138 NI Act | High Court Cannot Let Off Accused In NI Act Case By Ordering Only Cheque Amount Payment Without Interest Or Penalty: Supreme Court

"Interfering with the exercise of discretion as to what would constitute appropriate sentence and ultimately letting off the respondent by merely asking him to pay the cheque amount without any prison term and without awarding any interest, prima facie, appeared to us perverse and erroneous, hence, indefensible," Supreme Court, in a significant ruling dated April 13, 2026, held that a High Court cannot exercise its revisional jurisdiction to modify a sentence in a cheque dishonour case by merely directing the payment of the cheque amount while setting aside prison terms and interest.

A bench of Justice Dipankar Datta and Justice Satish Chandra Sharma observed that such an approach effectively allows an accused to suffer no penalty for a proved offence under Section 138 of the Negotiable Instruments Act, especially when the complainant has been deprived of their money for over a decade.

The matter arose from two complaints filed under Section 138 of the Negotiable Instruments Act involving cheques worth Rs. 2,00,000 and Rs. 50,00,000. The trial court convicted the respondent, sentencing him to two years of imprisonment and a fine totaling double the cheque amounts. While these convictions were upheld by the appellate court, the Karnataka High Court, in its revisional jurisdiction, modified the sentence to only the principal cheque amount, setting aside the imprisonment and the additional fine.

The primary question before the court was whether the High Court was justified in using its revisional powers to reduce the sentence to the mere principal amount without interest or imprisonment. The court also examined whether such a modification constitutes a perverse exercise of judicial discretion when the offence has been concurrently proved by lower courts.

High Court Erred In Conflating Revisional And Appellate Jurisdiction

The Supreme Court noted that the High Court mistakenly assumed it was exercising appellate power rather than revisional power. The bench observed that the High Court interfered with the sentence by claiming the trial court gave no reason for imposing a fine double the cheque amount, yet the High Court itself failed to award any interest or prison term. This resulted in a situation where the respondent faced no actual penalty for the proved offence.

Accused Cannot Be "Simply Let Off" After Decade-Long Delay

The bench emphasized the unfairness of returning only the principal cheque amount after ten years of dishonour. The judges noted that the respondent was "simply let off" by the High Court without any punishment. The court found this modification to be perverse, as it required the respondent to only pay the cheque amount "sans even any interest," which the appellant rightly claimed was unjust after a decade of litigation.

"Indefensible" Exercise Of Judicial Discretion

During the proceedings, the Supreme Court pointed out that letting off a respondent by merely asking for the cheque amount appeared "prima facie perverse and erroneous." The Court recorded that even the counsel for the respondent expressed an inability to defend the High Court's decision, describing the order as "indefensible." The bench stressed that appropriate sentences must be imposed to maintain the deterrent effect of Section 138 of the NI Act.

Settlement Reached Under Supreme Court Supervision

In light of the court’s observations regarding the perversity of the High Court's order, the respondent proposed a full and final settlement. The respondent undertook to pay a sum of Rs. 45,00,000 to the appellant by August 31, 2026. The appellant, though reluctant, agreed to this amount to resolve the long-standing dispute. The Court recorded this undertaking as a specific commitment to be honoured by the respondent.

Revival Clause In Case Of Default

Setting aside the High Court's judgment, the Supreme Court allowed the appeals. The bench clarified that the impugned order was "wholly perverse and manifestly erroneous." Crucially, the Court directed that should the respondent fail to make the promised payment by the stipulated deadline, the appellant is at liberty to apply for the revival of these appeals. In such an event, the Court will consider the desirability of sending the respondent to prison immediately.

The Supreme Court concluded that the High Court’s intervention was legally flawed as it stripped the conviction of any punitive or compensatory weight beyond the principal debt. By setting aside the "manifestly erroneous" order, the Court reinforced that Section 138 proceedings must account for the time value of money and the necessity of a penal element. The appeals were allowed with a clear warning that non-compliance with the settlement would lead to the restoration of original sentences.

Date of Decision: April 13, 2026