M. G. Agarwal vs State Of Maharashtra

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 24 April 1962

Coram: P.B. Gajendragadkar, Bhuvneshwar P. Sinha, K.N. Wanchoo, N. Rajagopala Ayyangar

In this matter the petitioner, M. G. Agarwal, faced the respondent, the State of Maharashtra. The case was decided by the Supreme Court of India on 24 April 1962. The written opinion was prepared by Justice P. B. Gajendragadkar, who also headed the bench that included Justices Bhuvneshwar P. Sinha, K. N. Wanchoo and N. Rajagopala Ayyangar. The judgment lists the parties as petitioner M. G. Agarwal versus respondent State of Maharashtra and records the date of the judgment as 24/04/1962. The bench is identified in the report as “GAJENDRAGADKAR, P. B.; AIYYAR, T. L.; VENKATARAMA SINHA, B. P. (Chief Justice); WANCHOO, K. N.; AYYANGAR, N. R.” The citation for the report appears as 1963 AIR 200 and 1963 SCR (2) 405, with additional citator references to decisions reported in 1966, 1972, 1973, 1976 and 1984. The operative statutes mentioned include section 423(1)(a) of the Code of Criminal Procedure of 1898 (Act V of 1898) and section 120B of the Indian Penal Code of 1860 (Act XLV of 1860). The headnote summarises the factual background: the appellant Agarwal was an Income Tax Officer and Kulkarni, a clerk serving under him, were tried together with another departmental clerk on several charges, the chief allegation being that they conspired to obtain pecuniary advantage by securing income‑tax refund orders in the names of fictitious persons, thereby fraudulently misappropriating a large sum of government funds.

The trial judge concluded that the prosecution had not proved the alleged criminal conspiracy and therefore acquitted Agarwal and the second appellant of the charge under section 120B, and also acquitted the second appellant of all other charges under the Indian Penal Code. The third accused, although acquitted of the charge under section 120B, was convicted of other offences because he had entered a plea of guilt. The State appealed the acquittal order. The High Court, on appeal, affirmed the conviction of all the accused persons under section 120B of the Code and also convicted the second appellant of the additional charges. The Supreme Court held that the powers of the High Court under section 423(1)(a) of the Code of Criminal Procedure, when dealing with an order of acquittal, are as extensive as the powers under section 423(1)(b) concerning orders of conviction. Nonetheless, while entertaining an appeal against an acquittal, the court must remember that the original presumption of innocence in favour of the accused is reinforced by the acquittal order. Even so, the court remains free to form its own conclusions on the guilt or innocence of the accused based on the evidence presented by the prosecution. The Court referred to the authorities Sheo Swarup v. King Emperor, 934 LR 61 IA 398 and Nur Mohammad v. Emperor, AIR 1945 PC 151. It further observed that the comments made in earlier decisions of this Court on the point were not intended to create a rigid rule governing all such appeals, and that it is not necessary for the High Court to characterise the findings as perverse before it can set aside a judgment of acquittal.

The Court observed that before it could set aside an acquittal, it had to describe the findings of fact as perverse. In reaching that conclusion, the Court referred to the decisions in Surajpal Singh v State [1952] S C R 193 and Ajmer Singh v State of Punjab [1953] S C R 418, as well as Sanwat Singh v State of Rajasthan [1961] 3 S C R 120 and Harbans Singh v State of Punjab [1962] Supp 1 S C R 104. The Court reiterated the settled principle that a conviction may be based on circumstantial evidence only when that evidence is wholly inconsistent with the accused’s innocence and is consistent solely with his guilt. Where the proven circumstances could be compatible with either innocence or guilt, the accused is entitled to the benefit of doubt. While applying this principle, the Court stressed a distinction between primary facts, which must be proved in the ordinary manner, and the inference of guilt that may be drawn from those facts. It explained that the doctrine of benefit of doubt applies only at the stage of drawing an inference of guilt, and such an inference is permissible only when the proved facts are entirely incompatible with innocence and only compatible with guilt. The judgment then set out the procedural background: the appeals were civil appellate jurisdiction criminal appeals numbered 176 of 1959 and 40 of 1960, filed by special leave against a Bombay High Court order dated 26 August 1959 in criminal appeal No 1638 of 1958. Counsel for the appellants and respondents were listed, and the judgment was dated 24 April 1962 and delivered by Justice Gajendragadkar. The case concerned a criminal conspiracy alleged by the prosecution involving three individuals—M G Agarwal, M K Kulkarni and N Laxminarayan, designated as accused numbers 1, 2 and 3—who were alleged to have acted together between December 1954 and June 1955 while employed in the Income‑Tax Office, Ward A‑III, Greater Bombay. Accused 1 served as First Income‑Tax Officer, while accused 2 and 3 were assessment clerks under him. The principal charge alleged that the three conspirators used their official positions to devise and execute illegal acts for personal monetary gain, specifically by issuing fraudulent income‑tax refund orders in the names of fictitious persons or persons not entitled to refunds, and subsequently cashing those orders and misappropriating the proceeds.

