REPORTABLE

IN THE SUPREME COURT OF INDIA CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 1044 OF 2008 ARISING OUT OF

SPECIAL LEAVE PETITION (CRL.) NO. 4977 OF 2007

KURIACHAN CHACKO & ORS. … APPELLANTS

VERSUS

STATE OF KERALA … RESPONDENT With

CRIMINAL APPEAL NO.1045 OF 2008 ARISING OUT OF

SPECIAL LEAVE PETITION (CRL.) NO. 4978 OF 2007 C.N. RANEESH & ORS. … APPELLANTS

VERSUS

THE STATE OF KERALA … RESPONDENT

With CRIMINAL APPEAL NO.1046 OF 2008

ARISING OUT OF SPECIAL LEAVE PETITION (CRL.) NO. 5214 OF 2007

P.V. CHACKO … APPELLANT

VERSUS

THE STATE OF KERALA … RESPONDENT J U D G M E N T

C.K. THAKKER, J. 1. Leave granted.

2. The  present  appeals  have  been

instituted  by  the  appellants  against  the

judgment and order dated 19th July, 2007 passed

by  the  High  Court  of  Kerala  in  Criminal

Revision  Petition  No.  4126  of  2006  and

companion matters. By the impugned order, the

High Court dismissed revision petitions filed

by the appellants herein as also by the State

of Kerala.

3. To understand the issue raised in the

present  appeals,  few  relevant  facts  may  be

stated:

4. The  appellants  are  partners  of  M/s

LIS, Ernakulam, a partnership firm engaged in

the business of sale of lotteries and magazines

after collecting advance money. They floated a

scheme  known as  “LIS Deepasthambham  Scheme”.

The  scheme  was  simple  in  its  conception.  A

person has to pay Rs.625/- and purchase one

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unit  of  lotteries  from  the  promoters.  The

promoters will make use of Rs.350/- to purchase

35  lottery  tickets  of  the  Kerala  State

Government each of Rs.10/- for the unit holder

for the next 35 weeks. If the unit holder wins

any prize up to Rs.5,000/- in the 35 draws, the

promoters shall collect the amount and pay the

same to the unit holder. If the unit holder

wins  any  prize  above  Rs.5,000/-,  the  ticket

shall be handed over to the unit holder for

collection  of  the  amount.  The  balance  of

Rs.275/- (Rs.625 – Rs.350) will be used to make

the unit holder a subscriber of a magazine by

name  ‘Thrikalam’  for  one  year.  The  said

magazine would reproduce relevant and important

materials from other magazines. It would also

furnish necessary information about the lottery

tickets which have won prizes.

5. The  unit  holder  will  be  returned

(paid) not only Rs.625/- which he had initially

invested,  but  twice  his  investment  i.e.

Rs.1,250/-  (less Rs.100/-  as service  charges

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for the promoters and legal deduction for tax,

etc.) on an early date. As per the scheme, on

sale  of  three  tickets  of  Rs.10/-  each,  the

Government would pay commission of 28% of which

the promoters would share 25% with the unit

holders.  Likewise,  the  publisher  of  the

magazine would give commission of 30% to the

promoters and promoters would share 25% with

the  unit  holders.  All  these  amounts  are

available  to  the  unit-holders.  Under  the

scheme,  in  order  of  strict  seniority,  the

senior  most  unit  holder  would  be  paid

Rs.1,250/- as soon as the requisite amounts are

available as commission with the promoters. The

promoters, in addition to 28% commission for

the lottery tickets, and 30% commission for the

magazines, would also get commission for the

prizes won by the tickets sold through them

from the Government. Those amounts also would

be entirely made available for payment to unit

holders. If a unit holder is paid Rs.1,250/-

before  the  expiry  of  35  weeks,  no  lottery

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tickets  will  be  purchased  on  his  behalf

thereafter. It is because he had already been

paid  the  requisite  amount.  On  the  same

reasoning, if the amount of Rs.1,250/- is paid

to  the  subscriber  before  the  expiry  of  one

year, ‘Thrikalam’ magazine would also not be

sent to the subscriber thereafter. The price of

unpurchased  lottery  tickets  and  unused

magazines  thereafter  will  be  used  by  the

promoters  towards  the  payment  of  amount  of

Rs.1,250/- to other unit holders. According to

the promoters, the scheme was viable as well as

workable. All persons would be able to double

their investment at the earliest. No specific

time, however, was given but it was assured

that  the  amount  would  be  doubled  at  the

earliest and it would be paid on the basis of

seniority.  Under  the  scheme,  the  amount  of

Rs.1,250/- (double the investment by the unit

holder) will be paid as soon as 14 more members

are enrolled. The advantage of technology was

borrowed. Passwords could be chosen. There was

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a web site for promoters. The unit holder could

use his password and the site would reveal all

details about the tickets purchased on behalf

of the unit holder by the promoters. The unit

holders thus would be able know the details of

the tickets purchased for them by the promoters

and would also able to ascertain whether any

prizes had been won by any ticket purchased on

their behalf by the promoters.

