# PRADEEP KUMAR AND ANOTHER v. POST MASTER GENERAL AND OTHERS

- **Citation:** [2022] 19 S.C.R. 583
- **Court:** Supreme Court of India
- **Decided:** 2022-02-07
- **Case number:** Civil Appeal Nos. 8775-8776 of 2016
- **Bench:** L. Nageswara Rao, Sanjiv Khanna, B. R. Gavai
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/pradeep-kumar-and-another-v-post-master-general-and-others-36240
- **Pages:** 37

## Headnote

Negotiable Instruments Act, 1881: ss. 4, 78, 82 - Kisan Vikas
Patra Rules, 1988 - rr. 14, 15, 19 Government Savings Certificate
Act, 1959 s. 12 - Kisan Vikas Patras - Discharge of certificate -
Appellants during the years 1995 and 1996 purchased Kisan Vikas
Patras-'KVPs' in joint names from various post offices, of combined
face value on maturity Rs. 32.60 lacs - However, the KVPs were
encashed by one service agent allegedly acting on behalf of
appellants at a different post offices before the maturity date at a
lower value after the stipulated/lock-in period of holding - Sum of
Rs. 25,54,000/- paid by the sub post master, Post Office-respondent
no. 4 in cash to the service agent, who cheated the appellants and
pocketed the entire amount - Consumer complaint by the appellants
- NCDRC, while accepting some negligence on part of respondents
in making the payment, dismissed the complaint against the
respondents holding that they had acted in accordance with rr. 14
and 15 of the 1988 Rules, since there was no rule at the time of
encashment that the KVPs had to be paid by cheque and could not
be encashed in cash - However, the service agent, was held liable
to pay Rs. 25,54,000/- with interest @ 9% pa - On appeal, held:
Post office/bank can be held liable for the fraud or wrongs committed
by its employees - Respondents will be held liable for the acts of
Sub Post Master during the course of his employment - Payment
was made in violation of the statutory mandate of s.10 and, thus,
there is no valid discharge under clause (c) to s. 82 - Furthermore,
the service agent not being a 'holder', payment to her is not a valid
discharge u/s.78 rw s.8 - Respondents would have avoided the
liability and claimed valid discharge if they had accepted the KVPs
with the identity slip or if they had made payment by cross cheque,
in which case, they would have satisfied the condition that they had
made payment in good faith and there was no negligence, a
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requirement of clause (c) to s. 82 rw s.10 - Respondent Nos. 1 to 4
would be jointly and severally liable to pay the maturity value of
the KVPs as on the date the KVPs were presented to the post office
for encashment - Also appellants entitled to compensation of Rs.
1,00,000/-, as also costs.
Allowing the appeals, the Court
HELD: 1.1 In the impugned judgment, the NCDRC, while
accepting that some negligence could be attributed to the
respondents in making the payment, dismissed the complaint
against the respondents holding that they had acted in accordance
with rules 14 and 15 of the 1988 rules. Rule 19, requiring payment
by cheque when discharge value is more than Rs. 20,000/-, came
into force and is effective from 28-29th August 2001, whereas in
the present case, the KVPs were encashed at an earlier point of
time. Further, the appellants had not been truthful as it was difficult
to fathom as to why they had signed and acknowledged payment
on the backside of the KVPs and thereafter the KVPs were given
to an unknown agent. The appellants, having done so, acted with
open eyes and at their own peril and risk. [Para 9][592-E-F]
1.2 KVPs issued by the post office are a promissory
instrument as defined by Section 4 of the Negotiable Instruments
Act. Section 13 of the NI Act states that a negotiable instrument
may be payable either to order or to bearer. Sections 15 and 16
of the NI Act define 'indorsement', 'indorsee', 'indorser' and
'indorsement in blank' and 'in full'. [Para 12][593-C-D; 594-B]
1.3 On a harmonious reading of Sections 8 and 78, it follows
that payment made to a person in possession of the instrument,
but not entitled to receive or recover the amount due thereon in
his name, is not a valid discharge. [Para 15][595-G]
1.4 As per Section 9, a 'holder in due course' is a person
who for consideration has become a possessor of the instrument
if payable to a bearer or if payable to the order to the person
mentioned, i.e. the payee, or bec

## Text

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583
 [2022] 19 S.C.R. 583
583
PRADEEP KUMAR AND ANOTHER
v.