In this case the prosecution identified ten fictitious persons in whose names the spurious refund orders had been issued. These persons were listed as G M Thomas, P N Swamy, K S Patel, S R Bhandarkar, S P Jani, D M Joshi, C B Kharkar, Ramnath Gupta, V M Desai and K V Rao. The investigation revealed that a total of twenty‑five bogus vouchers had been prepared to correspond with these ten fabricated cases. Moreover, the accused opened eleven false bank accounts in various banks in Bombay, through which they misappropriated the amount of fifty‑four thousand rupees. This misappropriation formed the core of the charge brought against the three accused officers. In addition to this principal allegation, nine subsidiary charges were also framed.

Charges numbered two, three and four related to the income‑tax refund order dated 7 January 1955 that was purportedly issued in favour of G M Thomas. The prosecution contended that, through their collective actions in obtaining that refund order, the three accused had committed offences punishable under sections 467 and 471 read with section 34 of the Indian Penal Code, as well as under section 5(2) of the Prevention of Corruption Act read with section 5(1)(d) of the same Act and again under section 34 of the Indian Penal Code. Similarly, charges five, six and seven were framed on the same legal provisions concerning the refund order dated 2 April 1955 also issued in favour of G M Thomas. Regarding the refund order dated 2 April 1955 in favour of S R Bhandarkar, charges eight, nine and ten were framed under the identical statutory provisions. Thus, the trial before the Special Judge of Greater Bombay proceeded on these ten distinct charges against the three accused.

The prosecution’s case, in substance, asserted that the accused had devised a sophisticated and deceptive scheme to defraud the public treasury. Their plan involved deliberately issuing income‑tax refund orders in the names of persons who either did not exist or were not entitled to any refund. The accused then proceeded to encash the resulting refund certificates and appropriate the proceeds. To give the appearance of legitimacy, the conspirators forged the signatures of the fictitious claimants, prepared fabricated supporting documents and handled the cases as if they were genuine taxpayer refunds. By employing this elaborate device, the accused managed to misappropriate the sum of fifty‑four thousand rupees.

The Court noted the routine procedure for handling a return or refund application in the Income‑Tax Office. Typically, when a return or refund request is received, it is first examined by the assessment‑refund clerk, who then forwards it to the Income‑Tax Officer for consideration. The Officer ordinarily issues a notice to the assessee, reviews the assessee’s accounts and determines the correctness of the return. After completing this examination, the Officer passes an assessment order and prepares the I.T. 30 form, which records details of tax payable, tax paid, and any refund ordered. This form is then sent to another clerk for preparation of the refund order. The completed refund order, together with the demand and collection register and the I.T. 30 form, is returned to the Income‑Tax Officer, who verifies the records, signs the refund order and the I.T. 30 form, makes an entry in the demand and collection register, and cancels any related refund certificates such as dividend warrants. The Officer also signs the advice memo prepared by the refund clerk, which is subsequently sent to the Reserve Bank, while the refund order is dispatched to the assessee. The prosecution alleged that the accused subverted each of these steps to give their fraudulent scheme the veneer of regular administrative procedure.

