M.A.A.Annamalai vs State Of Karnataka & Anr

Bangalore in Criminal Petition No.2625 of 2004. 2

3. Brief facts of the case are as under:-

The appellant, who was one of the Directors of R.P.S.

Benefit Fund Ltd. submitted his resignation letter on

8.12.1997 which became effective from the date of filing of

Form 32 (27.12.1997) with the Registrar of Companies. The

said Form has been filed with this petition.

4. Respondent no.2 filed a complaint with the Indira Nagar

Police Station, Bangalore, alleging:

- that RPS Benefit Fund had invited deposits from the public vide circular dated 06.12.1998 and that monies had been invested by the Petitioner and his wife in the Pensioner's Benefit Fund, pursuant to the approval of the scheme by the Reserve Bank of India;

- that the Company had issued letters on 18.05.1999 and 14.06.1999 to the investors not to present their interest warrants and that payments of interests would be made by August 1999;

- that the company had since closed its business and the amount due to the Respondent No.2 was about Rs.2,91,778/-;

5. The Respondent No.2 lodged a First Information Report

on 15.10.1999 with the Indira Nagar Police Station alleging the

offence under section 420 Indian Penal Code read with 3

sections 3, 4, 5 and 6 of the Money Circulation and Banning

Act, 1978." In the FIR, it was stated that the alleged offences,

if any, were committed during the period between 24.05.1998

and 17.09.1999.

6. According to the appellant, he ceased to be a Director of

the company from 27.12.1997, therefore, he was not

responsible in any manner for what had happened in the

company after he had resigned as a Director of the company.

7. The First Information Report was lodged by respondent

no.2 and consequently the then Xth Additional Chief

Metropolitan Magistrate, Bangalore issued a non bailable

warrants against the appellant.

8. On Company Petition filed at the instance of the

creditors, the Company Court on 23.7.2002 directed the

winding up of the company. In the winding up petition,

nothing had been mentioned about the appellant because he

was not the Director of the company at the relevant point of

time.

4

9. The Karnataka High Court on 10.6.2004 directed

quashing of the entire proceedings in Criminal Petition

No.4007 of 2002 regarding the erstwhile Directors of the

company. The proceedings before the Xth Additional Chief

Metropolitan Magistrate were based on the complaint filed by

respondent no.2 stating that he and his wife had invested in

the Short Term Deposit Scheme with the company.

10. The High Court held that some of the Directors of the

company had retired in April 1999 and that the non-payment

of matured funds and non payment of interest amount had

taken place after April 1999. According to the appellant, he is

in no manner responsible for company's non payment of either

the mature funds and interest amount. The appellant

submitted that the petition had been filed for some collateral

purposes for unnecessary exerting the pressure on the former

Directors.

11. The learned Judge also held that material ingredients of

the offence of cheating had not been made out. The appellant

filed a petition before the High Court of Karnataka under

section 482 of the Code of Criminal Procedure seeking to 5

quash the proceedings initiated on the basis of the complaint

registered as CC 22656 of 2001 arising out of the Crime

No.425/1999 pending before the Xth Additional Chief

Metropolitan Magistrate, Bangalore.

12. The appellant submitted that he cannot be held liable or

responsible for any of the alleged illegalities committed by the

company after he had resigned from the company. The

appellant's main grievance is that in the impugned judgment,

the learned Single Judge has not dealt with this principal

argument advanced by the appellant. In the impugned

judgment the court observed:-

"It is needless to say that there are some documents produced by the petitioner to show that at the relevant point of time he was not the Director of the Company. It is also his case that he also being an investor, the ratio followed by this court in the case of similarly situate persons, applies to his case also. However, it is for the trial court to ascertain as to whether there is investment by the petitioner or not, when he was appointed as a Director, when he resigned and whether the alleged incident has taken place during his directorship and further, to ascertain the preliminary aspect as to whether there is a prima facie case against him and whether he has participated in the proceeding or not as in- charge and managing affairs keeping in view the various decisions and pass orders in accordance with law."

6 13. The court further observed that the petition was disposed

of with a direction to the appellant to approach the trial court

seeking for order of discharge.

