the admission of the complainant’s witness, read with the judgments concerning the remaining cheques, constituted a probable defence sufficient to rebut the statutory presumption. As the Corporation thereafter failed to prove that the disputed cheque was presented against a subsisting and legally enforceable liability, the conviction could not be sustained.

Decision: The High Court allowed the criminal revision petition and set aside the judgment of conviction, the order of sentence passed by the Judicial Magistrate First Class, Panipat, and the appellate judgment. The petitioner was acquitted of the charge under Section 138 of the Negotiable Instruments Act, 1881.