6. The  idea  appeared  to  be  very

attractive.  Several  persons  participated  and

invested  money.  The  membership  collection

during a short period of time reached to almost

Rs.500 crores. Amounts were being paid to the

unit  holders initially  very promptly—on  many

occasions even before the expiry of 35 weeks.

More  and  more  subscribers  joined  the  queue.

There  was aggressive  publicity and  marketing

through  visual  (TV)  and  printed  media

(pamphlets  and  newspapers).  The  scheme  was

proceeding very happily. More and more amounts

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were coming into the kitty of the promoters

from unit holders.

7. Suddenly, however, there was a jolt to

the  scheme.  Police  Authorities  registered  a

crime  against  the  promoters  for  an  offence

punishable under Section 420 of Indian Penal

Code  (IPC),  under  the  Prize,  Chits  &  Money

Circulation  Scheme  (Banning)  Act,  1978

(hereinafter referred to as ‘the Act’) and also

under  the  Reserve  Bank  of  India  Act,  1934.

Certain proceedings were initiated even earlier

with which we are not concerned in the present

proceedings.  The  learned  Chief  Judicial

Magistrate,  Ernakulam  by  an  order,  dated

November 14, 2006, framed charge against the

appellants herein for offences punishable under

Section 420 read with Section 34, IPC and under

Sections 4 and 5 read with Section 2(c) and 3

of the Act. He, however, discharged all the

accused  for  the  offences  punishable  under

Sections 4 and 5 read with Sections 2(e) and

(3) of the Act and also under Sections 45I(bb),

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45S and 58B of the Reserve Bank of India Act,

1934.

8. Being aggrieved by the order passed by

the trial Court, the accused as well as the

State  filed  revision  petitions  in  the  High

Court  of  Kerala.  Whereas  the  accused  were

aggrieved  by  the  order  of  the  trial  Court

framing  charge  against  them,  the  State  was

aggrieved by the order discharging the accused

for certain offences under the Act and under

the Reserve Bank of India Act, 1934.

9. A  Single  Judge  of  the  High  Court

considered rival contentions of the parties and

noted  that  the  learned  Additional  Advocate

General/Special  Public  Prosecutor  fairly

submitted that on the facts of the case Section

2(e) of the Act was not attracted. Similarly,

there was no error on the part of the trial

Court in not framing charge against the accused

for offences punishable under the Reserve Bank

of India Act, 1934. The High Court observed

that though no express concession was made by

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the State, it was not seriously challenged by

the  prosecution  that  the  trial  Court  had

committed any error in discharging the accused.

10. The  accused,  on  the  other  hand,

strenuously contended that the trial Court was

wholly  wrong  in  framing  charge  against  the

accused for an offence punishable under Section

420 read with Section 34, IPC as also under

Sections 4 and 5 read with Sections 2(c) and 3

of the Act and the said order was liable to be

set aside ordering discharge of the accused in

respect of all offences.

11. The High Court, after considering the

rival contentions of the parties and referring

to the relevant decisions on the point, held

that the trial Court was right in discharging

the  accused  for  offences  punishable  under

Sections 4 and 5 read with Sections 2(e) and 3

of the Act and also under the Reserve Bank of

India Act, 1934. The High Court held that the

trial  Court  was  also  right  in  framing  the

charge  against  the  accused  for  offences

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punishable under Sections 4 and 5 read with

Sections 2(c) and 3 of the Act and also under

Section 420 read with Section 34, IPC. The High

Court, therefore, confirmed the order passed by

the trial Court and dismissed revisions of both

the parties. The said order is challenged by

the appellants-accused in present appeals.

12. On  September  7,  2007,  notice  was

issued by this Court. On February 22, 2008, the

matters were ordered to be posted for final

hearing on a non-miscellaneous day. That is how

they are before us.

13. We have heard learned counsel for the

parties.

14. The learned counsel for the appellants

submitted that the trial Court and the High

Court were right in discharging the accused for

certain offences punishable under the Act and

also under the Reserve Bank of India Act, 1934.

The State has not preferred appeal against the

said order and the decision has become final.

He,  however,  contended  that  both  the  Courts

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were wrong in not discharging the accused for

offences punishable under Sections 4 and 5 read

with Sections 2(c) and 3 of the Act as also for

an offence punishable under Section 420 read

with Section 34, IPC.