14. According to the appellant, even according to the

averments of the complaint in the First Information Report

there were no allegations whatsoever against the appellant, in

that event, the High Court ought to have quashed the

proceedings against the appellant instead of compelling him to

approach the Trial Court for obtaining the order of discharge.

The casual approach of the High Court has led to grave

miscarriage of justice.

15. According to the appellant, respondent no.2 had invested

in the Pensioner's Benefit Fund after approval of the scheme

by the Reserve Bank of India and therefore, in any event, the

element of cheating as alleged cannot be made out by any

stretch of imagination. The complaint and the First

Information Report, as aforementioned, do not make out any

case against the appellant.

7

16. In the facts and circumstances of this case, the High

Court was not justified in refusing to quash the complaint

against the appellant and compelling him to go to the trial

court for seeking an order of discharge.

17. We have heard the learned counsel for the parties. The

learned counsel appearing for the State has failed to point out

any specific allegation or averment against the appellant.

Admittedly, the appellant had resigned from the Board of

Directors of the Company with effect from 27.12.1997 and

therefore, cannot be held responsible for any activities of the

company after he ceased to be a Director of the company.

Even, according to the allegation of respondent no.2, no

criminal case can be made out against the appellant.

18. It may be pertinent to mention that a letter has been

placed on record which was sent by respondent no.2, R.

Narayanamurthy to the Inspector of Police, Indranagar Police

Station, Indranagar, Bangalore which reads as under:- 8

"From:

R. Narayanamurthy, S/o Late N.A. Ramaswamy, 105, Second Main Road, 4th Cross, Sadanandnagar, NGEF Layout, Bangalore - 560038

To The Inspector of Police, Indranagar Police Station, Indranagar, Bangalore-560033

Dear Sir, Sub: Complaint against RPS Benefit Fund Ltd. and Mr. M.A.A. Annamalai, Director of the company. I wish to inform you that I am withdrawing all my charges against the abovesaid company and its director M.A.A. Annamalai, s/o Annamalai Chettiar residing at No.1, Velayudam Street, Nungambakkam, Chennai -6000034. I further wish to inform you that I am withdrawing all my criminal cases against Mr. M.A.A. Annamalai and other directors because of my advanced age and ill health and also as I have received 55% of the deposited amount from the Official Liquidator, High Court of Madras at Chennai and I am also confident to receive further amounts in due course. I also understand that Mr. M.A.A. Annamalai resigned from the Board of RPS benefit Fund Ltd. on 8/12/1997 whereas I have deposited my money with the company only in December 1998 and in the year 1999. His name has been inadvertently included as an accused by the Investigating Officer.

Hence I am withdrawing all my criminal charges against Mr. M.A.A. Annamalai and the company. Thanking you, Yours faithfully, Sd/-

(R. Narayanamurthy) Date: 16/09/09"

9 19. This letter indicates that respondent no.2 is not

interested in prosecuting the appellant. According to the

appellant, the proceedings initiated against the appellant in

this case are liable to be quashed.

20. It may be pertinent to mention that respondent no. 2 also

filed an affidavit on 16.9.2009 before this Court. In this

affidavit, reference has also been made to the affidavit filed

before the High Court on 24.6.2009 in which he prayed that

all cases against the Company and the Directors be withdrawn

as he had already received 55% of the deposit amount from

the Official Liquidator, High Court of Madras at Chennai. In

the said affidavit filed before this Court, it was also mentioned

that the appellant had resigned as Director from RPS Benefit

Fund Ltd. on 8.12.1997 but his name had been included as

one of the accused by the Investigating Officer. In this

connection, he had also mentioned that the deponent was to

withdraw the charges of cheating against all the Directors of

the RPS Benefit Fund Ltd., including the appellant pending

before the 10th Additional Chief Metropolitan Magistrate,

Bangalore.

