Section 89 of the Negotiable Instruments Act,1881.
(1) Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such payment shall not be questioned by reason of the instrument having been altered, or the cheque crossed.
(2) Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image.
(3) Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.
Clause (1) of this section affords protection to a person or a banker liable to make payment when there is a material alteration in a note, cheque or bill or when the crossing of a cheque is obliterated. The conditions of protection are that,
Thus, where, A draws a cheque for Rs 10/- in favour of B and B, without A's knowledge, alters the amount to Rs 100/- in such a way that at the time of presentation it looks like a cheque for Rs 100/- and the bank, on presentation, pays the amount to B bona fide in due course, the bank is entitled to the protection under the section and can debit the amount against A.
This is an exception to the general rule that the drawee of a cheque or the acceptor of a bill has no right to debit more than he is directed to pay. This special protection is meant for the facility of commerce and is based on the principle that whenever one of two innocent parties must suffer by the act of a third person, he who has enabled such person to occasion the loss must sustain it. This principle has, however, been restricted to this that the neglect must be in the transaction itself and must be the proximate and direct cause that led to the loss complained of.
Liable to pay: Liability of a banker is not confined to deposits of the drawer in its hand. The banker's obligation to honour the 'customer's cheques depends entirely on the contract between the banker and the customer. If there is a previous agreement allowing the customer to overdraw that is enough to impose a liability on the bank to honour the cheques for the excess amounts to the maximum amount of the limit of the overdraft, if there is such a limit.1)
In Bank Of Maharashtra vs Automotive Engineering Co.2) the Hon'ble Supreme Court held that:
“In the facts of the case, there was no occasion to doubt about the genuineness of the cheque from the apparent tenor of the instrument. There is nothing on record from which it can be held that the payment of the said cheque has not been made in good faith. Although no straight-jacket formula can be laid down to cover each case of negligence of a banker and the question of negligence requires to be decided in the facts and circumstances in each case, it does not appear to us that the appellant bank can be held to be guilty of negligence simply because an ultraviolet ray lamp was not kept in the branch and the cheque in question was not subjected under the ultraviolet ray lamp.”
Clause (2) and (3) of this section was inserted by section 5, Act 55 of 2002.3) Clause 2 provides that any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration. Further there is a duty on the bank or clearing house to ensure that both the electronic image and the truncated cheque are exactly same. Clause (3) gives the bank an additional responsibility to verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.