Hon,ble Supreme Court in Paramjeet Batra v. Sfafe of tJttaralthlndl, wherein, at paragraph No

THE HONOURABLE SMT JUSTICE JUWADI SRIDEVI CRIMINAL PETITION No.1076 OF 2022 ORDER This Criminal Petition is filed by the petitioners-accused Nos.1 and 2 seeking to quash the proceedings against them in C.C.No.'18 of 2021 pending on the file of the learned Special Court under the Telangana Protection of Depositors of Financial Establishments Act- cum-fi/etropolitan Sessions Judge at Hyderabad, registered for the offences under Sections 406 and 420 read with Section 34 of the lndian Penal Code (hereinafter referred as 'lPC') and Section 5 of the Telangana Protection of Depositors of Financial Establishments Act, 1999 (hereinafter referred as 'the Act').

2. Heard [Vlr. P Pratap, learned counsel for the petitioners, lVlr. Srinivas Polavarapu, learned counsel for respondent Nos.3 and 4 and Smt. S.Madhavi, learned Assistant Public Prosecutor for the State- respondent Nos. l and 2. Perused the record.

3. The petitioners-accused Nos.1 and 2, are the husband and wife and they are the tVlanaging Director and Director of tt//s. Sri Rishab Chit Fund lndia Private Limited (hereinafter referred to as 'Company'), respectively 2

4. The case of the prosecution, in brief, is that :i.,: petitioners have induced the de faclo complainants and sevei"r;r others to invest amounts in their Ccmpany, thereby collecting apprr.r<imately Rs.69.00 crores from around 622 members. Upon compl<:t rn of chit period, instead of disbursing the due arnounts in cash, ttlr, petitioner-accused No.1 has issued cheques and promissory note; as fixed deposit receipts (FDRs) lt is further alleged that th:r petitioners have misappropriatecl the funds collected from the rnen'br:rs of the chit for their personal luxuries and acquireC properties, the eby cheating the general public Basing on the two complaints lod,: i:,1 by the de facta complainants, ,tases in Crime Nos.1g6 and 1 ,[, of 2018 rvere registered agairst the petitioners. After completion ,rf investigation, the Police filed charge sheet in C.C.No.jB of 2021 ,:lubbing both the cflmes

5. Submissions of learned co unsel for the pe titioners: 5. 1 . The petitioners-accused Nos.1 and 2 are inn(rcr:,nt and they have nothing to do lvith the offences alleged against tlrem. ln fact, the de facto complainants and other victims have vr;li ntarily advanced hand loan to the petltioners for an interest @ Zoh tt:r month and the cheques and promissory notes were given towarrls security by the petitioners to the de faclo complainants and others r. is alleged in the 3 complaint that cheques and promissory notes were given as FDRs However, the petitioners never issued any FDRs in favour of the de factc complainants and other victims. lf really the petitioners have issued FDRs, the de facfo complainants would have produced the same before the Investigating Officer during- the course of investigation. The de facto complainants have not mentioned any basic particulars like tenure or maturity of the FDRs alleged to have been issued by the petitioners to him. Ev,en during the course of investigation, though the Police have examined 65 victims, not even a single FDR was produced by them

5.2. The case of the petitioners is only that they have taken the amount from the de facto complainants and others as a handloan and cheques and promissory notes were given towards security. The de facto complainants did not deposit any amount with the Company for interest. Accepting hand loan by issuing collateral security does not amount to 'deposit'. ln fact, it is not the case of the de faclo conrplainants that they have deposited amounts in the Company for interest and the said amount was misappropriated by the Company, except stating that after completion of chit period, chit amounts were not disbursed in their favour. Though there is no allegation either in the FIR or in the charge sheet attracting the offence under Section 5 of the 4 \(!t Act, the Police purposefully filed charge sheet ado rr1 the said offence, to harass the petitioners and the case is to be Iri :d by the learned Principal Sessions Judge. lnvoking Section lj of the Act is unwarranted, as the Company rs not a financial est;t t rlish rnent

5.3. Assuming that some irregularities as alleg,:rl by the de facto complainants have taken place in the chits subscri:rr l by them, a case could have been filed against the Company, tru not against the petitioners herein, who are the Managing Director a rd Director of the Company. In the absence of Company being arrarrr= C as an accused, the proceedings against the petitioners are not rnai , t;:inable.

