Kuriachan Chacko & Ors vs State Of Kerala

2

C.K. THAKKER, J.

1. Leave granted.

2. The present appeals have been

instituted by the appellants against the

judgment and order dated 19th July, 2007 passed

by the High Court of Kerala in Criminal

Revision Petition No. 4126 of 2006 and

companion matters. By the impugned order, the

High Court dismissed revision petitions filed

by the appellants herein as also by the State

of Kerala.

3. To understand the issue raised in the

present appeals, few relevant facts may be

stated:

4. The appellants are partners of M/s

LIS, Ernakulam, a partnership firm engaged in

the business of sale of lotteries and magazines

after collecting advance money. They floated a

scheme known as "LIS Deepasthambham Scheme".

The scheme was simple in its conception. A

person has to pay Rs.625/- and purchase one 3

unit of lotteries from the promoters. The

promoters will make use of Rs.350/- to purchase

35 lottery tickets of the Kerala State

Government each of Rs.10/- for the unit holder

for the next 35 weeks. If the unit holder wins

any prize up to Rs.5,000/- in the 35 draws, the

promoters shall collect the amount and pay the

same to the unit holder. If the unit holder

wins any prize above Rs.5,000/-, the ticket

shall be handed over to the unit holder for

collection of the amount. The balance of

Rs.275/- (Rs.625 - Rs.350) will be used to make

the unit holder a subscriber of a magazine by

name `Thrikalam' for one year. The said

magazine would reproduce relevant and important

materials from other magazines. It would also

furnish necessary information about the lottery

tickets which have won prizes.

5. The unit holder will be returned

(paid) not only Rs.625/- which he had initially

invested, but twice his investment i.e.

Rs.1,250/- (less Rs.100/- as service charges 4

for the promoters and legal deduction for tax,

etc.) on an early date. As per the scheme, on

sale of three tickets of Rs.10/- each, the

Government would pay commission of 28% of which

the promoters would share 25% with the unit

holders. Likewise, the publisher of the

magazine would give commission of 30% to the

promoters and promoters would share 25% with

the unit holders. All these amounts are

available to the unit-holders. Under the

scheme, in order of strict seniority, the

senior most unit holder would be paid

Rs.1,250/- as soon as the requisite amounts are

available as commission with the promoters. The

promoters, in addition to 28% commission for

the lottery tickets, and 30% commission for the

magazines, would also get commission for the

prizes won by the tickets sold through them

from the Government. Those amounts also would

be entirely made available for payment to unit

holders. If a unit holder is paid Rs.1,250/-

before the expiry of 35 weeks, no lottery 5

tickets will be purchased on his behalf

thereafter. It is because he had already been

paid the requisite amount. On the same

reasoning, if the amount of Rs.1,250/- is paid

to the subscriber before the expiry of one

year, `Thrikalam' magazine would also not be

sent to the subscriber thereafter. The price of

unpurchased lottery tickets and unused

magazines thereafter will be used by the

promoters towards the payment of amount of

Rs.1,250/- to other unit holders. According to

the promoters, the scheme was viable as well as

workable. All persons would be able to double

their investment at the earliest. No specific

time, however, was given but it was assured

that the amount would be doubled at the

earliest and it would be paid on the basis of

seniority. Under the scheme, the amount of

Rs.1,250/- (double the investment by the unit

holder) will be paid as soon as 14 more members

are enrolled. The advantage of technology was

borrowed. Passwords could be chosen. There was 6

a web site for promoters. The unit holder could

use his password and the site would reveal all

details about the tickets purchased on behalf

of the unit holder by the promoters. The unit

holders thus would be able know the details of

the tickets purchased for them by the promoters

and would also able to ascertain whether any

prizes had been won by any ticket purchased on

their behalf by the promoters.

6. The idea appeared to be very

attractive. Several persons participated and

invested money. The membership collection

during a short period of time reached to almost

Rs.500 crores. Amounts were being paid to the

unit holders initially very promptly--on many

occasions even before the expiry of 35 weeks.

