HON’BLE SRI JUSTICE SAMUDRALA GOVINDA RAJULU CRLP. NOs.3083 OF 2007, 3209 OF 2007 & 5413 OF 2007 Date:08.12.2009 CRIMINAL PETITION NO.3083 OF 2007 Between: Mr. Kailash Choudhari …..Petitioner/Accused No.3 And: M/s. In Cable Net (Andhra ) Limited and another …..Respondents. CRIMINAL PETITION NO.3209 OF 2007 Between: Mr. D.K.Jain …..Petitioner And: The State of A.P., rep. By Public Prosecutor, Hyderabad and another …..Respondents. CRIMINAL PETITION NO.5413 OF 2007 Between: M/s. Elegant Capitals Pvt Limited and another …..Petitioners And: The State of A.P., rep. By Public Prosecutor, Hyderabad and another …..Respondents. HON’BLE SRI JUSTICE SAMUDRALA GOVINDA RAJULU CRLP. NOs.3083 OF 2007, 3209 OF 2007 & 5413 OF 2007 COMMON ORDER: Criminal Petition No.5413 of 2007 is filed by the accused Nos.1 and 2, Criminal Petition No.3083 of 2007 is filed by the 3rd accused and Criminal Petition No.3209 of 2007 is filed by the 4th accused for quashing proceedings in C.C.No.227 of 2007 on the file of III Additional Chief Metropolitan Magistrate, Hyderabad relating to the offence under Section 420 I.P.C. M/s. In Cable Net (Andhra) Limited filed private complaint in the lower court alleging offences punishable under Sections 409, 420 read with Section 120B I.P.C. The lower court after recording sworn statement of Chief Executive Officer of the complainant company passed order dated 5.3.2007 taking cognisance of the case against all the accused for offence punishable under Section 420 IPC only and issued summonses to the accused. The complainant company is indulging in business of providing cable television net work to subscribers in this state. A-1 is a company located in Mumbai. It is alleged in the complaint that A-3 and A-4 introduced A-2 who is representing A-1 company to the complainant and informed that A-1 would finance the complainant for acquisition of shares in APAKSH Broadband Limited (in short, APABBL) and that the complainant readily accepted proposal of the accused. There is no dispute that on 25.3.2006, the complainant and A-1 represented by A-2 entered into Inter Corporate Deposit agreement (in short, ICD Agreement) under which A-1 agreed to provide finance of Rs.33 crores in different instalments as per requirement of the complainant by end of April, 2006 to the complainant to facilitate making investment in shares of APABBL and the entire loan amount is to be secured by collateral security of 50% of shares held by promoters and others in the complainant-company as on 25.3.2006 and also entire shares held by the complainant in APABBL. The complainant alleges that as per terms of ICD agreement, the complainant deposited 50% of the shares of the promoters in the complainant-company and also entire partly paid up shares held by the complainant in APABBL with A-1. It is main complaint of the complainant that A-2 released only Rs.11.10 crores as against agreed amount of Rs.33 crores contemplated under ICD agreement in spite of several letters and failed to release entire loan amount of Rs.33 crores by April, 2006, after having taken entire security from the complainant, incapacitating the complainant from raising any further finance from any other financial institutions. It is further complaint of the complainant that A-3 and A- 4 who are directors of APABBL with a view to destroy and finish business of the complainant company in this state hatched criminal conspiracy with A-2 in making the complainant company to enter into ICD agreement with A-1, without any intention of honouring ICD agreement. Even though the complaint was filed for offences punishable under Section 409, 420 and 120B I.P.C, the lower court took the case on file against the accused for offence punishable under Section 420 I.P.C only. It is contended by the Senior Counsel appearing for A-3 and A-4 that even as per order dated 5.3.2007 taking cognisance of the case the lower court did not take cognisance of the case for offence punishable under Section 120B I.P.C and that therefore, the lower court should not have ordered issuance of summonses to A-3 and A-4, having regard to limited averments contained in the complaint against A-3 and A-4. Complaint of the complainant for offences punishable under Section 420 and 409 IPC is only against A-1 and A-2 and not against A-3 and A-4 who have not received any benefit or property under ICD agreement. As per para 10 of the complaint, only offence punishable under Section 120B IPC is alleged against A-3 and A-4 and no other offence. Having not taken cognisance of the case for offence punishable under Section 120B IPC, it is not known why and how summonses were ordered to be issued by the lower court to A-3 and A-4 also. In fact in the order dated 5.3.2007, the lower court did not specify the accused or number of accused to whom summonses were ordered to be issued. Therefore, prima facie issuing of summonses to A-3and A-4 by the lower court is irregular and has no sanction of law. On the other hand, it is contended by the Senior Counsel appearing for the complainant that the complainant is going to lead evidence at the time of trial before framing charge and that after taking complainant’s evidence before charge the lower court will frame appropriate charges at the stage of Section 246 Cr.P.C depending on the offences made out in the complainant’s evidence before charge. Scope of Section 246 Cr.P.C does not permit framing of charges for offences other than the offences for which the case was taken cognisance at the stage of Section 204 Cr.P.C. Summonses cannot be ordered to be issued to any persons by the Magistrate other than those against whom the offence for which the case was taken on file. In case the Magistrate comes to the conclusion at the stage of Section 246 Cr.P.C that there are other offences