15. It  was  submitted  that  the  scheme

formulated  by  the  appellants  could  not  fall

within  the  mischief  of  ‘Money  Circulation

Scheme’ as defined in clause (c) of Section 2

of  the  Act.  If  it  is  so,  ban  envisaged  by

Section 3 would not apply. Consequently, penal

provisions  of  Sections  4  and  5  cannot  be

invoked.  The  Courts  below  were  wrong  in

observing that  prima facie, the provisions of

the Act got attracted and appellants could not

be  discharged.  Moreover,  for  application  of

Section 415, IPC, there must be fraudulent and

dishonest intention which was not present in

the instant case. Penalty provision of Section

420, IPC had, therefore, no application. Even

there, the Courts were wrong in framing charge

against the accused.

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16. The  learned  counsel  for  the

respondents, on the other hand, supported the

order passed by the trial Court and confirmed

by the High Court. It was submitted that both

the Courts considered the relevant provisions

of law, requisite ingredients under the Act and

formed a prima facie opinion that the scheme in

question was covered by definition clause 2(c)

(Money  Circulation  Scheme)  and  the  case  was

required to be gone into by a competent Court.

Likewise, the Courts below observed that there

was ‘cheating’ as defined in Section 415, IPC

and the accused could not be discharged. No

fault can be found against the approach adopted

by both the Courts and the appeals deserve to

be dismissed.

17. Before we deal with the merits of the

matter and reasoning of the Courts below, it

would  be  appropriate  if  we  refer  to  the

relevant provisions of the Act.

18. The Preamble of 1978 Act declares that

it has been enacted “to ban the promotion or

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conduct of prize chits and money circulation

schemes and for matters connected therewith and

incidental thereto”.

19. Section  2  is  legislative  dictionary

and defines certain terms. The phrase ‘Money

Circulation Scheme’ is defined in clause (c)

which reads as under;

(c)  "money  circulation  scheme"  means any  scheme,  by  whatever  name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative  or  applicable  to  the enrolment  of  members  into  the scheme, whether or not such money or  thing  is  derived  from  the entrance money of the members of such  scheme  or  periodical subscriptions;

20. The definition is not simple. Judicial

notice thereof had been taken in the leading

decision of this Court in State of West Bengal

v.  Swapan  Kumar  Guha,  (1982)  1  SCC  561.

Chandrachud,  C.J.  after  taking  note  of

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legislative drafting, reshaped and rearranged

Section 2(c) thus;

'money  circulation  scheme'  means  any scheme, by whatever name called,

(i) for the making of quick or easy money, or

(ii) for the receipt of any money or valuable  thing  as  the consideration for a promise to pay money,

on any event or contingency relative or  applicable  to  the  enrolment,  of members  into  the  scheme,  whether  or not  such  money  or  thing  is  derived from the entrance money of the members of  such  scheme  or  periodical subscriptions;  

21. Section  3  bans  money  circulation

schemes  or  enrolment  as  member  to  any  such

scheme  or  participation  in  such  scheme.

Sections  4  and  5  are  penal  provisions  and

prescribe  punishment.  Section  6  deals  with

offences  committed  by  Companies.  Section  7

authorizes Police Officer not below the rank of

officer  in  charge  of  a  police  station  to

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exercise power to enter and search premises and

to seize things used for such scheme. Section 8

provides  for  forfeiture  of  newspaper  and

publication  containing  money  circulation

scheme.  Section  9  declares  that  no  Court

inferior  to  the  Court  of  Chief  Metropolitan

Magistrate or Chief Judicial Magistrate shall

try any offence punishable under the Act. All

offences  punishable  under  the  Act  have  been

made cognizable under Section 10. Section 11

grants exemption from the operation of the Act

to certain money circulation schemes.

22. From  the  perusal  of  the  above

provisions, it is clear that the Act prohibits

‘money circulation scheme’. The main question,

therefore, is whether the scheme in question is

a  ‘money  circulation  scheme’  covered  by  the

Act?

23. In  Swapan Kumar Guha,  this Court had

an occasion to consider the provisions of the

Act.  Interpreting  the  connotation  ‘Money

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Circulation  Scheme’  and  speaking  for  the

majority, Chandrachud, C.J. observed: “Commas  or  no  commas,  and  howsoever thoughtfully  one  may  place  them  if they  are  to  be  there,  I  find  it impossible to take Clause (c) to mean that any and every activity "for the making  of  quick  or  easy  money"  is comprehended within its scope. For the matter of that, I cannot believe any law to ban every kind of activity for making  quick  or  easy  money,  without more, on pain of penal consequences. It is far too vague and arbitrary to prescribe that "whosoever makes quick or easy money shall be liable to be punished  with  fine  or  imprisonment". For  then,  in  the  absence  of  any demarcation of legitimate money making activities  from  those  which  fall within the ban, the question whether the penal provision is attracted in a given case will depend upon the will and  temper,  sweet  or  sour,  of  the magistracy.  Besides,  speaking  of  law and morals, it does not seem morally just or proper to say that no person shall  make  quick  or  easy  money, especially quick. A person who makes quick money may do so legitimately by the use of his wits and wisdom and no moral turpitude may attach to it. One need not travel after to find speaking examples  of  this.  Indeed,  there  are honourable men (and now women) in all professions  recognised  traditionally as noble, who make quite quick money by  the use of their talents, acumen and experience acquired over the years by dint of hard work and industry. A lawyer who charges a thousand rupees