More and more subscribers joined the queue.

There was aggressive publicity and marketing

through visual (TV) and printed media

(pamphlets and newspapers). The scheme was

proceeding very happily. More and more amounts 7

were coming into the kitty of the promoters

from unit holders.

7. Suddenly, however, there was a jolt to

the scheme. Police Authorities registered a

crime against the promoters for an offence

punishable under Section 420 of Indian Penal

Code (IPC), under the Prize, Chits & Money

Circulation Scheme (Banning) Act, 1978

(hereinafter referred to as `the Act') and also

under the Reserve Bank of India Act, 1934.

Certain proceedings were initiated even earlier

with which we are not concerned in the present

proceedings. The learned Chief Judicial

Magistrate, Ernakulam by an order, dated

November 14, 2006, framed charge against the

appellants herein for offences punishable under

Section 420 read with Section 34, IPC and under

Sections 4 and 5 read with Section 2(c) and 3

of the Act. He, however, discharged all the

accused for the offences punishable under

Sections 4 and 5 read with Sections 2(e) and

(3) of the Act and also under Sections 45I(bb), 8 45S and 58B of the Reserve Bank of India Act,

1934.

8. Being aggrieved by the order passed by

the trial Court, the accused as well as the

State filed revision petitions in the High

Court of Kerala. Whereas the accused were

aggrieved by the order of the trial Court

framing charge against them, the State was

aggrieved by the order discharging the accused

for certain offences under the Act and under

the Reserve Bank of India Act, 1934.

9. A Single Judge of the High Court

considered rival contentions of the parties and

noted that the learned Additional Advocate

General/Special Public Prosecutor fairly

submitted that on the facts of the case Section

2(e) of the Act was not attracted. Similarly,

there was no error on the part of the trial

Court in not framing charge against the accused

for offences punishable under the Reserve Bank

of India Act, 1934. The High Court observed

that though no express concession was made by 9

the State, it was not seriously challenged by

the prosecution that the trial Court had

committed any error in discharging the accused.

10. The accused, on the other hand,

strenuously contended that the trial Court was

wholly wrong in framing charge against the

accused for an offence punishable under Section

420 read with Section 34, IPC as also under

Sections 4 and 5 read with Sections 2(c) and 3

of the Act and the said order was liable to be

set aside ordering discharge of the accused in

respect of all offences.

11. The High Court, after considering the

rival contentions of the parties and referring

to the relevant decisions on the point, held

that the trial Court was right in discharging

the accused for offences punishable under

Sections 4 and 5 read with Sections 2(e) and 3

of the Act and also under the Reserve Bank of

India Act, 1934. The High Court held that the

trial Court was also right in framing the

charge against the accused for offences 10

punishable under Sections 4 and 5 read with

Sections 2(c) and 3 of the Act and also under

Section 420 read with Section 34, IPC. The High

Court, therefore, confirmed the order passed by

the trial Court and dismissed revisions of both

the parties. The said order is challenged by

the appellants-accused in present appeals.

12. On September 7, 2007, notice was

issued by this Court. On February 22, 2008, the

matters were ordered to be posted for final

hearing on a non-miscellaneous day. That is how

they are before us.

13. We have heard learned counsel for the

parties.

14. The learned counsel for the appellants

submitted that the trial Court and the High

Court were right in discharging the accused for

certain offences punishable under the Act and

also under the Reserve Bank of India Act, 1934.

The State has not preferred appeal against the

said order and the decision has become final.

He, however, contended that both the Courts 11

were wrong in not discharging the accused for

offences punishable under Sections 4 and 5 read

with Sections 2(c) and 3 of the Act as also for

an offence punishable under Section 420 read

with Section 34, IPC.

