Court’s Decision
The Delhi High Court dismissed the appeal filed against the acquittal of the respondent in a cheque dishonour case under the Negotiable Instruments Act, holding that in the case of a proprietorship concern, only the proprietor can be held liable under Section 138 of Negotiable Instrument Act, and since the cheque was issued and signed by a different individual who was not arrayed as an accused, no cause of action arose against the respondent.
Facts
The appellant, engaged in manufacturing acoustic enclosures and genset control panels, supplied goods to a proprietorship concern. An advance cheque was issued, which was dishonoured, leading to assurances from the respondent (alleged proprietor) that the dues would be cleared. A cheque for ₹60,000 was issued, which was dishonoured first for “funds insufficient” and later for “payment stopped by drawer.” A legal notice demanding ₹62,200 (including interest) was issued, followed by a complaint under Sections 138/141 of the Negotiable Instruments Act and Sections 420/406 of the Indian Penal Code. The trial court acquitted the respondent, leading to the current appeal.
Issues
- Whether the respondent could be held liable under Section 138 of the Negotiable Instruments Act in a case involving a proprietorship concern.
- Whether the trial court erred in acquitting the respondent despite consistent conduct suggesting he was the proprietor.
- Whether the demand notice for an amount higher than the cheque amount was valid for prosecution under Section 138.
Petitioner’s Arguments
The appellant argued that:
- The respondent consistently represented himself as the proprietor of the firm, filed a vakalatnama, and sought exemptions as proprietor.
- The cheque in question was issued under the respondent’s assurances for payment.
- The respondent participated in proceedings without disputing his role as proprietor until the stage of Section 313 statement.
- The cheque amount (₹60,000) was the same as the one dishonoured, and the demand for ₹62,000 included justified interest.
- The trial court failed to appreciate that the respondent’s conduct showed misrepresentation and error in acquitting him.
Respondent’s Arguments
The respondent contended that:
- He was not the proprietor; his wife, Sarika Singh Kuchhawaha, was the actual proprietor of the firm, and this fact was proven by the bank’s testimony.
- He was not the signatory of the dishonoured cheque, nor was he involved in the transaction.
- The cheque was issued by Sarika Singh, and she was neither served with a legal notice nor arrayed as an accused, making the prosecution unsustainable.
- The application to summon the actual proprietor was dismissed by the trial court and was not challenged, attaining finality.
Analysis of the Law
The Court analysed:
- Section 138 of the Negotiable Instruments Act: It applies to the drawer of the cheque, and the drawer alone can be punished for dishonour unless the case involves a company or partnership firm.
- Section 141 of the NI Act: Vicarious liability is attracted in cases involving companies or partnerships, not proprietorship concerns, which have no separate legal identity.
- In proprietorship concerns, only the proprietor can be prosecuted, and the firm and proprietor are treated as one and the same.
Precedent Analysis
1. Raghu Lakshminarayanan v. Fine Tubes (2007) 5 SCC 103
Held that a proprietary concern has no juristic personality, and only the proprietor can be held liable for cheque dishonour, not others associated with the concern.
2. Ashok Transport Agency v. Awadhesh Kumar (1998) 5 SCC 567
Differentiated between partnership and proprietorship concerns, clarifying that a proprietorship concern is only a business name of the proprietor.
3. M.M. Lal v. State NCT of Delhi, 2012 (4) JCC 284
Held that a sole proprietorship has no separate legal identity, and vicarious liability under Section 141 of the NI Act cannot be imposed on employees or non-proprietors.
The Delhi High Court applied these precedents to hold that the respondent could not be prosecuted as he was neither the proprietor nor the drawer of the cheque.
Court’s Reasoning
- The dishonoured cheque was signed by Sarika Singh Kuchhawaha as the proprietor, and the bank records established her proprietorship.
- The testimony of the bank official remained unchallenged, and the appellant failed to prove the respondent’s proprietorship.
- The appellant made an attempt to summon the actual proprietor but failed, and the dismissal of that application attained finality.
- Since the respondent was neither the proprietor nor the drawer, no cause of action arose against him under Section 138 of the NI Act.
- The demand notice was not legally enforceable against the respondent, and the entire foundation of the prosecution case was flawed.
Conclusion
The Delhi High Court dismissed the appeal, holding that:
“A proprietary concern is not a juristic person, and only the proprietor can be prosecuted under the Negotiable Instruments Act for cheque dishonour.”
The acquittal of the respondent by the trial court was upheld, and the appeal was dismissed.
Implications
1. Clarifies that in cheque dishonour cases involving proprietorship concerns, only the proprietor who issued the cheque can be prosecuted.
2. Emphasises that vicarious liability under Section 141 of the NI Act does not apply to proprietorship concerns.
3. Reinforces the importance of correctly identifying and arraying the actual proprietor as an accused in NI Act prosecutions to avoid fatal technical failures.
FAQs
1. Can an employee or non-proprietor be prosecuted under Section 138 of the Negotiable Instruments Act if a proprietorship firm’s cheque is dishonoured?
No, only the proprietor can be prosecuted as a proprietorship concern has no separate legal identity.
2. What if the wrong person is prosecuted under the Negotiable Instruments Act for a dishonoured cheque?
The prosecution will fail if the accused is not the drawer of the cheque or the proprietor of the firm that issued the cheque, as seen in this case.
3. Does the demand notice under Section 138 need to match the cheque amount exactly?
While minor differences may not be fatal, demanding amounts not legally enforceable against the actual drawer can weaken the prosecution’s case.