than the offence for which the case was taken cognisance, for which charges have to be framed against persons other than those against whom the case was taken cognisance, then the Magistrate has to proceed under Section 319 Cr.P.C after giving notice to the said person(s). It is not correct to say that for the sake of evidence which is going to be let in by the complainant at a subsequent stage during trial, summonses can be issued to A-3 and A-4, even at the stage of Section 204 Cr.P.C. It is further contended by the Senior Counsel papering for the complainant that the lower court took cognisance of the entire complaint, but erred in taking cognisance for offence punishable under Section 420 IPC only. In case the complainant is aggrieved by the order dated 5.3.2007 taking cognisance of the case for offence punishable under Section 420 IPC only and not taking cognisance of the offence for the offences punishable under Section 409 and 120B IPC, then nothing prevented the complainant to take steps questioning the said order in higher courts in-so far as it relates to not taking cognisance of the case for the offence punishable under Sections 409 and 120 B IPC. Having not taken any such steps in higher courts, now it does not lie in mouth of the complainant to contend otherwise. Therefore, I find that order dated 5.3.2007 of the lower court issuing summonses to A-3 and A-4 also is unsustainable in law. It is contended by the Senior Counsel appearing for the accused that the lower court should have applied mind before taking cognisance of the case and that taking cognisance of the case with single line order is not permissible in law. Reliance was placed on decision of the Supreme Court i n M.N. Ojha and others Vs. Alok Kumar Srivastav and another [1] in which previous decision of the Supreme Court in Pepsi Foods Limited and another Vs. Special Judicial Magistrate and others [2] was referred. In the latter reported decision, it was observed “ 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 brining 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.” In the case on hand, it cannot be said that the lower court did not exercise mind before taking cognisance the present case. Exercise of mind by the lower court is evident from the fact that the lower court took cognisance of the case for offence punishable under Section 420 IPC only and not for offences punishable under Section 409 and 120B IPC. It is contended that the lower court did not apply mind in so far as taking cognisance of the case for offence punishable under Section 420 IPC. Mind of the lower court is not explicit from the order dated 5.3.2007 because it does not contain reasons for taking cognisance of the case for offence punishable under Section 420 IPC. The lower court also did not discuss factual and legal aspects leading to taking cognisance of the case for the said offence. In my opinion, failure on the part of the lower court to give reasons which weighed in its mind to take cognisance of the case for offence punishable under Section 420 IPC, will not clothe the petitioners with a right to seek quashing of summonses in these petitions; and it may be a ground to send back the matter to the lower court for making explicit the reasons which weighed in its mind for taking cognisance of the case for offence punishable under Section 420 IPC. Be that as it may, let me examine the complaint and documents annexed thereto to find out whether there is any prima facie case made out by the complainant for taking cognisance of the case for offence punishable under Section 420 IPC. Along with the complaint, the complainant enclosed eight documents which include ICD agreement dated 25.3.2006, 4 letters exchanged between the complainant company and A-1 company and share transfer forms. In sworn statement given by Chief Executive Officer of the complainant, it was stated that A-3 and A-4 promised to arrange loan of Rs.33 crores through A-1 and A-2 and that there was agreement between the complainant and A-1 and that out of Rs.33 crores, A-1 represented by A-1 gave Rs.11.1 crores and that the complainant gave shares as security to A-1 who failed to give balance amount which was promised and that as shares were given to the accused, there is no possibility of borrowing of loan from others and that A-2 was threatening them that they would execute (transfer) shares in favour of A-1 towards Rs.11.1 crores and that even though he prayed for release of balance amount, they failed to pay the amount by way of cheating. Thus, it is complaint of the complainant that A-1 represented by A-2 failed to honour ICD agreement relating to release of entire loan amount of Rs.33 crores, but only released Rs.11.10 crores even though the complainant delivered the entire security in the shape of shares as per the agreement. It is contended that at best it can be said that there was breach of contract in this case by way of not releasing entire promised loan of Rs.33 crores but releasing only Rs.11.10 crores. Reliance was placed on Alpic Finance Limited Vs. P. Sadasivan and another[3] wherein it was held that the complaint must disclose essential ingredient of the offence and that where default was made by the accused in payment of instalments by way of repayment of loan advanced by the complainant as per agreement between the parties, it will not disclose element of fraud or deception or dishonest inducement or wilful mis-representation in the entire transaction and that therefore, the offence under Section 420 I.P.C is not made out. In S.W. Palanitkar and others Vs. State of Bihar and others [4] it was held that mere failure to fulfil promise subsequently, is not cheating. Senior Counsel appearing for A-1 and A-2 contended that ICD agreement contains mutual covenants