15. It was submitted that the scheme

formulated by the appellants could not fall

within the mischief of `Money Circulation

Scheme' as defined in clause (c) of Section 2

of the Act. If it is so, ban envisaged by

Section 3 would not apply. Consequently, penal

provisions of Sections 4 and 5 cannot be

invoked. The Courts below were wrong in

observing that prima facie, the provisions of

the Act got attracted and appellants could not

be discharged. Moreover, for application of

Section 415, IPC, there must be fraudulent and

dishonest intention which was not present in

the instant case. Penalty provision of Section

420, IPC had, therefore, no application. Even

there, the Courts were wrong in framing charge

against the accused.

12

16. The learned counsel for the

respondents, on the other hand, supported the

order passed by the trial Court and confirmed

by the High Court. It was submitted that both

the Courts considered the relevant provisions

of law, requisite ingredients under the Act and

formed a prima facie opinion that the scheme in

question was covered by definition clause 2(c)

(Money Circulation Scheme) and the case was

required to be gone into by a competent Court.

Likewise, the Courts below observed that there

was `cheating' as defined in Section 415, IPC

and the accused could not be discharged. No

fault can be found against the approach adopted

by both the Courts and the appeals deserve to

be dismissed.

17. Before we deal with the merits of the

matter and reasoning of the Courts below, it

would be appropriate if we refer to the

relevant provisions of the Act.

18. The Preamble of 1978 Act declares that

it has been enacted "to ban the promotion or 13

conduct of prize chits and money circulation

schemes and for matters connected therewith and

incidental thereto".

19. Section 2 is legislative dictionary

and defines certain terms. The phrase `Money

Circulation Scheme' is defined in clause (c)

which reads as under;

(c) "money circulation scheme" means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

20. The definition is not simple. Judicial

notice thereof had been taken in the leading

decision of this Court in State of West Bengal

v. Swapan Kumar Guha, (1982) 1 SCC 561.

Chandrachud, C.J. after taking note of 14

legislative drafting, reshaped and rearranged

Section 2(c) thus;

'money circulation scheme' means any scheme, by whatever name called,

(i) for the making of quick or easy money, or

(ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money,

on any event or contingency relative or applicable to the enrolment, of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

21. Section 3 bans money circulation

schemes or enrolment as member to any such

scheme or participation in such scheme.

Sections 4 and 5 are penal provisions and

prescribe punishment. Section 6 deals with

offences committed by Companies. Section 7

authorizes Police Officer not below the rank of

officer in charge of a police station to 15

exercise power to enter and search premises and

to seize things used for such scheme. Section 8

provides for forfeiture of newspaper and

publication containing money circulation

scheme. Section 9 declares that no Court

inferior to the Court of Chief Metropolitan

Magistrate or Chief Judicial Magistrate shall

try any offence punishable under the Act. All

offences punishable under the Act have been

made cognizable under Section 10. Section 11

grants exemption from the operation of the Act

to certain money circulation schemes.

22. From the perusal of the above

provisions, it is clear that the Act prohibits

`money circulation scheme'. The main question,

therefore, is whether the scheme in question is

a `money circulation scheme' covered by the

Act?

23. In Swapan Kumar Guha, this Court had

an occasion to consider the provisions of the

Act. Interpreting the connotation `Money 16

Circulation Scheme' and speaking for the

majority, Chandrachud, C.J. observed:

"Commas or no commas, and howsoever thoughtfully one may place them if they are to be there, I find it impossible to take Clause (c) to mean that any and every activity "for the making of quick or easy money" is comprehended within its scope. For the matter of that, I cannot believe any law to ban every kind of activity for making quick or easy money, without more, on pain of penal consequences. It is far too vague and arbitrary to prescribe that "whosoever makes quick or easy money shall be liable to be punished with fine or imprisonment".