In the procedure followed by the income‑tax department, the Income‑tax Officer first passed an assessment order after examining the return and the assessee’s accounts. Following that order, a form identified as I.T. 30 was prepared; this form contained several columns that, when completed, recorded the amount of tax payable by the assessee, the tax already paid, any refund ordered by the officer, and any collection demanded by the department. Once the I.T. 30 form was duly filled, it was forwarded to another clerk whose task was to draw up the refund order. At that stage the refund order, together with the demand and collection register and the I.T. 30 form, were returned to the Income‑tax Officer. The officer examined the documents, signed both the refund order and the I.T. 30 form, and caused an entry to be made in the demand and collection register. He also cancelled any refund certificates, such as dividend warrants, that had been issued. In addition, the officer received an advice memorandum prepared by the refund clerk and signed it. That memorandum was then sent to the Reserve Bank, while the refund order was dispatched to the assessee. After the Reserve Bank cashed the refund voucher, the advice memorandum was returned to the Income‑tax Office, where an entry was subsequently made in the Daily Refund Register. The prosecution alleged that the accused conspirators attempted to imitate every step of this prescribed procedure so that their fraudulent scheme would appear to be in full compliance with departmental rules for issuing refund orders. According to the prosecution, the fraud was uncovered in April 1955 when the Commissioner of Income‑tax for Bombay City, Mr Sundararajan, received a report indicating numerous irregularities in refund orders issued by the A‑III Ward. Acting on that information, he instructed the Inspecting Assistant Commissioner of Income‑tax for A‑Range, Mr Gharpure, to conduct an inspection of the work of accused No 1, cautioning him to perform the inspection in the ordinary manner so as not to arouse suspicion. Mr Gharpure carried out the inspection and submitted his report on 6 June 1955, finding no evidence of fraud. On 10 June 1955, the Commissioner directed Mr Gharpure to produce all refund books maintained in the A‑III Ward, and the books were presented to him. While reviewing these records, the Commissioner observed several suspicious features: a counter‑foil of a refund order in the name of G M Thomas bore a postal acknowledgment that lacked any postal stamp and appeared unusually clean, which the Commissioner found doubtful; he also noted that a number of refunds were made in round figures, an occurrence that was highly unusual. These observations led the Commissioner to suspect that the refund orders might have been fabricated as part of the conspirators’ scheme.

The auditor observed that, on the reverse side of the counter‑foils, neither the postal acknowledgments nor the advice notes had been affixed, a circumstance that heightened his suspicion due to the irregular appearance of the files. Consequently, he undertook a more detailed examination of the six counter‑foil books to determine whether the refund orders were consistently issued in round figures. This additional scrutiny revealed that refund orders had indeed been made in the names of Messrs G. M. Thomas, K. S. Patel, P. N. Swamy, D. N. Joshi and S. R. Bhandarkar. After these refund orders were encashed, they were forwarded by the Reserve Bank to the Accountant‑General’s Office, leading the auditor to believe that he could obtain the corresponding documents from that office. All of these inquiries occurred on the evening of 10 June 1955.

On the following day, Saturday 11 June 1955, the auditor requested the income‑tax files of several individuals, including G. M. Thomas and K. S. Patel, together with the files of twenty other regular assessors. While the files of the twenty regular assessors were produced, the files of the ten persons under suspicion were not produced, and the auditor was informed that those particular files were unavailable. The failure to produce the files reinforced his suspicion that some irregularity had taken place. He therefore summoned Accused No. 1 at 2 p.m.; the accused was absent from his office and arrived only at 3 p.m. The auditor then presented the relevant counter‑foils to Accused No. 1 and conducted an examination, recording the statement made by the accused.

