Dishonour of Cheque Case under Sec. 138 of NI Act: Legal Guide

What is Negotiable Instrument?

A negotiable instrument is a document based on a contract, guaranteeing a promise of payment of a specific amount of money on a certain date or on demand, by the payee whose name is stated in the document. Negotiable Instruments are cash equivalents which can be converted to liquid cash subjected to certain agreements. Negotiable instruments are also transferable from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument. Bills of Exchange, Promissory Note or Cheque are some examples of Negotiable Instruments. Main types of negotiable instruments are Inland instruments, foreign instruments and Bank drafts.

A little history behind Negotiable Instruments Act

The Negotiable Instruments act of our country governs the law of transactions involving negotiable instruments and the framework of the statute involving these regulations of negotiable instruments is known as Negotiable Instruments Act,1881. It mainly deals with Bills of Exchange, Promissory notes and Cheques. These are the three most common types of negotiable instruments. This act applies to the whole of India and to all persons residing in India, whether Indians or foreigners. The provisions of this Act are also applicable to Hundis unless there is a local usage to the contrary. Other native instruments like Treasury bills, Bearer debentures etc are also considered as negotiable instruments either by mercantile customs or under other enactments.

The Negotiable Instruments act was framed in the year 1881 when the British ruled our country. Prior to 1881, the transactions relating to negotiable instruments were governed by the Indian Contract Act 1872. This act has been amended more than 24 times to meet the needs of the time. The last amendment was made in 2015.

Holder in due course

As per S 9 of Negotiable Instruments Act, Holder in due course means a holder who takes the instrument bona fide for value before it is overdue, and without any notice of defects in the title of the person, who transferred it to him/her. Thus a person who claims to be a ‘holder in due course’ is required to prove that:

  • on paying a valuable consideration, he/she became the possessor of such instrument, thus being a bearer or an endorser.
  • he/she had come into possession of instrument before the amount due became actually payable.
  • he/she acted in good faith.
  • he/she came into possession of that instrument without having any reason to believe if any defect existed in the title of the transferor from whom he/she derived his/her title.

Bouncing of cheque or dishonour of cheque

Bouncing of the cheque is a slang word when the cheque gets dishonoured. A cheque gets dishonoured or bounced when it is insufficient of funds in the account of the person who issued this cheque. Here the person who issues the cheque is known as ‘drawer’, the person in whose favour the cheque is drawn is called ‘payee’, and the bank who is directed to pay the amount is known as ‘drawee’.

The main grounds for dishonour of cheque are:

  • Insufficient of funds
  • The account remains closed when the cheque is presented. (NEPS MICON LTD AND OTHERS VS. MAGMA LEASING LTD. 1999 AIR (SCW) 1637)
  • After the cheque is issued, the drawer makes a stop payment instruction to the bank. (MAHENDRA S. DADIA VS. The STATE OF MAHARASHTRA. 1(1999) BANKING CASES (BC) 133 (17/03/1998).
  • Signature is not matching
  • There is overwriting in the cheque
  • The cheque was presented after the lapse of three months, i.e. after the cheque has expired.
  • Opening balance insufficient
  • Disparity in the words and figures mentioned on the cheque
  • In case the cheque is issued by a company, the same does not bear the seal of the company
  • Mismatch in account number
  • In case of joint account where both signatures are required, only one sign is there
  • Death of the customer
  • Insolvency of the customer
  • Insanity of the customer
  • On the order of the garnishee
  • Crossed cheque
  • When a cheque is issued against the rules of trust
  • Alteration in cheque
  • Doubt in genuineness of the cheque
  • Presented at the wrong branch
  • Crossing limit of overdraft (OD)

When a cheque is dishonoured, the drawee bank immediately issues a ‘Cheque Return Memo’ to the banker of the payee stating the reason for non-payment. The payee’s banker then gives the dishonoured cheque and the memo to the payee. The holder or payee can resubmit the cheque within three months of the date on it if he/she believes it will be honoured the second time. However, if the drawer fails to make the payment, then the payee has the right to prosecute the drawer legally.