For then, in the absence of any demarcation of legitimate money making activities from those which fall within the ban, the question whether the penal provision is attracted in a given case will depend upon the will and temper, sweet or sour, of the magistracy. Besides, speaking of law and morals, it does not seem morally just or proper to say that no person shall make quick or easy money, especially quick. A person who makes quick money may do so legitimately by the use of his wits and wisdom and no moral turpitude may attach to it. One need not travel after to find speaking examples of this. Indeed, there are honourable men (and now women) in all professions recognised traditionally as noble, who make quite quick money by the use of their talents, acumen and experience acquired over the years by dint of hard work and industry. A lawyer who charges a thousand rupees 17

for a Special Leave Petition lasting five minutes (that is as far as a Judge's imagination can go), a doctor who charges a couple of thousands for an operation of tonsillitis lasting ten minutes, an engineer, an architect, a chartered accountant and other professionals who charge likewise, cannot by any stretch of imagination be brought into the drag- net of Clause (c). Similarly, there are many other vocations and business activities in which, of late, people have been notoriously making quick money as, for example, the builders and real estate brokers. I cannot accept that the provisions of Clause

(c) are directed against any of these categories of persons. I do not suggest that law is powerless to reach easy or quick money and if it wills to reach it, it can find a way to do it. But the point of the matter is that it will verge upon the ludicrous to say that the weapon devised by law to ban the making of quick or easy money is the provision contained in Section 2

(c) of the Prize Chits and Money Circulation Schemes (Banning) Act".

24. Explaining the ambit and scope of the

expression `Money Circulation Scheme', the

Court proceeded to state;

"In order to give meaning and content to the definition of the expression 'money circulation scheme' which is contained in Section 2(c) of the Act, one has, therefore, to look perforce 18

to the adjectival Clause which qualifies the words "for the making of quick or easy money". What is within the mischief of the Act is not "any scheme, by whatever name called, for the making of quick or easy money"

simpliciter, but a scheme for the making of quick or easy money, "on any event or contingency relative or applicable to the enrolment of members into the scheme", (whether or not such money or thing is derived from the entrance money of the members of such scheme or their periodical subscriptions). Two conditions must, therefore, be satisfied before a person can be held guilty of an offence under Section 4 read with Sections 3 and 2(c) of the Act. In the first place, it must be proved that he is promoting or conducting a scheme for the making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrolment of members into that scheme. The legislative draftsman could have thoughtfully foreseen and avoided all reasonable controversy over the meaning of the expression 'money circulation scheme' by shaping its definition in this form;

'money circulation scheme' means any scheme, by whatever name called,

(i) for the making of quick or easy money, or 19

(ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money,

on any event or contingency relative or applicable to the enrolment, of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

I have reshaped the definition, in order to bring out its meaning clearly, without adding or deleting a single word or comma from the original text of Section 2(c). The substance of the matter is really not in doubt :

only the form of the definition is likely to create some doubt as to the meaning of the expression which is defined and, therefore, I have made a formal modification in the definition without doing violence to its language and indeed, without even so much as altering a comma".

25. The Court observed that besides the

prize chits, the Act aims at banning `Money

Circulation Scheme'. It is, therefore,

necessary that the activity charged as falling

within the mischief of the Act, must be shown

to be a part of the scheme for making quick or

easy money depending upon the happening or non- 20

happening of an event or contingency relative

or applicable to the enrolment of members into

the scheme.

26. Referring to dictionary meanings, this

Court proceeded to state;

"Therefore, a transaction under which, one party deposits with the other or lends to that other a sum of money on promise of being paid interest at a rate higher than the agreed rate of interest cannot, without more, be a 'money circulation scheme' within the meaning of Section 2(c) of the Act, howsoever high the promised rate of interest may be in comparison with the agreed rate. What that section requires is that such reciprocal promises, express or implied, must depend for their performance on the happening of an event or contingency relative or applicable to the enrolment of members into the scheme. In other words, there has to be a community of interest in the happening of such event or contingency".

(emphasis supplied)

27. On the facts of the case, the Court

held that it was not a `Money Circulation

Scheme' and proceedings initiated against the

accused were liable to be dropped. 21

28. Strongly relying on Swapan Kumar Guha

and the observations of this Court, the learned

counsel for the appellants contended that the

point is directly covered by the said decision

and the Courts below were not right in

distinguishing it and in not discharging the

accused.