Based on this inquiry, the auditor concluded that the three accused had fraudulently fabricated a number of documents, resulting in the misappropriation of a substantial sum of money. Accordingly, he petitioned the Central Board of Revenue to suspend Accused No. 1. At the same time, he intended to search the A‑III Ward office, but was unable to do so because the keys to that office had been taken by Accused No. 3. The auditor instructed the police guard stationed at his office that no one should be permitted to enter the A‑III Ward room without his explicit permission. The next day, when he returned to his office, he discovered that no personnel were present in A‑III Ward. Before departing, he ordered the office to be sealed and directed the on‑duty inspector to report any individual who might attempt to enter the premises thereafter.

After returning home, the auditor received a telephone call informing him that Accused No. 3 had arrived at the A‑III Ward office in possession of the keys. He then directed the inspector to seize the keys from Accused No. 3 and to require the accused to report to the office on the next working day. The next day, Monday 13 June 1955, the auditor accompanied...

On 13 June 1955, the official accompanied by several other officers proceeded to the A‑III Ward office, broke the seal and the lock, entered the premises and affixed six registers. He then conducted a search for the assessment records of the ten individuals who were the subject of the investigation, but those records were not found. Following this, he reassigned accused No 1 to a charge considered unimportant and instructed all banks to refrain from allowing any withdrawals from any of the eleven accounts that appeared to him to be suspicious. He subsequently summoned accused No 3 for examination. He also issued a summons to accused No 2, but accused No 2 was unavailable because he was on leave. The official directed one of his inspectors to determine whether the ten persons in question were real individuals or merely fictitious names. All of these actions took place on 13 June 1955.

The next day, 14 June 1955, the official returned to the A‑III Ward office together with accused No 3 in order to search for the missing documents, specifically the assessment records of the ten persons. After waiting for some time, accused No 3 opened the table of accused No 2 and removed several papers. A detailed list of these papers was prepared, and the papers were taken into the officials’ custody. The list was signed by the official, the accompanying officers and also by accused No 3. Subsequent to this seizure, accused Nos 2 and 3 were suspended from their duties. The investigation that followed led to the trial of all three accused before the Special Judge for Greater Bombay on the charges previously mentioned.

During the trial, accused No 3 entered a plea of guilt to every charge framed against him, whereas accused Nos 1 and 2 denied any involvement in the alleged offences. The prosecution sought to prove its case against the three by producing the relevant documents, including the files kept in the A‑III Ward office, and by examining four departmental witnesses to explain the procedure for passing assessment orders and granting refunds, with the aim of showing that the alleged conspiracy could not have succeeded without the active assistance and cooperation of accused No 1. The departmental witnesses were Sundararajan, P. W. 1 Nagwekar, P. W. 2 Subramanian, P. W. 5 Downak and P. W. 21. In addition, the prosecution examined Das Gupta, P. W. 26, to establish the handwriting of the accused, and called eleven other witnesses to identify accused Nos 2 and 3 in relation to the steps they allegedly took to open bank accounts and to encash refund vouchers issued under the refund orders passed by accused No 1. After hearing all the evidence, the Special Judge held that the prosecution had failed to establish beyond reasonable doubt the existence of a criminal conspiracy among the three accused.

In this case, the trial judge concluded that the ten persons named in the refund orders did not actually exist. Nevertheless, he continued to treat the matter as if those ten individuals were non‑assessees while still acknowledging that refund orders had been issued in their favour. The judge explained that the first accused might have signed the relevant documents without proper examination, hurriedly disposing of cases and relying on his staff, and therefore it was difficult to find him guilty of participating in the conspiracy. At most, the judge said, the only allegation that could be made against the first accused was negligence. Consequently, the judge acquitted the first accused of the principal charge of conspiracy under section 120‑B as well as all ancillary charges. Regarding the second accused, the judge was not persuaded that the prosecution’s evidence proved his signature on the documents, nor was he convinced by other evidence suggesting he had assisted the third accused in encashing refund vouchers; on that basis, the second accused was also acquitted of every charge. The third accused, having pleaded guilty, was convicted under sections 471 of the Indian Penal Code and 5(2) of the Prevention of Corruption Act and was sentenced to several terms of imprisonment to run concurrently, but he was acquitted of the conspiracy charge. The trial judge therefore acquitted the first and second accused of all offences. The State of Maharashtra appealed the acquittals of the first two accused before the Bombay High Court, and the appeal was allowed. The High Court held that the trial judge had erred by assuming that the first accused had pleaded negligence in signing the documents and issuing the orders in haste. The High Court observed that, contrary to that assumption, the first accused had expressly stated in his written statement that before directing refunds in the ten cases he had examined the supporting files and was satisfied that each refund was proper. This admission was acknowledged by counsel for the first accused in the High Court. The High Court then examined whether the ten alleged assessees were real persons or fictitious names and concluded that the names associated with the eleven accounts for which refund orders were issued were indeed fictitious. Finally, the High Court reviewed the circumstantial evidence on which the prosecution had relied to prove its principal charge of conspiracy.

