138 NI Act - Failure to Show Cheque in Account Records Proves Fatal for Finance Company: Karnataka High Court Affirms Acquittal

"Adverse Inference for Withholding Key Financial Records Justified……. Failure to Produce Challan and Account Details Casts Doubt on Existence of Legally Enforceable Debt", High Court of Karnataka affirming the acquittal of the accused by the JMFC-V, Mangalore, in a cheque dishonour case under Section 138 of the Negotiable Instruments Act, 1881. Justice G. Basavaraja upheld the trial court's findings, emphasizing that the non-production of the challan acknowledging receipt of the cheque and the absence of corresponding entries in the company’s account statement created serious doubts regarding the existence of a legally enforceable debt.

The High Court decisively ruled that the presumption under Sections 118 and 139 of the NI Act was successfully rebutted, and adverse inference under Section 114(g) of the Evidence Act was rightly drawn against the complainant for suppressing primary evidence. The Court further relied on the finality of arbitral proceedings that had already negated the claim of debt, reinforcing that the complainant did not approach the court with clean hands.

Disputed Cheque for ₹9.10 Lakh and Set Aside Arbitral Award

The appellant, M/s Shriram Transport Finance Co. Ltd., a non-banking finance company, alleged that respondent Simon Correa had issued a cheque dated 14 July 2014 for ₹9,10,000 towards full and final settlement of a loan arising out of a hypothecation agreement. Upon dishonour of the cheque due to "insufficient funds", and after service of a statutory notice, the company initiated proceedings under Section 138 of the NI Act before the JMFC-V, Mangalore, which ended in acquittal of the accused.

The complainant subsequently appealed under Section 378(4) CrPC, contending that the trial court failed to appreciate the existence of the debt and the cheque’s issuance. However, the defence argued that the appellant had earlier initiated arbitration proceedings on the same subject, culminating in Arbitration Suit No. 18/2016, where the District Judge set aside the arbitral award for want of proof of debt, noting discrepancies in account entries and suppression of payments by the complainant.

The appeal presented a multi-faceted legal dispute involving crucial principles under Section 138 NI Act, Section 114(g) of the Evidence Act, and the interplay between civil arbitral findings and criminal prosecution.

The core legal issue was whether the complainant had successfully established the existence of a legally enforceable debt or liability – a mandatory ingredient under Section 138. The High Court observed that no challan was produced by the complainant to acknowledge receipt of the cheque in question, nor was the alleged cheque reflected in the account statement (Ex.P9) filed by the complainant.

Justice Basavaraja emphasized:

“If really, the accused had issued the disputed cheque to the complainant as alleged by the complainant, the Complainant Company ought to have mentioned the same in the account statement Exhibit P9... In the absence of such entry, it is difficult to accept the case of the complainant.”

Further, drawing upon the Supreme Court’s judgment in Gopal Krishnaji Ketkar v. Mohamed Haji Latif [AIR 1968 SC 1413], the trial court and High Court both applied Section 114(g) of the Indian Evidence Act, 1872 to draw adverse inference against the complainant for withholding the cheque receipt register and complete loan account details.

Arbitral Proceedings Strengthen Defence of No Liability

Notably, the earlier arbitral award passed in favour of the finance company had been set aside in Arbitration Suit No.18/2016, with the District Court recording that:

“The criminal court had come to the conclusion that there was no such dues worth Rs. 9,10,533/- and therefore the plaintiff was absolved from the criminal liability.”

This finding, which had attained finality, significantly bolstered the accused’s claim that there was no enforceable liability. The complainant's subsequent attempt to initiate a fresh arbitration (as revealed through a notice dated 19.05.2025) was also noted by the High Court as evidence of suppression of material facts and lack of clean hands on the complainant’s part.

Presumption under NI Act Rebutted – Absence of Best Evidence Undermined Claim

Justice Basavaraja reiterated the settled position that although the presumption under Sections 118 and 139 of the NI Act operates in favour of the complainant, it is rebuttable by the accused through preponderance of probabilities.

The Court observed that:

“...the complainant has not produced any challan issued to the accused for having received the cheque... This will create reasonable doubt as to issuance of cheque by the accused.”

Further, the Court acknowledged the defence’s evidence that blank cheques were collected at the time of disbursal, a practice often criticized by courts. The accused had clearly deposed that only two instalments were in arrears and the disputed cheque was never issued for final settlement, but retained from the time of loan processing.

Scope of Appeal Against Acquittal – No Perverse Finding Found

The High Court stressed that appellate interference in acquittal is limited to cases of perverse or manifestly illegal findings. In this case, the Court found no perversity or misapplication of law and held that the trial court had correctly evaluated the evidence and drawn logical inferences.

“On re-appreciation of the entire evidence on record, I do not find any error/illegality in the judgment of acquittal.”

The appeal was accordingly dismissed.

The judgment reinforces the burden on complainants in cheque dishonour cases to establish the existence of a legally enforceable debt with cogent documentary evidence. The non-production of primary documents, such as challans and full account statements, can fatally undermine a Section 138 complaint. Moreover, the finality of findings in parallel civil or arbitral proceedings plays a significant role in evaluating criminal liability under the NI Act. The High Court’s ruling affirms the importance of transparency and procedural diligence in prosecuting financial claims.

Date of Decision: 13th November 2025