29. We are unable to uphold the

contention. We have closely gone through

Swapan Kumar Guha and in our opinion, the case

is clearly distinguishable. This Court, in that

case, reproduced First Information Report (FIR)

in toto. The Court then considered whether FIR

prima facie disclosed an offence under the Act.

The Court analyzed FIR `carefully, and even

liberally' and came to the conclusion that the

FIR against `Sanchaita Investments' and its

partners (`accused' in that case) made in

respect of following allegations;

(1)The firm had been offering fabulous interest @ 48% per annum to its members, which rate of interest was later reduced to 36% per annum;

22

(2)Such high rate of interest was being paid even though the loan certificate receipts show that interest was liable to be paid at the rate of 12% per annum only; and

(3)The fact that interest was paid in excess of 12% shows clearly that a 'Money Circulation Scheme' was being promoted and conducted for the making of quick or easy money.

30. The Court then proceeded to apply the

provisions of the Act to the allegations of

prosecution against the accused. According to

the Court, the respondents did not allege,

directly or indirectly, that the firm was

promoting or conducting a scheme for the making

of quick or easy money, dependent on any event

or contingency relative or applicable to the

enrolment of members into the scheme. Secondly,

the FIR did not contain any allegation

whatsoever that the persons who advanced or

deposited their monies with the firm were

participants of a scheme for the making of

quick or easy money, dependent upon any such 23

event or contingency. The Court noted the

contention of the learned counsel for the

prosecution that the accused were promoting or

conducting a scheme for making quick or easy

money. According to the Court, however, such

argument could not be upheld since it was

fallacious. It was observed in the paragraph we

have reproduced hereinabove that it would be

arbitrary to hold that whoever makes `quick or

easy money' should be punished. The Court noted

some illustrative cases in which a person may

be able to make `quick or easy money'; for

instance, a lawyer who charges a thousand

rupees (in early eighties, not now) for a

Special Leave Petition lasting five minutes, a

doctor who charges a couple of thousands for an

operation of tonsillitis lasting ten minutes,

an engineer, an architect, a chartered

accountant and other professionals who charge

likewise. There are many other vocations and

business activities in which people notoriously

make quick money, e.g. builders and real estate 24

brokers. From that, however, one cannot jump to

the conclusion that they are all liable to be

punished under Sections 4 and 5 of the Act.

31. The Court also took into account,

apart from FIR, a detailed affidavit in reply

filed in the High Court. Even in the said

affidavit, there was no clear basis in respect

of allegations, nor material was disclosed to

show that prima facie, the firm was promoting

or conducting a scheme for making quick or easy

money which was dependent on any event or

contingency relative or applicable to the

enrolment of members into the scheme. The

`song' of the State was that the scheme

conducted by the accused would generate black

money and would paralyze economy of the

country. The Court was conscious and alive of

seriousness of the problem and observed that

unquestionably a private party could not be

allowed to issue `bearer bonds' by a back door.

At the same time, however, such activities 25

should be curbed by the Government by taking

appropriate action in accordance with law. But

if the activity does not fall within the

definition of `money circulation scheme' within

the meaning of Section 2(c) of the Act, no

prosecution can be launched against them. Thus,

the second ingredient of Section 2(c) of the

Act, according to the Court, was totally

absent.

32. In the instant case, both the

essentials of Section 2(c) are present. The

scheme provides for (i) making of quick or easy

money, and (ii) it is dependant upon an event

or contingency relative or applicable to the

enrolment of members into the scheme. As

observed by us, a member would be entitled to

double amount only after his enrolment,

additional 14 members are enrolled in the

scheme. The second ingredient, namely, such

payment of money is dependant on the "event or

contingency relative or applicable to the 26

enrolment of members into the scheme" is thus

very much present. Swapan Kumar Guha,

therefore, in our considered opinion, does not

apply and carry the case of the accused

further.

