The Judgment of the Court was delivered by
Khundkar, J.:— These two appeals arise out of the convictions of three persons, Hari Das Barat, Sudhir Chandra Nathak and Barendra Nath Ganguli on a charge of conspiracy to cheat under s. 420 read with s. 120B of the Indian Penal Code. For that offence they were sentenced to rigorous imprisonment for two years. The appellants were also convicted under live separate counts of specific acts of cheating with regard to five different individuals but no separate sentences were passed on them in respect of this conviction.
The case for the prosecution was that the appellants were associated together for the furtherance of a scheme known as the Auto Circulating Co., the original objects of which are to be gathered from the prospectus, Ext. 3, which was published on August 3, 1937. This prospectus is in the following terms:—
The Auto Circulating Co.
Registered under Act IX—1937.
The company is placing before the public a new scheme, by which each policy-holder will be benefited to the extent of twelve times the amount of his contribution in the course of fourteen months.
On receipt of a sum of Rs. 5 (Rupees five only) the company will allot a policy, which will enable him to claim from the company the sum of Rs. 60 (Rupees sixty only) in twelve instalments of Rs. 5 (Rupees five only) each, commencing after the expiry of two months from the date of his payment. This, in the opinion of the company, will be made possible by the issue of two fresh policies of a like value and on similar terms against each original policy; so that a contribution will be multiplied many times over by allotment of the series of increasing policies. The company expects that policy-holders in ever increasing numbers will be attracted by the benefit offered by the scheme and that policy-holders once benefited will renew their applications over and over again, and thus there will limitless prospect of expansion; and there will thus be no difficulty in securing to the policy-holders payments in the manner stated above. The circulation of the policies will be arranged for by the company.
Subsequently a further prospectus, Ext. B(3) which related to a supplementary scheme and which is described as prospectus of scheme B was issued and its language is as follows:—
The Auto Circulating Co.
Registered under Act IX—1937.
The company is placing before the public another novel scheme by which a person will be benefited to the extent of two times in the course of two months or so according to the calculation of the company.
On having a sum of Rs. 5, the company will issue a receipt and allot a coupon, which will enable the allottee to receive a sum of Rs. 10 from the company by two instalments, the first one of Rs. 5 within a reasonably short time, say, within a ??? from the date of the puccâ receipt of the company, and the other, after the expiry of one and a half months therefrom. This, in the opinion of the company, will be made possible by the issue of two fresh coupons of a like value against each original coupon and by allotting those again on similar terms and thus the amount of benefit will accrue out of allotment of a few successive coupons. The company expects that the allottees of coupons in ever-increasing number will also be attracted by the benefit to be offered by the scheme and will renew their applications again and again thus there will be limitless prospect of expansion and no difficulty will arise to arrange for the payment of benefit in the manner stated above.
It is apparent that the only material difference between the two schemes was in the amount which the investor was to receive and the time of payment. After this, another prospectus of scheme B was printed. That has been called the prospectus of revised scheme B. It is very important, but for the sake of clarity it will be dealt with later.
The idea behind the scheme outlined in the two prospectuses set out above may be described as that of a financial snowball which would gather volume as long as it could run without disintegrating and without slackening in speed. Obviously, the investors who subscribed to the scheme first were to be paid out of the subscriptions of the investors who come in later. Obviously also the liabilities of the company toward its subscribers would grow as policy followed policy in a sort of geometrical progression. Nor is this all. Expenses would have to be met out of takings, and some of these, notably commissions to agents would absorb considerable sums. As subscribers could be paid only so long as the company had in its hands sufficient contributions from other subscribers who came in afterwards, there would have to be a continuous uninterrupted and enormously progressive increase in the latter. That such a process could not go on for ever is self-evident. That the, promoters of the scheme intended to make a profit for themselves out of the moneys coming into their hands is also beyond dispute. Large numbers of people were induced to subscribe and many agents were employed at very high rates of commission. The evidence is that for each policy of Rs. 5, which an agent brought in, he would ordinarily be paid Re. 1. The concern functioned for five months from the middle of August, 1937, to the middle of January, 1938, during which period it received from the public a very large amount of money, about, it is said, four lakhs of rupees. Many of the earlier investors were paid in accordance with the representation contained in the prospectus. Others, though they did not receive the full amount promised, got more than their money back. Still others got back what they had contributed.
