Cheque Bounce Under NI Act Requires Legally Enforceable Debt, Not Just Issuance of Cheques: Supreme Court Acquits Accused in ₹9 Lakh Security Deposit Dispute

Tenant Cannot Retain Possession Without Paying Rent and Still Demand Refund of Security Deposit - Supreme Court of India, in a landmark ruling on March 4, 2025, set aside the conviction of an accused under Section 138 of the Negotiable Instruments Act, 1881, holding that a cheque bounce case requires proof of a legally enforceable debt, not just the existence of a dishonoured cheque. The Court reversed the Karnataka High Court’s decision that had sentenced the accused to imprisonment and directed payment of ₹9,00,000 as compensation, and instead restored the original trial court judgment, which had confined the liability to ₹3,00,000.

The case revolved around M.S. Nagabhushan (appellant-accused) and D.S. Nagaraja (respondent-complainant) over a security deposit dispute in a rental agreement. The respondent, who had taken the appellant’s property on lease in 2014, refused to vacate it even after the lease expired in 2015, retaining possession for nearly five years without paying rent. Despite this, he deposited four post-dated cheques issued by the appellant as security deposit refund, leading to a cheque bounce case when they were dishonoured due to insufficient funds.

"To constitute an offence under Section 138 of the Negotiable Instruments Act, there must be an existing, legally enforceable debt or liability. If a tenant refuses to vacate the premises and continues to occupy the property rent-free for years, the security deposit cannot remain payable in full," the Supreme Court ruled, emphasizing that legal obligations must be assessed in context rather than mechanically enforcing dishonoured cheques.

The appellant-accused and respondent-complainant had entered into a lease-cum-rent agreement on May 12, 2014, under which the respondent deposited ₹9,00,000 as a security deposit for renting an apartment in Bangalore for 11 months at a rent of ₹2,500 per month. As per the terms, the appellant was required to refund the security deposit upon the respondent vacating the premises and returning the keys.

At the end of the lease, the respondent issued a legal notice on June 18, 2015, demanding the refund of the security deposit, but the appellant, unable to arrange the amount immediately, issued four post-dated cheques, which later bounced due to insufficient funds. The respondent then filed four separate complaints under Section 138 of the NI Act.

The Trial Court convicted the appellant but limited the compensation to ₹3,00,000, holding that the full amount of ₹9,00,000 was not enforceable as debt since the respondent had not vacated the flat and had occupied it rent-free. The appellate court and Karnataka High Court, however, enhanced the compensation to ₹9,00,000 and imposed an additional default sentence of two years’ imprisonment.

The Supreme Court, in its ruling, made it clear that a landlord cannot be forced to refund the security deposit while the tenant illegally occupies the premises without paying rent.

The Supreme Court overturned the High Court’s decision, emphasizing the legal principles governing cheque bounce cases and enforceability of debt.

Security deposit refund is contingent upon handing over vacant possession, not an automatic liability.

The Court ruled that the appellant had no legal obligation to return the entire security deposit when the respondent failed to vacate the flat for nearly five years.

"The obligation to refund a security deposit does not exist in isolation. A tenant who continues to occupy a property rent-free cannot claim the entire deposit refund as an enforceable debt," the Supreme Court stated, reinforcing that cheque bounce liability does not arise when the alleged creditor has not fulfilled their own contractual obligation.

Issuing a cheque does not automatically establish criminal liability under the NI Act.

The Supreme Court underscored that for a cheque bounce case to succeed, the complainant must prove that the cheque was issued against an existing, legally enforceable debt.

"If a person issues a cheque on a conditional understanding that remains unfulfilled, the dishonour of the cheque does not constitute an offence under Section 138 of the NI Act. The law does not criminalize financial disputes where the underlying obligation is in question," the Court ruled.

The tenant admitted in cross-examination that he had not vacated the premises, making the claim of full refund unsustainable.

The Court relied on the respondent’s own testimony before the Trial Court, where he admitted under cross-examination that he had not vacated the flat even after the lease expired. The Court noted:

"It is correct to state that from that day till this date, I have not paid the rent amount and maintenance amount."

The Supreme Court held that this admission alone was sufficient to prove that the respondent was wrongfully demanding a refund despite continuing possession of the property.

Courts cannot mechanically enforce post-dated cheques when the transaction itself is disputed.

The Supreme Court criticized the appellate court and High Court for failing to evaluate the enforceability of the underlying debt and instead mechanically imposing a conviction based on cheque dishonour.

"Cheque bounce laws exist to prevent fraud, not to enable wrongful enrichment. Courts must ensure that the cheque represents a legally enforceable debt before imposing criminal liability," the Supreme Court ruled, emphasizing that mechanical enforcement of post-dated cheques without assessing the transaction’s validity undermines justice.

The Supreme Court set aside the conviction imposed by the High Court and appellate court, restoring the original Trial Court ruling. The Court limited the appellant’s liability to ₹3,00,000 and ruled that any amount beyond this must be reimbursed to him.

"Since the appellant had already deposited ₹4,20,000 before this Court, the trial court shall ensure that the excess amount over ₹3,00,000 is refunded to him," the Court directed, ensuring that the appellant is not burdened beyond what was originally imposed by the Trial Court.

The Supreme Court reaffirmed that dishonouring a cheque does not automatically result in conviction under Section 138 of the NI Act unless a legally enforceable debt is proven.

"Legal obligations are not determined by cheque issuance alone. The complainant must establish a genuine financial liability, and a tenant who refuses to vacate the premises has no automatic right to claim a refund of security deposit," the Court concluded, setting an important precedent in cheque bounce disputes arising from rental agreements.

This Supreme Court ruling clarifies a crucial aspect of cheque bounce cases under Section 138 of the NI Act—that a dishonoured cheque does not create liability unless backed by a legitimate, enforceable debt.

By holding that a tenant cannot demand a refund of security deposit while illegally retaining possession of a property, the Court has protected landlords from wrongful financial liabilities and ensured that cheque bounce laws are not misused for undue enrichment.

The judgment reinforces that every financial dispute must be assessed on its merits and that courts must ensure fairness and enforceability before imposing criminal liability for dishonoured cheques.

Date of Decision: March 4, 2025