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Guidelines for compunding of offence of dishonor of cheque

Supreme Court guidelines on cheque bounce case has been issued in the case of Damodar S. Prabhu v. Sayed Babalal H. The court stated that cheque bounce is a criminal and compoundable offence.
Written by:
Abhishek Sahoo
Published on

You must have known or read it that cheque bounce is a criminal offence and you can be prosecuted for the same. But as per Supreme Court, it is a compoundable offence and detailed guidelines for compounding of cheque bounce case were given in the case mentioned below:


  • CASE TITLE: Damodar S. Prabhu v. Sayed Babalal H.

  • Bench: K.G. Balakrishnan, P. Sathasivam, J.M. Panchal

  • DATE OF DECISION: May 03, 2010


Parties were involved in commercial transactions and that disputes had arisen on the account of the dishonour of five cheques issued by the appellant. Thereafter, the parties went through the several stages of litigation before their dispute reached this Court by way of special leave petitions.



Hon’ble Supreme Court observed that “With regard to the impugned judgments delivered by the High Court of Bombay at Goa, the appellant has prayed for the setting aside of his conviction in these matters by relying on the consent terms that have been arrived at between the parties. The respondent has not opposed this plea and, therefore, we allow the compounding of the offence and set aside the appellant’s conviction in each of the impugned judgments. However, there are some larger issues which can be appropriately addressed in the context of the present case.”

Hence, Supreme Court traced the law of Negotiable Instruments: The object of bringing Section 138 of NI Act into the statute was to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. It was to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of dishonor of cheque due to insufficient arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers. If the cheque is dishonoured for insufficiency of funds in the drawer’s account or if it exceeds the amount arranged to be paid from that account, the drawer is to be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

When the offence was inserted in the Section 138 of the Negotiable Instrument Act in 1988, it carried the provision for imprisonment up to one year, which was revised to two years following the amendment to the Act in 2002. It is quite evident that the legislative intent was to provide a strong criminal remedy in order to deter the worryingly high incidence of dishonour of cheques. What must be remembered is that the dishonour of a cheque can be best described as a regulatory offence that has been created to serve the public interest in ensuring the reliability of these instruments. The impact of this offence is usually confined to the private parties involved in commercial transactions.

As per the 213th Report of the Law Commission of India, more than 38 lakh cheque bounce cases were pending before various courts in the country as of October 2008. This is putting an unprecedented strain on our judicial system.

The facts herein are an illustration of how parties involved in cheque bounce cases usually seek the compounding of the offence under negotiable instrument act at a very late stage. The interests of justice would indeed be better served if parties resorted to compounding of 138 NI Act as a method to resolve their disputes at an early stage instead of engaging in protracted litigation before several forums, thereby causing undue delay, expenditure and strain on part of the judicial system. This is clearly a situation that is causing some concern, since Section 147 of Negotiable Instruments Act does not prescribe as to what stage under the stages in 138 Suprcases is appropriate for compounding the offence and whether the same can be done at the instance of the complainant or with the leave of the court.

In O.P. Dholakia v. State of Haryana, (2000) 1 SCC 672, a division bench of Supreme Court had permitted the compounding of the offence even though the petitioner’s conviction had been upheld by all the three designated forums. After noting that the petitioner had already entered into a compromise with the complainant, the bench had rejected the State’s argument that Court need not interfere with the conviction and sentence since it was open to the parties to enter into a compromise at an earlier stage and that they had not done so. The bench had observed:

“Taking into consideration the nature of the offence in question and the fact that the complainant and the accused have already entered into a compromise, we think it appropriate to grant permission in the peculiar facts and circumstances of the present case, to compound.”

Similar reliefs were granted in orders reported as Sivasankaran v. State of Kerala & Anr., (2002) 8 SCC 164, Kishore Kumar v. J.K. Corporation Ltd., (2004) 12 SCC 494 and Sailesh Shyam Parsekar v. Baban, (2005) 4 SCC 162, among other cases.

