The District Manager vs. Joint Secretary

IN THE HIGH COURT OF ANDHRA PRADESH :: AMARAVATI THE HON'BLE SRI JUSTICE NINALA JAYASURYA CRIMINAL PETITION No.216 of 2020

Between:-<br>Eastern Foods Private Limited & Others.		….	Petitioners
	And
The State of Andhra Pradesh,<br>Rep.by its Public Prosecutor and another.		….	Respondents
Counsel for the Petitioners	: Mr.J.Nageswara Rao
Counsel for the Respondents	: Assistant Public Prosecutor
	Mr.Ghanta Rama Rao,<br>Senior Counsel, assisted<br>by Mr.Ghanta Sridhar

ORDER:

The present Criminal Petition is filed seeking to quash the proceedings in C.C.No.1918 of 2019 on the file of the Court of the Judicial First Class Magistrate (Excise), Guntur.

2. The petitioners herein are arrayed as accused in the said case for the offence under Section 138 of the Negotiable Instrument Act (for short 'the Act').

3. Heard learned counsel for the petitioners. Also heard learned Assistant Public Prosecutor for the 1st respondent and Mr.Ghanta Rama Rao, learned Senior Counsel appearing for the 2nd respondent/complainant.

4. The facts which lead to the filing of the present Quash Petition may briefly be stated thus:

The 1st petitioner is a company incorporated under the Indian Companies Act carrying on the business of Wheat and Wheat products. The 2nd petitioner is the Managing Director and the 3rd petitioner is the Director of the 1st petitioner's company. The 2nd respondent/complainant is also a company incorporated under the provisions of the Companies Act. In the course of their business operations, the 1st petitioner entered into contract for sale of 2650 Metric Tons of Wheat @ Rs.20,320/- Per Metric Ton (for short 'PMT') bearing No.SPOT/HYD/MP/18-19/RF/603 dated 17.01.2019 with the 2 nd respondent. As per the said contract/agreement, 75% payment has to be deposited against the scanned copy of Railway Receipt (RR) within one day of rake loading date and 25% within 3 days of rake reaching destination, the 1st petitioner has to provide Post Dated Cheques (for short 'PDCs') for balance 25% within 12 days from the date of Invoice/RR date. In the capacity of the Director of 1st petitioner-Company, 3rd petitioner signed the contract/agreement. In terms of the said contract/ agreement, the 2nd respondent raised an Invoice dated 07.02.2019 for Rs.5,40,37,544.96 ps., and on 12.02.2019, the 1st petitioner effected 75% of the invoice amount i.e., Rs.4,05,28,129/- adjusted credit balance of Rs.64,092/-, leaving outstanding balance of Rs.1,34,45,323.96 ps. As per the terms of the contract/agreement for effecting the balance payment, the 2nd and 3rd petitioners issued a Cheque bearing No.074963 dated 19.02.2019 for

Rs.1,34,45,323.96 ps., in favour of the 2nd respondent-Company drawn on State Bank of India, S.M.E.Branch, Industrial Estate, Madhupatna. While giving the said PDC against the liability of the 1st petitioner-Company vide Letter dated 12.02.2019, the 1st petitioner-Company clearly confirmed that the said PDC was issued against the amount due by the 1st petitioner-Company to the 2nd respondent-Company in connection with the contract/agreement dated 17.01.2019 only. In addition to the said letter, the 1st petitioner-Company has also given an undertaking and assurance stating that it will keep the account maintained by its banker appropriately funded to ensure payment of the dues of the 2nd respondent-Company on the date of presentation of said PDC.

5. When the due date for the said PDC for encashment was on 19.02.2019, the 3rd petitioner while enclosing a letter dated 17.02.2019 sent an e-mail on 18.02.2019 at 17.19 hours stating that out of the total PDC amount of Rs.1,34,45,323.96 ps., payment of Rs.68,01,873.20 ps., was made and that an amount of Rs.66,43,450.76 ps., was adjusted in respect of some transactions of the year 2018. On the same day i.e., on 18.02.2019 at 20.40 hours, the 2nd respondent sent a reply while referring to the terms of the agreement/contract dated 17.01.2019, Letter of Confirmation and Letter of Undertaking dated 12.02.2019. In the said Communication/mail, it was categorically mentioned that the said

amount of Rs.68,01,873.20 ps., remitted by the 1st petitioner-Company on 18.02.2019 was without permission of the 2nd respondent-Company and the same shall not be considered as payment under the contract/agreement for supply of Wheat by the 2nd respondent-Company i.e., dues against the said PDC.

