Naini Gopal Lahiri And Ors. vs State Of Uttar Pradesh

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 8 May 1964

Coram: P.B. Gajendragadkar, M. Hidayatullah, K.C. Das Gupta, J.C. Shah, Raghubar Dayal

In this matter, the Court set out the background of United Hindustan Films Limited, which was incorporated as a public limited company on 13 November 1946 with its registered office in Calcutta. The memorandum of association stated that the company’s purpose was to engage in all aspects of the cinematographic trade, including both silent and sound films, the manufacture and distribution of educational, commercial and agricultural pictures, and the acquisition or rental of films from other producers. Clause 31 of the memorandum specifically authorised the company to employ brokers, commission agents and underwriters for the sale of its shares and debentures and to determine their remuneration. The articles of association further allowed the company to pay a commission to any person who subscribed for shares or procured other subscribers, subject to a maximum rate of ten per cent of the amount subscribed. The articles also named Messrs Eastland Trust as the managing agents for a period of twenty years, and gave them the authority, among other powers, to appoint underwriters on a commission of ten per cent on the sale of shares, whether those shares were sold directly by the company or through brokers or agents appointed by the managing agents. The prospectus of the company was filed with the Registrar of Joint Stock Companies for West Bengal on 30 November 1946. On 2 December 1946, Ram Kishore Chatterji, who would later become the third appellant, wrote to the managing agents offering the services of his firm, Messrs Chatterji and Co., as underwriters for the company. A reply dated 9 December 1946 informed him that the board of directors had considered the application and resolved to appoint Messrs Chatterji and Co. as underwriters. A formal contract was subsequently executed, and at a board meeting held on 21 June 1947, the appointment of Messrs Chatterji and Co. as underwriters was confirmed, with a commission fixed at ten per cent of the face value of the shares they sold. The Court then described the geographical scope of the company’s operations, which were limited to the district of Benaras and adjoining districts. Sheo Prasad Sharma, identified as appellant No. 2, was appointed managing director of the Benaras branch of the company and simultaneously served as branch manager of the Bengal Express Bank at Benaras. Ram Kishore Chatterji, appellant No. 3, performed part‑time clerical duties for the company at Benaras and also acted as the accountant of the Bengal Express Bank at the same location. The first appellant, Naini Gopal Lahiri, was employed as a clerk in the Traffic Accounts Office of the East Indian Railway at Benaras during the period 1946‑1947.

During the period 1946‑47, the appellant Naini Gopal Lahiri was employed in Benaras. Many residents of the District of Benaras subsequently purchased shares of the company. In a complaint addressed to the Home Minister of Uttar Pradesh sometime in 1951, it was alleged that the office‑bearers of the company, including the three appellants, had made false representations to the public that the company intended to open a cinema house at Benaras and that such a venture would yield large profits. Relying on those representations, members of the public were induced to buy shares of the company. An investigation was ordered into the complaint, and a police report was filed in the Court of the Magistrate, Ist Class, Benaras, charging the three appellants and eight other persons with conspiracy to commit cheating, criminal breach of trust, falsification of accounts and, alternatively, with committing those offences in furtherance of a common intention. The matter was tried before the Benaras Court of Session on charges of offences under Section 420 read with Section 34 of the Indian Penal Code, as well as offences under Sections 406, 408, 409, 417, 465, 471 and 477A read with Section 120B of the Indian Penal Code. The Sessions Judge convicted the three appellants together with two others, B. B. Biswas and R. C. Moitra, of offences under Sections 417, 420, 409, 465, 471 and 477A read with Sections 120B and 34 of the Indian Penal Code and imposed imprisonment for various terms. On appeal to the High Court of Allahabad, the convictions and sentences of B. B. Biswas and R. C. Moitra were set aside. The High Court also set aside the convictions of the appellants Naini Gopal Lahiri, Sheo Prasad Sharma and Ram Kishore Chattcrji for offences under Sections 417, 465, 471, 477A and 409 read with Section 120B and Section 34 of the Indian Penal Code, but it upheld the conviction for the offence under Section 420 read with Section 34 of the Indian Penal Code on the charge of cheating the company out of a sum of Rs 6,680 paid to Messrs. Chatterji and Co. as commission under the underwriting agreement. The High Court confirmed the sentences imposed by the Court of Session for that particular offence. With special leave, the three appellants have appealed to this Court. The sole issue for determination on this appeal is whether, based on the findings of the High Court, the appellants are proven to have, in furtherance of a common intention, committed the offence of cheating the company and thereby induced it to part with Rs 6,680 as commission under the underwriting agreement. By the ninth head of charge framed by the Court of Session, the appellants Sheo Prasad Sharma, R. K. Chatterji and R. C. Moitra (who was acquitted by the High Court) were charged with having dishonestly or fraudulently induced the company to pay the share commission in the