S 138 of Negotiable Instruments Act, 1881

According to Section 138 of the Act, the dishonour of cheque is a criminal offence and is punishable by imprisonment up to two years or with a monetary penalty or with both. Thus, the main ingredients involving in S 138 are:

  1. The cheque should have been issued for discharge of any debt or liability
  2. The cheque should have been presented within its validity period or 6 months.
  3. The payee or holder of the cheque should have issued a notice to the drawer within 30 days period regarding return of the unpaid cheque
  4. And after receiving the said notice, the drawer fails to pay within the period of 15 days.

So, if a cheque gets bounced, the payee can file a complaint along with an affidavit and relevant papers. The court will issue summons and hear the matter and upon found guilty, the defaulter will be punished with a monetary penalty which may be twice the amount issued in the cheque or punishment for a term of 2 years or both as per S 138 of the Negotiable Instruments Act.

How to send legal notice for cheque bounce case

Once the cheque has bounced, the payee is supposed to send a legal notice within 30 days of the dishonouring of the cheque to the drawer of the cheque, threatening to initiate legal proceedings under the negotiable instruments act in case the amount is not paid within the stipulated time period of 15 days. As there is no prescribed format for this notice, it could be sent by the complainant himself/herself. However, following information should be mentioned unambiguously in the legal notice.

  • A statement that the cheque was presented within its period of validity.
  • Statement of debt or legally enforceable liability.
  • Information regarding dishonour of cheque as given by the bank.
  • Demanding the issuer to pay the amount due within 15 days of receiving such notice.

Service of notice on the person issuing the Cheque is mandatory; the mode of service of notice can be any recorded delivery which is admitted as evidence under the Indian Evidence Act. The notice should be sent by Registered AD., Speed Post only. The purpose of making such provision is to make the person issuing the Cheque aware about the fact that the Cheque issued by him has been returned by his bankers due to insufficiency of funds in the account and he has to make arrangement for the amount within the stipulated period and intimate the banker as well as the person to whom the Cheque has been given by him.

Jurisdictions for cheque bounce case

The landmark judgment, DASHRATH RUPSINGH RATHOD vs. STATE OF MAHARASHTRA, ((2014) 9 SCC 129 ), The Supreme Court has changed the criteria under S 138 of N.I. Act which is to prosecute a person who failed to pay the cheque amount due to the insufficiency of funds or the actual amount exceeds the cheque amount.

A bench of justices T.S. Thakur, Vikramjit Sen and C. Nagappan ruled that the case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located. Earlier, a case under S 138 could be initiated by the holder of the cheque at his residence or place of business. This landmark decision would apply retrospectively. The reason for such judgment was that the payers were recklessly using extensive credit, thus misusing the place of the institution. To curb this practice, the judgment aims to get the root of the issue and resolve by a strict approach so as to discourage the payer from misusing or carelessly issuing cheques.

Eg:- Mr.X who resides in Kochin issues a cheque to Mr. Z. who resides in Bangalore. The cheque bounces in a bank in Chennai due to an insufficiency of funds. Then the place of the institution would be Chennai.

As a result of this landmark judgment, the negotiable instruments act was subjected to the amendment in 2015.

Offence under S 138 by company

When a company issued a cheque and it is dishonoured by the drawee bank it is said that offence under section 138 of the negotiable instrument act, is committed by the company. But the company cannot be prosecuted for the offence because it is a legal entity and no physical punishment can be imposed upon a company.

When such offence has been committed by a company its director will be punished for the offence under section 138. A company performs all acts through its directors so vicarious liability shall be imposed upon its directors.

In N. K. Wahi vs Shekher Singh (2007) 9 SCC; the supreme court has held that under section 141, N I Act, if any offence has committed by a company then every person who is a director or employee is not liable, only that person is liable who was in-charge for the conduct of the business of the company at the time when cheque was issued.

Hence, if the offence has committed by a company the person responsible for the affairs of the company at that particular time when the cheque was issued, shall be liable and punishable under section 138. Section 141 does not postulate that all the directors are liable; this section envisages constructive or vicarious liability upon the directors for the offence punishable under section 138.

It infers from a co-joint reading of section 138 and 141, that only those persons or directors will be liable for the offence who, at the time of issuance of the cheque, in-charge of the affairs of the company. In N.K. Wahi v. Shekhar Singh, (2007) 9 SCC 481; the Supreme Court has held that “to launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company.”

