Kiran Raj

The Supreme Court has set aside the judgments of the High Court of Karnataka and the appellate court in a dispute concerning the dishonour of post-dated cheques issued as a security deposit. The bench comprising Justice Vikram Nath and Justice Sandeep Mehta restored the trial court’s decision, directing that a compensation amount of Rs. 3,00,000 be paid to the complainant while the remaining sum, previously enhanced by the appellate court and High Court, be reimbursed to the appellant. The Supreme Court observed that the complainant had continued to occupy the rented premises beyond the lease period without paying rent, and as a result, the entire security deposit was not a legally enforceable debt against the appellant.

The dispute originated from a lease-cum-rent agreement executed on May 12, 2014, between the appellant and the respondent for a flat in Bengaluru. The respondent, as the tenant, deposited Rs. 9,00,000 as a security deposit. The agreement was valid for 11 months and was set to terminate on April 11, 2015. Upon expiration of the lease, the appellant was required to refund the security deposit upon receiving vacant possession of the flat.

The respondent issued a notice on June 18, 2015, requesting the return of the security deposit. Since the appellant could not arrange for the amount, he issued four post-dated cheques to the respondent. These cheques, amounting to a total of Rs. 9,00,000, were presented to the bank but were dishonoured due to insufficient funds. The respondent subsequently filed four separate complaints under Section 138 of the Negotiable Instruments Act, 1881, before the XXII Additional Chief Metropolitan Magistrate, Bangalore.

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On November 9, 2016, the trial court convicted the appellant and sentenced him to pay a fine of Rs. 3,00,000 with 6% simple interest per annum from the date of the cheques until realisation. The court directed that Rs. 2,95,000 be paid to the respondent as compensation, with the remaining Rs. 5,000 forfeited to the state. The appellant was given 30 days to comply, failing which he would have to undergo simple imprisonment for one year.

Both parties filed appeals before the LXVII Additional City Civil & Sessions Judge, Bengaluru. While the appellate court dismissed the appellant’s appeals and upheld his conviction, it partly allowed the respondent’s appeal and enhanced the compensation amount to Rs. 9,00,000. The appellant was directed to pay the revised compensation amount, and in default, he was sentenced to one year of imprisonment.

Challenging this decision, the appellant filed multiple revision petitions before the Karnataka High Court. On July 8, 2024, the High Court dismissed all of them, upholding the appellant’s conviction and the enhanced compensation. The High Court further directed the appellant to pay Rs. 9,00,000 by July 31, 2024, failing which he would undergo two years of simple imprisonment.

The appellant subsequently approached the Supreme Court, arguing that the cheques were issued as security and that the respondent had continued to occupy the premises beyond the lease period without paying rent.

The Supreme Court examined the circumstances surrounding the dishonour of the cheques and the respondent's continued occupation of the flat. The appellant contended that the respondent did not vacate the premises as per the lease agreement and refused to return the keys. It was further argued that the respondent had misused the cheques and initiated legal proceedings despite remaining in possession of the flat without paying rent or maintenance charges.

The Court noted:

"It is undisputed that the cheques in question were given by the appellant-accused to the respondent-complainant towards refund of the security deposit to the tune of Rs. 9,00,000 made by the latter, when he had taken the flat owned by the appellant-accused on rent. The refund of the amount of security deposit was contingent upon the respondent-complainant handing over the vacant possession of the flat and returning the keys thereof to the appellant-accused."

The Supreme Court considered evidence from the respondent’s cross-examination before the trial court, where he admitted that he had not vacated the flat. The Court quoted the respondent’s statement:

"It is correct to state that even now also I am residing in the house which was mortgaged. It is correct to state that from that day till this date I have not paid the rent amount and maintenance amount."

Based on these admissions, the Court determined that the respondent continued to occupy the premises for nearly five years beyond the lease period without paying rent. The Court held that the appellant was not liable to refund the full Rs. 9,00,000 as the outstanding rent and maintenance charges had to be deducted from the security deposit.

The Court also noted that the appellant had previously filed a suit under the Karnataka Rent Act, 1999, seeking the respondent’s eviction and damages. The suit was decreed in the appellant’s favour on September 27, 2019, directing the respondent to vacate the premises within two months. However, the respondent did not comply, leading the appellant to file an execution petition. The respondent was eventually evicted on January 8, 2020, following a court order.

The Supreme Court held that the enhancement of compensation from Rs. 3,00,000 to Rs. 9,00,000 by the appellate court and the High Court was not justified. It stated:

"In this background, the appellant-accused was definitely not liable to refund the entire security deposit amount of Rs. 9,00,000 covered by the post-dated cheques, to the respondent-complainant because he was entitled to deduct the amount of due rent and maintenance from the said amount."

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The Court further directed:

"Thus, while setting aside the judgments of the High Court and the appellate Court and restoring that of the trial Court, we direct that the sum of Rs. 3,00,000 by way of compensation shall be paid to the respondent-complainant. The remaining amount over and above the sum of Rs. 3,00,000 awarded to the respondent-complainant by way of compensation, shall be reimbursed to the appellant-accused."

The Court also noted that the appellant had previously deposited Rs. 4,20,000 with the Supreme Court in compliance with an earlier directive. The Court ordered that the sum of Rs. 3,00,000 be paid to the respondent from this deposit, while any remaining balance be refunded to the appellant.

The trial court was instructed to ensure compliance with the judgment within two months. The Supreme Court set aside the High Court’s judgment dated July 8, 2024, and the appellate court’s judgment dated March 6, 2018, restoring the trial court’s original order dated November 9, 2016.

Case Title: M.S. Nagabhushan v. D.S. Nagaraja
Neutral Citation: 2025 INSC 316
Case Number: SLP(Crl.) Nos. 11002-11009/2024
Bench: Justice Vikram Nath, Justice Sandeep Mehta

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