6. Subsequently, on 20.02.2019, the 2nd respondent-Company presented the said PDC through its banker HDFC, Guntur Main Branch and the same was dishonoured and returned with a Cheque Return Memo dated 28.02.2019 with an Endorsement "Payment stopped by Drawer". In those circumstances, the 2nd respondent-Company got issued a Statutory Notice under Section 138 (b) of the Act and called upon the 1st petitioner-Company to pay an amount of Rs.1,34,45,323.96 ps., covered under the PDC and to the said notice, the petitioners herein got issued a Reply on 19.03.2019 inter alia stating that the payment of Rs.68,01,873.20 ps., was accepted by the 2 nd respondent-Company against PDC dated 19.02.2019, without any objection and therefore cannot turn around and enforce the PDC, which has lost its enforceability by reason of adjustment of the amount covered by the Cheque. In the said Reply, it was also stated that the 1 st petitioner-Company is ready to issue a fresh cheque for Rs.1,34,45,323.96 ps., with respect to the wheat contract, if the 2nd respondent-Company agrees to refund the RTGS amount of Rs.68,01,873.20 ps., and makes the full payment of Rs.66,43,450.76

ps., which was due to the 1st petitioner-Company. In the light of the said Reply, the 2nd respondent initiated proceedings under the Act and seeking to quash the same, the above Criminal Petition is filed.

7. The learned counsel for the petitioners/accused referring to the material on record, inter alia, contends that the 1st petitioner herein entered into different contracts with the 2nd respondent herein for supply of 'Maida'(refined wheat flour) and in respect of one of the transactions, the 2nd respondent was liable to pay an amount of Rs.66,43,450.76 ps. Since the 2nd respondent failed to pay the said amount, the 1st petitioner recovered the said sum from out of the PDC amount of Rs. 1,34,45,323.96 ps., and paid the balance amount of Rs.68,01,873.20 ps., to the 2nd respondent. He submits that the 2nd respondent received the said amount, retained the same and despite the communications/e-mails of the 1st petitioner dated 17.02.2019, 18.02.2019, presented the said PDC, without regard to the request of the 1st petitioner to return the said cheque as the enforceable liability has been settled and there is no further amount payable to the 2nd respondent. The learned counsel further submits that the PDC was issued as an advance payment by the 1st petitioner and the same cannot be considered towards the discharge of enforceable debt. Referring to the Notice dated 08.03.2019 issued by the 2nd respondent demanding the total amount covered by the Cheque, he contends that there is no legally enforceable debt to claim the total amount covered

by the PDC, in view of the payment of Rs.68.01.873.20 ps., by the $1^{st}$ petitioner to the 2^nd respondent on 18.02.2019, which was detained by it. He submits that the very fact that the $2^nd$ respondent filed a Suit O.S.No.183/2022 on the file of the Special Court for Trial and Disposal of Commercial Disputes, Hyderabad for recovery of an amount of Rs.66,43,450.76 ps., [Rs.1,34,45,323.96 ps. $-$ Rs.68,01,873.20 ps.] that too claiming interest from 19.02.2019 makes it clear that the 2^nd respondent had accepted the payment made by the $1^st$ petitioner-Company towards the PDC amount, and supports the case of the $1^st$ petitioner that as on the date of presentation of PDC, the $1^st$ petitioner was not liable to pay the PDC amount of $Rs.1,34,45,323.96$ ps. In such circumstances, the presentation of PDC to realize the said amount and return of the said cheque would not attract the provisions of the Act

8. Referring to Section 56 of the Act and the decision of the Hon'ble Supreme Court in Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel & Another¹, the learned counsel for the petitioners contends that it is a fit case to exercise of the powers of this Court under Section 482 of the Criminal Procedure Code as continuation of the proceedings in C.C.No.1918 of 2019 in the attending facts and circumstances of the case, would constitute abuse

muchless under Section 138.

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$12022$ LiveLaw(SC) 830

of process of Law. Accordingly, the learned counsel seeks to allow the Quash Petition.