33. It was next contended that there is no

obligation on the part of the unit holder to

enlist/enroll more members into the scheme and,

therefore, the scheme does not attract Section

2(c). The contention has no force. Section 2(c)

no where provides that a member of the scheme

must himself enroll other members and only in

that eventuality, the provision of the Act

would apply. The section does not provide for

positive or dominant role to be played by a

member of the scheme. In our opinion, the

requirement of law is "an event or contingency

relative or applicable to the enrolment of

members into the scheme" and nothing more. The

plain language of the section does not insist

that such enrolment of members must be by the 27

members already enrolled. It is impossible to

read into the statutory provision such

requirement which is not stipulated by

Parliament. Upholding of the argument of the

learned counsel would result in re-writing of

the section, which is certainly not permissible

in our constitutional system. The event or

contingency on the happening of which the

amount would become payable must be relative or

applicable to the enrolment of the members into

the scheme. It is immaterial by whom such

members are enrolled. It may be by members, by

promoters or their agents or by gullible

sections of the society suo motu (by

themselves). The sole consideration is that

payment of money must be dependent on an event

or contingency relative or applicable to the

enrolment of more persons into the scheme,

nothing more, though nothing less. In the

present case, the second ingredient is very

much present.

28

34. It was then contended by the learned

counsel for the appellants that in the present

case, all the promises have been fulfilled by

the promoters and contract was complete

inasmuch as for payment of Rs.625/- by the unit

holder, he was given 35 lottery tickets each of

Rs.10/- and thus an amount of Rs.350/- gets

appropriated. Likewise, for the balance amount

of Rs.275/- (Rs.625/- - Rs.350/-), he has been

made subscriber of a magazine `Thrikalam' for

one year. Nothing, therefore, remains to be

done thereafter by the promoters except the

benefit which is likely to accrue in future.

Such a scheme cannot be termed as a scheme for

the making quick or easy money on any event or

contingency relative or applicable to the

enrolment of the members of the scheme.

35. We are unable to agree with the

learned counsel. The Courts below rightly held

that prima facie case had been made out against

the accused. Both the ingredients necessary for

application of Section 2(c) of the Act are 29

present in the case on hand. The trial Court,

for coming to that conclusion, referred to

certain documents. The advertisement clearly

declared that a member would get double the

amount when after his enrolment, two members

were enrolled under him and thereafter, 4 other

persons were enrolled and after the rolled 4

persons, 8 persons were enrolled under them.

Thus, only after 14 persons under the first

enrolled person become members under the

scheme, the first person would get Rs.1,250/-

i.e., double the amount of Rs.625/- (1+2+4+8).

The trial Court also noted that Kuriachan

Chacko (Accused No.1) who proposed the project

for implementation, described how the project

would work from which also it is clear that the

double amount will be given to a person who

purchases a unit only after 14 persons are

enrolled subsequent to him.

36. In the affidavit in reply filed in

this Court, respondent State has relied upon a

letter written to the Reserve Bank of India by 30

the accused on October 9, 2004 wherein the

scheme has been explained. The relevant part

reads thus:

1. We are collecting Rs.625 from a person to be considered as a member of the Deepasthambham project.

2. The Rs.625 is intended as follows

Rs.10 worth Kerala Lottery Ticket per week for 35 weeks : Rs.350/-

Rs.10 worth Thrikalam Tri-Monthly Collage Magazine one year subscription : Rs. 275/-

3. As such, we are collecting money in advance for the Kerala Lottery ticket and subscription of the Thrikalam magazine and not as DEPOSIT at all.

4. We are giving membership in a particular style--adopting the principle of Multi Level Marketing method.

1st Stage First One member joins 2nd Stage Below him Two members join 3rd Stage Below them Four members join 4th Stage Below them Eight members join

Thus 14 members join below the first one.

5. From one membership we take 27% commission to be distributed in the three stages in the above manner.

On collecting such commissions, we get Rs.1150/- from the members below him. Otherwise, when the 14th member joins, the commission 31

reserved for the first member is paid.