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for a Special Leave Petition lasting five  minutes  (that  is  as  far  as  a Judge's imagination can go), a doctor who charges a couple of thousands for an  operation  of  tonsillitis  lasting ten  minutes,  an  engineer,  an architect, a chartered accountant and other  professionals  who  charge likewise,  cannot  by  any  stretch  of imagination be brought into the drag- net  of  Clause  (c).  Similarly,  there are many other vocations and business activities in which, of late, people have  been  notoriously  making  quick money  as,  for  example,  the  builders and  real  estate  brokers.  I  cannot accept that the provisions of Clause (c) are directed against any of these categories  of  persons.  I  do  not suggest that law is powerless to reach easy or quick money and if it wills to reach it, it can find a way to do it. But the point of the matter is that it will verge upon the ludicrous to say that the weapon devised by law to ban the making of quick or easy money is the provision contained in Section 2 (c)  of  the  Prize  Chits  and  Money Circulation Schemes (Banning) Act”.

24. Explaining the ambit and scope of the

expression  ‘Money  Circulation  Scheme’,  the

Court proceeded to state;

“In order to give meaning and content to  the  definition  of  the  expression 'money  circulation  scheme'  which  is contained in Section 2(c) of the Act, one has, therefore, to look perforce

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to  the  adjectival  Clause  which qualifies the words "for the making of quick or easy money". What is within the mischief of the Act is not "any scheme, by whatever name called, for the  making  of  quick  or  easy  money" simpliciter,  but  a  scheme  for  the making of quick or easy money, "on any event  or  contingency  relative  or applicable to the enrolment of members into the scheme", (whether or not such money  or  thing  is  derived  from  the entrance money of the members of such scheme  or  their  periodical subscriptions).  Two  conditions  must, therefore,  be  satisfied  before  a person  can  be  held  guilty  of  an offence  under  Section  4  read  with Sections 3 and 2(c) of the Act. In the first place, it must be proved that he is  promoting  or  conducting  a  scheme for the making of quick or easy money and  secondly,  the  chance  or opportunity  of  making  quick  or  easy money must be shown to depend upon an event  or  contingency  relative  or applicable to the enrolment of members into  that  scheme.  The  legislative draftsman  could  have  thoughtfully foreseen  and  avoided  all  reasonable controversy  over  the  meaning  of  the expression 'money circulation scheme' by  shaping  its  definition  in  this form;  

'money  circulation  scheme'  means  any scheme, by whatever name called,

(i) for  the  making  of  quick  or  easy money, or

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(ii) for  the  receipt  of  any  money  or valuable thing as the consideration for a promise to pay money,

on any event or contingency relative or  applicable  to  the  enrolment,  of members  into  the  scheme,  whether  or not  such  money  or  thing  is  derived from the entrance money of the members of  such  scheme  or  periodical subscriptions;  

I  have  reshaped  the  definition,  in order  to  bring  out  its  meaning clearly, without adding or deleting a single word or comma from the original text of Section 2(c). The substance of the matter is really not in doubt : only  the  form  of  the  definition  is likely to create some doubt as to the meaning  of  the  expression  which  is defined and, therefore, I have made a formal modification in the definition without doing violence to its language and  indeed, without even so much as altering a comma”.

25. The  Court  observed  that  besides  the

prize chits, the Act aims at banning ‘Money

Circulation  Scheme’.  It  is,  therefore,

necessary that the activity charged as falling

within the mischief of the Act, must be shown

to be a part of the scheme for making quick or

easy money depending upon the happening or non-

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happening of an event or contingency relative

or applicable to the enrolment of members into

the scheme.

26. Referring to dictionary meanings, this

Court proceeded to state;

“Therefore,  a  transaction  under which, one party deposits with the other or lends to that other a sum of money on promise of being paid interest at a rate higher than the agreed  rate  of  interest  cannot, without  more,  be  a  'money circulation  scheme'  within  the meaning of Section 2(c) of the Act, howsoever high the promised rate of interest may be in comparison with the agreed rate.  What that section requires  is  that  such  reciprocal promises, express or implied, must depend for their performance on the happening of an event or contingency relative  or  applicable  to  the enrolment  of  members  into  the scheme. In other words, there has to be a community of interest in the happening  of  such  event  or contingency”.