POST MASTER GENERAL AND OTHERS
(Civil Appeal Nos. 8775-8776 of 2016)
FEBRUARY 07, 2022
[L. NAGESWARA RAO, SANJIV KHANNA AND,
B. R. GAVAI, JJ.]
Negotiable Instruments Act, 1881: ss. 4, 78, 82 - Kisan Vikas
Patra Rules, 1988 - rr. 14, 15, 19 Government Savings Certificate
Act, 1959 s. 12 - Kisan Vikas Patras - Discharge of certificate -
Appellants during the years 1995 and 1996 purchased Kisan Vikas
Patras-'KVPs' in joint names from various post offices, of combined
face value on maturity Rs. 32.60 lacs - However, the KVPs were
encashed by one service agent allegedly acting on behalf of
appellants at a different post offices before the maturity date at a
lower value after the stipulated/lock-in period of holding - Sum of
Rs. 25,54,000/- paid by the sub post master, Post Office-respondent
no. 4 in cash to the service agent, who cheated the appellants and
pocketed the entire amount - Consumer complaint by the appellants
- NCDRC, while accepting some negligence on part of respondents
in making the payment, dismissed the complaint against the
respondents holding that they had acted in accordance with rr. 14
and 15 of the 1988 Rules, since there was no rule at the time of
encashment that the KVPs had to be paid by cheque and could not
be encashed in cash - However, the service agent, was held liable
to pay Rs. 25,54,000/- with interest @ 9% pa - On appeal, held:
Post office/bank can be held liable for the fraud or wrongs committed
by its employees - Respondents will be held liable for the acts of
Sub Post Master during the course of his employment - Payment
was made in violation of the statutory mandate of s.10 and, thus,
there is no valid discharge under clause (c) to s. 82 - Furthermore,
the service agent not being a 'holder', payment to her is not a valid
discharge u/s.78 rw s.8 - Respondents would have avoided the
liability and claimed valid discharge if they had accepted the KVPs
with the identity slip or if they had made payment by cross cheque,
in which case, they would have satisfied the condition that they had
made payment in good faith and there was no negligence, a
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requirement of clause (c) to s. 82 rw s.10 - Respondent Nos. 1 to 4
would be jointly and severally liable to pay the maturity value of
the KVPs as on the date the KVPs were presented to the post office
for encashment - Also appellants entitled to compensation of Rs.
1,00,000/-, as also costs.
Allowing the appeals, the Court
HELD: 1.1 In the impugned judgment, the NCDRC, while
accepting that some negligence could be attributed to the
respondents in making the payment, dismissed the complaint
against the respondents holding that they had acted in accordance
with rules 14 and 15 of the 1988 rules. Rule 19, requiring payment
by cheque when discharge value is more than Rs. 20,000/-, came
into force and is effective from 28-29th August 2001, whereas in
the present case, the KVPs were encashed at an earlier point of
time. Further, the appellants had not been truthful as it was difficult
to fathom as to why they had signed and acknowledged payment
on the backside of the KVPs and thereafter the KVPs were given
to an unknown agent. The appellants, having done so, acted with
open eyes and at their own peril and risk. [Para 9][592-E-F]
1.2 KVPs issued by the post office are a promissory
instrument as defined by Section 4 of the Negotiable Instruments
Act. Section 13 of the NI Act states that a negotiable instrument
may be payable either to order or to bearer. Sections 15 and 16
of the NI Act define 'indorsement', 'indorsee', 'indorser' and
'indorsement in blank' and 'in full'. [Para 12][593-C-D; 594-B]
1.3 On a harmonious reading of Sections 8 and 78, it follows
that payment made to a person in possession of the instrument,
but not entitled to receive or recover the amount due thereon in
his name, is not a valid discharge. [Para 15][595-G]
1.4 As per Section 9, a 'holder in due course' is a person
who for consideration has become a possessor of the instrument
if payable to a bearer or if payable to the order to the person
mentioned, i.e. the payee, or becomes the indorsee thereof.