6. The Rs.1150 paid to the first member is claimed by us as payment of double the amount he had entrusted and we explain it as "Refund and Commission" less our service charge.

i.e. Refund Rs.625 Commission Rs.625 ------- Rs.1250 Less Service Charge Rs. 100 ------- Rs.1150 -------

7. Once the Rs.1150 is paid to the member, the membership is ceased, and no more ticket or Thrikalam will be given to him, even if the promised 35 tickets and one year Thrikalam are not yet over.

8. To justify this stand of ours, though the Rs.1150 paid is actually the commission, we term it as Refund and Commission so that the member shall not make any claim for the remaining tickets or Thrikalam.

9. If the member wish to get lottery ticket and Thrikalam again he has to join again by taking new membership.

10. The lottery commission available to us on Kerala Government Lottery is 28% alone. As the commission we are paying to the member is 27%, the margin for us is only 1%.

32

But then there will be a lot of other commissions on prizes bagged by the members which will add to our gain.

11. At the beginning, we offered the Superlotto and Thunderball online tickets also. But we stopped that since 2 months and now we are issuing only Kerala Govt. tickets. By October end, we will be purchasing a minimum of 1 lakh tickets every week i.e. 10 lakh rupees worth tickets in a week from Kerala Government.

37. The High Court also upheld the

argument of the prosecution that the scheme was

a `mathematical impossibility'. The promoters

of the scheme very well knew that it is certain

that the scheme was impracticable and

unworkable making tall promises which the

makers of the promises knew fully well that it

could not work successfully. It could work for

some time in that `Paul can be robbed to pay

Peter' but ultimately when there is a large

mass of Peters, they will be left in the lurch

without any remedy as they would by then have

been deceived and deprived of their money. 33

38. The Court, taking into account the

scheme as a whole, recorded a finding thus:

"The question therefore is very important as to whether the Scheme is a possibility or is only a tall false claim made to fraudulently induce persons to part with their money. In this context, it has to be seen that the profitable working of the Scheme is impossible from the very nature of the Scheme offered. Simple arithmetics reveal that utilising the amount of Rs. 625/-, only an amount of Rs. 180.50 will be available as commission of which Rs. 24.25 is claimed by the promoter and Rs. 156.25 is offered for payment to the unit holders. The details of the same are given below:

Head Amount Commission Total For the For the Percentage Promoter Subscriber amount Percentage/ Percentage/ amount Amount Lottery Rs.350/- 28% 3% 25% Tickets (Rs.98) (Rs.10.50) Rs.87.50 Magazine Rs.275/- 30% 5% 25% (Rs.82.50) (Rs.13.95) Rs.68.75 Total Rs.625/- Rs.180.50 Rs.24.25 Rs.156.25 34

Deficit in each

If Rs.625/- were to be returned =625-156.25=Rs.468.75

Deficit in each If Rs.1250/- were to be returned =1250-156.25=Rs.1093.75

If the amount of Rs. 625/- were to be returned, there will be a deficit of Rs. 468.75. If double the amount i.e., Rs. 1,250/- were to be returned, there will be a deficit of Rs. 1,093.75. Therefore for every person for whom double payment is made, the promoter will have to make Rs. 1,093.75 and this obviously is paid to him from the money which subsequent subscribers pay as the price of the unit. Of course, I have not taken note of the uncertain commission which would be receivable by the promoter for prizes won by the unit holders through them. I have also not taken specific note of the savings in respect of unpurchased tickets and non-supplied magazines after the subscriber receives the double amount and closes the transaction before elapse of the period of 35 months. It must be evident for any discerning mind that this Scheme cannot work unless more and more subscribers join and the amount paid by them as unit price is made use of to pay the previous subscribers. The system is an inherently fragile system which is unworkable. Foolish, gullible and stupid persons alone may fall for the Scheme without carefully analysing the stipulations of the Scheme. It would be totally erroneous to assume that the offence of cheating would not lie if the persons deceived are gullible, unintelligent and stupid persons. The system and the law has a duty to protect such victims of crime also.

