Friendly Transactions Without Commercial Consideration Do Not Constitute Legally Enforceable Debt U/S 138 NI Act: Jharkhand High Court
The Court held that the presumption under Section 138 of the Negotiable Instruments Act stands rebutted where the material on record indicates that the transaction was merely a friendly arrangement lacking commercial consideration and therefore did not constitute a legally enforceable debt.
The Jharkhand High Court has upheld the acquittal of two accused persons in a cheque dishonour case, holding that a friendly financial transaction between parties, absent formation of a legally enforceable commercial contract, would not attract the penal provisions of Section 138 of the Negotiable Instruments Act, 1881.
The Court observed that friendship by itself cannot constitute valid consideration under the Indian Contract Act, 1872 and that where no legally enforceable contract is established between the parties, the transaction would fall outside the ambit of “legally enforceable debt or liability” contemplated under Section 138 of the NI Act.
The Court was hearing an acquittal appeal filed by the complainant challenging the judgment passed by the Judicial Magistrate, 1st Class, Jamshedpur, acquitting the accused persons of the offence under Section 138 of the Negotiable Instruments Act.
A Bench of Justice Rajesh Kumar observed:“ …the presumption lies in favour of the holder of cheque in due course that the cheque has been issued for discharge of legally enforceable dues and the onus lies upon the other side to discharge this presumption, but if the material is available on record, suggesting that it is not for the legally enforceable dues, rather it was a friendly transaction between the parties which does not form any contract or does not give any right to impose the same as legally enforceable debt, then that presumption goes and the court has to decide the matter, as per the material available on record.”
The Court further observed: “The consideration has to be commercial. The friendship cannot be a consideration to form a contract. Thus, if no contract has been formed, then the transaction cannot be legally enforced and it does not come under the definition of legally enforceable debt and the jurisdiction of Section 138 of N.I Act is not applicable.”
Advocate P.C. Sinha appeared for the appellant. A.P.P. Vishwanath Roy appeared for the State.
Background
According to the complainant, he shared friendly relations with the accused and, in order to help them in business, advanced a total amount of Rs. 2 lakh, comprising Rs. 1 lakh through a cheque and another Rs. 1 lakh in cash.
It was alleged that against the said amount, the accused issued two post-dated cheques of Rs. 1.5 lakh and Rs. 50,000 respectively as security. Upon presentation, both cheques were dishonoured due to insufficiency of funds.
The complainant thereafter issued legal notices demanding payment of the cheque amounts. According to the complainant, despite receipt of notice, the accused failed to make payment, resulting in the institution of a complaint case under Section 138 of the Negotiable Instruments Act.
During the trial, the complainant examined himself as the sole prosecution witness and reiterated that the amount advanced was a “friendly loan”. In cross-examination, however, discrepancies emerged regarding the exact amounts and mode of payment allegedly made to the accused.
The trial court ultimately acquitted the accused persons, following which the complainant preferred the present acquittal appeal before the High Court.
Court’s Observation
The High Court examined the scheme of Section 138 of the Negotiable Instruments Act and reiterated that the provision applies only where the cheque has been issued towards the discharge of a “legally enforceable debt or liability.”
The Court observed that although a statutory presumption ordinarily operates in favour of the holder of the cheque, such presumption is rebuttable and can disappear once material is brought on record indicating the absence of a legally enforceable liability.
Referring to the decision of the Supreme Court in Rajesh Jain v. Ajay Singh (2023), the Court reproduced the principles governing rebuttal of presumptions under Sections 118 and 139 of the NI Act, reiterating: “The accused is not expected to prove the non-existence of the presumed fact beyond reasonable doubt. The accused must meet the standard of ‘preponderance of probabilities’, similar to a defendant in a civil proceeding.”
The Court further reproduced the following observations from Rajesh Jain:
“Once the accused adduces evidence to the satisfaction of the Court that on a preponderance of probabilities there exists no debt/liability in the manner pleaded in the complaint or the demand notice or the affidavit-evidence, the burden shifts to the complainant and the presumption ‘disappears’ and does not haunt the accused any longer.”
Applying the aforesaid principles, the High Court observed that the complainant himself had consistently described the transaction as a “friendly loan” and the materials on record did not establish the existence of any commercial agreement or enforceable contractual arrangement between the parties.
The Court further noted that “in the Indian Contract Act, 1872 to form a legally enforceable contract, there has to be an agreement between the parties and the consideration is the more basic ingredients”.
The Bench observed that where no enforceable contract is formed between the parties, the underlying transaction would not amount to a legally enforceable debt to attract criminal liability under Section 138 of the Negotiable Instruments Act.
The Court ultimately found no infirmity in the acquittal recorded by the trial court.
Conclusion
Accordingly, the Court upheld the acquittal of the accused persons under Section 138 of the Negotiable Instruments Act and dismissed the acquittal appeal.
Cause Title: Md. Masudul Haque Ansari @ M.H. Ansari v. The State of Jharkhand & Ors. (Neutral Citation: 2026:JHHC:13634)