Holder in due course means the original holder or a transferee
in good faith, who has acquired possession of the negotiable
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instrument for consideration, without having sufficient cause to
believe that there was any defect in the title of the person from
whom he has derived the title. Negotiation in case of transfer
should be before the amount mentioned in the negotiable
instrument becomes payable. Clause(g) to Section 118 states that
unless contrary is proved the 'holder' of a negotiable instrument
is presumed to be a 'holder in due course'. But the proviso
qualifies the presumption, where the instrument has been
obtained from its lawful owner or a person in lawful custody thereof
by means of an offence or fraud or has been obtained from the
maker or acceptor thereof by means of an offence or fraud or by
an unlawful consideration. In such cases the burden of proving
that the 'holder' is a 'holder in due course' lies on the person
claiming to be so. [Para 16][596-C-F]
1.5 When payment is made in accordance with the apparent
tenor of the instrument in good faith and without negligence to a
person in possession thereof, it is payment in due course. The
requirement in Section 10 that the payment should be in both
good faith and without negligence is cumulative. Thus, mere good
faith is not sufficient. Consequently, Section 3(22) of the General
Clauses Act, 1897, which defines 'good faith' as an act done
honestly, whether done negligently or not, is not sufficient to hold
that the payment made was 'payment in due course' under the NI
Act. Ascertainment of whether the act of payment is in good faith
and without negligence is by examination of the circumstances in
which payment is made. In other words, antecedent and present
circumstances should not afford a reasonable ground for believing
that the person to whom payment is made is not entitled to receive
payment of the amount mentioned. While it would not be advisable
or feasible to strait-jacket the circumstances, albeit value of the
instrument, other facts that would raise doubts about the reliability
and identity of the person entitled to receive payment and
genuineness of the instrument in the payer's mind are relevant
considerations.[Para 17][597-B-E]
1.6 Presumption under clause (g) to Section 118 would not
apply as the service provider is not an indorsee and the
instrument was in the name of the appellants. Further, the service
PRADEEP KUMAR AND ANOTHER v. POST MASTER
GENERAL AND OTHERS
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provider was not a 'holder in due course', as obtained possession
of the instrument by means of an offence or fraud. However,
Section 78 uses the expression 'holder' and not 'holder in due
course'. The service provider was not the 'holder' as defined
under Section 8 of the NI Act. She was not entitled to sue the
maker, acceptor or indorser of the instrument of the amount due
thereon in her name. Further as elucidated below are primarily
predicating the decision on the application of clause(c) to Section
82 read with Section 10of the NI Act as the KYPs were bearer
instruments. The respondent can claim discharge under Section
82(c) of the NI Act by showing that they had complied with the
requirements of Section 10, that is, they had acted in good faith
and without negligence [Para 22][602-A-D]
1.7 It appears to be the stand of the respondents, though
not specifically stated and argued, that the KVPs were bearer
instruments and hence encashable by the bearer of the
instrument. This stand of the respondents, is partially correct as
KVPs are encashable in terms of the 1988 Rules. KVPs are bearer
instruments with conditions to be satisfied before payment is made
to the 'physical holder' and presenter of the instrument for
encashment, an aspect we would elaborate. The respondents are
not under an obligation to honour KVPs unless the conditions
specified are satisfied. However, once it is accepted that the KVPs
are bearer instruments, the maker, i.e. the respondents, would
be discharged when they make payment in terms of clause(c)
to Section 82 of the NI Act, that is, 'payment made in due course'
as defined by Section 10 of the Act. For clarity, if the KVPs are
held to be payable to order, then the maker, that is, the
respondents, would be discharged from liability in terms
of Section 78 of the NI Act when they make payment to the
'holder', which as per Section 8 of the Act means a person who is
entitled to possession of the instrument and is also entitled to
sue to recover the amount from the maker of the instrument.
The respondents as the maker of KVPs have not discharged the
liability in terms of Section 78 as payment to R was not made to
the 'holder' of the KVPs. R not entitled to sue the maker, acceptor
or indorser of the instrument for the recovery of the amount due
thereon in her name. The KVPs were not indorsed in favour of
R. [Para 28][604-F-G; 605-A-D]
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1.8 The Rule 11 of 1988 Rules states that a certificate shall
be encashable at the post office which issued it. However, a KVP
can also be encashed at any other post office if the Officer-incharge of that post office is satisfied, on production of the identity
slip or on verification from the post office of issue, that the person
presenting the certificate for encashment is entitled to
encashment. Thus, it cannot be said that the KVPs are simple
bearer instruments payable to anyone who presents the same for
encashment and discharge. [Para 29][606-B-C]
1.9 There is nothing on record to suggest that the Officerincharge of the post office was satisfied on the production of the
identity slip or on verification from the post office of issue that
the person presenting the certificate for encashment is entitled
thereto. Thus, there was violation of Rules 9 and 11 of the 1988
Rules. [Para 33][612-C]
1.10 The NCDRC had been rather harsh in holding that
the appellants were silent and, therefore, guilty of negligence.
The finding overlooks that no one would like to avail services of
a stranger or an agent if the work, that is, transfer of KVP
certificates, could be otherwise handled and done with ease.
Further, no one would like to lose money to a stranger.
Necessarily, the appellants had remained in touch with R but were
given the impression that the exercise is complex and would take
time. Further they had belief that the post office would take care
of their interest, act in good faith and would not be negligent.
[Para 35][615-G-H; 616-A]
1.11 The payment was made in violation of the statutory
mandate of Section 10 of the NI Act and, therefore, there is no
valid discharge under clause (c) to Section 82 of the NI Act.