In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [(2005) 8 SCC 89; a clear case should be spelt out in the complaint against the person sought to be made liable. Therefore, the complaint must clearly show who the responsible person for the affair of the business of the company at the particular time when the alleged cheque was issued.

How are the disputes going to be resolved under the GST regime?

The Constitution (one hundred and first amendment) Act, 2016 provides that the Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute-

(a) between the Government of India and one or more States; or

(b) between the Government of India and any State or States on one side and one or more other Sates on the other side; or

(c) between two or more States, arising out of the recommendations of the Council or implementation thereof.

Further, the Act has the power to make recommendations on the taxes, exemption, and principles.

The Goods and Services Tax Council shall make recommendations to the Union and the States on— 

(a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to, or exempted from the goods and services tax; (c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under

(b) the goods and services that may be subjected to, or exempted from the goods and services tax; (c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under

(c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply;

(d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax;

(e) the rates including floor rates with bands of goods and services tax;

(f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;

(g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and

(h) any other matter relating to the goods and services tax, as the Council may decide.

30 Most Important Questions for GST Preparedness

Is your business GST Ready?

Goods & Services Tax (GST) is the most important business decision your organization needs to make. GST expert team to assess present business model, tax structure and examine logistic model. You also need a GST expert to review pricing and marketing strategy.

From evaluation of tax credit mechanisms to ERP processes involved in procurements, supplies, payments, and other control mechanisms, an experienced taxation and business lawyer can play a key role in the smooth transition from current tax model to GST compliance.

Adv GR Rajesh Kumar can help your organization in reviewing of existing exemptions, benefits, and concessions that are enjoyed under the current system of taxation and help your organization to avail tax benefits on inter-state sales and stock transfers.

Here is the most important GST preparedness checklist:

  1. Have you completed GST Migration and obtained provisional GSTIN?
  2. Have you identified HSN Code of Finished Goods, Raw Material and Consumable?
  3. Have you identified proposed GST rates for Finished Goods, Raw Material, and Consumables
  4. Have you identified Accounting Code of output service and input services?
  5. Have you identified proposed GST rates of output service and input services?
  6. Have you checked is there any exemption under GST for Finished Goods, Raw Materials, and Consumables?
  7. Have you checked is there any exemption under GST for output service or input service?
  8. Have you identified which of the purchase of goods/services in which you have to pay GST on reverse charges?
  9. Do you know on which inward supply of goods/service you would get Input Tax Credit (ITC)?
  10. Do you have the format of Tax Invoice to be issued to your customers?
  11. Do you have the format of Bill of Supply to be issued in the case of supply of exempt goods/services?
  12. Do you have the format of receipt to be issued for advance received?
  13. Do you have the format of an invoice to be issued for purchase from an unregistered person and other inward supply of goods and services covered under reverse charge?
  14. Do you have the format of payment voucher to be issued to suppliers in case of inward supply of goods and services covered under reverse charges?
  15. Do you have the format of Credit Not and Debit Note to be issued under GST?
  16. Have you decided to opt for a composite scheme under GST or not? If Yes, then you have to apply within 30 days from appointed date of GST.
  17. Have you got your books verified to ensure no credit has been left to be taken in returns under existing law?
  18. Have you filed all the returns up to appointed date under existing laws?
  19. Have you received Form C, F, H, I etc. under Central Sale Tax Act related to all out of state purchase up to appointed date?
  20. Have you compiled details of unavailed CENVAT Credit (ED, CVD, and SAD) on capital goods as on appointed date?
  21. Have you compiled details of unavailed credit of VAT and Entry Tax on capital goods as on appointed date?
  22. Have you compiled details of stock held in inputs or contained in semi-finished and finished goods as on appointed date for which you possess duty paid invoice or other documents?
  23. Have you compiled details of stock held in inputs or contained in semi-finished and finished goods as on appointed date for which duty-paid invoice or other documents are not available? (Applicable only to person other than manufacturer and service provider)?
  24. Have you compiled details of stock held in inputs or contained in semi-finished and finished goods as on appointed date for which you possess invoice or documents evidencing payment of VAT or Entry Tax?
  25. Have you compiled details of stock held in inputs or contained in semi-finished and finished goods as on appointed date for which no invoice or documents evidencing payment of VAT or Entry Tax is available?
  26. Have you compiled details of the transfer of CENVAT credit for registered person having a centralized registration under existing law?
  27. Have you compiled details of goods sent to job-worker and held in his stock on behalf of the principal as on appointed date?
  28. Have you compiled details of VAT or Service Tax paid on inputs or input services under existing law but the supply of goods or service made after the appointed date?
  29. Have you compiled details of goods sent on approval basis six months prior to the appointed day?
  30. Have you compiled and updated details of your vendor such as name, address, GSTIN etc.?