The High Court, after examining the circumstantial evidence presented by the prosecution, concluded that the allegation of conspiracy involving the three accused persons was proved beyond reasonable doubt. Accordingly, the High Court partially allowed the State’s appeal and found all three accused guilty of the offence punishable under section 120‑B of the Indian Penal Code. In addition, the Court convicted accused No. 2 of the offences set out in sections 467 and 471 of the Indian Penal Code as well as under section 5(2) of the Prevention of Corruption Act. The Court affirmed the acquittal with respect to all other charges that had been framed against the accused. Having convicted accused Nos. 1 and 2 under section 120‑B, the High Court imposed a term of rigorous imprisonment of eighteen months on each of them for that offence. Moreover, accused No. 2 was ordered to undergo rigorous imprisonment for eighteen months for each of the offences under sections 467, 471 of the Indian Penal Code and under section 5(2) of the Prevention of Corruption Act. The sentences for the latter offences were directed to run concurrently with the sentence imposed for the conspiracy charge. The appellants, accused Nos. 1 and 2, challenged the conviction and sentencing by filing special leave petitions numbered 176 of 1959 and 40 of 1960 respectively. The appeal before this Court arises from the order of conviction and sentence that the High Court passed while exercising the powers conferred upon it by section 423 of the Criminal Procedure Code in the course of hearing an appeal against the acquittal. The principal issue for determination therefore concerns the scope of the High Court’s authority to interfere with an order of acquittal on appeal. This question has been examined in numerous decisions of the Privy Council and of this Court. In interpreting the different facets of section 423, the emphasis has at times shifted from one aspect to another, creating some uncertainty regarding the true extent and effect of the provisions contained in that section. Consequently, this Court proposes to address the point succinctly. Section 423(1) outlines the powers of an appellate Court in disposing of appeals filed before it, with clauses (a) and (b) dealing respectively with appeals against acquittals and appeals against convictions. It is clear that the power granted by clause (a) – concerning an appeal against an order of acquittal – is as wide as the power granted by clause (b) – concerning an appeal against an order of conviction. Hence, the High Court’s powers in the context of criminal appeals are equally extensive whether the appeal challenges an acquittal or a conviction. This constitutes one dimension of the issue. The other dimension relates to the method adopted by the High Court when addressing appeals against orders of acquittal.

When the High Court considers an appeal against an order of acquittal, it must keep the presumption of innocence that favors the accused firmly in mind. This presumption is reinforced by the trial Court’s earlier acquittal, so the High Court constantly remembers that the accused is entitled to the benefit of any reasonable doubt while examining the merits of the appeal. As an appellate body, the High Court normally hesitates to disturb the factual findings recorded by the trial Court, especially when those findings are based on an assessment of oral testimony. The trial Court enjoys the advantage of observing the demeanor and credibility of witnesses directly, a benefit that the appellate court does not possess. Consequently, although the statutory powers granted to the High Court for hearing appeals against acquittal are as extensive as those for appeals against conviction, the High Court’s approach in the former category is guided primarily by the overriding consideration of the presumption of innocence. At times the breadth of the High Court’s power is stressed, while on other occasions the need for a cautious approach in such appeals is emphasized, using different expressions. Nonetheless, the correct legal position is that, however circumspect the High Court may be, it remains fully empowered to reach its own conclusions on the prosecution’s evidence concerning the guilt or innocence of the accused.

