The Supreme Court of India, in a significant ruling, has set aside the conviction of an individual under Section 138 of the Negotiable Instruments Act, 1881, after the parties voluntarily entered into a compromise. A bench comprising Justice Aravind Kumar and Justice Sandeep Mehta allowed the appeal, quashing the concurrent conviction orders from the lower courts and reaffirming that the offence is compoundable at any stage of the proceedings.
The legal issue before the court was whether a conviction for a dishonoured cheque could be overturned based on a settlement reached between the complainant and the accused after the conviction had been upheld by all lower courts, including the High Court. The Supreme Court answered in the affirmative, allowing the appeal and acquitting the appellant.
Background of the Case
The case originated from a complaint filed by Harpal Singh (the complainant) against Gian Chand Garg (the appellant). Mr. Singh alleged that Mr. Garg had borrowed a sum of ₹5,00,000 and issued a cheque for repayment. The cheque, upon presentation, was returned with the endorsement “funds insufficient.”
Following a trial, the Judicial Magistrate First Class (JMFC) convicted Mr. Garg on April 21, 2010, sentencing him to six months of simple imprisonment and a fine of ₹1,000. This decision was upheld first by the Additional Sessions Judge on September 14, 2010, and subsequently by the Punjab and Haryana High Court, which dismissed Mr. Garg’s criminal revision petition on March 27, 2025.
However, after the High Court’s dismissal, the parties entered into a compromise on April 6, 2025. Based on this settlement, Mr. Garg filed an application before the High Court seeking a modification of its order to reflect the compromise and seek an acquittal. The High Court dismissed this application on grounds of non-maintainability, prompting Mr. Garg to appeal to the Supreme Court.
Court’s Analysis and Reasoning
The Supreme Court began its analysis by citing the settled position of law regarding the nature of proceedings under Section 138 of the NI Act. The bench emphasized that Section 147 of the NI Act, introduced by the 2002 amendment, specifically makes the offence compoundable, notwithstanding the provisions of the Code of Criminal Procedure, 1973.
The Court relied on several previous judgments to support its reasoning. It quoted the decision in M/s. Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2018), which held that the offence under Section 138 is “primarily related to a civil wrong and the 2002 amendment specifically made it compoundable.”
The judgment also referenced the observation in P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021), which described the offence as a “‘Civil Sheep’ in ‘Criminal Wolf’s Clothing’,” highlighting that the issues are private in nature but are brought under criminal jurisdiction to enhance the credibility of negotiable instruments.
Further, the court cited M/s. Gimpex Private Limited v. Manoj Goel (2021), which observed that when parties enter into a compromise, they cannot be allowed to reverse its effects, as the “Settlement agreement subsumes the original complaint.” The bench also noted the view in B.V. Seshaiah v. State of Telangana & Anr. (2023), stating that when parties compound an offence to save themselves from litigation, “the courts cannot override such compounding and impose its will.”
Applying these principles to the present case, the Supreme Court examined the compromise deed dated April 6, 2025. It noted that the complainant, Harpal Singh, had voluntarily accepted two demand drafts of ₹2.5 lakhs each and three post-dated cheques of ₹1 lakh each in full and final settlement of the default sum, without any coercion.
The court concluded, “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, therefore, the concurrent conviction rendered by the Courts below has to be set-aside.”
Decision of the Court
In light of its analysis, the Supreme Court allowed the appeal. The order dated March 27, 2025, passed by the Punjab and Haryana High Court was set aside. Consequently, the order of conviction and the sentence imposed on the appellant, Gian Chand Garg, were quashed.
