REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO.  2089 OF 2008 (Arising out of SLP (Crl.) No.3600 of 2006)

Sharon Michael & Ors. … Appellants

Versus

State of Tamil Nadu & Anr. … Respondents

J U D G M E N T

S.B. Sinha, J.

1. Leave granted.

2. Appellants are before us being aggrieved by and dissatisfied with the

judgment and order dated 2.3.2006 passed by a learned Single of the High

Court  of  Judicature  at  Madras  in  Criminal  Appeal  No.26498  of  2005

dismissing their applications for quashing the summons issued to them in

Crime No.32 of 2005 on a complaint filed by one of the partners of M/s.

Aarbee Apparels Impex, Tiruppur under Sections 120-B, 409 and 420 of the

Indian Penal Code (for short, “IPC”).

3. M/s.  T.M.S.  Fashion  Private  Limited,  Chennai  (for  short,  “the

Company”) is a certifying agent.  Appellant No.1 is the Assistant General

Manager of the company engaged in export of garments.  Appellant No.2 is

the Accounts Manager, Appellant No.3 is the Shipping Manager, Appellant

No.4  is  one  of  its  Directors  and Appellant  No.5  is  a  Consultant  for  the

Company.  Appellant No.6 is an employee of Bax Global Private Ltd. who

has nothing to do with the appellant company.

4. In the complaint petition, the complainant alleged that the appellant

Nos.1 to 4 had approached the Aarbee Apparels Impex which is engaged in

the manufacture of Hosiery Garments in the month of December 2004 for

supply of men’s cardigan and sweat shirts for the total value of 76,197.60

Euros to Ultimate Buyers at Germany.  Pursuant thereto or in furtherance of

the said contract entered into by and between the parties, export of the said

garments were made by Respondent No.2.  The Company is said to have

issued various inspection certificates in the following terms :

“This is to certify that the goods of above Order have been inspected prior to shipment and found in  order  and  good  conditions.   This  certificate shall  be  entirely  without  prejudice  and  shall  not absolve the seller from liability in respect of any

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actions,  claims,  demand  of  proceedings subsequently  taken  or  made  by  TMS  (Fashion) Pvt. Ltd. and/or their customer.”

The supplier company Aarbee apparel, however, stood guarantor for

‘skip stitches after checking’.   

5. The buyer company by an email refused to accept the shipment on the

premise  that  on  a  random checking  too  many  defects  disqualifying  the

goods to be shipped were found and, thus, the goods being sub-standard,

were not acceptable.  They asked the company to pick up the goods from

their warehouse.  Respondent No.2, however, did not make any attempt to

re-export the said goods from Germany to India.  

On  or  about  18.3.2005,  it  filed  a  complaint  petition  with  the

Superintendent of Police, Coimbatore to help it  to recover dues from the

appellant company.   

Appellant company, thereafter sent a legal notice to Respondent No.2

on or about 25.3.2005, inter alia, stating :

“Our clients state that you were clearly informed that quality control checks would be very stringent and unless quality norms are met, the buyer would not accept the consignment leading to large losses all around.  You accepted the terms and promise to deliver the finished goods in time.  Accordingly,

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three purchase orders were placed on you by TMS, details as follows :

SPO No. Style No. Rate ? PC

1. 051949 P30837 Euro.6.80 (C&F)

2. 7051961 P30857 Euro.9.45 (C&F)

3. 7051964 P30858 Euro10.26 (C&F)

The  delivery  date  was  stipulated  as  15.01.2005, payment on L/C basis at sight.  The letter of credit was accordingly established by Manhattan on you expiring on 25.01.2005 for the sum of 84.486.00 Euro  you  have  accepted  the  purchase  order  and claimed to have commenced manufacture.

Our  clients  state  that  within  a  few days,  it  was found that your factory was having only around 15 machines  and  worse,  the  factory  itself  as  not running for a few months and you had given the entire order on job work basis to various smaller units  in  Tirupur.   At  that  stage,  our  client  had committed  the  delivery schedule  to  the  buyer  in Germany and also accepted heavy penalties in case of delayed delivery of short  supply.  Thus, there was no choice for our clients to cancel the order with you and find another manufacturer.  Further, rejection  would  be  automatic  and  you  were directed  to  ensure very strict  quality  checks  and delivery schedules.  You have assured TMS that despite the out sourcing of the work, quality and delivery schedule would not be an issue since you would  personally  see  the  order  is  carried  out categorically.

