Proceedings under Section 138 N.I. Act Cannot Be Initiated Through FIR or Police Investigation

The Petitioner, a railway contractor, entered into an agreement dated 08.07.2010 with Opposite Party No. 2 (complainant) and others to execute work worth Rs. 42,80,000/-.

The complainant alleged that after the work was completed, security money and dues totaling Rs. 60,00,000/- remained unpaid.

The Petitioner issued four cheques—two in the name of the complainant’s son (Kanhaiya Kumar) and two in the name of Amar Kumar—all of which were dishonored.

The complainant filed an FIR (Hathidah P.S. Case No. 61 of 2016) under Sections 406/420 IPC and Section 138 of the Negotiable Instruments (N.I.) Act.

The Petitioner moved the High Court to quash the FIR, contending the dispute was civil/contractual and the N.I. Act proceedings were procedurally flawed.

1. Whether an FIR can be registered for an offence under Section 138 of the N.I. Act?

2. Whether the complainant (Arun Kumar Singh) had the locus standi to initiate proceedings for cheques issued in favor of third parties?

3. Whether the allegations under Sections 406 and 420 of the IPC were made out in what appeared to be a contractual dispute?

Section 142 of the N.I. Act, which mandates that a complaint for cheque dishonor must be filed by the payee or the holder in due course.

The Supreme Court precedent in N. Harihara Krishnan vs. J. Thomas (2017) and the Patna High Court decision in Hemant Kumar Das vs. State of Bihar established that the N.I. Act is a complete code that excludes the filing of an FIR or a police investigation under Section 156(3) CrPC for Section 138 offences.

Regarding Sections 406 and 420 IPC, the principle that a breach of contract does not constitute criminal breach of trust or cheating unless dishonest intention existed at the inception of the transaction.

The Court observed that the FIR was legally unsustainable on three grounds. First, the N.I. Act requires a private complaint to a Magistrate and does not permit an FIR; thus, the police had no jurisdiction to register a case for cheque dishonor.

Second, the complainant, Arun Kumar Singh, was neither the payee nor the holder in due course of the cheques (which were in the names of Kanhaiya and Amar), making the complaint incompetent under Section 142 of the N.I. Act.

Third, regarding the IPC sections, the Court found the dispute to be purely contractual relating to the accounting of railway work. Since there was no evidence of fraudulent inducement at the start or entrustment of property that was subsequently misappropriated, the mere addition of "IPC sections" could not convert a civil claim into a cognizable criminal offence.

The Court allowed the petition and quashed the entire FIR of Hathidah P.S. Case No. 61 of 2016 and all subsequent proceedings pending before the Additional Chief Judicial Magistrate, Barh.