A Bench comprising CJI N.V. Ramana, Justice Surya Kant and Justice Hima Kohli has held while setting aside the conviction of the Appellant-Branch Manager of a Bank under Section 409 of the IPC, that money which is deposited in the bank by the customer becomes a part of the banker's fund who is then under an obligation to pay the sum deposited as and when demanded by the customer along with the agreed rate of interest. Until called upon to pay it, the bank can utilize the same in any manner to earn profit.

The Appellant filed an appeal against the order of the Andhra Pradesh High Court, wherein he was held guilty of offences under Sections 409, 420 and 477A of the Indian Penal Code, 1860 and Section 13(2) r/w Section 13(1)(d) of the Prevention of Corruption Act, 1988 and was sentenced to rigorous imprisonment for 5 years, while the other accused in the case with him (Accused no. 2 and 3) were acquitted of all charges.

The Appellant (Accused no. 1) was the Branch Manager of the Nizamabad Branch, and was the brother-in-law of Accused no. 3. The prosecution alleged a conspiracy between the Appellant, Accused no. 2, A. Sandhya Rani, who worked as a Clerk-cum-Cashier at the same bank. They allowed withdrawal of a sum of up to Rs. 10,00,000 even though the account did not have the requisite funds for such withdrawal.Sect

The modus operandi of the accused persons was that the Appellant, who was the Branch Manager in the Nizamabad Branch issued loose-leaf cheques of Rs. 2,50,000 and this transaction was not entered into the ledger book. Several other transactions were also not entered into the ledger. The endorsement on the 3rd cheque by the Appellant showed payment to Accused no. 3, but the signature on the cheque did not tally with that of Accused no. 3. The Appellant is also alleged to have pre-maturely closed 2 FDR, one of which stood in the name of B. Satyajit Reddy, which was the first point of contention. The prosecution's case was that the working of the Appellant, accused no. 2 and 3 together in these transactions, resulted in a wrongful loss to the Bank and its Depositors. The second point of contention was that after this premature encashment, the amount was transferred to the account of Accused no. 3, the Nishita Educational Academy.

Thereafter, when the Auditor started noticing these irregularities, the Appellant was shifted from the Branch where he was working to the Head Office, where an inquiry was ordered.

The Chairman of the Bank made a written complaint to the CBI, Hyderabad and the Special Judge, CBI Court acquitted all accused of offences u/s 120-B, IPC and u/s 13(2) r/w Section 13(1)(c) of the PC Act. Accused no. 2 and 3 were acquitted of all charges, but the Appellant was held guilty of offences under Section 420, 409 and 477A IPC and u/s 13(2) r/w Section 13(1)(d) of the PC Act.

The Appellant appealed against this order in the High Court, however, the High Court reiterated the findings of the Special Judge, CBI Court and held the Appellant guilty on both accounts- firstly, for misusing his position as Branch Manager to prematurely encash the two FDRs and secondly, to transfer the amount into the Academy's account.

Thus, the Appellant approached the Apex Court under Article 136.

Senior Advocate Siddharth Luthra, appearing for the Appellant argued that the non-examination of B. Satyajit Reddy by the CBI, nor his statement being recorded during the course of internal auditing was fatal to the case of the prosecution (relying on Prabhat & Ors. V. State of Maharashtra, Mahak Chand & Ors. V. State of UP).

It was also contended that there is complete absence of mens rea as the Appellant would not receive any benefit even if the accused was handed over Accused no. 3.

Additional Solicitor General, Jayant K. Sud, appearing for the Respondents, argued on the limited jurisdiction of the Court under Article 136. He contended that since the present appeal does not involve a question of law, but instead involves mixed questions of laws and facts, it ought not to be entertained.

He also contended that in order to establish mens rea u/s 420, 409 and 477A IPC, it is not necessary to prove that the Appellant derived some benefit or that some loss was caused to the Bank.

Since the Appellant was the custodian of the Branch, the onus shifted on him to show that he has complied with all transactions genuinely and all requirements had been adhered to. He relied on N.V. Subbarao v. State in this behalf.

Two issues arose in the case:

i) Whether a case is made out for interference by this Court in the concurrent findings of the Courts below?

The Court, while discussing its jurisdiction under Article 136, ruled that even though the scope of interference is limited, it can interfere in exceptional circumstances.