10

21. The learned counsel for the appellant submitted that,

apart from the affidavit of respondent no. 2, no case under

section 420 IPC is made out against the appellant. The

primary requirement to make out an offence of cheating under

section 415 punishable under section 420 IPC is

dishonest/fraudulent intention at the time of inducement is

made. In order to appreciate the controversy in proper

perspective, we deem it appropriate to reproduce section 415

IPC. The same reads as under:

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

22. Two main ingredients of section 420 IPC are dishonest

and fraudulent intention. The Indian Penal Code has defined

the word "dishonestly" in section 24 IPC. Section 24 IPC reads

as under:

"24. Dishonestly - Whoever does anything with the intention of causing wrongful gain to one person or wrongful loss to another person, is said to do that thing "dishonestly"."

11 23. The word "fraudulently" has also been defined in section

25 IPC. Section 25 IPC reads as under:

"25. Fraudulently - A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise."

24. In the instant case, according to the appellant there has

been no dishonest intention nor have any allegations as to the

extent of such a dishonest intention been made in the

complaint and FIR. In fact, no material whatsoever has been

produced by the respondent no.2 which would indicate any

such dishonest/fraudulent intention at any stage leave alone

at the stage of the alleged inducement of inviting depositors to

deposit money with the company. Furthermore, the

complaint against the Chairman and the Managing Director

itself has been quashed by an order of the High Court for the

very reason that such dishonest/fraudulent intention was

not made out in this case. The judgment of the High Court

acquired finality before no appeal was preferred before this

Court.

25. It is submitted that the FIR merely alleged a violation

under the Money Circulation and Banning Act without giving 12

any basis or material for the same, cannot be sustained. In

the instant case, a company was operating under license from

the Reserve Bank of India and was so carrying on a legitimate

business under a license by the statutory authority. The mere

fact that the company got into financial distress and went into

liquidation would not in any manner make the activity carried

out by them unlawful so as to invoke sections 3 to 6 of the

Money Circulation and Banning Act. In fact, to fall within the

mischief of the Act, it must be shown that the activity ought to

be an unlawful one to make quick and easy money and a

lawful activity duly approved by the Reserve Bank of India

cannot fall under the mischief of the said Act.

26. According to the appellant, the company started its

activities only after getting license from the Reserve Bank of

India and the depositors were legally invited to invest in the

company thereafter and respondent no.2 was one of the

depositors. Admittedly, in the liquidation proceedings, more

than 55% of outstanding company's liabilities had been

cleared despite the company having been wound up. 13

27. The appellant submitted that a complaint under section

420 IPC stands on a different footing than a complaint under a

special statute. Unlike special statutes, like the Negotiable

Instruments Act which casts a vicarious liability on officers in

charge of and responsible for the company in an offence under

the Indian Penal Code, there is no role for vicarious liability.

The appellant has also alleged that even assuming that the

company can be said to have committed an offence, this would

not be enough to sustain a complaint against any officer of the

company for an offence under the Indian Penal Code unless an

allegation or material of the said officer having been involved

in the commission of the offence is made out. Any special

provision like section 141 of the Negotiable Instruments Act, a

deemed provision is included where if the offence is committed

by a company, the officers responsible for the conduct of the

business of the company are deemed to be liable and a

presumption of their liability arise unless duly discharged by

them. There is no such presumption under the Indian Penal

Code and while so necessary allegation/ material must be

available not merely against the company but also against the

accused persons as having participated in such offence. In 14

the instant case, there is not even a whisper anywhere either

in the complaint or in any material collected to show a direct

participation of the appellant who was merely included on the

ground that, once upon a time, he was one of the Directors of

the company.

28. The appellant also submitted that even assuming that

there could have been a vicarious liability thrust on the

appellant, even then there cannot be any such vicarious

liability in absence of any allegations and material to show

that the appellant was in charge of or responsible for the

conduct of the company's business which had given rise to the

offence. In the instant case, the appellant ceased to be the

Director of the company w.e.f. 27.12.1997 following his

resignation on 8.12.1997, which fact was also recorded in the

Statutory Form 32 filed before the Registrar of Companies.