(emphasis  supplied)   

27. On the facts of the case, the Court

held  that  it  was  not  a  ‘Money  Circulation

Scheme’ and proceedings initiated against the

accused were liable to be dropped.

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28. Strongly relying on Swapan Kumar Guha

and the observations of this Court, the learned

counsel for the appellants contended that the

point is directly covered by the said decision

and  the  Courts  below  were  not  right  in

distinguishing it and in not discharging the

accused. 29. We  are  unable  to  uphold  the

contention.  We  have  closely  gone  through

Swapan Kumar Guha and in our opinion, the case

is clearly distinguishable. This Court, in that

case, reproduced First Information Report (FIR)

in toto. The Court then considered whether FIR

prima facie disclosed an offence under the Act.

The  Court  analyzed  FIR  ‘carefully,  and  even

liberally’ and came to the conclusion that the

FIR  against  ‘Sanchaita  Investments’  and  its

partners  (‘accused’  in  that  case)  made  in

respect of following allegations;

(1)The firm had been offering fabulous interest  @  48%  per  annum  to  its members, which rate of interest was later reduced to 36% per annum;

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(2)Such  high  rate  of  interest  was being  paid  even  though  the  loan certificate  receipts  show  that interest was liable to be paid at the rate of 12% per annum only; and

(3)The fact that interest was paid in excess of 12% shows clearly that a 'Money  Circulation  Scheme'  was being  promoted  and  conducted  for the making of quick or easy money.

30. The Court then proceeded to apply the

provisions of the Act to the allegations of

prosecution against the accused. According to

the  Court,  the  respondents  did  not  allege,

directly  or  indirectly,  that  the  firm  was

promoting or conducting a scheme for the making

of quick or easy money, dependent on any event

or contingency relative or applicable to the

enrolment of members into the scheme. Secondly,

the  FIR  did  not  contain  any  allegation

whatsoever  that  the  persons  who  advanced  or

deposited  their  monies  with  the  firm  were

participants  of  a  scheme  for  the  making  of

quick or easy money,  dependent upon any such

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event  or  contingency.  The  Court noted  the contention  of  the  learned  counsel  for  the

prosecution that the accused were promoting or

conducting a scheme for making quick or easy

money. According to the Court, however, such

argument  could  not  be  upheld  since  it  was

fallacious. It was observed in the paragraph we

have reproduced hereinabove that it would be

arbitrary to hold that whoever makes ‘quick or

easy money’ should be punished. The Court noted

some illustrative cases in which a person may

be  able  to  make  ‘quick  or  easy  money’;  for

instance,  a  lawyer  who  charges  a  thousand

rupees  (in  early  eighties,  not  now)  for  a

Special Leave Petition lasting five minutes, a

doctor who charges a couple of thousands for an

operation of tonsillitis lasting ten minutes,

an  engineer,  an  architect,  a  chartered

accountant and other professionals who charge

likewise. There are many other vocations and

business activities in which people notoriously

make quick money, e.g. builders and real estate

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brokers. From that, however, one cannot jump to

the conclusion that they are all liable to be

punished under Sections 4 and 5 of the Act.

31. The  Court  also  took  into  account,

apart from FIR, a detailed affidavit in reply

filed  in  the  High  Court.  Even  in  the  said

affidavit, there was no clear basis in respect

of allegations, nor material was disclosed to

show that prima facie, the firm was promoting

or conducting a scheme for making quick or easy

money  which  was  dependent  on  any  event  or

contingency  relative  or  applicable  to  the

enrolment  of  members  into  the  scheme.  The

‘song’  of  the  State  was  that  the  scheme

conducted by the accused would generate black

money  and  would  paralyze  economy  of  the

country. The Court was conscious and alive of

seriousness of the problem and observed that

unquestionably  a  private  party  could  not  be

allowed to issue ‘bearer bonds’ by a back door.

At  the  same  time,  however,  such  activities

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should be curbed by the Government by taking

appropriate action in accordance with law. But

if  the  activity  does  not  fall  within  the

definition of ‘money circulation scheme’ within

the  meaning  of  Section  2(c)  of  the  Act,  no

prosecution can be launched against them. Thus,

the second ingredient of Section 2(c) of the

Act,  according  to  the  Court,  was  totally

absent.