9. The learned Senior Counsel appearing for the 2nd respondent, on the other hand, while refuting the various submissions made on behalf of the petitioners contends that admittedly the 1st petitioner-Company and the 2nd respondent-Company entered into different contracts for supply of 'Maida' by the 1st petitioner-Company, that the contract for supply of 'Wheat' by the 2nd respondent-Company to the 1 st petitioner-Company dated 17.01.2019 is separate and distinct. He submits that all these contracts/agreements are independent and governed by the respective terms and conditions contained therein. He submits that in respect of the supply of Maida, the 1st petitioner committed default as a result of which, the 2nd respondent to meet its end consumer's requirements purchased the same in the open market at higher prices and therefore a Debit Note for Rs.67,74,432/- was raised by the 2nd respondent on 30.09.2018 and the said amount cannot be adjusted or retained from the outstanding amount of Rs.1,35,45,323.96 ps., i.e., PDC amount which is due and payable by the 1st petitioner for the supplies of Wheat made by the 2nd respondent. Referring to the relevant Communications in this regard dated 18.02.2019 etc., the learned Senior Counsel would contend that the 2nd respondent had in categorical terms informed the 1st petitioner

that the amount of Rs.68,01,873.20 ps., which was remitted by the 1st petitioner shall not be construed as payment under the wheat contract and in terms of the contract/agreement dated 17.01.2019 and the Letter of Assurance and Undertaking dated 12.01.2019, the 2nd respondent was entitled for the PDC amount and accordingly, the same was presented for realization. He submits that the 1st petitioner-Company made payment of outstanding amount by way of adjustment of certain amounts allegedly due from the 2nd respondent, which are in respect of altogether a different and independent contract. Assuming without conceding, the learned counsel would submit that if the 1st petitioner is entitled for any amount in respect of the contract entered into between the parties with regard to supplies of Maida, it has to work out remedies available in Law, but not by adjusting amounts as was done in the present case.

10. The learned Senior Counsel further submits that the PDC in the present case was furnished in respect of a concluded contract/agreement and in terms thereof. While distinguishing the judgment of Hon'ble Supreme Court in Dashrathbhai Trikambhai Patel, he submits that as there is a dispute about payment towards the liability, it is a matter for trial and not a fit case for quashing the proceedings at the threshold. Making the above said submissions, the learned Senior Counsel submits that there are no merits, much less

valid grounds, for quashing the proceedings as sought for and accordingly seeks to dismiss the present petition.

11. This Court has considered the submissions made and perused the material on record. On an appreciation of rival contentions, the point that falls for consideration by this Court is:

"Whether the Proceedings under challenge warrants interference by this Court in the facts and circumstances of the case, as there is no enforceable debt as on the date of presentation of the PDC?"

Point:

12. At the outset, it is pertinent to state that there is no dispute that the 1st petitioner-Company and the 2nd respondent-Company entered into different contracts, wherein the 1st petitioner agreed to supply certain quantities of Maida to the 2nd respondent-Company. Likewise, the 2nd respondent-Company entered into a contract dated 17.01.2019 for supply of Wheat to the 1st petitioner-Company. In so far as the said Wheat contract is concerned, it is also not in dispute that the 1st petitioner-Company furnished a Cheque bearing No.074963 dated 19.02.2019 for Rs.1,34,45,323.96 ps., vide Letter dated 12.02.2019, wherein it is mentioned as follows:

"I/We further undertake and assure you, till the full and final settlement of all your dues of the following:

a) We will not close the Bank account on which we have issued the cheque to you.

• b) We will not issue any stop payment instruction to the bank, against the above mentioned cheques.
• c) Will not change the bank Signatories.
• d) Will keep the account appropriately funded to ensure payment of your dues, on the day of presentation."