5.4. The petitioner-accused No 2, who is the wife of petitioner_ accused No. 1 , is not an authorized signatory ar.rl the proceedings against her are not maintainable. ln support of the s.rme, he relied on the judgment of this Court in Crl.p,Nos.5600, 392.C, 3930, 3931 and 3941 of 2022, wherein, the proceedings against thr: rtetitroner therein/ wife were quashed on the ground that she is n rt an authorized signatory.

5.5. The allegations pertain to non-payment of cl.it amount and that the Chit Funds Act, 1982, provides appropriate rer-edies before the Registrar of chits The de facfo complarnants inst.:,d of avairing the 5 remedy under law, foisted the present criminal complaints against the petitioners with all false and baseless allegations

5.6. ln order to attract an offence under Section 420 of lPC, rnducement to deliver property with a fraudulent intention from the inception is necessary, but there are no such averments in the complaint. A mere deposit of money/giving hand loan does not create an entrustment to commit criminal breach of trust under Section 406 of lPC. Hence, the offences under Sections 406 and 42O o't IPC are not made out

5.7. The victims have also initiated the proceedings against the petitioners under the provisions of the Negotiable lnstruments Act, 1BBl, however, most of the proceedings were dismissed. Several victims, including respondent No.4-de facfo complainant, have filed civil suits against the petitioners. The suit filed by respondent No.4- de facto complainant against the petitioners was decreed in his favour and E.P. is also pending. Even in the said civil suit also, there is neither any mention of the FDRs nor are they marked as exhibits Though the grievance of respondent No.4-de facto complainant was redressed in the civil suit, he has filed the present complaint against the petitioners colouring the civil dispute into a criminal offence and the 6 same amounts to inltiation of parallel proceedings. I re offences under Sections 406 and 420 cannot be invoked simultane ror rsly.

5.8. Learned counsel relied upon a decision of t.rr: Hon,ble Supreme Court in Paramjeet Batra v. Sfafe of tJttaralthlndl, wherein, at paragraph No.7, it is held as follows. 'l;,.:.L: w "7. Wlile exercising its juriscliction under Seci t.t, 492 of the Code ihe High Courl has to be caulious. This :,r wer is to be used sparingly artd only for tlte purpose of prev:,,r ing abuse of the prctcess of any courl or athetwise fo secure ,; - 1s of Tuslice Whether a complaint discloses a criminal c,lir.nce or not depenLls upon the nature of facts atteged thtrt.:in. Whether essenlia/ ingredients of crirninal offence are prc::i.t tl or not has to be ,iudged by the Higlt Couft. A complauft :u.;closing civil transactions may also have a criminal texture t:ut the Hgh .t jlly of a civil Cottft rnust see whether a dispute whlch /s ess€ nature is given a cloak of criminat offence. ln suL:tt t situation, if a civil remedy is available and is, in f act. a,lL:t, ted as has happened in this case, the High Courl should,t:,hesitate to quaslt criminal proceedings to prevent abuse o process of cou17."

