Section 138 NI Act: Dishonour of Cheque and the Bank's Role

A dishonoured cheque was once a purely civil matter. The payee sued on the debt, and the cheque was evidence of it. In 1988 Parliament made the dishonour itself an offence, because the civil courts were too slow to make a cheque worth taking. Section 138 now generates more criminal litigation than almost any other provision in India. This note sets out the offence, the three periods that decide every case, and what the bank itself must do when it returns a cheque.

1. The Offence

Figure 1: The six ingredients of Section 138

• A cheque drawn on an account maintained by the drawer with a banker, for payment of any amount of money to another person.
• For the discharge, in whole or in part, of any debt or other liability, which must be legally enforceable. A cheque given as a gift, as security for a debt not yet due, or for a time barred debt, falls outside the section.
• Returned unpaid by the bank either because the amount standing to the credit of the account is insufficient, or because it exceeds the amount arranged to be paid from that account by an agreement with the bank.
• Presented within the period of its validity: the section says six months from the date on which it is drawn or the period of its validity, whichever is earlier, and since the Reserve Bank cut validity to three months from 1 April 2012, the effective period is three months.
• A demand notice in writing made by the payee or holder in due course to the drawer within thirty days of receiving information from the bank of the return of the cheque.
• Failure of the drawer to make payment within fifteen days of receipt of the notice. Until those fifteen days expire, no offence is committed.
• Punishment: imprisonment for a term which may extend to two years, or a fine which may extend to twice the amount of the cheque, or both.

2. The Three Periods

Figure 2: The sequence from dishonour to complaint

• Thirty days to give notice: running from the date the payee receives information from the bank of the dishonour, not from the date of dishonour itself. The notice must make a demand for payment of the cheque amount; a notice that merely complains is not enough.
• Fifteen days to pay: running from the receipt of the notice by the drawer. The offence is complete only on the expiry of the fifteenth day without payment. A complaint filed before then is premature.
• One month to complain: under Section 142(b), within one month of the date on which the cause of action arises, that is the day after the fifteen days expire. A delay may be condoned by the court if the complainant satisfies it that he had sufficient cause.
• Service of the notice: a notice sent by registered post to the correct address is presumed served, and a drawer who avoids service cannot rely on his own evasion, because Section 27 of the General Clauses Act, 1897 supplies the presumption and the drawer must rebut it.
• Successive presentation: a cheque may be presented more than once within its validity. The Supreme Court has held that a payee who did not prosecute on an earlier dishonour may prosecute on a later one, but each prosecution needs its own dishonour and its own notice within thirty days of it; an old notice cannot be reused to revive a lapsed limitation.

3. Presumptions and Defences

• Section 118(a): until the contrary is proved, it is presumed that every negotiable instrument was made or drawn for consideration.
• Section 139: it shall be presumed, unless the contrary is proved, that the holder of a cheque received it for the discharge, in whole or in part, of any debt or other liability.
• The effect: once the signature on the cheque is admitted or proved, the burden shifts to the drawer to show that there was no legally enforceable debt. The presumption is rebuttable, and the standard on the accused is the preponderance of probabilities, not proof beyond reasonable doubt.
• How it is rebutted: by showing that the cheque was given as a blank security for an unquantified liability, that the debt was time barred, that the consideration failed, or by bringing out improbabilities in the complainant's own case in cross-examination.
• Section 140: it is no defence that the drawer had no reason to believe when he issued the cheque that it would be dishonoured.
• Section 141, offences by companies: where the offence is committed by a company, every person who at the time was in charge of, and responsible to the company for, the conduct of its business is deemed guilty, along with the company. A complaint must contain specific averments to that effect, and the company itself must be prosecuted before an officer can be made vicariously liable.
• Compounding: the offence is compoundable under Section 147, and the Supreme Court has encouraged early settlement, using a graded scale of costs for late compounding, which it revised in 2025 and has said is a guide to be applied on the facts rather than a fixed rule.

4. Jurisdiction and Procedure

• Who may complain: the payee or the holder in due course, by a complaint in writing under Section 142(a), which must be made within one month of the cause of action.
• Jurisdiction after 2015: the Negotiable Instruments (Amendment) Act, 2015 inserted Section 142(2), which fixes jurisdiction in the court within whose local jurisdiction the branch of the bank where the payee maintains the account is situated, where the cheque is delivered for collection through an account; and where it is presented otherwise than through an account, the branch of the drawee bank where the drawer maintains the account.
• Why the amendment was made: to reverse the position that had required the complaint to be filed where the drawee bank was situated, which had forced payees to litigate at the drawer's convenience. Section 142A was inserted to transfer pending cases accordingly and to validate what had been done.
• Consolidation: where more than one complaint is filed against the same drawer, all are tried together by the court having jurisdiction over the first complaint.
• Summary trial (Section 143): the offence is tried summarily, and the Magistrate may pass a sentence of imprisonment up to one year and a fine exceeding five thousand rupees in a summary trial, which is an express departure from the ordinary limits.
• Evidence on affidavit (Section 145): the complainant's evidence may be given on affidavit and read in evidence, subject to the court summoning the deponent for cross-examination.