32. In  the  instant  case,  both  the

essentials  of  Section  2(c)  are  present.  The

scheme provides for (i) making of quick or easy

money, and (ii) it is dependant upon an event

or contingency relative or applicable to the

enrolment  of  members  into  the  scheme.  As

observed by us, a member would be entitled to

double  amount  only  after  his  enrolment,

additional  14  members  are  enrolled  in  the

scheme.  The  second  ingredient,  namely,  such

payment of money is dependant on the “event or

contingency  relative  or  applicable  to  the

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enrolment of members into the scheme” is thus

very  much  present.  Swapan  Kumar  Guha,

therefore, in our considered opinion, does not

apply  and  carry  the  case  of  the  accused

further.

33. It was next contended that there is no

obligation on the part of the unit holder to

enlist/enroll more members into the scheme and,

therefore, the scheme does not attract Section

2(c). The contention has no force. Section 2(c)

no where provides that a member of the scheme

must himself enroll other members and only in

that  eventuality,  the  provision  of  the  Act

would apply. The section does not provide for

positive or dominant role to be played by a

member  of  the  scheme.  In  our  opinion,  the

requirement of law is “an event or contingency

relative  or  applicable  to  the  enrolment  of

members into the scheme” and nothing more. The

plain language of the section does not insist

that such enrolment of members must be by the

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members already enrolled. It is impossible to

read  into  the  statutory  provision  such

requirement  which  is  not  stipulated  by

Parliament. Upholding of the argument of the

learned counsel would result in re-writing of

the section, which is certainly not permissible

in  our  constitutional  system.  The  event  or

contingency  on  the  happening  of  which  the

amount would become payable must be relative or

applicable to the enrolment of the members into

the  scheme.  It  is  immaterial  by  whom  such

members are enrolled. It may be by members, by

promoters  or  their  agents  or  by  gullible

sections  of  the  society  suo  motu  (by

themselves).  The  sole  consideration  is  that

payment of money must be dependent on an event

or contingency relative or applicable to the

enrolment  of  more  persons  into  the  scheme,

nothing  more,  though  nothing  less.  In  the

present  case,  the  second  ingredient  is  very

much present.

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34. It was then contended by the learned

counsel for the appellants that in the present

case, all the promises have been fulfilled by

the  promoters  and  contract  was  complete

inasmuch as for payment of Rs.625/- by the unit

holder, he was given 35 lottery tickets each of

Rs.10/- and thus an amount of Rs.350/- gets

appropriated. Likewise, for the balance amount

of Rs.275/- (Rs.625/- - Rs.350/-), he has been

made subscriber of a magazine ‘Thrikalam’ for

one  year.  Nothing,  therefore,  remains  to  be

done  thereafter  by  the  promoters  except  the

benefit which is likely to accrue in future.

Such a scheme cannot be termed as a scheme for

the making quick or easy money on any event or

contingency  relative  or  applicable  to  the

enrolment of the members of the scheme.

35. We  are  unable  to  agree  with  the

learned counsel. The Courts below rightly held

that prima facie case had been made out against

the accused. Both the ingredients necessary for

application  of  Section  2(c)  of  the  Act  are

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present in the case on hand. The trial Court,

for  coming  to  that  conclusion,  referred  to

certain  documents.  The  advertisement  clearly

declared that a member would get double the

amount when after his enrolment, two members

were enrolled under him and thereafter, 4 other

persons were enrolled and after the rolled 4

persons, 8 persons were enrolled under them.

Thus, only after 14 persons under the first

enrolled  person  become  members  under  the

scheme, the first person would get Rs.1,250/-

i.e., double the amount of Rs.625/- (1+2+4+8).

The  trial  Court  also  noted  that  Kuriachan

Chacko (Accused No.1) who proposed the project

for implementation, described how the project

would work from which also it is clear that the

double amount will be given to a person who

purchases  a  unit  only  after  14  persons  are

enrolled subsequent to him.

36. In  the  affidavit  in  reply  filed  in

this Court, respondent State has relied upon a

letter written to the Reserve Bank of India by

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the  accused  on  October  9,  2004  wherein  the

scheme has been explained. The relevant part

reads thus:

1. We are collecting Rs.625 from a person to be considered as a member of the Deepasthambham project.

2. The Rs.625 is intended as follows

Rs.10 worth Kerala Lottery Ticket per week for 35 weeks : Rs.350/-

Rs.10  worth  Thrikalam  Tri-Monthly Collage  Magazine  one  year subscription : Rs. 275/-

3. As  such,  we  are  collecting  money  in advance for the Kerala Lottery ticket and  subscription  of  the  Thrikalam magazine and not as DEPOSIT at all.

4. We  are  giving  membership  in  a particular style—adopting the principle of Multi Level Marketing method.

1st Stage  First   One member joins 2nd Stage  Below him   Two members join   3rd Stage  Below them  Four members join  4th Stage  Below them  Eight members join

Thus  14  members  join  below  the first one.