In the case, the prosecution alleged that the appellants induced the company to pay a sum of Rs 6,630 while they knew, or had reason to believe, that such an act would likely cause wrongful loss to the shareholders because it was based on a fictitious “deed of underwritership” which the three persons recognized as fictitious. In addition, separate charges of criminal breach of trust were framed against the appellants concerning an amount of Rs 6,989‑6‑0, an amount that included the Rs 6,680 paid as underwriting commission. The basis of the charge under Section 420 read with Section 34 of the Indian Penal Code was that Sheo Prasad Sharma, R. K. Chatterji and R. C. Moitra, by creating a “fictitious deed of under‑writership”, dishonestly or fraudulently induced the company to pay the underwriting commission and thereby caused wrongful loss to the shareholders. The three accused were required to answer the allegation that, by setting up an underwriting agreement in favour of Messrs. Chatterji and Co., which was a sham or “fictitious deed”, the company was induced to pay Rs 6,680 as commission to that firm, a commission which was not actually payable. The High Court, after considering the material, held that this charge was proved. However, the High Court acted inconsistently by convicting Naini Gopal Lahiri of the offence punishable under Section 420 read with Section 34, instead of convicting R. C. Moitra, who was named in the charge as a participant in the cheating offence together with R. K. Chatterji and Sheo Prasad Sharma. The High Court acquitted R. C. Moitra and B. B. Biswas, while convicting the appellants of cheating. In recording its judgment, the High Court appears to have erred because there was no charge against B. B. Biswas for the offence under Section 420 read with Section 34, nor was there any charge against N. G. Lahiri for that offence. Apart from this defect, the judgment of the High Court is otherwise unsustainable. The material findings of the High Court, when viewed against the evidence, can be summarised as follows: the court declined to rely on the testimony of Dr S. K. Moitra, the approver, whose testimony, together with some documentary evidence, constituted the main basis of the prosecution’s case. The High Court held that the evidence did not establish that the company’s funds were misused and that the State failed to prove that the true purpose of forming the company was to finance the Bengal Express Bank, which was alleged to be a moribund entity. The court also held that the allegation of fraudulent representations made in a criminal conspiracy in the prospectus of the company so as

In this case, the Court observed that the prosecution had failed to demonstrate that any fraudulent representations had been made in order to induce shareholders to subscribe to the share capital. The Court also noted that the allegation of an offence under Section 417 of the Indian Penal Code, concerning shares that were said to have been purchased by three women named Shaila Bala, Sabita Devi and Surja Bala, was not supported by the evidence. Accordingly, the Court held that this charge could not be sustained. The only accusation that the High Court considered to have been proved was the allegation that fraudulent and dishonest inducements had been made to the company so that it would pay a commission of Rs 6,680 pursuant to the underwriting agreement. However, the High Court rejected the State’s contention that the underwriting agreement was a “sham or fictitious” agreement. By reference to the memorandum of association, the Court noted that Messrs Eastland Trust had been appointed as managing agents and that they had been given the authority to appoint underwriters. The Court of Session, on the other hand, had held that the same document was a sham created to support a false claim for commission to which the company was not bound. The Court of Session described the underwriting agreement as a transaction that was never intended to be operative and as a cloak used by the three appellants to procure a commission that the company did not owe. On that basis, the Court of Session convicted the three appellants of cheating under Section 420 read with Section 120B of the Indian Penal Code and of the offence under Section 409 read with Sections 120B and 34 of the Indian Penal Code.

