Section 138 of the Negotiable Instruments Act provides that the dishonor of a cheque for the reason "insufficiency of funds" or for the reason that the amount covered by the cheque was not arranged for, constitutes a penal offence punishable with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque or with both. The said provision was incorporated into the Negotiable Instruments Act specifically to enhance the acceptability of cheques in settlement of liabilities by making the drawer of the cheque liable for penalties, with adequate safeguards to prevent harassment of honest drawers. The said section would apply only when the cheque is presented for payment within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.

The other ingredients necessary to constitute an offence under Section 138 of the Act are:

1. The cheque so issued must have been issued in discharge of a legally enforceable debt or liability.

2. The payee should have given a notice of dishonor to the drawer within fifteen days of the receipt of information by him from the bank regarding dishonor of the cheque, demanding repayment of the amount covered by the cheque.

3. The drawer should have failed to make the payment within fifteen days of the receipt of the notice.

There is no restriction as to how many number of times a cheque can be presented to the bank. The cheque can be presented any number of times within the period of its validity and the only requirement for filing a complaint under Section 138 of the Act is that a notice has to be given about the cheque having been dishonored within fifteen days of such dishonor.

Under Section 142 of the Negotiable Instruments Act, the Magistrate is empowered to take cognizance of the offence only on a complaint, in writing, made by the payee or the holder in due course of the cheque provided that such complaint is made within one month from the end of the 15th day on which the payee, after receiving the notice, fails to make the payment. It is to be noted that if the payee fails to make a complaint within the period of one month, as contemplated, no proceedings can lie under Section 138 of the Act, and the only recourse available would be to initiate recovery proceedings before the competent Civil Courts.

In case the dishonored cheque is issued by a Company, every person who, at the time the offence was committed, was in charge of and was responsible to the Company for the conduct of its business, is deemed to be guilty of the offence and shall be liable to be proceeded against and punished.