The complaint itself expressly stated that the offence had

taken place only thereafter and in fact the FIR expressly stated

that the occurrence of offence was between 24.5.1998 and

17.9.1999. At that stage, the appellant had admittedly ceased

to be a Director of the company and was not even connected

with the company in any manner at the time when the alleged 15

offence was committed and cannot be prosecuted in respect of

such acts of the company.

29. The appellant, in order to strengthen his stand, has

placed reliance on a numbers of judgments of this Court.

Reliance has been placed on the case of Hira Lal Hari Lal

Bhagwati v. CBI, New Delhi (2003) 5 SCC 257. In this case,

the Court has observed that for establishing the offence of

cheating, the complainant is required to show that the

accused had fraudulent or dishonest intention at the time of

making promise or representation. From his failure to keep

promise subsequently, such a culpable intention right at the

beginning cannot be presumed.

30. Reliance has also been placed on another case between

Uma Shankar Gopalika v. State of Bihar & Another (2005)

10 SCC 336, in which this Court observed that it is well

settled that every breach of contract would not give rise to an

offence of cheating and only in those cases breach of contract

would amount to cheating where there was any deception

played at the very inception. If the intention to cheat has

developed later on, the same cannot amount to cheating. 16

31. The learned counsel for the appellant also relied on the

case of S.V.L. Murthy etc. v. State represented by CBI,

Hyderabad (2009) 6 SCC 77, in which this Court observed as

under:

"41. An offence of cheating cannot be said to have been made out unless the following ingredients are satisfied:

(i) deception of a person either by making a false or misleading representation or by other action or omission;

(ii) fraudulently or dishonestly inducing any person to deliver any property; or

(iii) to consent that any person shall retain any property and finally intentionally inducing that person to do or omit to do anything which he would not do or omit.

For the purpose of constituting an offence of cheating, the complainant is required to show that the accused had fraudulent or dishonest intention at the time of making promise or representation. Even in a case where allegations are made in regard to failure on the part of the accused to keep his promise, in the absence of a culpable intention at the time of making initial promise being absent, no offence under Section 420 of the Penal Code can be said to have been made out."

32. In Vir Prakash Sharma v. Anil Kumar Agarwal (2007)

7 SCC 373, this Court observed as under:

"13. The ingredients of Section 420 of the Penal Code are as follows:

(i) Deception of any persons;

17 (ii) Fraudulently or dishonestly inducing any person to deliver any property; or

(iii) To consent that any person shall retain any property and finally intentionally inducing that person to do or omit to do anything which he would not do or omit.

No act of inducement on the part of the appellant has been alleged by the respondent. No allegation has been made that he had an intention to cheat the respondent from the very inception."

33. This Court in Pepsi Foods Ltd. & Anr. v. Special

Judicial Magistrate & Ors. (1998) 5 SCC 749 observed as

under:

"28. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and would that be sufficient for the complainant to succeed in bringing charge home to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinise the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused."

18 34. The learned counsel appearing for the State of Karnataka

supported the impugned judgment of the High Court and

submitted that no interference is called for by this court. He

placed reliance on the case of State of Haryana & Others v.

Bhajan Lal & Others 1992 Supp (1) SCC 335 in which this

Court observed as under:

".....that the power of quashing a criminal proceeding should be exercised very sparingly and with circumspection and that too in the rarest of rare cases; that the court will not be justified in embarking upon an enquiry as to the reliability or genuineness or otherwise of the allegations made in the FIR or the complaint and that the extraordinary or inherent powers do not confer an arbitrary jurisdiction on the court to act accordingly to its whims or caprice."

35. The learned counsel for the State also submitted that, in

the instant case, the FIR was not only registered under section

420 IPC but under sections 3, 4, 5 and 6 of the Prize Chits

and Money Circulation Schemes (Banning) Act, 1978.