Our clients state that despite these assurance, you could not stick to the schedule delivery date and ultimately, even the letter of credit opened on you by Manhattan expired.   To our clients  short  and dismay, it  was found that practically none out of the  garment  were  defective.  A Complete  quality

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check was proving difficult because of your non- cooperation and finally TMS had to send its staff from Chennai  to  supervise  the  quality  check  by end  January  2005.   The  order  was  coming  into your factory from various jobbers in bits and much time the garment was checked, it could not be the checked  garment  factory since  you did  not  even have an repeating apparently, many of the pieces rejected  to  TMS  quality  control  staff  were repeated and brought  by you as  if  it  had passed scrutiny.  Ultimately by middle of February 2005, our  client  already threatened with  huge penalties by  the  buyer  due  to  delay,  decided  that  7.080 pieces would be shipped out on the understanding that  you  will  receive  payment  only  for  those garments  accepted  by  the  buyer.   The  final inspection  reports  from TMS passed  these  items only under your letter of guarantee for the various defects pointed out  in the reports.   It  is  relevant that  Order  No.7051949  Styles  P30837  totally rejected by TMS, Tirupur, since the fabric did not meet  the  specifications  given  in  the  purchase order.

Accordingly,  the  other  shipments  pertaining  to Order No.7051961 & 7051964 left Chennai under Airway Bill  Nos.020-34456435 dated 18.02.2005 and  No.020-34456413  dated  19.02.2005 destination Düsseldorf, Germany.  By e-mail dated 1.3.2005,  the  buyer  Exprit,  Germany  have informed  TMS,  Channai  that  the  entire consignment was rejected by them.  Our client’s enquiries with the buyer revealed  that on random checking, it was found that practically every piece checked  had  some defect  or  the  other  and  their stores  could  not  retail  such  poor  quality  stock. Our clients have pleaded with the buyer to salvage at  least  those  few pieces  which  they would  feel acceptable  qualitywise  and  that  process  is  still underway.   However,  our  clients  have  been informed clearly that there is no obligation on the

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part of the buyer to accept even a single garment since it  is  not  their  job to check each and every garment before accepting the goods.  Such random checks are the accepted trade practice and failure to adhere to such strict quality norms has resulted in huge losses to our clients.  Our clients state that in particular, TMS has lost commission amounting to 1882-90 Euros (Rs. One lac three thousand five hundred and sixty only) and Manhattan have been threatened by the buyer with a claim equal to five time  the  FOB  value  (Rs.2,58,90,000).   In  fact Manhattan have already received a debit note from the  buyer  for  style  P30857  for  52020.54  Euro. Further  claims  are  expected  any  moment.   Our clients  state  that  you are  directly responsible  for these  losses.   You  have  deliberately  made  our clients  risk  their  reputation  in  the  international market and you have exposed our clients to severe losses  by  your  irresponsible  and  dishonest  acts. You  have  deceived  our  clients  into  placing  the order  with  you  by  falsely  representing  that  you have the experience,  infrastructure  and means to carryout the order on top of all these you appear to have  given  some  false  complaint  to  the  Crime Branch, Tirupur as if TMS has cheated you.  You are  hereby called  upon to  immediately  withdraw this complaint which clearly amounts to malicious prosecution  meant  to  harass  our  clients  failing which our clients would take severe action against you.   Our  clients  also  hereby put  you on notice that  the  consignment  is  lying  at  Germany  and despite our clients repeated mails to you, you have neither  bothered  to  respond  and  explain  and rejection  of  the  goods  nor  have  you  agreed  to make arrangements to take back the consignment. Our clients have been informed by the buyer that they will  not be responsible  for the consignment after  10.4.2005.   The  warehousing  and  handling charges would have to be borne by you.  Having guaranteed the quality of the consignment to the standards set by the buyer, you cannot today claim

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the value of the order from our clients and instead you are due to our clients the damage suffered by them by your non-performance.  On behalf of our clients, we hereby call upon you to pay our clients a  sum  of  Rs.28,61,130/-  being  the  rupee equivalent  of  52,020.54  Euro  within  15  days  of receipt of this notice, failing which our clients will institute appropriate legal action for the recovery thereof,  needless  to  add  at  your  costs  and consequences.  Further, be forewarned that further claims from the buyer to our client’s account will be in turn claimed by our clients from you.  This notice  is  issued  without  prejudice  to  our  clients rights  to  you  for  malicious  prosecution  and damages  on  account  of  your  complaint  to  the Police against our clients, if the need arises.”

6. A first information report was lodged by respondent No.2 before the

Coimbatore Police Station on or about 4.6.2005, inter alia, requesting the

officer in charge of the Police Station to take legal action for the alleged

offences committed by the appellants and help it to recover the amount from

them. Thereupon Crime No. 32 of 2005 was registered.    