5.9. ln supporl of his contentions, learned corrn,:iel relied on the judgment of the Hon'ble Supreme Court in S.W.patanitkar and others y. Sfafe of Bihar and anothef , wherein, it is re-errrphasised that both the offences under Sections 406 and 420 of lpC, arr:: independent and distinct. The two offences cannot co-exist simultan(: ously for the same set of facts. While cheating involves dishonest inte rt,on at the time of making a (false) representation, criminal breach o1 l-ust necessitates ' lzor s1 I t scc ozs ' l2oo2\ 1 scc 241 1 evidence of property being entrusted to someone who then misappropriates it. However, in both the offences, mens rea, i.e., intention to defraud or dishonest intention must be present, although, in the case of cheating, it must be there from the very beginning or inception

5.1 0. The victims have formed into an association and approached this Court by filing W P.No.26770 o'f 2021 against the petitioners herein and the same is pending. Even the allegations in the FIR as well as charge sheet were taken on their face value and accepted in its entirety, there are no specific allegations against the petitioners and no case is made out against them. Hence, he prayed to quash the proceedings against the petitioners

6. Submissions of learned counsel for respondent Nos.3 and 4-de facto complainants:

6.1. The petitioners, being the Managing Director and Director of the Company, are not only doing chit business, but also receiving fixed deposits from the members of chits as well as the public

6.2. Learned counsel has drawn attention of this Court to the meanings of 'financial establishment' and 'deposit' as defined under I Sections 2(b) and 2(c) of the Act respectively, lr,lrich are extracted hereundei": "deposit means the deposit of a sum of nt t,t:.t either in lumpst,m or installments made with a financial e::':t ttishntent for a {ixed period, for interest or return in any kind. Finanolal Establishment, nteans any perso/r r,i group of individuals accepting deposit under arly ,;clteme or arrangement or in any other manner but doe: , )t inclucle a corporation or a cooperative society owned or c('-t ollecl by any State tlovernment or the Central Governmenl :' a banking company as defined under Clause (c) of Sccrr trt 5 of the Bankinq Regulation Ac[ 1949 "

6.3. lnstead of returning the matured chit amour t the petrtioners lured and deceived the victims to keep their mature,: amount by way of periodical installment over a definite period with r particular rate of interest, as such, the offence under Section 5 of 'rr: Act, is attracted against the petitioners. ln support of his contentic,r he relied on the judgment of thel Hrgh Court of Madras in S.lVan,:fiini v. The State lnspector of Police, Economic Offence Wing-tt \tellore3, wherein, at paragraph No.'1 3, the judgment of the Hon'ble iiupreme Court in lJnion of lndia v. Margadarshi Chit Funds (P) Lirntted was referred to, which is as follows: 24) Vy'et have already noted that there are two ./t)es of chits, namely, simple chits and busmess chits. This i.. tegorisation was given by Lhe Study Group headed by Dr. Br,?ratosh Dutta constituted by the Banking Commission in 1 .7 .). The said description was given imprimatur by this Court in [] )setye Bank of lndia v. Peerless General Finanbe and lnvesb'ten t Companv Limited tfi 987) 7 SCC 424 AtR 1987 SC 1. l:1.)_.)l The said 3 Crl.M.P.Nossl43E nct 5147 of ZO17, dated 05.02 20.15 1zo'tzy r: scc ooo o I description along with the definition of the term 'chit' contained in Section 2(b) of the Chit Funds Act gives a fair idea of the nature of fund business. A person (known as foreman) enters into agreement with specified number of persons where under all those persons agree to subscribe a ceftain sum of money by way of periodical instalment over a definite period. Say, for example, this kind of agreement is entered into with 20 persons. These 20 persons i.e. subscribers agree to subscribe Rs.5,000/- per month for 20 months. ln this manner, every month Rs.1 ,00,000/- are contributed by these 20 persons. Out of this amount, foreman deducts his commission, say, Rs.10,000/- (which is regutated by the provisions of Chit Funds [p!). Remaining amount of Rs.90.000/- would be the prize amount. This amount would be given to one of the subscribers as determined by lot or by auction or by tender or in such other manner as may be specified in chit agreement. lf it is by auction, then the subscribers may give their bids offering the discount. The subscriber offering maximum discount shall be successfr.r/ subscdber. It may be mentioned that there is a cap on such a discount which laid down in the Chit Funds Act and a subscriber cannot offer more discount than the maximum limit stipulated under the Chit Funds Act. lf there are more than one subscribers offering maximum discount, then the successfu/ subscnbers would be chosen by draw of /ols. Successfu/ subscriber woutd get the prize amount, i.e., the amount after deduction of the discount offered by him. The amount of discount shatt be distributed among all the subscribers. ln a way, the said amount of discount which the successfu/ bidder has foregone becomes the dividend which is to be distributed to alt the subscribers after deducting a fixed amount representing the commission payabte to the foreman. Foreman is a person who organises the auction and conducts the proceedings. From the aforesaid procedure in which this busmess is conducted it also becomes ctear that those subscribers, who delay the bidding or do not bicl, stand to gain and they receive maxinum share in the discounts. lf seen from this angle, the chit is somewhat tike a recurring deposit with the bank. ln fact, there is no bar on the foreman of the chit fund also to participate in the bidding, as a subscriber.,'