13. Apart from the said Letter, a specific authorization to present the said cheque for encashment was also issued by a separate Letter dated 12.02.2019. As pointed out by the learned Senior Counsel, the said authorization was with specific reference to the Wheat purchased by the 1st petitioner-Company from the 2nd respondent-Company. Be that as it may. Deducting/adjusting an amount of Rs.66,43,450.76 ps., from out of the outstanding amount covered by the PDC i.e., Rs.1,34,45,323.96 ps., the 1st petitioner made payment of Rs.68,01,873.20 ps., to the 2nd respondent on the premise that the 2nd respondent illegally debited Rs.66,43,450.76 ps., from the 1st petitioner's account for supply of Maida. Though such adjustment of the amount of Rs.68,01,873.20 ps., was not accepted, which is evident from the 2nd respondent's Reply dated 19.02.2019, it had not remitted back the said amount and retained the same, stating that it shall not be considered as payment under the Wheat contract. Thereafter, the 2 nd respondent presented the PDC for the amount of Rs. 1,34,45,323.96 ps. Though this Court finds some merit in the contention raised by the learned Senior Counsel to the effect that the contracts entered between the parties for supply of Maida and Wheat

are separate and distinct, and therefore retaining/adjustment of certain amounts to which the 1st petitioner is stated to be entitled is not tenable, as noted above, the 2nd respondent had not refunded the amount remitted by the 1st petitioner i.e., Rs. 68,01,873.20 ps., towards the supplies of Wheat made by the 2nd respondent. Had the 2 nd respondent refunded the said amount and then proceeded to present the PDC for Rs.1,34,45,323.96 ps., and the same was not honoured at the instance of the 1st petitioner-Company, perhaps the 2 nd respondent would be justified in contending that the petitioners are liable for prosecution under Section 138 of the Act. Instead of adopting such course of action, the 2nd respondent subsequently filed a Suit for recovery of Rs. 66,43,450.76 ps., together with interest from 19.02.2019 which would go to show that the 2nd respondent had adjusted the amount of Rs. 68,01,873.20 ps., towards the amount due and payable in respect of the Agreement entered for supply of Wheat. It may be appropriate to mention here that in the Plaint in O.S.No.183 of 2022, it was inter alia pleaded that "the amount that had been remitted to the plaintiff by the defendant was retained by the plaintiff(complainant) intending that on realization of the cheque amount, it would remit back that improperly and unilaterally credited the amount to the defendant." Whatever the reasons might be, the fact remains that the 1st petitioner paid an amount of Rs. 68,01,873.20 ps., and the 2nd respondent while retaining the said amount, presented

the PDC for Rs. 1,34,45,323.96 ps., for realization and it was not honorued.

14. The issue as to whether the offence under Section 138 of the Act would deem to be committed if the Cheque that is dishonoured does not represent the enforceable debt at the time of encashment was considered by the Hon'ble Supreme Court in the case of Dashrathbhai Trikambai Patel referred to above. In the said case, the respondent, borrowed a sum of Rs.20,00,000/- from the appellant on 16.01.2012 and to discharge the same, issued a Cheque dated 17.03.2014 and when the same was presented on 02.04.2014, dishonoured due to 'insufficient funds'. The appellant filed a Criminal complaint against the respondent for the offence under Section 138 of the Act. The Trial Court acquitted the respondent on the ground that the respondent paid an amount of Rs.4,09,315/- between 08.04.2012 and 13.12.2013, thus partly discharged the liability towards total debt of Rs.20,00,000/-. The Trial Court opined that the appellant failed to prove that he was owed a legally enforceable debt of Rs.20 Lakhs. On appeal before the High Court, the same was confirmed, holding that a part of the debt owed by the 1st respondent/appellant was discharged and the Notice issued under Section 138 of the Act, is not a valid. The Hon'ble Supreme Court referring to the earlier decisions in Indus

Airways Private Limited v. Magnum Aviation Private Limited², Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited³, as also section 56 of the Act, is not inclined to interfere with the Orders under Appeal. It would be profitable to extract the relevant Paras of the judgment, which reads thus:

26. The appellant contends that the purpose of Section 138 of the Act would be defeated if the dishonour of the cheque issued for security is not included within the purview of Section 138 where the payment of a part of the cheque amount is made. It was contended that it would lead to a possibility where the drawer of the cheque could evade prosecution under Section 138 by paying a small amount of the debt while defaulting on the remaining payment. Section 56 stipulates that if there is an endorsement on a negotiable instrument that a part of the sum mentioned in the cheque has been paid, then the instrument may be negotiated for the balance. Section 56 reads as follows:

56. Indorsement for part of sum due.- No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument, but where such amount has been partly paid a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance."

27. Section 15 defines the phrase 'indorsement' as follows:

28. Indorsement.- When a maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended

$^{2}$ (2014) 12 SCC 539

$\overline{3}$ (2016) 10 SCC 458

to be completed as a negotiable instrument, he is said to indorse the same, and is called the "indorse"."