It is not in dispute that after two employees of the appellant company

were arrested, a sum of Rs.30,00,000/- (Rupees thirty lacs only) was paid by

the  appellant  company to  the  respondent  No.2.   It  is  further  stated  that

another sum of Rs.18,00,000/- (Rupees eighteen lacs only) is owing and due

to them.  It is at that stage, the appellants filed an application under Section

482 of the Code of Criminal Procedure.   

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By  reason  of  the  impugned  judgment,  while  dismissing  the  said

application, the High Court held:

“9. The  facts  and  circumstances  of  this  case would  reveal  that  M/s.  ESPRIT  EUROPE TRADING  AND  PRODUCT  DEVELOPMENT had approached  the  Manhattan  Limited  in  Hong Kong to supply “men’s cardigan and sweat shirts”. Manhattan  Limited  had  contacted  TMS fashions Pvt. Ltd. to procure those goods and supply them to  Esprit  Europe  Trading  and  Product Development,  based  on  the  Letter  of  Credit opened by Manhattan Limited, TMS Fashions Pvt. Ltd.,  approached  M/s.  Aarbee  Exports  Impex  to produce  “men’s  cardigan  and  sweat  shirts”  for export.

10. As  far  as  the  De  facto  complainant  is concerned,  the  de  facto  complainant  was  not approached  by  M/s.  Espirit  Europe  Trading  and Product  Development  or  Manhattan  Ltd.  TMS Fashions  Pvt.  Ltd.  alone  contacted  the  de  facto complainant  and  persuaded  them to  manufacture the specified goods for export to Germany.  The documents  would  show  that  quality  check  had been done  by the TMS Fashions  Pvt.  Ltd.   The whole production done by the d facto complainant was completely controlled by TMS Fashions Pvt. Ltd.

11. There  is  a  specific  allegation  in  the complaint that the de facto complaint refused to go in for shipment of  the goods as they understood that the Letter of Credit opened by M/s. Manhattan Ltd. with State Bank of India, Tirupur Branch was not renewed on 25.1.2005.  It has also been stated in  the  complaint  that  TMS  Fashions  Pvt.  Ltd. informed the de facto complainant that the Letter of  Credit  opened  by  Hong  Kong  Company  was revalidated upto 28.2.2005, having consigned the

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goods,  the  de  facto  complainant  approached  the State  Bank  of  India,  Tirupur  Branch  but  was unfortunately informed by the State Bank of India, Tirupur Branch that the Letter of Credit was never revalidated,  it  is  further  contended  in  the complaint.  The allegations of criminal conspiracy and cheating have been made in the complaint.”

It was furthermore opined :

“16. In the instant  case,  it  has been specifically contended  in  the  complaint  that  the  petitioners herein  enticed  the  de  facto  complainant  to  part with the goods having made misrepresentation that the  Letter  of  Credit  opened  by  the  Hong  Kong Company was extended  for  a  further  period  and thereby  the  accused  de  facto  complainant  was duped  by  the  petitioners  herein.   Therefore,  the above  authority  will  not  apply  to  the  facts  and circumstances of this case.”

The High Court concluded:

“20. It  is  not  as  if  that  the  complaint  lacks ingredients of the offence of cheating and criminal breach of trust.  The petitioners cannot wriggle out of the investigation process embarked upon by the second respondent-police on the ground that they acted as an agent of their principal M/s. Manhattan Ltd.  The allegation in the complaint would reveal that the whole transaction was clinched by the de facto complainant only with the petitioner herein. But for the representation made and the assurance given by the petitioners, the goods would not have been shipped by the de facto complainant,  it  has been  contended  in  the  complaint.   The  whole gamut of the allegation will have to be probed into

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by the investigation agency.  When the complaint reflects commission of cognizable offence and the same will  have to  be thoroughly investigated  by the  second  respondent-police,  the  question  of quashing the case registered against the petitioners does not arise for consideration.”

7. Mr. G.V. Rao, learned counsel appearing on behalf of the appellant

would contend that the dispute between the parties having arisen out of a

contract qua contract, the complaint petition was not maintainable.

8. Mr.  V.  Kanagaraj,  learned  senior  counsel  appearing  on  behalf  of

Respondent No.2, on the other hand, submitted that the complaint petition

had to be filed only because the appellant  did not  pay the entire amount

representing the value of the garments exported.  It was contended that the

appellants having made part payment of the entire dues cannot be permitted

now to turn round and contend that they have no liability in the matter at all.

9. Indisputably Respondent No.2 is the producer of the garments.  The

buyer  is  a  German  Company.   Rightly  or  wrongly,  the  buyer  refused  to

accept the goods, inter alia, on the premise that the same were defective and

sub-standard.   We will  assume  that  the  appellant  company  was  assured

payment for such supplies.  Even if that be so, it  would be a del credere

agent.  Its liability is, therefore, a civil liability.  The allegations contained

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in  the  First  Information Report  did  not  reveal  that  any misrepresentation

was made at the time of formation of the contract.  The goods were to be

supplied by Respondent No.2.  They were presumably required to meet the

requirements of the buyer.  Even if the certificate granted by the appellant

company was incorrect, an appropriate action against them could have been

taken for breach of contract.   