6.4. The petitioners have intentionally cheated the de facto complainants and others. Every breach of contract cannot be a civil remedy. However, if the allegations disclose criminal offence, the same can be tried by the competent Criminal Court. ln support of the said contentions, learned counsel relied on the judgments of the Hon'ble 10 l;! :' Supreme Court in Kathyayini v. SidharTh P.S. t;'eddy and otherss; lndian Oil Corporation v. NEPC tndia Limite:t and others6 and P.Swaroopa Rani v. M.Hari Narayana @ Hari l:tabu7, wherein, rt is held that civil proceedings and criminal proce€,:jngs can proceed simultaneously Pendency of civil proceedings orr he same subject matter and involving the same parties is not a g 1- -rnd to quash the crimina! proceedings, if a prima facie case exists ir: ainst the accused persons.

6.5. With regard to the penal liability, learned c:rr-rsel relied on the judgment of the erstwhile High Court of Andhra P':r lesh in V.Revathi v. State of Andhra Pradeshs and drawn attentic rof this Court to paragraph No.14, wherein, it is held as follows: "14. There is no penal provision Ltnder lhc 191'1 \ct providtng for punishment in case of 'default' t:.', nmilted by organizer/foreman of the chit by not paying priz' ; niolrnt to the succe.ssfu/ highest bidder or in case the orga ,', t./forentan of the chit abscotlds by discontinuing the chit duru)'t ne course af its currency and by not repaying or refunding sLrbscriptiotj amouttts already collected from tlrc member:;. I te 1971 Act predorninantly deals with regulatory /reasu/es '' starTing chtt fund bus/hess, for commencement of a chit an<, ' tnning of the chit tillthe end of the chit period. ln case, tlte orc1i t tzer/forernan of the chit commits 'default', no penal remedy is t.i-)scribed and no penal liability is attached to such organizer."'.t c.nran of the chit under the 1971 Act. Similarly, even if the -, )t 2 Acl comes into force. rt a/so does not contain any provistr,) dealing witlt perral remedy against organizer/foreman of tte chit and attachng penal liability for 'default' comtr,)ltt.l hy such ] 1ZOZS1 SCC Ontine ! C 1428, '(2006) 6 SCC 736 7 AIR 2OO8 SCC 1BB4 tj 2012 (2) ALD (Crl.) 238 (AP) I i I 11 organizer/foreman of the chit. Therefore, I have no hesitation to conclude thal the 1999 Act is equally applicable in the case of a chit fund transaction also in addition to applicability of the existing 1971 Act and also the 1982 Act as and when it comes into force "