28. A Division Bench of the Kerala High Court has held in Joseph Sartho v. Gopinathan ((2008) 3 KLJ 784) that since the representation in the cheque was for a sum higher than the amount that was due on the date that it was presented for encashment, the drawer of the Cheque cannot be convicted for the offence under Section 138 of the Act. The High Court of Delhi addressed the same issue in Alliance Infrastructure Project Ltd. v. Vinay Mittal (ILR (2010) III Delhi 459). The High Court observed that when part payment is made after the cheque is drawn, the payee has the option of either taking a new cheque for the reduced amount or by making an endorsement on the cheque acknowledging that a part payment was made according to the provisions of Section 56 of the Act. It was also held that the notice of demand which requires the drawer of the cheque to make payment of the whole amount represented in the cheque despite receiving part repayment against the sum, before the issue of notice, cannot be valid under Section 138(b) of the Act. A similar view was taken by the High Court of Gujarat in Shree Corporation v. Anilbhal Puranbhai Bansal(2018 (2) GLH 105)".

29. Under Section 56 read with Section 15 of the Act, an endorsement may be made by recording the part-payment of the debt in the cheque or in a note appended to the cheque. When such an endorsement is made, the instrument could still be used to negotiate the balance amount. If the endorsed cheque when presented for encashment of the balance amount is dishonoured, then the drawee can take recourse to the provisions of Section 138. Thus, when a part- payment of the debt is made after the cheque was drawn but before the cheque is encashed, such payment must be endorsed on the cheque under Section 56 of the Act. The cheque cannot be presented for encashment without recording the part payment. If the unendorsed cheque is dishonoured on presentation, the offence under Section 138 would not be attracted since the cheque does not represent a legally enforceable debt at the time of encashment.

30. In the instant case, the 1st petitioner paid amounts in respect of the supplies made by the 2nd respondent by adjusting certain amounts allegedly due to it in respect of a different contract. As the amount paid by the 1st petitioner was not refunded, it amounts to acceptance of part payment by the 2nd respondent, more particularly, as it chose to retain the same and restricted its' Suit claim to the balance after giving credit to the amount paid by the 1st petitioner. Therefore, it has to be concluded that the said PDC did not represent the legally enforceable debt, at the time of encashment and in the absence of which, the offence under Section 138 of the Act would not be attracted.

31. Further, it is not the case of the 2nd respondent that in terms of Section 56 of the Act, an endorsement was made at the time of presentation of the Cheque, regarding the amount received/retained by the 2nd respondent and presented for payment of balance and the same was dishonoured. As summarized by the Hon'ble Supreme Court in the case of Dashrathbhai Trikambai Patel to attract an offence under Section 138 of the Act, the Cheque, which is dishonored must represent the legally enforceable debt on the date of maturity or presentation and when a part or whole of the sum represented on the Cheque is paid by the drawer of the cheque, it must be endorsed on the cheque as prescribed in Section 56 of the Act and the Cheque endorsed with the payment made may be used to encash the balance,

if any. If the Cheque that is endorsed is dishonoured when it is sought to be encashed upon maturity, then the offence under Section 138 of the Act will stand attracted.

17. The above judgment of the Hon'ble Supreme Court, is applicable to the case on hand, in as much as the 1st petitioner discharged part of the debt and PDC amount does not represent the legally enforceable debt at the time of encashment. In such view of the matter, the contentions raised on behalf of the 2nd respondent are rejected. Accordingly, the point is answered in favour of the petitioners/accused.

18. In the light of the legal position, this Court is of the considered opinion that it is a fit case to exercise powers under Section 482 of the Criminal Procedure Code and continuation of proceedings against the petitioners constitutes abuse of process of Law. Accordingly, the Criminal Petition is allowed and the proceedings against the petitioners in C.C.No.1918 of 2019 on the file of the Court of the Judicial First Class Magistrate(Excise), Guntur are quashed.

Miscellaneous Petitions pending, if any, in this Criminal Petition shall stand closed.

______________________ NINALA JAYASURYA, J.

Date: 10.10.2023 BLV

HONOURABLE SRI JUSTICE NINALA JAYASURYA

CRIMINAL PETITION No.216 of 2020

Date: .10.2023

BLV