10. The ingredients of an offence as contained in Section 420 of IPC are

as under:

“i) Deception of any persons;

ii)  Fraudulently  or  dishonestly  inducing  any person to deliver any property; or

iii)  to  consent  that  any  person  shall  retain  any property  and  finally  intentionally  inducing  that person  to  do  or  omit  to  do  anything  which  he would not do or omit.”

Criminal  breach  of  trust  is  defined  in  Section  405  of  IPC.   The

ingredients of an offence of the criminal breach of trust are :

“1. Entrusting any person with property or with any dominion over property.

2. That  person  entrusted  (a)  dishonestly misappropriating  or  converting  to  his  own use that property; or (b) dishonestly using or disposing  of  that  property  or  willfully

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suffering  any  other  person  so  to  do  in violation—

(i) of  any  direction  of  law  prescribing the mode in which such trust is to be discharged, or  

(ii) of  any legal  contract  made touching the discharge of such trust.”

Ingredients of Section 409 of IPC read as under :

“(i) The accused must be a public servant;

(ii) He  must  have  been  entrusted,  in  such capacity, with property.

(iii) He must have committed breach of trust in respect of such property.”

11. The First Information Report contains details of the terms of contract

entered into by and between the parties  as also the mode and manner in

which  they were  implemented.   Allegations  have  been made against  the

appellants in relation to execution of the contract.   

No  case  of  criminal  misconduct  on  their  part  has  been  made  out

before  the  formation  of  the contract.   There  is  nothing  to  show that  the

appellants  herein  who  hold  different  positions  in  the  appellant-company

made any representation in their personal capacities and, thus, they cannot

be made vicariously liable only because they are employees of the company.

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12. In R. Kalyani v. Janak C. Mehta & Ors. [2008 (14) SCALE 85], this

Court held :

“24.  As  there  had  never  been  any  interaction between the appellant  and them, the question  of any  representation  which  is  one  of  the  main ingredients for constituting an offence of cheating, as  contained  in  Section  415 of  the Indian  Penal Code, did not and could not arise.

25.  Similarly,  it  has  not  been  alleged  that  they were  entrusted  with  or  otherwise  had  dominion over  the  property  of  the  appellant  or  they  have committed any criminal breach of trust.

So far as allegations in regard to commission of the offence of forgery are concerned, the same had been made only against the respondent No. 3 and not against the respondent No. 2. Sending a copy thereof  to  the  National  Stock  Exchange  without there  being  anything  further  to  show  that  the respondent  No. 2 had any knowledge of the fact that  the  same  was  a  forged  and  fabricated document cannot constitute offence.

Allegations  contained  in  the  FIR  are  for commission of offences under a general statute. A vicarious liability can be fastened only by reason of a provision of a statute and not otherwise. For the said purpose, a legal fiction has to be created. Even  under  a  special  statute  when the  vicarious criminal  liability  is  fastened  on  a  person  on  the premise that he was in- charge of the affairs of the company and responsible to it, all the ingredients laid  down under  the  statute  must  be fulfilled.  A legal  fiction  must  be  confined to  the  object  and purport for which it has been created.”

It was furthermore observed:-

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“27. If a person, thus, has to be proceeded with as  being  variously  liable  for  the  acts  of  the company, the company must be made an accused. In any event, it would be a fair thing to do so, as legal fiction is raised both against the Company as well as the person responsible for the acts of the Company.”

The liability of the company is, therefore, a civil liability.  It is also

not a case where although a prima facie case had been made out disclosing

commission of an offence, the court is called upon to consider the defence

of the accused.  The First Information Report itself refers to the documents.

They  can,  therefore,  be  taken  into  consideration  for  the  purpose  of

ascertaining as to whether  the allegations  made in  the complaint  petition

read  as  a  whole,  even  if  taken  to  be  correct  in  its  entirety,  discloses

commission of any cognizable offence or not.  As admittedly Respondent

No.2 was the supplier of garments which were found out to be defective in

nature, we are of the opinion that the dispute between the parties is civil in

nature.    

13. For the  reasons  aforementioned,  the impugned judgment  cannot  be

sustained.   It  is  set  aside  accordingly.   The  appeal  is  allowed.   The

impugned summons issued to the appellants are quashed.  

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……………………………….J. [S.B. Sinha]

..…………………………..…J. [Cyriac Joseph]

New Delhi; December 19, 2008

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