The High Court adopted a different approach. It held that the underwriting agreement was not a “sham or fictitious” document. The Court pointed out that the articles of association specifically named Messrs Eastland Trust as managing agents of the company for a period of twenty years. These managing agents were authorized to conduct the business of the company under the supervision of the board of directors and were empowered to pay an underwriting commission of ten per cent on the sale of shares, whether the shares were sold directly or through agents appointed by the underwriters. The Court observed that Messrs Eastland Trust had come into existence at the same time as the company’s incorporation and had been functioning as managing agents from the very date the joint‑stock company was formed. The managing agents possessed full authority to appoint underwriters, and they exercised that authority by appointing Messrs Chatterji and Co. as underwriters. Consequently, the Court found that nothing illegal or improper had occurred in the appointment of Messrs Chatterji and Co. The Court also noted that the State had not produced any evidence linking R K Chatterji with Messrs Eastland Trust or its partners, nor was there any evidence that the managing agents had any “oblique motive” in making the appointment.

The Court observed that the High Court had inferred, from the surrounding circumstances, that the underwriting agreement was not a fictitious arrangement. Nevertheless, the High Court concluded that R K Chatterji, who was described as a person of limited means, had been used as a front by the first appellant, N G Lahiri, and the second appellant, S P Sharma, to exploit the underwriting agreement for their own benefit. According to the High Court, the appellants had sold the shares themselves and had manipulated the transaction so that, although the underwriting commission was recorded as having been paid to Messrs Chatterji and Co., a substantial portion of that commission was actually received by Lahiri and Sharma. In support of this view, the High Court relied on evidence that the appellants Lahiri, Sharma and a third individual, K L Banerji, were actively canvassing for the sale of shares and were receiving the share application monies on behalf of the company. The evidence further showed that, out of a total of 1,100 share applications, not a single application bore the signature of R K Chatterji in the capacity of an underwriter, nor were there any applications indicating that Messrs Chatterji and Co. had acted as underwriters. The Court noted that the shareholders examined as witnesses testified that they had purchased shares directly from Lahiri, Sharma and Banerji, and that R K Chatterji had not negotiated the sale of those shares. From these testimonies, the High Court inferred that the actual sellers of the shares were Lahiri and Sharma, not Chatterji. The High Court also examined two documentary exhibits, identified as Ka‑989 and Ka‑534, which had been recovered during the investigation. These documents recorded that the underwriting commission paid to Messrs Chatterji and Co. had been divided under the account heading “P/L Account Commission,” indicating that Lahiri, Sharma and Chatterji were sharing the commission. On the basis of this evidence, the High Court articulated its findings, stating unequivocally that R K Chatterji had functioned merely as a conduit to enable S P Sharma and N G Lahiri to obtain unlawful gains from the company’s commission. It was conceded that, as directors of the company, Sharma and Lahiri could not directly participate in the sale of shares and earn commission, because their fiduciary duties to the shareholders and the public barred them from openly profiting from such transactions. To circumvent this limitation, the Court held, they employed a camouflage by exploiting the underwritership agreement in favor of Chatterji and Company. Moreover, the evidence demonstrated that not only Sharma and Lahiri, but also certain shareholders of the company, had taken part in the sale of shares and had earned commission for themselves. All these circumstances, the Court concluded, indicated a concerted scheme to defraud the company of its legitimate underwriting commission.

It was held that the scheme could have been carried out only with the active concurrence and connivance of S. P. Sharma and N. G. Lahiri, who were described as the brain trust of the enterprise at Benaras, the principal centre of the company's activities. The High Court inferred that the unlawful acts attributed to the three appellants were performed in furtherance of a shared intention to deprive the company of the commission arising from the sale of its shares. Consequently, the Court convicted the appellants of offences punishable under Section 420 read with Section 34 of the Indian Penal Code. In addition, the High Court observed that the Court of Session had recorded convictions against the appellants—namely Sharma, Lahiri, Chatterji and Moitra—under the same provision, holding that they had been proved to have committed criminal breach of trust in respect of the underwriting commission obtained by cheating the company. However, the Court noted that once a conviction for the offence of cheating had been recorded, it would be anomalous to convict the same individual of criminal breach of trust on the identical facts, and therefore the conviction under the latter provision was inappropriate.