35 According to me, there is no reason to assume that the promoters had no contumacious intention and they embarked on the venture without any culpable motive on the honest assumption that the tickets sold through them will win prizes and sufficient commission will be available to pay double the amount to all the unit holders".

39. The Court also stated;

"I take note of the fact that inherently there is merit in the allegation of the prosecution that the Scheme is so grossly unworkable that the persons who made representations to that effect and induced persons to part with money did entertain the contumacious intention. They knew fully well that unworkable false representations were being made. The obvious attempt, it can be presumed at this stage, was to induce persons by such false unworkable representations to part with money. Initially some subscribers can be kept satisfied to induce them and others similarly placed to join the long queue. But inevitably and inescapably later subscribers are bound to suffer unjust loss when they swallow the false promises and make payments".

40. The ratio laid down by this Court in

State Of Madhya Pradesh v. Mir Basit Ali Khan

& Ors., (1971) 2 SCC 96 has no application. In 36

that case, the Court was considering the

provisions of Section 420, IPC read with

Section 120B. Obviously, it was not a case

under 1978 Act.

41. On the facts and in the circumstances

of the case, in our opinion, the Courts below

were right in not interfering with the

prosecution at the stage of framing of charge.

We see no reason to interfere with the order.

42. So far as the offence punishable under

Section 420 read with Section 34, IPC is

concerned, it is true that for application of

penal provision of Section 420, IPC, there must

be `cheating' as defined in Section 415, IPC.

43. The said Section reads thus:

415. Cheating

Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to 37

cause damage or harm to that person in body, mind, reputation or property, is said to "cheat".

44. Mere reading of the Section makes it

clear that it requires the following

ingredients to be satisfied;

1. Deception of any person;

2.(a) Fraudulently or dishonestly inducing that person;

(i) to deliver any property to any person, or

(ii) to consent that any person shall retain any property, or

(b) intentionally inducing that person to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property. [vide Ram Jas, (1970) 2 SCC 740; Hridaya Ranjan Prasad Verma v. State of Bihar, (2000) 4 SCC 168; S.W. Palamitkar v. State of Bihar, (2002) 1 SCC 241].

45. The trial Court as well as the High

Court considered the facts of the case and held

that there is element of cheating inasmuch as a 38

representation was made by the accused that

every unit holder will get double the amount

invested by him; the representation was false,

the maker of the representation was aware that

the representation was not true and by such

representation, he deceived the victim to

believe the representation to be true and

actuated him to act on such representation. The

promoters induced common public to part with

money on the lure of doubling the amount.

Prima facie, the Courts were satisfied that but

for such representation and the benefit sought

to be given under the scheme, the victims would

not have acted on such representation. It was,

therefore, a case of application of Section

415, IPC. Prima facie case had been made out in

absence of better explanation by the accused.

If it is so, it could be said to be a case for

application of Section 420 read with Section

34, IPC, of course, at this stage.

46. In our opinion, the Courts below have

not committed any error in coming to such 39

conclusion at the stage of framing of charge

and no interference by this Court is,

therefore, called for.

47. For the foregoing reasons, in our

opinion, both the Courts below were right in

framing the charge against the appellants and

no illegality has been committed by them in

coming to such conclusion. It is no doubt,

true, that the above orders do not mean that

the accused have committed such offences. It

only means that a prima facie case has been

made out to frame charge and at that stage, no

interference is called for. We are, therefore,

not inclined to interfere with the said order.

The appeals deserve to be dismissed and are

hereby dismissed.

48. Before parting with the matter, we may

clarify that we may not be understood to have

expressed any opinion on the merits on the

matter one way or the other. All the

observations made by the trial Court, by the

High Court as well as by us in this judgment, 40

must be construed as limited to the framing of

charge and nothing more than that. As and when

the main matter will come up before the Court

for hearing, the Court will decide it on merits

without being inhibited or influenced by the

above observations.

49. Ordered accordingly.

.........................................................J. (C.K. THAKKER)

NEW DELHI, .........................................................J. JULY 10, 2008. (D.K. JAIN)