Supreme Court | Conviction Under Section 138 NI Act Unsustainable Once Parties Enter Into Voluntary Settlement | Section 147 Declares Offence Compoundable at Any Stage
Kiran Raj
The Supreme Court of India Division Bench of Justice Aravind Kumar and Justice Sandeep Mehta allowed an appeal against a conviction under Section 138 of the Negotiable Instruments Act, 1881. The Court quashed the sentence imposed by the trial court, upheld by the appellate and revisional courts, after noting that the complainant and accused had voluntarily entered into a settlement. The Bench directed that in light of the compromise deed and accompanying affidavit confirming full and final settlement, the criminal proceedings under the NI Act could not be sustained.
The proceedings originated from a complaint instituted under Section 138 of the Negotiable Instruments Act, 1881. The complainant, who later became Respondent No. 1 before the Supreme Court, alleged that the appellant had borrowed a sum of ₹5,00,000. Towards repayment, the appellant issued a cheque marked as Exhibit C-1. Upon presentation, the cheque was returned unpaid with the endorsement “funds insufficient,” as evidenced by Exhibit C-2. Following dishonour, a statutory legal notice was issued (Exhibit C-4).
When the appellant failed to comply with the demand, the complainant lodged a complaint before the jurisdictional Magistrate. After trial, the Judicial Magistrate First Class convicted the appellant. The sentence imposed comprised six months’ simple imprisonment, a fine of ₹1,000, and in default of payment of fine, a further simple imprisonment of fifteen days.
The appellant carried the matter in appeal before the Additional Sessions Judge. By order dated 14 September 2010, the appellate court upheld the conviction and sentence. Dissatisfied, the appellant approached the Punjab and Haryana High Court through Criminal Revision Petition No. 2563 of 2010. The High Court, by order dated 27 March 2025, dismissed the revision petition, affirming the concurrent findings of guilt and sentence imposed by the lower courts.
Subsequently, the parties entered into a compromise agreement dated 6 April 2025. The terms of settlement recorded that Respondent No. 1 expressed no objection to the appellant seeking modification of the revisional order and pressing for acquittal. Pursuant to the compromise, the appellant filed CRM No. 15127 of 2025 before the High Court, praying for alteration of the revisional court’s order. By order dated 9 April 2025, the High Court dismissed the application on the ground of non-maintainability.
Following rejection of the modification plea, the appellant approached the Supreme Court by way of Special Leave Petition (Criminal) No. 8050 of 2025. Leave was granted, and the matter was heard by the Division Bench.
During the hearing, counsels representing the appellant and Respondent No. 1 advanced submissions and placed on record the compromise deed along with supporting affidavit. Respondent No. 2, the State of Haryana, did not enter appearance, ostensibly on account of the private settlement between the parties.
The settlement was substantiated through documents annexed as Annexures P-3 and P-6 to the petition. These included two demand drafts bearing Nos. 004348 dated 4 April 2025 and 004303 dated 11 February 2025, each of ₹2.5 lakhs, as well as three cheques bearing Nos. 354412, 354413, and 354414, dated 10 May 2025, 10 June 2025, and 10 July 2025 respectively, each for ₹1 lakh. The complainant acknowledged receipt of these instruments as constituting full and final settlement of the outstanding liability.
The appellant thus contended that the foundation of the conviction under Section 138 of the NI Act no longer survived. On this basis, he sought quashing of the conviction and sentence. The Court examined the statutory scheme, relevant precedents, and the compromise placed on record.
The Bench recorded that the settled position of law recognised the compoundable nature of offences under Section 138 of the NI Act. The Court observed: “It is apposite to advert to settled position of law enunciated by this court with regard to nature of proceedings under section 138 NI Act and the legal consequences that ensues upon a compromise being entered into between the parties.”
Relying on earlier precedents, the Court referred to M/s. Meters and Instruments Private Limited & Anr. v. Kanchan Mehta, 2018 (1) SCC 560. It quoted: “The provision is necessary as in many transactions cheques were issued merely as a device to defraud the creditors. Dishonor of cheque causes incalculable loss, injury and inconvenience… At the same time, it was also noted that nature of offence under Section 138 primarily related to a civil wrong and the 2002 amendment specifically made it compoundable.”
The Bench further cited P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258, observing: “This court referred the offence under section 138 NI Act as a ‘Civil Sheep’ in ‘Criminal Wolf’s Clothing’ which meant issues agitated by the parties under the said provision are of private nature which are brought within the sweep of criminality jurisdiction in order to strengthen the credibility of the negotiable instruments.”
The Court also relied on M/s. Gimpex Private Limited v. Manoj Goel, (2021) SCC OnLine SC 925, noting: “Once parties voluntarily entered into such an agreement and agree to abide by the consequence of non-compliance of the settlement agreement, they cannot be allowed to reverse the effects of the agreement by pursuing both the original complaint and the subsequent complaint arising from such non-compliance. The Settlement agreement subsumes the original complaint…”
Additionally, reference was made to B.V. Seshaiah v. State of Telangana & Anr., (2023) SCC OnLine SC 96, where the Court had stated: “When parties enter into an agreement and compound the offence, they do so to save themselves from the process of litigation and when such a step is taken by the parties, the law very well allows them to do so. Hence, the courts cannot override such compounding and impose its will.”
The Bench summarised: “Although dishonour of cheque entails criminal consequence, the legislature by virtue of section 147 of the NI Act has made it compoundable notwithstanding the provisions of the Code of Criminal Procedure, 1973 and the same can be compounded at any stage of the proceedings especially when the parties have themselves arrived at a voluntary compromise.”
On examination of the compromise deed and affidavit filed by Respondent No. 1, the Court recorded: “Upon careful perusal of the recitals contained in the said documents, it clearly emerges that the Respondent No.1… has arrived at a compromise with appellant without any coercion and at his own will and voluntarily. Once the complainant has signed the compromise deed accepting the amount in full and final settlement of the default sum the proceedings under Section 138 of the NI Act cannot hold water.”
In conclusion, the Division Bench recorded: “Therefore, in the light of aforesaid discussion, we are of the considered view that the present appeal deserves to be allowed.”
Accordingly, the Court directed that the appeal stands allowed. The impugned order of the Punjab and Haryana High Court dated 27 March 2025 in Criminal Revision Petition No. 2563 of 2010 was set aside. The conviction and sentence imposed on the appellant by the trial court and upheld by the appellate court were quashed.
The Court further ordered: “Pending applications if any, stands disposed of. No order to cost.”
Advocates Representing the Parties
For the Petitioners: Mr. Aftab Ali Khan, Advocate; Ms. Arna Das, Advocate; Mr. Naresh Kumar, Advocate-on-Record.
For the Respondents: Mr. Jay Kishor Singh, Advocate-on-Record; Dr. Rishi Pal Singh Garttan, Advocate.
Case Title: Gian Chand Garg v. Harpal Singh & Anr.
Neutral Citation: Not provided in judgment
Case Number: Criminal Appeal No. ___ of 2025 (Arising out of SLP (Crl.) No. 8050 of 2025)
Bench: Justice Aravind Kumar, Justice Sandeep Mehta