GST for Vendor Management: General Guidelines

GST  Checklist – Vendors:

Collect the following information from vendors by 30th June:

  1. HSN/SAC Codes of their supplies
  2. Rates of Tax under GST of their supplies
  3. Their GSTN for various locations

GST for Vendor Management: General Guidelines

  • Review Vendor Contracts: Review your existing contracts in light of the GST provisions, and wherever no contracts in writing, ensure that you enter into written contracts. Please seek professional help in this regard. You may contact us for any clarification.
  • Terms of Discount: The terms of offering a discount to your customers should be pre-defined in the contracts. If discounts are given post-supply with varying terms, the same may be disallowed for deduction for calculating the taxable value.
  • Review Employee Benefits: Any reimbursements to the employees beyond the pre-defined CTC may be considered as supply and taxed under GST. Please have employee compensation structures reviewed to ensure all bills filed for reimbursement are in the name of the company. Fixed Dearness Allowance may attract GST.
  • Exempted Goods & Services: Go through the detailed list of exempted goods & services attached to examine if they are supplied by you or taken as inputs.
  • GST Returns: 3 GST Returns are to be filed in a month and one annual return by most dealers. Review the formats attached for these returns and call us in the case of any clarification.
  • Software Upgradation: Your accounting software (Tally, SAP, etc.) may require a GST patch. Contact your software dealer at the earliest and ensure upgradation before 1st July.
  • Stock Audit on 30th June: Conduct a detailed stock audit on 30th June EOD. The old stock may have to be segregated and tagged for identification. This has a direct bearing on input credit availability under GST.
  • Unregistered Vendors: In case any of your vendors are unregistered in GST, you will have to pay tax under the reverse charge mechanism from any procurements from them. Either ensure all vendors are registered or be prepared to make a note of all purchases for which reverse charge will have to be charged.
  • Freight: Any charges on account of freight recovered from your customer will be added to the taxable value for computation of GST. Please communicate the same to your customers.
  • Working Capital Management: The new regime will require the monthly closing of accounts with all revenues and expenses. GST under reverse charge may impact the working capital. Also, analyze the cost impact of the changing tax rate.
  • Reviewing Sales Price: Under the anti-profiteering philosophy of the tax regime, any tax savings will have to be passed on to the customer. Thus, calculations to that effect must be undertaken. Failure to do so may attract repercussions from the GST Department.
  • Input Credit for Excise to Traders: Traders with excisable goods in their opening stock as on 1st July, but with tax invoices not reflecting Excise paid on inventory will be eligible to input credit for stock not older than 12 months through a 40/60 calculation mechanism specified under GST, on the sale of such stock. Please ask your company’s accountants to speak to us for understanding this method.
  • IGST on Imports: CVD and SAD will cease to exist w.e.f. 1st July. All imports to have Basic Customs Duty and IGST levied on them.

Intelligence Advisory – New Petya/Petna Ransomware Outbreak

What is Ransomware?

Ransomware is a type of malware that blocks access to a computer or its data and demands money to release it. Like WannaCry ransomware, ‘Petya’ spreads rapidly through networks that use Microsoft Windows.

What is Petya/Petna Ransomware?

Petya/Petna works by modifying Window’s Master Boot Record (MBR), causing the system to crash. It uses the EXTERNALBLUE exploit tool to accomplish this, which is a similar exploit to that of the WannaCrypt/WannaCry ransomware.

How does it work?

Petya/Petna is spread as a DLL file, requiring the execution by another process to compromise the system. After execution, it modifies the Window’s system’s Master Boot Record (MBR), causing the system to crash.