5. From  one  membership  we  take  27% commission  to  be  distributed  in  the three stages in the above manner.

On collecting such commissions, we get  Rs.1150/-  from  the  members below him. Otherwise, when the 14th member  joins,  the  commission

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reserved for the first member is paid.

6. The Rs.1150 paid to the first member is claimed by us as payment of double the amount he had entrusted and we explain it as “Refund and Commission” less our service charge.

i.e. Refund Rs.625 Commission Rs.625

   ------- Rs.1250

Less Service Charge Rs. 100 ------- Rs.1150 -------

7. Once the Rs.1150 is paid to the member, the membership is ceased, and no more ticket or Thrikalam will be given to him, even if the promised 35 tickets and  one  year  Thrikalam  are  not  yet over.

8. To justify this stand of ours, though the  Rs.1150  paid  is  actually  the commission, we term it as Refund and Commission so that the member shall not make  any  claim  for  the  remaining tickets or Thrikalam.

9. If  the  member  wish  to  get  lottery ticket and Thrikalam again he has to join again by taking new membership.

10. The lottery commission available to us on  Kerala  Government  Lottery  is  28% alone. As the commission we are paying to the member is 27%, the margin for us is only 1%.

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But then there will be a lot of other commissions on prizes bagged by the members which will add to our gain.

11. At  the  beginning,  we  offered  the Superlotto  and  Thunderball  online tickets also. But we stopped that since 2 months and now we are issuing only Kerala Govt. tickets. By October end, we will be purchasing a minimum of 1 lakh tickets every week  i.e. 10 lakh rupees  worth  tickets  in  a  week  from Kerala Government.

37. The  High  Court  also  upheld  the

argument of the prosecution that the scheme was

a ‘mathematical impossibility’. The promoters

of the scheme very well knew that it is certain

that  the  scheme  was  impracticable  and

unworkable  making  tall  promises  which  the

makers of the promises knew fully well that it

could not work successfully. It could work for

some time in that ‘Paul can be robbed to pay

Peter’ but ultimately when there is a large

mass of Peters, they will be left in the lurch

without any remedy as they would by then have

been deceived and deprived of their money.

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38. The  Court,  taking  into  account  the

scheme as a whole, recorded a finding thus:

“The  question  therefore  is  very important as to whether the Scheme is a possibility or is only a tall false claim made to fraudulently induce persons to part with their money. In this context, it has to be  seen  that  the  profitable working  of  the  Scheme  is impossible from the very nature of the  Scheme  offered.  Simple arithmetics reveal that utilising the amount of Rs. 625/-, only an amount  of  Rs.  180.50  will  be available as commission of which Rs.  24.25  is  claimed  by  the promoter and Rs. 156.25 is offered for payment to the unit holders. The details of the same are given below:

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Head      Amount  Commission           Total Percentage amount

For the Promoter Percentage/ amount

For the Subscriber Percentage/ Amount

Lottery Tickets

Rs.350/- 28% (Rs.98)

3% (Rs.10.50)

25% Rs.87.50

Magazine Rs.275/- 30% (Rs.82.50)

5% (Rs.13.95)

25% Rs.68.75

Total Rs.625/- Rs.180.50 Rs.24.25 Rs.156.25

Deficit in each If Rs.625/- were to be returned =625-156.25=Rs.468.75 Deficit in each If Rs.1250/- were to be returned =1250-156.25=Rs.1093.75

If the amount of Rs. 625/- were to be returned, there will be a deficit of Rs. 468.75. If double the amount i.e., Rs. 1,250/- were to be returned, there will  be  a  deficit  of  Rs.  1,093.75. Therefore  for  every  person  for  whom double payment is made, the promoter will  have  to  make  Rs.  1,093.75  and this obviously is paid to him from the money which subsequent subscribers pay as the price of the unit. Of course, I have not taken note of the uncertain commission  which  would  be  receivable by the promoter for prizes won by the unit holders through them. I have also not taken specific note of the savings in respect of unpurchased tickets and non-supplied  magazines  after  the subscriber receives the double amount and  closes  the  transaction  before elapse of the period of 35 months. It must  be  evident  for  any  discerning mind  that  this  Scheme  cannot  work unless more and more subscribers join and the amount paid by them as unit price  is  made  use  of  to  pay  the previous subscribers. The system is an inherently  fragile  system  which  is unworkable.  Foolish,  gullible  and stupid persons alone may fall for the Scheme without carefully analysing the stipulations of the Scheme. It would be  totally  erroneous  to  assume  that the offence of cheating would not lie if the persons deceived are gullible, unintelligent and stupid persons. The system  and  the  law  has  a  duty  to protect  such  victims  of  crime  also.