6.6 The victims never advanced any handloan to the Company or the petitioners and collected promissory notes or cheques towards security. The petitioners in their confessional statements clearly admitted that they have lured the victims. The petitioners are the Directors in their individual capacity, as such, the question of arraying the Company as an accused does not arise. The judgments relied on by the learned counsel for the petitioners are not applicable to the facts of the present case. There are specifrc allegations against the petitioners and the truth or otheruvise of the allegations levelled against them can only be known after conducting full-fledged trial before the trial Court. Hence, he prayed to dismiss the petition. 7 . On the other hand, learned Assistant Public Prosecutor appearing for the State-respondent Nos.'l and 2 contended that the petitioners have committed misappropriation of huge amounts by cheating the general public. There are specific allegations against the petitioners and they are triable issues. Hence, it is not a fit case to quash the proceedings against the petitioners at this juncture. 12 \t-n{ B. Having regard to the submissions advanceri ty both sides and upon perusal of the material available on record, il ;t.ima facie appears that the petitroners are engaged in the business of : perating chit fund. and that respondent Nos.3 and 4-de facto ccmp,,rinants and many others have subscribed to the chit scheme and mari: regular payments towards chit installments. The sole allegatior attributed to the petitioners is lhat after completion of maturity r,eriod. instead of disbursing the chit amount, the petitioners have :;:nverted the said amounts into deposits and issued cheques and 1: rr,missory notes as fixed deposit receipts towards security. lt is thr,, :ontention of the petitioners that the de facto complainants and r.r her victims have advanced the sieid amounts as hand loan and the r n ancial instruments like cheques and promissory notes were giver. towards security. However, the pertitioners denied about issuing fixed C rposit receipts.

9. Upon a meticulous scrutiny of the averments .r the charge sheet, it is evident that the lnvestigating Officer has takerr t onsrderable effort in examining several individuals as victims. As ma r, as 65 witnesses were examined but not even a single FDR was prr:cl rced either by the de facto complainants or victims. Even the basic pi: rliculars like tenure or maturity of the FDRs alleged to have been issue:c by the petitioners io the de faclo complainants were not mentioned. r :he charge sheet, ,/' 13 it is mentioned that the cheques and promissory notes were given as FDRs. However, the cheques and promissory notes cannot be termed as FDRs because they are fundamentally different financial instruments with distinct purposes and legal standings.

10. The entire case is based on the confessional statements of the petitioners. lt is settled law that the confessional statement made by the accused before the Police is inadmissible in evidence. 11 . [n the absence of any evidence to establish the allegations against the petitioners, it shall be presumed that the tinancial instruments were given by the petitioners to the de facto complainants and victims towards security for hand loan. However, it is equally settled that mere failure or inability to repay an amount does not, by itself, constitute the offence of cheating, in the absence of any fraudulent or dishonest intention from the inception. Apart from that, if really there was dishonest or fraudulent intention on the part of the petitioners at the very inception of the transaction, they would not have issued cheques and promissory notes as security lo the de facto complainants and others.

12. When the said cheques issued by the petitioners were presented for clearance with the Bank, they were dishonoured for the reason 'insufficient funds'. Questioning the dishonour of cheques, 14 many of the viclims have initiated proceedings unrj:.r N.l. Act against the petitioners. but many of them were dismissell according to the learned counsel appearing for ttle petitioners ers well as learned counsel for tl.re de faclo complainants. '1 3. Civil sr.rits; were also filed by the victints. Alnto,;t all the suits filed by the victims; were decreed in their favour. - he suit filed by respondent No.4-de facto comp,,ain a nt was der;rt ed in his favour directing the respondents therein i.e., the petitic,n,,rrs herein to pay Rs.17,39,2761- with interest @ 12% per annum frr:,n. the date of filing of the suit till the date of decree and future intere:;t t@ 6% per annum from the date rtf decree till the date of realizaticrn and E.p. is also pending.

14. The dispute between the parties is purely r: ii il in nature. The issue involved in the present matter was already acl udicated upon by the Civil Court in N.l. Act proceedings as well as 1rr,, civil suit filed by the de facto complainants. With respect to the offer.r::: under Section 5 of the Act, the victims, by forming into an ass,:)rt ation, have filed W.P.No.26770 of 2021 before this Court, whr:rr:in the issue of incriminating material arising out of the provisions ,rf the Act, is under consideration. - .t.:. 15