Further, R not being a 'holder', payment to her is not a valid
discharge under Section 78 read with Section 8 of the NI Act. The
respondents would have avoided the liability and claimed valid
discharge if they had accepted the KVPs with the identity slip or
if they had made payment by cross cheque, in which case, they
would have satisfied the condition that they had made payment in
good faith and there was no negligence, a requirement of clause
(c) to Section 82 read with Section 10 of the NI Act.[Para 36][616B-C]
PRADEEP KUMAR AND ANOTHER v. POST MASTER
GENERAL AND OTHERS
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1.12 The respondent no. 4 is not a third person but an officer
and an employee of the Post Office. Post Office, as an abstract
entity, functions through its employees. Employees, as
individuals, are capable of being dishonest and committing acts
of fraud or wrongs themselves or in collusion with others. Such
acts of bank/post office employees, when done during their course
of employment, are binding on the bank/post office at the instance
of the person who is damnified by the fraud and wrongful acts of
the officers of the bank/post office. Such acts of bank/post office
employees being within their course of employment will give a
right to the appellants to legally proceed for injury, as this is their
only remedy against the post office. Thus, the post office, like a
bank, can and is entitled to proceed against the officers for the
loss caused due to the fraud etc., but this would not absolve them
from their liability if the employee involved was acting in the
course of his employment and duties.The fraud was committed
by M.K. Singh, respondent No. 4, in and during the course of his
employment. This is clear from the findings recorded in the
departmental proceedings. [Para 37, 39][616-D-G; 617-C]
1.13 The respondents were faced with a difficult position
as they wanted to act against M.K. Singh, and at the same time
also protect themselves against any liability and claims of the
appellants. Faced with this dilemma, the respondents acted halfheartedly and took action in the proceedings initiated against
M.K. Singh, while they wanted to protect their commercial
interests and defend themselves against claims made by the
appellants. The findings recorded in the inquiry report, which
became the basis for the order of dismissal, which punishment
was subsequently converted to compulsory retirement, would,
in our opinion, equally apply to the encashment of all the KVPs.
No valid distinction can be drawn between the case that became
the subject matter of departmental enquiry and other cases of
encashment of the KVPs. Hence, the post office/bank can be held
liable for the fraud or wrongs committed by its employees.
Accordingly, the respondents will be held liable for the acts of
M.K. Singh during the course of his employment. [Para 40][618B-E]
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1.14 The impugned order passed by the NCDRC dismissing
the consumer case filed by the appellants is set aside. The order
and directions against R remain undisturbed. The consumer case
is allowed by issuing the following directions that the respondent
Nos. 1 to 4 would be jointly and severally liable to pay the maturity
value of the KVPs as on the date the KVPs were presented to
the post office for encashment, along with 7% simple interest
per annum from the said date till the date of payment; that the
appellants would be entitled to a compensation of Rs.1,00,000/-
and costs of Rs. 10,000/-; and that the amounts as directed would
be paid within the stipulated period from the date of
pronouncement of this judgment. [Para 41][618-E-H]
Indian Overseas Bank v. Industrial Chain Concern
(1990) 1 SCC 484 : [1989] 2 Suppl. SCR 27; Kerala
State Co-operative Marketing Federation v. State Bank
of India and Others (2004) 2 SCC 425 : [2004] 2 SCR
1; PonnappaMoothan Sons, Palghat v. Catholic Syrian
Bank Limited and Others (1991) 1 SCC 113 : [1990] 1
Suppl. SCR 542; Canara Bank v. Canara Sales
Corporation and Others (1987) 2 SCC 666 : [1987] 2
SCR 1138; Tai Hing Cotton Mill Ltd. v. Liu Chong Hing
Bank Ltd. and Others (1985) 2 All ER 947; State Bank
of India (Successor to the Imperial Bank of India) v.
Smt. Shyama Devi (1978) 3 SCC 399 : [1978] 3 SCR
1009 - referred to.
Case Law Reference
[1989] 2 Suppl. SCR 27
referred to
Para 18
[2004] 2 SCR 1
referred to
Para 20
[1990] 1 Suppl. SCR 542
referred to
Para 21
[1987] 2 SCR 1138
referred to
Para 34
[1978] 3 SCR 1009
referred to
Para 38
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.87758776 of 2016.
From the Judgment and Order dated 15.05.2015 of the National
Consumer Disputes Redressal Commission at New Delhi in O.P. No.148
PRADEEP KUMAR AND ANOTHER v. POST MASTER
GENERAL AND OTHERS
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of 2001 and Order dated 10.07.2015 in RA No.136 of 2015 in OP No.148
of 2001.
Aditya Kr. Choudhary, Gurmehar Uaan Singh, Vaibhav Prasad
Deo, Saurav Kumar, Ms. Namita Choudhary, Advs. for the Appellants.
Vikramjit Banerjee, ASG, Nalin Kohli, Gurmeet Singh Makker,
Ms. Rukhmini Bobde, Rajan Kr. Chourasia, Jitendra Mahapatra, A. K.
Yadav, Kedar Nath Tripathy, Advs. for the Respondent.
The Judgment of the Court was delivered by
SANJIV KHANNA, J.
The aforementioned civil appeals preferred by Pradeep Kumar
and Raj Rani (hereinafter wherever required referred to as 'the
appellants') assail the judgment dated 15th May 2015 passed by the
National Consumer Disputes Redressal Commission, New Delhi, the
'NCDRC' for short, whereby their complaint registered as Consumer
Case No. 148 of 2001 against the Post Master General, U.P. Circle,
Lucknow, Uttar Pradesh, Senior Superintendent of Posts, Lucknow
Division, Post Master, Head Post Office Chowk, Lucknow and M.K.