Upon reboot, the modified MBR prevents Windows from loading and a ransom note will be displayed, requiring the user to send US$300 in Bitcoins to a specific Bitcoin address in order for their files to be decrypted. However, the email account that is associated to disseminate the decryption key had been shut down and users will not be able to get their files decrypted after payment.

Shipping company Maersk’s IT system was impacted by the cyber-attack.
Shipping company Maersk’s IT system was impacted by the cyber-attack. Photograph: Mauritz Antin/EPA

When was Petya/Petna Ransomware released?

Petya/Petna Ransomware was originally released by the Shadow Brokers group in April 2017.

What steps do I need to take to reduce the risk of infection?

  • Enable your firewalls as well as intrusion detection and prevention systems.
  • Proactively monitor and validate traffic going in and out of the network.
  • Implement security mechanisms for other points of entry attackers can use, such as email and websites.
  • Deploy application control to prevent suspicious files from executing on top of behavior monitoring that can thwart unwanted modifications to the system.
  • Disable SMB (v1) on vulnerable machines – using either GPO or by following the instructions provided by Microsoft.
  • Ensure that all of the latest patches (if possible using Virtual Patching solution) is applied to affected operating systems – especially the ones related to MS17-010.
  • Perform regular backups of all critical information to limit the impact of data or system loss and to help expedite the recovery process. Ideally, this data should be kept on a separate device, and backups should be stored offline.
  • Establish a Sender Policy Framework (SPF), Domain Message Authentication Reporting and Conformance (DMARC), and DomainKeys Identified Mail (DKIM) for your domain, which is an email validation system designed to prevent spam by detecting email spoofing by which most of the ransomware samples successfully reaches the corporate email boxes.
  • Maintain updated Antivirus software on all systems.
  • Consider installing Enhanced Mitigation Experience Toolkit, or similar host-level anti-exploitation tools.
  • Keep the operating system third party applications (MS Office, browsers, browser Plugins) up-to-date with the latest patches.

Read the full technical advisory for Petya/Petna ransomware from CERT-IN.

References

Understanding Basics of GST

The single tax rate for a product or service in any part of the country (except Jammu & Kashmir).

The following 17 different indirect taxes will be subsumed under GST:

 Central taxes  State taxes
  •  Central Excise Duty;
  • Duties of Excise (Medicinal and Toilet Preparations);
  • Additional Duties of Excise (Goods of Special Importance);
  • Additional Duties of Excise (Textiles and Textile Products);
  • Additional Duties of Customs (commonly known as CVD);
  • Special Additional Duty of Customs (SAD);
  • Service Tax;
  • Cesses and surcharges insofar as they relate to supply of goods or services.
  •  State VAT;
  • Central Sales Tax;
  • Purchase Tax;
  • Luxury Tax;
  • Entry Tax (All forms);
  • Entertainment Tax (except those levied by the local bodies);
  • Taxes on advertisements;
  • Taxes on lotteries, betting, and gambling;
  • State cesses and surcharges insofar as they relate to supply of goods or services.

Benefits of GST:

  • Better compliance for trade and industry sector
  • Seamless flow of credit across the value chain.
  • Removal of cascading effect.
  • Dual GST (Central GST & State GST ) and Integrated GST (IGST)
  • Tax rates : 5%, 12%, 18% & 28%
  • Destination based tax
  • Taxable event – SUPPLY
  • Threshold exemption limit : Rs 20 lakhs & Rs 10 lakhs (for special category States & North Eastern States)
  • Composition scheme threshold: Rs 50 lakhs
  • Pan based registration
  • Tax can be deposited by internet banking, NEFT/RTGS, debit card, credit card & Over the Counter (OTC).
  • Goods and service tax network (GSTN), the technology backbone of GST. It provides IT infrastructure and services to the Central and State Governments, taxpayers, and other stakeholders for implementation of the Goods and Services Tax (GST)
  • GST Suvidha Provider (GSP) is an online compliance platform which will enable the taxpayer to comply with the provisions of the GST law through its web platform.

Important Links for GST

GST ACTS

GST Rates of Goods

GST Rates of Services