This legal stance was clarified by the Privy Council in Sheo Swarup v. The King Emperor (1934) L.R. 61 1 A. 398 and Nur Mohammad v. Emperor (A.I.R. 1945 P.C. 151). Earlier decisions of this Court, while highlighting the importance of a cautious approach, observed that the presumption of innocence is bolstered by the acquittal and therefore the trial Court’s findings—benefiting from direct witness observation—may be reversed only for “very substantial and compelling reasons,” as stated in Surajpal Singh v. The State. A similar view was expressed in Ajmer Singh v. State of Punjab, where interference by the High Court was deemed justified only when “very substantial and compelling reasons” exist. Other rulings have used phrases such as “good and sufficiently cogent reasons” or “strong reasons” to describe the threshold for overturning an acquittal. It must be remembered, however, that these observations were not intended to create a rigid rule governing the High Court’s decisions in appeals against acquittals, but merely to underline the need for a careful and measured approach.

The Court explained that earlier observations concerning appeals against acquittals were not meant to add a new requirement to clause (a) of section 423 (1) of the Code. Their purpose was merely to underline that a High Court should proceed cautiously when hearing an appeal against an acquittal, because, as Lord Russell observed in the case of Shoo Swarup, the presumption of innocence in favour of the accused does not cease to exist merely because the accused was acquitted at trial. Consequently, the expression “substantial and compelling reasons” should not be treated as a rigid formula that must be applied in every case. Recent decisions of this Court, such as Sanwat Singh v. State of Rajasthan and Harbans Singh v. State of Punjab, illustrate that the High Court is not required to label the trial Court’s findings as perverse before overturning an acquittal. The issue before the Court in the present appeals was whether, on the basis of the material placed before the prosecution, the High Court was justified in concluding that the prosecution’s case against the appellants had been proved beyond reasonable doubt and that the trial Court’s contrary view was erroneous. In addressing this question, the Court would examine the salient and broad features of the evidence to understand the appellants’ grievance against the High Court’s conclusions. However, under Article 136, the Court would generally be reluctant to disturb the High Court’s factual findings, especially where those findings arise from the assessment of oral evidence.

The Court also noted a further point of law before it turned to the evidence. The prosecution’s case against accused number one was based entirely on circumstantial evidence, and the charge of conspiracy under section 120 B was to be proved through the alleged conduct of the conspirators. Established criminal jurisprudence holds that circumstantial evidence may serve as a basis for conviction only if it is wholly inconsistent with the accused’s innocence and is consistent solely with guilt. If the proved circumstances are compatible with either innocence or guilt, the accused is entitled to the benefit of doubt. This principle is undisputed. Nonetheless, applying it requires a distinction between primary or basic facts and the inferences drawn from them. Primary facts must be judged in the ordinary manner, without invoking the doctrine of benefit of doubt. Once a fact is established, the Court must then determine whether that fact leads to an inference of guilt; only when the fact is wholly inconsistent with innocence and solely consistent with guilt may the inference of guilt be drawn, allowing the doctrine of benefit of doubt to apply. The Court therefore signaled that this legal framework would guide its appreciation of the evidence in the present case.

In assessing the evidence, the court distinguished between primary facts that must be proved and the inferences that may be drawn from those facts. For the primary facts, the court applied the ordinary standard of proof, examining whether the evidence established each fact beyond reasonable doubt, without invoking the doctrine of benefit of doubt. Once a primary fact was held to be proved, the court then considered whether that fact necessarily led to a conclusion of the accused’s guilt. At this stage, the benefit‑of‑doubt principle could be invoked, and an inference of guilt could be sustained only when the proved fact was wholly inconsistent with any possibility of the accused’s innocence and was compatible solely with guilt. The court explained that this legal framework guided its appreciation of the material presented in the present matter. Accordingly, the court examined the record of evidence together with the findings previously recorded by the High Court. After completing this analysis, the court concluded that the appeals did not merit reversal and therefore dismissed the appeals, confirming the earlier judgment.