It would be apt to clarify that in view of the non-obstante clause, the compounding of offences under the Negotiable Instruments Act, 1881 is controlled by Section 147 of NI Act and the scheme contemplated by Section 320 of the Code of Criminal Procedure will not be applicable in the strict sense since the latter is meant for the specified offences under the Indian Penal Code.

Section 147 of the Negotiable Instruments Act, 1881 is in the nature of an enabling provision which provides for the compounding of offences prescribed under the same Act, thereby serving as an exception to the general rule incorporated in sub-section (9) of Section 320 of the CrPC which states that ‘No offence shall be compounded except as provided by this Section’. A bare reading of this provision would lead us to the inference that offences punishable under laws other than the Indian Penal Code also cannot be compounded. However, since Section 147 was inserted by way of an amendment to a special law, the same will override the effect of Section 320(9) of the CrPC, especially keeping in mind that Section 147 of NI Act carries a non-obstante clause.

In Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., (2008) 2 SCC 305, Supreme Court had examined ‘whether an offence punishable under Section 138 of NI Act which is a special law can be compounded’. After taking note of a divergence of views in past decisions, Court took the following position:

”This provision is intended to prevent dishonesty on the part of the drawer of negotiable instruments in issuing cheques without sufficient funds or with a view to inducing the payee or holder in due course to act upon it. It thus seeks to promote the efficacy of bank operations and ensures credibility in transacting business through cheques. In such matters, therefore, normally compounding of offences should not be denied. Presumably, Parliament also realised this aspect and inserted Section 147 by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (Act 55 of 2002).”

The compounding of the offence at later stages of litigation in dishonour of cheque cases has also been held to be permissible in a recent decision of this Court, reported as K.M. Ibrahim v. K.P. Mohammed & Anr., 2009 (14) SCALE 262:

“11. As far as the non-obstante clause included in Section 147 of the Negotiable Instruments Act is concerned, the 1881 Act being a special statute, the provisions of Section 147 will have an overriding effect over the provisions of the Code relating to compounding of offences-

  • It is true that the application under Section 147 of the Negotiable Instruments Act was made by the parties after the proceedings had been concluded before the Appellate Forum. However, Section 147 of the aforesaid Act does not bar the parties from compounding an offence under Section 138 of NI Act even at the appellate stage of the proceedings. Accordingly, we find no reason to reject the application under Section 147 of the aforesaid Act even in a proceeding under Article 136 of the Constitution.”


Supreme Court guidelines on cheque bounce cases are as follows : 

  • That Summons be suitably modified making it clear to the accused that he could make an application for compounding of the offences at the first or second hearing of the case and that if such an application is made, compounding may be allowed by the court without imposing any costs on the accused.

  • If the accused does not make an application for compounding as aforesaid, then if an application for compounding is made before the Magistrate at a subsequent stage, compounding can be allowed subject to the condition that the accused will be required to pay 10% of the cheque amount to be deposited as a condition for compounding with the Legal Services Authority, or such authority as the Court deems fit.

  • Similarly, if the application for compounding is made before the Sessions Court or a High Court in revision or appeal, such compounding may be allowed on the condition that the accused pays 15% of the cheque amount by way of costs.

  • Finally, if the application for compounding is made before the Supreme Court, the figure would increase to 20% of the cheque amount.

It was also clarified that any costs imposed in accordance with these guidelines should be deposited with the Legal Services Authority operating at the level of the Court before which compounding takes place. For instance, in case of compounding during the pendency of proceedings before a Magistrate’s Court or a Court of Sessions, such costs should be deposited with the District Legal Services Authority. Likewise, if cost is imposed by the High Court then it should be deposited with the State Legal Services Authority and those imposed in connection with composition before the Supreme Court should be deposited with the National Legal Services Authority.

For more queries or confusion regarding the guidelines for compounding of offence of dishonour of cheque u/s 138 NI Act, ask for expert legal advice from us now!

It was also directed that it should be mandatory for the complainant to disclose that no other complaint has been filed in any other court in respect of the same transaction. Such a disclosure should be made on a sworn affidavit which should accompany the complaint filed under Section 200 of the CrPC. If it is found that such multiple complaints have been filed, orders for transfer of the complaint to the first court should be given. These directions should be given effect prospectively.

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