Singh, Sub-Post Master, Post Office, Yahiyaganj, Lucknow (hereinafter
wherever required collectively referred to as 'the respondents') has been
dismissed, albeit allowed and decreed against Rukhsana.
2. The appellants during the years 1995 and 1996 had purchased
Kisan Vikas Patras, 'KVPs' for short, in joint names from various post
offices located in the State of Uttar Pradesh in different denominations
and with varying dates of maturity. The combined face value on maturity
was Rs.32.60 lacs; however, the KVPs were encashable at the post
offices before the maturity date at a lower value after the stipulated/
lock-in period of holding.
3. As per the appellants, in the last week of February 2000, they
had approached the Post Master, Head Post Office Chowk, Lucknow,
with the request to transfer the KVPs to the Chowk Post Office,
Lucknow. The appellants were asked to apply with the Chowk Post
Office. They were informed that the transfer request would be allowed
after due verification of the KVPs and the identity/signatures on the
transfer application from the record with the issuing post office. The
process, they were forewarned, being time-consuming and cumbersome
would require several visits to the post office. The Post Master, Head
Post Office Chowk, Lucknow had recommended that they take services
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of Rukhsana, an agent appointed by the State of Uttar Pradesh and
associated with the post office. As per the appellants, they were misled
to believe that without the help of an agent like Rukhsana the transfer
would not be possible and she would take care of their interest. Rukhsana,
during the interaction, had informed the appellants that she had been
working and associated with the post office for fifteen years, and being
aware of the procedures would get the transfer effected without difficulty.
On 03.03.2000, Rukhsana came to the residence of the appellants, and
as instructed, the appellants signed the original KVPs on the backside
and handed them over to Rukhsana. She also took the Monthly Income
Scheme (MIS) passbook stating that it was required to process the
transfer. Rukhsana executed a receipt and gave it to the appellants
confirming receipt of the KVPs.
4. Rukhsana did not on her own revert to the appellants and when
contacted had assured them apropos the transfer. Meanwhile, appellant
No.1, i.e. Pradeep Kumar, had to leave Lucknow to join the official duty
in Motihari, Bihar. Raj Rani, the second appellant, remained in touch
with Rukhsana, who had informed that the process was taking time.
5. In June 2000, the appellants learnt that Rukhsana had cheated
several investors and had been arrested by the police. Thereupon, the
appellants made enquiries and discovered that the KVPs had been
encashed from the Yahiyaganj Post Office and Lal Bagh Post Office. A
sum of Rs. 25,54,000/- was paid in cash to Rukhsana, who had pocketed
the entire amount. The appellants state that their enquiries reveal
involvement of M.K. Singh, Sub-Post Master, Post Office, Yahiyaganj,
the fourth respondent before us, who, contrary to the rules, had paid the
maturity proceeds in cash and not by cheque in the names of the appellants.
Underpinning the argument are the Kisan Vikas Patra Rules, 1988, '1988
Rules' for short, and the Post Office Saving Bank Manual (Volume II),
which we will refer to and delineate later.
6. The appellants made several representations to which the
respondents did not respond, whereupon they filed the aforesaid complaint
under the Consumer Protection Act before the NCDRC, praying that
the respondents and Rukhsana should be directed to pay the appellants
Rs. 25,54,000/- along with interest @ 18% per annum. Additional prayer
was for compensation of Rs. 1,00,000/- on account of the mental agony
and harassment along with interest @ 10% per annum and Rs.10,000/-
by way of litigation expenses.
PRADEEP KUMAR AND ANOTHER v. POST MASTER
GENERAL AND OTHERS [SANJIV KHANNA, J.]
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7. The respondents in the written statement contested the
complaint. They had inter alia pleaded that the appellants, having signed
the KVPs in token of receipt of the discharge value, cannot complain.
Rukhsana was not an agent appointed by the post office. The contract
and understanding were between the appellants and Rukhsana, and the
fraud having been committed by Rukhsana in her individual capacity, the
respondents are not vicariously liable. Reference was made to the
instructions issued by the Ministry of Finance, Government of India vide
letter No. F3/37/91-NS II dated 8th November 1993, which we would
allude to subsequently. M.K. Singh, Sub-Post Master, Post Office,
Yahiyaganj, Lucknow filed a separate written statement pleading that
the complaint was not maintainable as he had paid the amount to the
right person and there was a valid discharge. He had not violated the
law. M.K. Singh referred to a criminal case already pending against him
and that the consumer complaint was not maintainable.
8. Rukhsana, after entering appearance, did not file her defence.
She was proceeded ex parte. Rukhsana was prosecuted and convicted
on the charges of cheating, criminal breach of trust, etc.