and that as the complainant did not fulfil its covenant, A-1 could not release entire promised loan amount. As per clause 2(e) of ICD agreement, entire inter corporate deposit shall be secured by collateral security by way of deposit of shares along with duly executed transfer deeds in favour of the financer as detailed therein. It is contended that though the complainant delivered shares mentioned in Annexures-I & II of ICD agreement along with share transfer forms, the security could not be enforced because the shares were in physical form and not in demat form. When the same was pointed out to A-2 as Director (Corporate Finance) of A- 1 by way of email dated 7.7.2006, they sent necessary forms to the complainant for completing formalities of dematerialising of shares and requesting the complainant to send the same forms duly signed. Since no action was taken by the complainant subsequently, A-2 addressed another e- mail dated 24.8.2006 to the complainant stating that they have not yet received necessary papers for dematerialising of shares of the complainant company as well as APABBL which were given as security for ICD and that in those circumstances, they are not in position to provide the complainant any more ICD funding. It is in those circumstances, A-1 company could not release balance of loan amount out of Rs.33 crores over and above Rs.11.10 crores. Having received huge amount of Rs.11.10 crores which is more than 33% of ICD funding, the complainant could not fulfil requirement of giving security. Though shares towards security were delivered in physical form, they could not be dealt with by A-1 as they are not in demat form which is a pre-requisite for dealing with those shares as per SEBI guidelines. It is evident that as the complainant failed to fulfil its part of contract, A-1-company had to go back by refusing to release balance of loan amount. It is contended for A-1 and A-2 that in order to attract the offence punishable under Section 420 IPC, fraudulent and dishonest intention must be shown to be existing from very beginning of the transaction and that failure to keep up promise at subsequent stage cannot make offence of cheating. Reliance was placed on Anil Mahajan Vs. Bhor Industries Limited and another [5] in this regard. It is contended that if A-1 and A-2 intended to cheat the complainant, they would not have parted with huge sum of Rs.11.10 crores to the complainant. The fact that more than 1/3 part of the contract was fulfilled by A-1, it cannot be said that there was fraudulent or dishonest intention for A-1 and A-2 at inception of ICD agreement. The said fact alone improbablises intention of A-1 and A-2 to cheat the complainant. Relying upon Keki Hormusji Gharda and others Vs. Mehervan Rustom Irani and another [6] it is contended that criminal law does not recognise vicarious liability. In the ANIL MAHAJAN, it was observed that managing director or director of a company cannot be said to have committed an offence only because they are holders of office. In the case on hand, the complainant did not allege commission of offence by A-2 merely on the fact that he is Director of A-1 company. As per allegations in the complaint, it was A-2 who was representing A-1 company and it was A-2 who made representation and entered into ICD agreement on behalf of A-1. This is not a case where A-2 was impleaded for the reason that he is director of A-1 company ipsofacto. I n Hridaya Ranjan Prasad Verma and others Vs. State of Bihar and another[7], the Supreme Court had occasion to consider breach of contract and offence of cheating and observed as follows: “ In determining the question it has to be kept in mind that the distinction between mere breach of contract and the offence of cheating is a fine one. It depends upon the intention of the accused at the time of inducement which may be judged by his subsequent conduct but for this subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed. Therefore it is the intention which is the gist of the offence. To hold a person guilty of cheating it is necessary to show that he had fraudulent or dishonest intention at the time of making the promise. From his mere failure to keep up promise subsequently such a culpable intention right at the beginning, that is, when he made the promise cannot be presumed.” If facts of the present case are scrutinised as alleged in the complaint which encloses ICD agreement and correspondence between the parties, details of which are discussed above, I have least doubt in my mind that it is a case of breach of I.C.D agreement entered into between the complainant and A-1. This Court in these criminal petitions is not interested to find whether it was the complainant who committed the breach or it was A-1. It is sufficient to find that mere breach of contract without proof of fraudulent and dishonest intention, that too, at the inception of the contract, cannot give rise to a cause of action to file a complaint for offence punishable under Section 420 IPC. Therefore, I have no hesitation to find in this case that the complainant has failed to make out prima facie case of offence of cheating punishable under Section 420 IPC as against any of A-1 to A-4. In the result, all the criminal petitions are allowed quashing proceedings in CC.No.227 of 2007 on the file of III Additional Chief Metropolitan Magistrate, Hyderabad ____________________________________ SAMUDRALA GOVINDA RAJULU,J. Date:08.12.2009. HON’BLE SRI JUSTICE SAMUDRALA GOVINDA RAJULU CRLP. NOs.3083 OF 2007, 3209 OF 2007 & 5413 OF 2007 Date:08.12.2009 Gk. [1] 2009 (11) SCALE 573 [2] (1998) 5 Supreme Court Cases 749 [3] 2001 (3) Supreme Court Cases 513 [4] 2002 (1) (Cri) 146 (SC) [5] 2006 (1) SCC (Cri) 746 [6] 2009 (2) ALD (Crl.) 425 (SC) [7] 2000 (4) SCC 168