With regard to the specific acts of cheating, with, which the accused were charged and with which we propose to deal first, the Magistrate convicted them apparently because he thought that the finding that they were guilty of conspiracy should logically lead to conviction for the specific acts of cheating. His observations regarding this branch of the case are as follows:—
As to the charges of overt acts (2), (3), (4), (5) and (6)it is said by defence that in none of the cases the policy-holders paid the amounts mentioned and that they had received from the company larger sums than they had paid. But the defence has not considered that they had received money on other accounts. They may have received more than they paid, but those are the cases when they had received on other account like their commission for being agents of the company. The point in issue is whether they had received what was due to them. They did not and therefore these charges have been proved. I have held that the conspiracy charge has been proved, the specific charges must also succeed. I have held that the company was started to cheat the public. I therefore hold charges that moneys relating to counts (2) to (6) were taken from the respective victims by fraud.
The Magistrate has not separately considered the materials upon which each specific count of cheating was rested and it will, therefore, devolve upon us to examine those materials for the purpose of ascertaining whether the ingredients of cheating, as defined in s. 415 of the Indian Penal Code have been made out. Counts (2) to (6) of the charge allege that the three accused cheated five separate persons by dishonestly inducing them to deliver various sums of money by deceiving them by means of representations and conduct as detailed in the overt acts as mentioned in count No. (1).
Those overt acts set out in count No. (1), the conspiracy charge are as follows:—
(a) That a bogus business house under the name and style of the “Auto Circulating Co.” was started with the actual object of collecting monies in a wide scale on the pretext of selling policies, coupons and units.
(b) That printed copies of prospectus and other literature extolling the benefits of the various schemes were circulated broadcast inviting applications for the purchase of policies, coupons and units.
(c) That copies of such prospectus and other literature contained various misleading statements including the statement “Government Registered.”
(d) That for the purpose of inducing the public to part with their monies, a large number of agents were appointed on a liberal scale of remuneration and they were furnished with copies of such printed literature and prospectus and such agents were deputed to induce people to part with their monies on the representations contained in such copies of literature and prospectus.
(e) That for the purpose of creating confidence in the minds of the members of the public and of misleading them into the belief that the promises contained in the printed prospectus would be fulfilled, certain payments were made purporting to be partial fulfilment of such promises.
It is difficult to see how any of the overt acts with the exception of that set out in (c) amounted to a false representation or suppression of material fact such as is required by s. 415 of the Indian Penal Code.
As regards the allegation contained in cl. (c) that “Government Registered” was a misleading statement, it appears that the company was actually registered under Act IX of 1932 and this representation is therefore not a false representation.
Coming to the evidence, we have read the testimony of P. Ws. 36, 38, 39, 41 and 44, the five persons alleged to have been cheated, with care, and we are unable to say that, upon a fair reading of their testimony, it can be held to be established that these persons were cheated within the meaning of s. 415 of the Indian Penal Code. In effect the scheme, was a gamble, and we are seriously inclined to think that the reason why so many people participated in it was because of its appeal to the gambling instinct of the public. Be that as it may, the evidence in question does not establish the making of any false statement or the suppression of any material fact which deceived these witnesses, nor does it establish that it was because of such deception that they contributed their money.
What these witnesses have said is this: P.W 36 invested his money on reading the prospectus, Exts. 3, 4 and 12, as he understood that policies would be increased and his money would be safe. P.W 39 was told by the second accused that if he paid Rs. 5 the company would pay him back Rs. 5 after two months and Rs. 5 each month for a year. This would be possible owing to the circulation of money. This witness saw on the prospectus that it was Government registered and this made him confident. P.W 38 saw the prospectus Ext. 3 and was told by the second accused (to use the witness' own words):—
If I would take policy with the money I would pay I would be able to purchase two other policies and therefore the business would increase and it would enable them to pay me Rs. 60. I believed him.