The basis of the charge under Section 420 read with Section 34 of the Indian Penal Code was that, by reliance upon a fictitious underwriting agreement, the company had been induced to part with the underwriting commission. The High Court arrived at this conclusion through a three‑step analysis. First, it was held that the directors of the company were not entitled to take part directly in the sale of the company's shares. Second, although a genuine agreement had been executed in favour of Messrs Chatterji and Co., appointing them as underwriters of the company, the Court found that, in practice, the underwriters had performed no actual underwriting activity. Third, the Court determined that the shares were in fact sold by Lahiri, Sharma and other persons, and that the commission nominally payable to the underwriters was in reality divided between Lahiri, Sharma and R. K. Chatterji. For reference, the terms of the underwriting agreement were quoted as follows: “Name of underwriter—Messrs Chatterji and Co.; Address—6/8/48, Sonapura, Benaras; Place of business—Throughout India; Date of appointment—(Nil). Terms and conditions are as below: (1) you guarantee a business worth rupees one lakh within a year; (2) you will receive a commission of ten per cent on the face value of shares; (3) you will receive your commission from time to time when the allotment money due on your business have been received by the company; (4) you are authorised to appoint any number of ordinary, special and district agents to procure business.” From these clauses it was clear that Messrs Chatterji and Co. had agreed to underwrite business of one lakh rupees within a year, meaning they were to procure other persons to subscribe for, or to purchase, shares of that value. The agreement expressly authorised the underwriters to appoint ordinary, special and district agents to procure such business.

An underwriter is a person who contracts with a company, for a commission, to guarantee that if the public does not take up all or a specified portion of the company’s shares, the underwriter will purchase the shortfall and thereby fulfill the total number of shares that he has agreed to underwrite. This arrangement functions like an insurance policy against the risk of insufficient subscription. A public company is prohibited from allotting shares to the public unless the minimum subscription amount, as stated in the prospectus, is actually raised through the issue of shares. Consequently, it is a common practice for a newly formed company to enter into an underwriting agreement. The underwriter also possesses the right to enter into subsidiary agreements that do not involve the company, and such subsidiary arrangements are not required to be disclosed in the prospectus.

The High Court recorded that it had been conceded that the directors of the company were not permitted to canvass “directly” for the sale of the company’s shares. The Court considered that this concession had no legal effect. Counsel for the State did not argue that the concession reflected the correct legal position, and the Court could not understand why a director would be barred from participating in the canvassing of share sales. The underwriting agreement contained no provision that prevented directors or other persons from acting as agents of Messrs Chatterji and Co. in the canvassing process. Because the underwriting agreement is a contract whereby the underwriter either purchases the shares himself or secures purchasers for the shares he has underwritten, the manner in which the underwriter obtains those purchasers is not a matter of concern to the company. The findings of the High Court indicated that the underwriting agreement was genuine and that commission was actually debited to Messrs Chatterji and Co. for shares subscribed by the public. The Court observed that, according to the High Court, the underwriters’ names did not appear in the public share applications; instead, the principal canvassing work was performed by Lahiri, the first appellant, Sharma, the second appellant, and several others. From this situation, the Court identified two plausible inferences: first, that the canvassers acted as agents of the underwriters, who were expressly authorized to appoint agents; second, that after securing the agreement, the underwriters remained inactive, while other individuals independently canvassed the shares, and subsequently the underwriters made a fraudulent representation that the publicly purchased shares were covered by the underwriting agreement in order to obtain payment. If the first inference is accepted as legitimate, no offence of cheating can be established. The High Court appeared to adopt the second inference and consequently convicted the appellants. However, it must be noted that no charge was framed against the appellants alleging that they represented the directors’ share sales as being conducted through the agency of the underwriters.