9. In the impugned judgment, the NCDRC, while accepting that
some negligence could be attributed to the respondents in making the
payment, dismissed the complaint against the respondents holding that
they had acted in accordance with Rules 14 and 15 of the 1988 Rules.
Rule 19, requiring payment by cheque when discharge value is more
than Rs. 20,000/-, came into force and is effective from 28-29th August
2001, whereas in the present case, the KVPs were encashed at an
earlier point of time. Further, the appellants had not been truthful as it
was difficult to fathom as to why they had signed and acknowledged
payment on the backside of the KVPs and thereafter the KVPs were
given to an unknown agent. The appellants, having done so, acted with
open eyes and at their own peril and risk. The claim that the KVPs were
handed over to Rukhsana without transfer application is unbelievable as
appellant No.1 is a well-educated person. The appellants had remained
silent for three months and did not make enquiries from the Post Office,
Yahiyaganj located merely 800 metres from their residence. The
appellants being negligent, the complaint against the respondents, including
the fourth respondent, was dismissed. Rukhsana, being a service provider,
was held liable to pay Rs. 25,54,000/- with interest @ 9% per annum
from the date of release of amount from the post office till the date of
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realisation by the appellants. Rukhsana was also liable to pay Rs. 1,00,000/
- as compensation and Rs. 10,000/- as litigation expenses. If the appellants
are unable to recover the amounts due from Rukhsana, they (the
appellants) were at liberty to sue the state government for its omission
and commission in appointing Rukhsana as an agent.
10. Rukhsana has neither entered appearance before us to contest
this appeal nor has challenged the judgment allowing the complaint against
her, which has attained finality.
11. Section 31 of the Negotiable Instruments Act, 1881, 'NI Act'
for short, states that a 'banker' includes any person acting as a banker
and any post office savings bank. In terms of this section, a post office
savings bank is a banker under the NI Act.
12. KVPs issued by the post office are a promissory instrument
as defined by Section 42 of the NI Act, as it is an unconditional undertaking
signed by the maker to pay a certain sum of money to, or to the order of
a certain person, or the bearer of the instrument.3 Section 134 of the NI
Act states that a negotiable instrument may be payable either to order or
to bearer. A negotiable instrument is payable to order, which is expressed
to be so payable or which is expressed to be payable to a particular
1 3. Interpretation-clause.-In this Act- 4 * * * * * "Banker".-5 ["banker" includes
any person acting as a banker and any post office savings bank;
2 4. "Promissory note."-A "Promissory note" is an instrument in writing (not being a
bank-note or a currency-note) containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money only to, or to the order of, a certain person, or to
the bearer of the instrument.
3 In the present case, we are not required to examine whether a KVP would be a 'bill of
exchange' in terms of Section 5 of the NI Act.
4 13. "Negotiable instrument".- (1) A "negotiable instrument" means a promissorynote,
bill of exchange or cheque payable either to order or to bearer.
 Explanation (i).-A promissory note, bill of exchange or cheque is payable to the order
which is expressed to be so payable or which is expressed to be payable to a particular
person, and does not contain words, prohibiting transfer or indicating an intention that
it shall not be transferable.
Explanation (ii).-A promissory note, bill of exchange or cheque is payable to bearer
which is expressed to be so payable or on which the only or last endorsement is an
endorsement in blank.
Explanation (iii).-Where a promissory note, bill of exchange or cheque, either originally
or by endorsement, is expressed to be payable to the order of a specified person, and
not to him or his order, it is nevertheless payable to him or his order at his option.
(2) A negotiable instrument may be payable to two or more payees jointly, or it may be
made payable in the alternative to one of two, or one or some of several payees.
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person but does not contain words prohibiting transfer or indicate an
intention that the instrument shall not be transferable. It is an accepted
position that KVPs are negotiable instruments in terms of Section 13 of
the NI Act. Sections 15 and 16 of the NI Act define 'indorsement',
'indorsee', 'indorser' and 'indorsement in blank' and 'in full'. Indorsement
for the purpose of negotiation is made by the maker or holder of the
negotiable instrument when he signs on the back or face of thereof, on a
slip of paper annexed thereto or on a stamp paper for the purpose of
negotiation. The person signing is called the indorser. If the instrument is
signed by the indorser in his name only, it is an indorsement in blank. If
the indorser also specifies the person to whom payment is to be made,
the indorsement is said to be 'in full', and the person so specified is
called the indorsee.
13. Sections 78 and 82 of the NI Act read:
"78. To whom payment should be made.-Subject to the
provisions of section 82, clause (c), payment of the amount due
on a promissory note, bill of exchange or cheque must, in order to
discharge the maker or acceptor, be made to the holder of the
instrument."