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According to me, there is no reason to assume  that  the  promoters  had  no contumacious  intention  and  they embarked  on  the  venture  without  any culpable  motive  on  the  honest assumption  that  the  tickets  sold through  them  will  win  prizes  and sufficient  commission  will  be available to pay double the amount to all the unit holders”.

39. The Court also stated;

“I  take  note  of  the  fact  that inherently  there  is  merit  in  the allegation of the prosecution that the Scheme is so grossly unworkable that the  persons  who  made  representations to that effect and induced persons to part  with  money  did  entertain  the contumacious  intention.  They  knew fully  well  that  unworkable  false representations  were  being  made.  The obvious attempt, it can be presumed at this stage, was to induce persons by such false unworkable representations to  part  with  money.  Initially  some subscribers can be kept satisfied to induce  them  and  others  similarly placed  to  join  the  long  queue.  But inevitably  and  inescapably  later subscribers are bound to suffer unjust loss  when  they  swallow  the  false promises and make payments”.

40. The ratio laid down by this Court in

State Of Madhya Pradesh v. Mir Basit Ali Khan

& Ors., (1971) 2 SCC 96 has no application. In

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that  case,  the  Court  was  considering  the

provisions  of  Section  420,  IPC  read  with

Section  120B.  Obviously,  it  was  not  a  case

under 1978 Act.

41. On the facts and in the circumstances

of the case, in our opinion, the Courts below

were  right  in  not  interfering  with  the

prosecution at the stage of framing of charge.

We see no reason to interfere with the order.

42. So far as the offence punishable under

Section  420  read  with  Section  34,  IPC  is

concerned, it is true that for application of

penal provision of Section 420, IPC, there must

be ‘cheating’ as defined in Section 415, IPC.

43. The said Section reads thus:

415. Cheating 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

36

cause damage or harm to that person in body, mind, reputation or property, is said to "cheat".

44. Mere reading of the Section makes it

clear  that  it  requires  the  following

ingredients to be satisfied;

1. Deception of any person;

2.(a)  Fraudulently  or  dishonestly inducing that person;

(i) to  deliver  any  property  to  any person, or

(ii) to  consent  that  any  person  shall retain any property, or

(b) intentionally  inducing  that person  to  do  or  omit  to  do anything which he would not do or  omit  if  he  were  not  so deceived,  and  which  act  or omission causes or is likely to cause  damage  or  harm  to  that person in body, mind, reputation or  property.  [vide  Ram  Jas, (1970)  2  SCC  740;  Hridaya Ranjan Prasad Verma v. State of Bihar,  (2000) 4  SCC 168;  S.W. Palamitkar  v.  State  of  Bihar, (2002) 1 SCC 241].

45. The trial Court as well as the High

Court considered the facts of the case and held

that there is element of cheating inasmuch as a

37

representation  was  made  by  the  accused  that

every unit holder will get double the amount

invested by him; the representation was false,

the maker of the representation was aware that

the representation was not true and by such

representation,  he  deceived  the  victim  to

believe  the  representation  to  be  true  and

actuated him to act on such representation. The

promoters induced common public to part with

money  on  the  lure  of  doubling  the  amount.

Prima facie, the Courts were satisfied that but

for such representation and the benefit sought

to be given under the scheme, the victims would

not have acted on such representation. It was,

therefore,  a  case  of  application  of  Section

415, IPC. Prima facie case had been made out in

absence of better explanation by the accused.

If it is so, it could be said to be a case for

application of Section 420 read with Section

34, IPC, of course, at this stage.

46. In our opinion, the Courts below have

not  committed  any  error  in  coming  to  such

38

conclusion at the stage of framing of charge

and  no  interference  by  this  Court  is,

therefore, called for.

47. For  the  foregoing  reasons,  in  our

opinion, both the Courts below were right in

framing the charge against the appellants and

no illegality has been committed by them in

coming  to  such  conclusion.  It  is  no  doubt,

true, that the above orders do not mean that

the accused have committed such offences. It

only means that a  prima facie case has been

made out to frame charge and at that stage, no

interference is called for. We are, therefore,

not inclined to interfere with the said order.

The appeals deserve to be dismissed and are

hereby dismissed.

48. Before parting with the matter, we may

clarify that we may not be understood to have

expressed  any  opinion  on  the  merits  on  the

matter  one  way  or  the  other.  All  the

observations made by the trial Court, by the

High Court as well as by us in this judgment,

39

must be construed as limited to the framing of

charge and nothing more than that. As and when

the main matter will come up before the Court

for hearing, the Court will decide it on merits

without being inhibited or influenced by the

above observations.

49. Ordered accordingly.

…………………………………………………J. (C.K. THAKKER)

NEW DELHI, …………………………………………………J. JULY 10, 2008. (D.K. JAIN)

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