P.W 41 was told by the second accused that it was a registered company, the business would never fail and they would start many other kinds of business with the moneys received. With reference to the statement regarding other businesses it may be pointed out at once that this representation is not set out in the charge either as an overt act or a representation which deceived these witnesses. Upon the facts and circumstances of this case, we are not prepared to hold that this statement even if it was ever made, was the statement which induced the witness to subscribe to the scheme. P.W 49 was told by the first accused that they would be able to pay policyholders by circulation of money and by interest on hundis. He was also told that their business had extended so much that the Postal Department would probably open out a Sub-Post Office for receiving and paying out money orders. This created confidence in the witness. Regarding the statement about interest on hundis the same observations apply as we have made regarding the statement concerning other businesses with reference to witness No. 41.
What has been set out above about the overt acts, the specific counts of cheating and the evidence upon which these counts are rested has led us to reach the conclusion that these counts have not been made out.
There remains the charge of conspiracy to cheat. This has been set out in the following words:—
That you (1) Hari Das Barat, (2) Sudhir Chandra Nathak and 3) Barendra Nath Ganguli, between August 16, 1937, and January 14, 1938, in the town of Calcutta, along with others, names unknown, were parties to a criminal conspiracy to commit an offence punishable with rigorous imprisonment for a term of two years or upwards, to wit, the offence of cheating and dishonestly inducing delivery of property, by deceiving unwary members of the public and thereby dishonestly inducing them to deliver to you at your office started under the name and style of “The Auto Circulating Company”, property to wit, divers sums of money amounting to Rs. 5 or multiples thereof being the purchase price of policies promised to be issued by you under the scheme described as “Scheme A” or of coupons or units promised to be allotted by you under schemes described as “Scheme B” or “Revised Scheme B” respectively and which said sums of money the said unwary members of the public would not have parted with had they not been so deceived and in pursuance of which conspiracy the following amongst other overt acts and the offences mentioned in counts Nos. 2 to 6 were committed.
For the moment we will, postpone consideration of revised scheme B which raises a question of a very different kind from those with which the rest of this charge is concerned.
The Magistrate's findings other than his finding regarding revised scheme B are rested upon the conduct of the accused and the contents of the prospectus of schemes A and these findings are to the following effect:—
The prospectus stated that the head office was at Bowbazar. This implies that the company also had branch offices but the evidence does, not establish this.
The expression “Government Registered” which ordinarily would be harmless operated when taken along with other representations which were false as an inducement to the public to pay money.
The limitless prospect of expansion would in a short time cover the whole population of the world and if the public were to re-invest their money that too would create further liabilities for the company.
The fact that the receipt issued in respect of the very first policy bore the serial number 1001 indicates that in the mentality of the accused deception and misappropriation predominated. Their intention was to convince policy-holders by means of receipts bearing high serial numbers that the company had already done good business, was on a firm footing and that there was not the slightest chance of failure to pay the instalments promised in the prospectus.
Although it was the duty of the accused to account for every penny they spent the accused were taking for themselves large sums of money through one Surendra Nath Nathak as overriding commission. We may pause to observe that this finding shows that the learned Magistrate is here making a confusion between the ingredients of cheating on the one hand and the ingredients of criminal misappropriation or criminal breach of trust on the other.
The fact that the company paid allowances, bonuses and prizes and special rates of commission to agents made the scheme unworkable. Non-disclosure of this fact amounted to dishonest concealment of fact.
We do not propose to enter in detail into a discussion of, these findings. Suffice it to say that, to establish a conspiracy to cheat, the prosecution would be bound to prove an agreement to do something which would fulfil the requirement of s. 415. We are not prepared to say that the findings outlined above are, findings of such facts as are needed to satisfy the two essential requirements of s. 415. They do not show that the contents of the prospectus of schemes A and B and the conduct of the accused amounted to false representations or dishonest concealment of facts such as were calculated to deceive the public and to so induce it to contribute money to the scheme. The idea which dominated the scheme was that of a rapidly increasing number of subscribers out of whose contributions the dues of earlier subscribers as well as expenses and the profits of the promoters would be paid. That it could not go on indefinitely was self-evident. But it was workable for a time and did, in fact, work for a time, and herein lay the roots of the gamble and the secret of the appeal which the scheme held for the public. The facts established make it difficult to distinguish this case from that of Radha Ballav Pal v. Emperor,. The head note of that report which accurately represents the effect of the decision is as follows:—
Where there is a prospectus which puts forward a highly speculative and palpably unworkable scheme but which makes no false statements and conceals nothing and merely appeals to the gambling instinct and with regard to which the finding is that members of the public who contributed to the scheme were either too obtuse to realise weakness which was patent or actuated by a vague hope that their money would somehow be repaid before the crash came, no conviction under s. 420, Indian Penal Code, can be founded on the issue of such a prospectus alone.