In the present case, there are various contradictions in the observations made by the High Court and the lower Court. The beneficiary of the entire transaction would be accused no. 3, who was acquitted, and the State preferred no appeal against his acquittal.

The High Court noted that no loss has been caused to the Bank, but still convicted the Appellant, even though the charges levelled against the accused were with respect to fraudulent actions which caused loss to the Bank.

ii) If yes, then whether the conviction of the present Appellant for offences u/s 409, 420 and 477A IPC as well as under Section 13(2) r/w Section 13(1)(d) is sustainable?

The Court discussed the essential ingredients of offences under Section 409 (criminal breach of trust by a public servant or a banker), 420 (cheating) and 477A (falsification of accounts) IPC.

The Court laid down the following essential ingredients of the offence under Section 405, IPC (criminal breach of trust)-

i) Entrusting any person with property or with any dominion over property;

ii) That person has dishonestly misappropriated or converted that property to his own use;

iii) Or that person dishonestly using or disposing of that property or wilfully suffering any other person so to do in violation of any direction of law or a legal contract.

Thus, in order to constitute criminal breach of trust, there must be actual use by the accused in violation of law or contract coupled with dishonest intention.

If the same is done by a public servant or a banker, merchant or agent, the offence will be one punishable under Section 409, IPC.

The essential ingredient of 'entrustment' must thus, be present. Once this is proved, the burden shifts of the accused to prove that the obligation of entrustment was carried out in a legally and contractually acceptable manner.

The Court laid down the following as the essential ingredients of the offence under Section 420 (cheating)-

i) Deception of any person,

ii) Fraudulently or dishonestly inducing that person to deliver any property to any person,

iii) mens rea of the accused at the accused at the time of making inducement.

Thus, for the offence of cheating, the fraudulent or dishonest intention must exist from the inception when the promise or representation was made.

Thus, unless the complaint showed that the accused had dishonest or fraudulent intention 'at the time he parted with the monies', it would not amount to cheating, and would only amount to criminal breach of trust.

To establish an offence under Section 477-A (falsification of accounts), the prosecution must establish the following-

i) that the accused destroyed, altered, mutilated or falsified the books, electronic records, papers, writing, valuable security or account in question;

ii) the accused did so in his capacity as a clerk, officer or servant of the employer;

iii) the books, papers, etc. belong to or are in possession of his employer or had been received by him for or on behalf of the employer;

iv) the accused did it willfully and with intent to defraud.

Regarding issuance of loose-leaf cheques-

As regards the issuance of loose cheques, there is no explicit prohibition on the same. Thus, the mere fact that the Appellant has issued loose cheques is not sufficient to conclude that he acted unlawfully or engaged in 'criminal misconduct'.

The Bank did not suffer any loss as all three cheques were passed when there were sufficient funds in account no. 282.

With respect to non-entry of ledgers, the Court held that the benefit of doubt can be accorded to the Appellant. Thus, the Court refused to accord weight to this allegation.

Unauthorized encashment of the two FDRs-

Discussing the ingredients of the offence under Section 409 IPC, the Court held that once the entrustment is admitted or proved, the onus lies on the Accused to prove that the entrusted property was dealt by him in an acceptable manner.

The Court noted that:

" Since the present case involves a conventional bank transaction, it may be further noted that in such situations, the customer is the lender and the bank is the borrower, the latter being under a super added obligation of honouring the customer's cheques up to the amount of the money received and still in the banker's hands. The money that a customer deposits in a bank is not held by the latter on trust for him. It becomes a part of the banker's funds who is under a contractual obligation to pay the sum deposited by a customer to him on demand with the agreed rate of interest. Such a relationship between the customer and the Bank is one of a creditor and a debtor. The Bank is liable to pay money back to the customers when called upon, but until it's called upon to pay it, the Bank is entitled to utilize the money in any manner for earning profit."

Thus, on account of the absence of concrete evidence, the Court acquitted the Appellant of charges u/s 409, IPC.

As regards the charge u/s 420, the Appellant was acquitted because Mr. Reddy refused to enter the witness box and also on account of no complaint being filed by him against the Appellant. The conviction of charge u/s 477A was also set aside.

However, the Court upheld the dismissal from service of the Appellant on account of gross departmental misconduct.

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