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82. Discharge from liability.-The maker, acceptor or indorser
respectively of a negotiable instrument is discharged from liability
thereon- (a) by cancellation.-to a holder thereof who cancels
such acceptor's or indorser's name with intent to discharge him,
and to all parties claiming under such holder; (b) by release.-to
a holder thereof who otherwise discharges such maker, acceptor
or indorser, and to all parties deriving title under such holder after
notice of such discharge; (c) by payment.-to all parties thereto,
if the instrument is payable to bearer, or has been indorsed in
blank, and such maker, acceptor or indorser makes payment in
due course of the amount due thereon."
14. Section 78 states that when payment is to be made to the
'holder' of the instrument, which would include his accredited agent
such as a banker acting as an agent for collection,5 the maker or acceptor
5 See Maddali Tirumala Ananta Venkata Veeraraghavaswami v. Srimat Kilambi
Mangamma and Another, AIR 1940 Mad. 90 and Raghubir Mahto v. Ramasray Bhagat,
AIR 1939 Pat.347 and also pg. 533 of Bhashyam & Adiga on The Negotiable
Instruments Act, 22nd Edition (2019).
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is discharged from liability. However, Section 78 is subject to and does
not apply to payments covered under clause (c) to Section 82 of the NI
Act. Clause (c) to Section 82 applies to an instrument payable to the
bearer or has been indorsed in blank, and in such cases the maker,
acceptor or indorser of a negotiable instrument is discharged from liability
when such maker, acceptor or indorser makes 'payment in due course'
of the amount due thereon. The expressions 'holder' and 'payment in
due course' are 'terms of art' as Section 8 defines the expression 'holder',
whereas Section 10 defines the expression 'payments in due course'.
On a harmonious reading of Section 78 and clause (c) of Section 82, it
follows that different principles apply for discharge from liability when
the negotiable instrument is payable to bearer or has been indorsed in
blank, in which case payment must be made in terms of Section 10,
whereas when the negotiable instrument is payable to order, the maker,
acceptor or endorser would be discharged from liability when payment
is made to the 'holder' of the instrument.
15. Section 8 of the NI Act, defines the expression 'holder' as:
"8. "Holder".-The "holder" of a promissory note, bill of exchange
or cheque means any person entitled in his own name to the
possession thereof and to receive or recover the amount due
thereon from the parties thereto. Where the note, bill or cheque is
lost or destroyed, its holder is the person so entitled at the time of
such loss or destruction."
The requirements of Section 8 are two-fold, and both requirements
have to be satisfied. A holder means a person (i) entitled to possession
of a promissory note, bill of exchange or a cheque, and (ii) entitled to sue
the maker, acceptor or indorser of the instrument for the recovery of the
amount due thereon in his name6. Thus, a person who is in possession of
the instrument but has no right to recover the amount due thereon from
the parties thereto is not a 'holder'. On a harmonious reading of Sections
8 and 78, it follows that payment made to a person in possession of the
instrument, but not entitled to receive or recover the amount due thereon
in his name, is not a valid discharge.
6 In the context of the present case, we need not examine the controversy and difference
of opinion on the issue of Benami owner, which aspect and issue have been the subject
matter of several decisions, including Subba Narayana Vathiyar and Others v.
Ramaswami Aiyyar (1907) 30 Mad. 88 (F.B.), Bacha Prasad v. Janki Rai and Others,
AIR 1957 Pat. 380 and Bhagirath v. Gulab Kanwar, AIR 1956 Raj. 174.We express no
opinion in the regard.
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16. Before we reproduce and refer to Section 10, distinction is
required to be drawn between 'holder' and 'holder in due course', an
expression defined in Section 9 in the following manner:
"9. "Holder in due course".-"Holder in due course" means any
person who for consideration became the possessor of a
promissory note, bill of exchange or cheque if payable to bearer,
or the payee or indorsee thereof, if 7[payable to order,] before the
amount mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title."
As per Section 9, a 'holder in due course' is a person who for
consideration has become a possessor of the instrument if payable to a
bearer or if payable to the order to the person mentioned, i.e. the payee,
or becomes the indorsee thereof. Holder in due course means the original
holder or a transferee in good faith, who has acquired possession of the
negotiable instrument for consideration, without having sufficient cause
to believe that there was any defect in the title of the person from whom
he has derived the title. Negotiation in case of transfer should be before
the amount mentioned in the negotiable instrument becomes payable.
Clause (g) to Section 1188 states that unless contrary is proved the 'holder'
of a negotiable instrument is presumed to be a 'holder in due course'.
But the proviso qualifies the presumption, where the instrument has been
obtained from its lawful owner or a person in lawful custody thereof by
means of an offence or fraud or has been obtained from the maker or
acceptor thereof by means of an offence or fraud or by an unlawful
consideration. In such cases the burden of proving that the 'holder' is a
'holder in due course' lies on the person claiming to be so.