15. lt is settled law that the offences under Sections 406 and 420 of lPC, cannot subsist in the same transaction. lt is apposite to refer to a recent decision of the Hon'ble Suprme Court in Dethi Race Ctub (1940) Ltd., v Sfate of UF, wherein, at paragraph Nos.30 and 43, it is held as follows: "30. There is a distinction between criminal breach of trust and cheating. For cheating, criminal intention is necessary at the time of making a false or misleading representation i.e., since inception. ln criminal breach of trust, mere proof of entrustment is sufficient. Thus, in case of criminat breach of trust, the offender is lawfully entrusted with the propefty, and he dishones y misappropriated the same. Whereas, in case of cheating, the offender fraudulently or dishones y induces a persin by deceiving him to deliver any propefty. ln such a situation, both the offences cannot co-exist simultaneousty.

43. lt is high time that the police officers across the country are impafted proper training in law so as to understand the fine distinction between the offence of cheating viz-a-viz criminat breach of trust. Both offences are independent and distinct. The two offences cannot coexist simultaneously in the same set of facts. They are antithetical to each other. The two provisions of the IPC (now BNS, 2023) are not twins that they cannot survive without each other."

16. Having gone through the contents of the charge sheet, it is clear that the Xerox copies of cheques and promissory notes which were tssued by the Company as FDRS were collected from the victims. When there are specific allegations against the Company and its Management, the present complalnt was lodged against the petitioners prosecuting them in their individual capacity, without arraigning the Company as an accused. Hence, no vicarious liability can be fastened 'zoz+ ttrsc 626 16 on the petitione,rs, without the Company being array,ld as an accused Furthermore. the petitioner-accused No.2 is rrit an authorized signatory of the Company

17. ln the case on hand, it is the case of the prrsecution that the petitioners are doing chit fund business, but it is n rt the case of the prosecution that the petitioners were running fini,,rr:ial establishment and in the abselnce of producing FDRs, prosecutir q the petitioners for the offence under Section 5 of the Act, does not at's,e. Additionally, no independent vritnesses have been examined : y the Police to corroborate the allegations made against the petitir: nr:rs

18. ln view of the foregoing discussion, th s Court is of the considered vierrv that the disputes between the perrt es are purely civil in nature, whi<;h were essentially given a crimira texture, and the present complaint was lodged with an intent to settl,,r the civil disputes through crinrinal proceedings. ln fact, civil remr:clies were already availed by the de facfo complainants and Execl tirin Petition is also pending to recc,ver the amount in question. ln view o'the law laid down by the Hon'ble Supreme Court in Paramjeet Batra':, case, I am of the considered opinion that it is a fit case to exercisr-' the powers under Section 482 of Cr.P.C., so as to prevent an abur;e of the process of Court. 17 I l9 Accordingry, this criminar petition is ailowed and the criminar proceedings against the petitioners-accused Nos..l and 2 in c.c.No..rB of 2021 pending on the fire of the rearned speciar court under the Telangana Protection of Depositors of Financial Establishments Act_ cum-lVletropolitan Sessions Judge, Hyderabad, are hereby quashed. As a sequel, pending miscellaneous applications, if any, shall stand closed. SD/. N. SRIHARI DEPUTY REGISTRAR G //TRUE COPY// SECTION OFFICER To, '1 . The Special Court under APPDFE Act-Cum-Metropolitan Sessions Judge' Hyderabad. zi(e-siationHouseofficer,CCSPoliceSt9!o1'Hyderabad' 3. Two CCs to the PuOtic prosecutor, State of Telangana' High Court Buildings' at Hyderabad (OUT) + One'CC to Mr. Srinivas Polavarapu, Advocate [OPUC] 5. One CC to IVlr. P Pratap, Advocate [OPUC] 6. Two CD CoPies M DL/PSL HIGH COURT DATED:26/09/2025 ORDER CRLP.No.1076 of 2022 r.l:o IL . TL: r l'- o .$ $ (^> \ fi 'c!ii + { ALLOWING THE CRIMINAL PETITIOI.I -\t', 1D -{