The appellants caused the company to pay a commission to Chatterji and Co. although that commission was not legally due to them. The specific allegation was that the company had been persuaded to remit the underwriting commission on the basis of an agreement that was described as “fictitious”. Section 415 of the Indian Penal Code provides the legal definition of the offence of cheating. The statute reads: “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’.” The definition is divided into two distinct parts that describe different manners of cheating. The first part criminalises a person who, by fraudulent or dishonest means, induces another to deliver property to a third person or to consent that the third person retain that property. The second part criminalises a person who, by deception, intentionally induces another to do or omit to do something that the victim would not have done if not deceived. The offence is established only if the induced act or omission is likely to cause damage or harm to the victim. Under the first part, the inducement must be fraudulent or dishonest, whereas under the second part the inducement must be intentional. Nevertheless, the core element common to both parts is the deception of the victim, meaning the victim must be made by representation to believe a false statement that the offender knows or has reason to believe is false. The representation may be explicit or may be inferred from conduct, but mere deception without resulting prejudice to the victim is insufficient. The victim must, as a consequence of the deception, act to his own detriment, and the offender must possess the required mens rea. The charge of fraud recorded by the Court of Session, aside from the earlier infirmity, fails to refer to any deception of the company. No allegation is made that any representation was given to the company, and these shortcomings are substantive rather than merely technical. The record does not contain any specific evidence of a representation, either express or implied, that deceived the company, and the High Court did not record any rinding in that behalf. The vouchers submitted by Messrs. Chatterji and Co., purporting to claim payment of underwriting commission, have not been produced before the court. Only receipts for payment of commission made to

The Court observed that a cheating offence could arise only if a false representation was made that deceived the company and induced it to part with property dishonestly. In the present matter, the only documents produced were receipts for commission paid to Chatterji and Co. The Court noted that, without proof of a representation that misled the company, the element of deception required for cheating was absent. Chatterji and Co. had agreed to secure purchasers for shares worth one lakh rupees within a one‑year period. Even if the firm later claimed commission for shares that were actually sold by other persons, the Court held that such a claim, by itself, did not demonstrate that the company was deceived or that it was induced to pay commission fraudulently. The Court also rejected the High Court’s conclusion that the directors were incompetent to canvass the sale of shares, calling that view wholly unsustainable. It further stated that the mere existence of a binding underwriting agreement with Chatterji and Co., under which commission was paid for shares involving Lahiri and Sharma, did not establish cheating, because there was a complete lack of evidence both of any deception and of the company’s inducement with the requisite fraudulent intention.

Counsel for the State subsequently argued that deception had been practiced by the managing agents by submitting a statutory report under Section 77(2) of the Indian Companies Act, 1913, which stated that no appointment of underwriters had been made. The Court pointed out that such an allegation was not mentioned in the original charge, nor was it raised at any stage before the trial court or the High Court, and therefore the Court could not entertain that issue. Even if the allegation were established, the Court explained, it would constitute a different cheating charge, requiring enquiry into several factual matters that had not been presented. Counsel also contended that the High Court erred in finding the underwriting agreement genuine rather than fictitious. The Court observed that the High Court’s judgment contained evidence showing the agreement’s authenticity, and it concluded that, in an appeal under Article 136 of the Constitution, there was no justification for overturning the High Court’s finding on that point. Finally, counsel suggested that, based on the High Court’s findings, the Court might convict the appellants under Section 509 read with Section 34 of the Indian Penal Code for criminal breach of trust of the company’s funds. The Court noted, however, that the charge framed in the trial was under Section 409 read with Section 34 of the Indian Penal Code, under which all three appellants had already been convicted by the Sessions Judge, and that the High Court had acquitted the appellants of that.

In this matter, the Court observed that the High Court had already acquitted the three appellants of the offence in question and that the State had not filed any appeal challenging the correctness of that acquittal. The Court further noted that the State possessed the legal right to apply for leave to appeal the High Court’s order of acquittal, but it chose not to take any such step. Because the State failed to exercise that option, the Court held that it would be unreasonable to entertain the State’s present plea and to require the appellants to answer anew a charge of criminal breach of trust for which they had previously been tried and subsequently acquitted. The Court clarified that it would not examine, at this stage, whether an appellate court might in some appropriate case have the authority, in an appeal against a conviction for cheating, to convert that appeal into one for the offence of criminal breach of trust. Even assuming such power existed, the Court was of the view that the present case did not fall within the circumstances where that power could be exercised. Accordingly, the Court allowed the appeal and ordered that the three appellants be acquitted of the offence under Section 420 read with Section 34 of the Indian Penal Code. The Court further directed that any fine that may have been paid in respect of the now‑quashed conviction be refunded to the appellants.