In the result we are unable to uphold the conviction upon the charge of conspiracy to cheat in so far as that charge is based upon the conduct of the accused and upon the publication of the prospectus of schemes A and B.
We now take up the consideration of this charge, in so far as it is based on the revised scheme B. That is set out in a leaflet which is in the following language:—
The company is placing before the public the revised scheme by which a person may be benefited to the extent of two times of the maximum in the course of two months or so—according to the calculation of the company.
On having a sum of Rs. 5 (including the charge) per unit the company will issue a receipt which may enable the holder to receive a sum of Rs. 10 at the maximum by two instalments—the first one within one month from the date of the puccâ receipt of the company and the other, after the expiry of one month therefrom. This, in opinion of the company, will be made possible by investing the fund as a loan in some lucrative business, e.g, in coal, tea and insurance companies, cotton mills, etc., and by starting any or more remunerative business, e.g, poultry, banking, etc. The company expects that people in ever-increasing number will invest again and again for having the benefit to be offered by the scheme. Thus there will be a large accumulated fund and the return may be expected to be very high. So there will possibly be no difficulty to pay the benefit in the manner stated above.
The words—
This in the opinion of the company will be made possible by investing the fund as a loan in some lucrative business, e.g, in coal, tea and insurance companies, cotton mills, etc., and by starting any or more remunerative business, e.g, poultry, banking, etc.
and the words—
Thus there will be a large accumulated fund and the return may be expected to be very high appear certainly upon the face of them to be a misrepresentation of facts, for there is no evidence to suggest that the promoters of the scheme ever contemplated investing the monies which came into their hands in such undertakings and the probabilities appear to be all against it. In dealing with this representation the Magistrate observed as follows:—
It is in evidence that to give more lucrative benefits to its policy-holders than those offered by another similar company……..it was given out to the public that the company intended to start poultry farms, collieries, etc., with the invested monies. This certainly gave an added security to the class of people who purchased policies.
With this observation we agree. If the prosecution had shown that, the accused persons had been parties to the publication of this prospectus, then in, our judgment, these accused persons would prima facie have been guilty of conspiracy to cheat.
There are, however, two difficulties. The first is that it does not appear to have been proved that this pamphlet was ever published or circulated. The only evidence regarding this to which we have been referred is that of P.W No. 23 who was employed as the cashier of the company and all he says is this:—
Another revised scheme B was started by which double the amount was to be paid. The first instalment after one month and the second instalment, a month after the payment of the first instalment.
This evidence does not show that this prospectus was ever published or circulated.
Further, this witness stated that revised scheme B was started on December 21, 1937. Now there is evidence which has not been rebutted that the accused No. 3 retired from the company on December 21, 1937.
This being so, it cannot be held that accused No. 3 was a party to the conspiracy to cheat, of which this prospectus is evidence and as against him it is unnecessary to pursue the question any further.
With regard to accused Nos. 1 and 2, however, the matter calls for further investigation and we think they should be re-tried for the offence of conspiracy to cheat by publishing and circulating the leaflet in question. It will be open to the prosecution to call evidence to prove that this pamphlet was in fact issued to the public at the instance of the accused Nos. 1 and 2 and it will be open to the defence to call such evidence as they may be advised to rebut this charge.
The result is that the appeals are allowed. The convictions and the sentences of the three accused are set aside. The accused Nos. 1 and 2 are directed to be tried by some other Magistrate on a charge of conspiracy to cheat in the light of the observations made above. The accused Nos. 1 and 2 will remain on the same bail as they are on now.
The accused No. 3, Barendra Nath Ganguli, will be discharged from his bail.
Henderson, J.:— I agree.
A.C.R.C
Appeal allowed, retrial ordered.