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CMA Intermediate · Business Laws and Ethics · Negotiable Instruments Act, 1881

Meera issued a cheque dated 1 April to Rohit as a gift, with no debt or liability owed to him. The cheque was dishonoured for insufficiency of funds. Which statement is correct regarding Section 138?

Section 138 does not apply. It operates only where the cheque is issued to discharge a legally enforceable debt or other liability, as the Explanation states. A cheque given as a pure gift creates no such liability, so dishonour for insufficient funds does not attract the offence.

  1. ASection 138 applies because the cheque was dishonoured for insufficient funds
  2. BSection 138 applies only if the cheque amount exceeds Rs 10,000
  3. CSection 138 does not apply because there was no legally enforceable debt or other liabilityCorrect
  4. DSection 138 applies automatically but with a reduced penalty

Explanation

Section 138 covers cheques drawn for discharge, in whole or part, of a debt or other liability, and its Explanation defines this as a legally enforceable debt or liability. A gift creates no such liability, so the offence is not made out. Dishonour alone is not sufficient.

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