36. He also placed reliance on the case of Rajesh Bajaj v.

State NCT of Delhi & Others (1999) 3 SCC 259, in which

this Court, while dealing with section 482 Cr.P.C. has held as

under:

19

"It is not necessary that a complainant should verbatim reproduce in the body of his complaint all the ingredients of the offence he is alleging. Nor is it necessary that the complainant should state in so many words that the intention of the accused was dishonest or fraudulent. Splitting up of the definition into different components of the offence to make a meticulous scrutiny, whether all the ingredients have been precisely spelled out in the complaint, is not the need at this stage. If factual foundation for the offence has been laid in the complaint the court should not hasten to quash criminal proceedings during investigation stage merely on the premise that one or two ingredients have not been stated with details. For quashing an FIR (a step which is permitted only in extremely rare cases) the information in the complaint must be so bereft of even the basic facts which are absolutely necessary for making out the offence".

37. The learned counsel for the State further submitted that

the mere settlement of the case with the complainant on

whose complaint the initial FIR was lodged does not dislodge a

criminal prosecution by the State. Several other witnesses

exist who would testify to the transactions and it would be up

to the trial court to test the prosecution case.

38. Reliance was also placed on the case of Medchl

Chemicals & Pharma (P) Ltd. v. Biological E.Ltd. &

Ors.(2000) 3 SCC 269, wherein this Court observed as under: 20

"Needless to record however and it being a settled principle of law that to exercise powers under Section 482 of the Code, the complaint in its entirety shall have to be examined on the basis of the allegation made in the complaint and the High Court at that stage has no authority or jurisdiction to go into the matter or examine its correctness. Whatever appears on the face of the complaint shall be taken into consideration without any critical examination of the same. But the offence ought to appear ex facie on the complaint".

39. It is further submitted by the counsel for the State that

the complaint clearly disclosed the offences under sections 3,

4, 5 and 6 of the Act and also offence under section 420 IPC.

40. Reliance has been placed by the learned counsel for the

State that this Court in Kuriachan Chacko & Others v.

State of Kerala (2008) 8 SCC 708, while dealing with the

Prize Chits and Money Circulation Schemes (Banning) Act, has

held that:

"21. The Preamble of the 1978 Act declares that it has been enacted "to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith and incidental thereto".

22. Section 2 is legislative dictionary and defines certain terms. The phrase "money circulation scheme" is defined in clause (c) which reads as under:

2.(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 21

the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

In this case, it was further held that:

"39. 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 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 enrolled 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.1250 i.e. double the amount of Rs.625 (1+2+4+8). The trial court also noted that Kuriachan Chacko (Accused 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."

41. We have carefully considered the rival contentions. It

emerges that:

a) In the instant case, the appellant ceased to be a

Director of the company from 27.12.1997

whereas the alleged offences, if any, were

committed during the period from 24.5.1998 to

17.9.1999.

22 b) Admittedly, there are no allegations against the

appellant in the First Information Report.

c) The company had invited investment from the

depositors to invest in the business/benefit funds

after receiving due approval of the scheme from

the Reserve Bank of India. Therefore, in any

event, the element of cheating as alleged cannot

be made out by any stretch of imagination.

d) The complainant/respondent no.2 submitted in

writing to this Court that he does not want to

proceed against the appellant because according

to him the appellant has been inadvertently

included as an accused by the Investigating

Officer. He further mentioned in the letter that

he had already received 55% of the deposited

amount from the Official Liquidator and he did

not want to proceed against the appellant. 23

e) Even assuming that there could have been a

vicarious liability thrust on the appellant, even

then there cannot be any such vicarious liability

in absence of any allegations and material to

show that the appellant was in-charge of or

responsible for the conduct of the company's

business which had given rise to the offence.

From any angle of the matter, the appellant

cannot be compelled to face the criminal trial in

this case.

42. The inherent power should not be exercised to stifle the

legitimate prosecution but at the same time no person be

compelled to face criminal prosecution if basic ingredients of

the alleged offence against him are altogether absent.

43. On consideration of the totality of the facts and

circumstances of this case, the impugned judgment of the

High Court is set aside and the appeal is allowed and the

proceedings initiated against the appellant on the basis of the

complaint registered as CC 22656 of 2001 pending before the 24

Xth Addl. Chief Metropolitan Magistrate, Bangalore, are

quashed.

44. As a result, this appeal is allowed.

.................................J. (Dalveer Bhandari)

.................................J. (A.K. Patnaik) New Delhi;

August 12, 2010.