5. Interim Compensation and Appeal

• Section 143A, interim compensation: the court trying an offence under Section 138 may order the drawer to pay interim compensation to the complainant, not exceeding twenty per cent of the amount of the cheque.
• When: in a summary trial or summons case, where the drawer pleads not guilty to the accusation; and in any other case, upon framing of charge.
• Time to pay: within sixty days of the order, extendable by a further period not exceeding thirty days on sufficient cause shown.
• On acquittal: the court directs the complainant to repay the interim compensation with interest at the bank rate published by the Reserve Bank prevailing at the beginning of the relevant financial year, within sixty days, extendable by thirty.
• Section 148, on appeal: in an appeal against conviction, the appellate court may order the appellant to deposit a sum which shall be a minimum of twenty per cent of the fine or compensation awarded, in addition to any interim compensation already paid.
• Purpose: both provisions, inserted in 2018, answer the complaint that a drawer could stall for years while the payee received nothing, by putting part of the money in the payee's hands during the proceeding.

6. The Bank's Own Role

• The return memorandum: the bank returns the cheque with a memorandum stating the reason for dishonour. That memorandum is the foundation of the complaint, and the reason stated on it is what the court will look at, so the language must be accurate and neutral.
• Why the wording matters: a vague or inaccurate reason may defeat a genuine complaint or expose the bank to a claim in defamation from its own customer where the cheque ought to have been paid.
• The bank is not a party: the proceeding is between the payee and the drawer. The bank is neither complainant nor accused, though its officer may be called to prove the return and the state of the account under the Bankers' Books Evidence Act, 1891.
• Return charges: the Reserve Bank requires charges for cheque return to be reasonable and disclosed in the schedule, and prescribes that charges be levied only where the customer is at fault.
• Repeated dishonour: the Reserve Bank's earlier instructions advised that where cheques of ₹1 crore and above drawn on an account were dishonoured for insufficiency of funds on four occasions in a financial year, no fresh chequebook should be issued and closure of the account might be considered. Since 2016 the response has been left to the discretion of each bank under a board approved cheque return policy, so the thresholds now vary between banks and must be checked against the policy in force.
• Wrongful dishonour is the bank's own liability: if the cheque ought to have been paid, the bank answers to the drawer under Section 31, quite apart from anything that happens between drawer and payee.

7. Questions Arising

Does a cheque returned for stop payment attract Section 138?

It can. The section names insufficiency of funds and the amount exceeding the arrangement, but courts have read those words purposively, so that a drawer who countermands payment in order to defeat a legally enforceable debt does not escape. Where the stop payment instruction was given for a genuine reason, such as a dispute about the goods or a lost cheque, the position is different, and the drawer may rebut the presumption under Section 139.

Is a cheque given as security within Section 138?

It depends on whether a legally enforceable debt existed when the cheque was presented. A cheque given as security for a liability that has since crystallised and become due is within the section. A cheque handed over as a blank or undated security for a liability that never became due, or for an amount never ascertained, is outside it, and the drawer may rebut the presumption by establishing those facts on the preponderance of probabilities.

8. Quick Revision

9. Frequently Asked Questions

What are the ingredients of an offence under Section 138?

A cheque drawn on an account maintained by the drawer, for the discharge of a legally enforceable debt or other liability, presented within its validity, returned unpaid for insufficiency of funds or because it exceeds the arrangement, a written demand notice within thirty days of information of dishonour, and failure to pay within fifteen days of receiving that notice.

What are the time limits in a cheque bounce case?

Thirty days from receiving information of the dishonour to send the demand notice; fifteen days from the drawer's receipt of the notice for him to pay, after which the offence is complete; and one month from that cause of action to file the complaint under Section 142(b), with power in the court to condone delay for sufficient cause.

Where can a cheque bounce complaint be filed?

Under Section 142(2), inserted by the 2015 amendment, in the court within whose jurisdiction the branch of the bank where the payee maintains the account is situated, where the cheque was delivered for collection through an account. Where it was presented otherwise than through an account, the court where the drawee bank branch at which the drawer maintains the account is situated.

What presumption does Section 139 raise?

That the holder of a cheque received it for the discharge, in whole or in part, of a debt or other liability. Read with Section 118(a), which presumes consideration, it shifts the burden to the drawer once the signature is admitted or proved. The presumption is rebuttable, and the drawer need only displace it on the preponderance of probabilities.

Can a court order the drawer to pay before the trial ends?

Yes. Section 143A permits the trial court to order interim compensation of up to twenty per cent of the cheque amount, payable within sixty days, where the drawer pleads not guilty in a summary or summons case or upon framing of charge in any other case. On acquittal the complainant must repay it with interest at the bank rate. On appeal against conviction, Section 148 allows the appellate court to require a deposit of a minimum of twenty per cent.

10. Related Topics and Provisions

• The cheque as a banker's instrument
• Crossing of cheques and its effect on the banker
• The paying banker and payment in due course
• The collecting banker and the protection of Section 131
• Duties of a banker: secrecy, care and honouring cheques