17. This brings us to Section 10 of the NI Act, which defines the
expression 'payment in due course' and reads as follows:
7 Subs. by Act 8 of 1919. s. 2, for "payable to, or to the order of, a payee,"
8 "118. Presumptions as to negotiable instruments. - Until the contrary is proved, the
following presumptions shall be made:-
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"(g) that holder is a holder in due course:- that the holder of a negotiable instrument is
a holder in due course:
provided that, where the instrument has been obtained from its lawful owner, or from
any person in lawful custody thereof, by means of an offence or fraud, or has been
obtained from the maker or acceptor thereof by means of an offence or fraud, or for
unlawful consideration, the burden of proving that the holder is a holder in due course
lies upon him."
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""Payment in due course" means payment in accordance with
the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for
believing that he is not entitled to receive payment of the amount
therein mentioned."
When payment is made in accordance with the apparent tenor of
the instrument in good faith and without negligence to a person in
possession thereof, it is payment in due course. The requirement in Section
10 that the payment should be in both good faith and without negligence
is cumulative. Thus, mere good faith is not sufficient. Consequently,
Section 3(22) of the General Clauses Act, 1897, which defines 'good
faith' as an act done honestly, whether done negligently or not, is not
sufficient to hold that the payment made was 'payment in due course'
under the NI Act. Ascertainment of whether the act of payment is in
good faith and without negligence is by examination of the circumstances
in which payment is made. In other words, antecedent and present
circumstances should not afford a reasonable ground for believing that
the person to whom payment is made is not entitled to receive payment
of the amount mentioned.9 While it would not be advisable or feasible to
strait-jacket the circumstances, albeit value of the instrument, other facts
that would raise doubts about the reliability and identity of the person
entitled to receive payment and genuineness of the instrument in the
payer's mind are relevant considerations.
18. Elucidation on the aspect of care required to be exercised by
the bankers to seek statutory protection under Section 13110 of the NI
Act is to be found in Indian Overseas Bank v. Industrial Chain
9 Bank of Maharashtra v. M/s. Automotive Engineering Co., (1993) 2 SCC 97
10 131. Non-liability of banker receiving payment of cheque.- A banker who has
in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title to the cheque proves
defective, incur any liability to the true owner of the cheque by reason only of having
received such payment.
Explanation I.- A banker receives payment of a crossed cheque for a customer within
the meaning of this section notwithstanding that he credits his customer's account with
the amount of the cheque before receiving payment thereof.
Explanation II.-It shall be the duty of the banker who receives payment based on an
electronic image of a truncated cheque held with him, to verify the prima facie
genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent
on the face of the instrument that can be verified with due diligence and ordinary care.
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Concern,11 wherein extensive reference has been made to the earlier
case laws, Halsbury's Laws of England and English decisions. When
deciding whether the bank is negligent it is necessary to see whether the
rules or instructions of the bank are followed or not, though this may not
always be conclusive. Till an account is opened, banker and customer
relationship is not created, but once the account is opened contractual
relationship is created. Moreover, mutual rights and obligations between
the banker and customer are also created under law. In case of fraudulent
encashment of cheques, the collection and payment embraces the bank's
duty to the real owner, if the customer happens not to be the real owner.
In such cases, the bank's liability is protected on the satisfaction of the
conditions mentioned under Section 131 of the NI Act and not otherwise.
This is so because the drawer of the cheque is not the customer of the
bank while the payee is. Consequently, if there is anything to arouse
suspicion regarding the cheque and the ownership of the customer, the
bank may find itself beyond the protection of Section 131 of the NI Act.
Suspicion may arise when the amount is very large, credibility and identity
of the customer is pied etc. Further, negligence may be established when
collection and payment is made contrary to the tenor of the instrument.
Carelessness occurs when there is failure to pay due attention to the
actual terms of the mandate. At the same time we must be realistic and
pragmatic not to narrow down banker's protection under Section 131 of
the NI Act to make the banker's position vulnerable. This would be
disadvantageous to the expansion of banking business. Banking has
penetrated and is widespread and, therefore, precautions at one time
may not be a proper guide. Corresponding standard of reasonable care
and not stricter liability is conducive and the correct test. The officers of
the banks are not required to be amateur detectives, albeit they can be
attributed the degree of intelligence ordinarily required from a person in
their position. Therefore, microscopic examination of the cheque paid in
collection may not ordinarily be necessary, but this may be required when
facts are sufficient to raise reasonable ground to suspect that there may
be a wrongdoing.
19. Explanation II to Section 131 of the NI Act inserted with
effect from 6th February 2003 states that it is the duty of every banker
who receives payment based on an electronic image of a truncated
cheque to verify the prima facie genuineness of the cheque, and exercise
11 (1990) 1 SCC 484
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due diligence and ordinary care to verify fraud, forgery or tampering
apparent on the face of the instrument. Therefore, the bank can escape
only when the banker acts in good faith and without negligence.