& Ors. Vs. State of Kerala  INSC 1082 (10 July 2008)
IN THE SUPREME COURT
OF INDIA CRIMINAL APPELLATE JURISDICTION CRIMINAL APPEAL NO. 1044 OF 2008
ARISING OUT OF SPECIAL LEAVE PETITION (CRL.) NO. 4977 OF 2007 KURIACHAN CHACKO
& ORS. ... APPELLANTS VERSUS CRIMINAL APPEAL NO.1045 OF 2008 ARISING OUT OF
SPECIAL LEAVE PETITION (CRL.) NO. 4978 OF 2007 C.N. RANEESH & ORS. ...
APPELLANTS VERSUS With CRIMINAL APPEAL NO.1046 OF 2008 ARISING OUT OF SPECIAL
LEAVE PETITION (CRL.) NO. 5214 OF 2007 P.V. CHACKO ... APPELLANT VERSUS 2 C.K.
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.
understand the issue raised in the present appeals, few relevant facts may be
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.
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.
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.
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.
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.
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, 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.
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.
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.
have heard learned counsel for the parties.
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.
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
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.
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.
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.
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".
2 is legislative dictionary and defines certain terms. The phrase `Money
Circulation Scheme' is defined in clause (c) which reads as under;
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;
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
after taking note of 14 legislative drafting, reshaped and rearranged Section
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;
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.
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?
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
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)
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
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;
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".
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.
to dictionary meanings, this Court proceeded to state;
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
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
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.
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
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.
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
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
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
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
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/-
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.
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
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
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
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
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.
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 full 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.
Court, taking into account the scheme as a whole, recorded a finding thus:
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:
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
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".
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.
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.
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.
said Section reads thus:
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
reading of the Section makes it clear that it requires the following ingredients
to be satisfied;
1. Deception of any
2. Fraudulently or
dishonestly inducing that person;
deliver any property to any person, or
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].
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
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.
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.
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.
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.
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