Paragraph numbers below are the court’s original numbering, recovered from the source text.
11. Coming to the facts of this case, it is no doubt true that IOC has initiated several civil proceedings to safeguard its interests and recover the D amounts due. It has filed C.S. No.425/1997 in the Madras High Court and 0.S. No.3327/1998 in the City Civil Court, Chennai seeking injunctive reliefs to restrain the NEPC India from removing its aircrafts so that it can exercise its right to possess the Aircrafts. It has also filed two more suits for recovery of the amounts due to it for the supplies made, that is CS No.998/1999 against NEPC India (for recovery of Rs.5,28,23,501/90) and CS No.11/2000 against E Skyline (for recovery of R.s.13, 12,76,421125), in the Madras High Court. IOC has also initiated proceedings for winding up NEPC India and filed a petition seeking initiation of proceedings for contempt for alleged disobedience of the orders of temporary injunction. These acts show that civil remedies were and are available in law and lOC has taken recourse to such remedies. But it does F not follow therefrom that criminal law remedy is ban-ed or JOC is estopped from seeking such remedy.
12. The respondents, no doubt, have stated that they had no intention to cheat or dishonestly divert or misappropriate the hypothecated aircraft or any parts thereof. They have taken pains to point out that the aircrafts are G continued to be stationed at Chennai ai1d Coimbatore Airports; that the two engines of VT-NEK though removed from the aircraft, are still lying at Madras Airport; that the two DART 552 TR engines of VT-NEJ were dismantled for the purpose of overhauling/repairing; that they were fitted to another Aircraft (VT-NEH) which had been taken on lease from 'Mis Aircraft Financing and H Trading BV' and that the said Aircraft (VT-NEH) has been detained by the f 717 lessor for its dues; that the two engines which were meant to be fitted to VT- A NEJ (in places of the removed engines), when sent for overhauling to Mis Hunting Aeromotive, U.K., were detained by them on account of a dispute relating to their. bills; and that in these peculiar circumstances beyond their control, no dishonest intent could be attributed to them. But these are defences that will have to be put forth and considered during the trial. Defences that B may be available, or facts/aspects when established during the trial, may lead to acquittal, are not grounds for quashing the complaint at the threshold. At this stage, we are only concerned with the question whether the averments in the complaint spell out the ingredients of a criminal offence or not.
13. The High Court was, therefore, justified in rejecting the contention C of the respondents that the criminal proceedings shou Id be quashed in view of the pendency of several civil proceedings. Re : Point No. (ii)
14. This takes us to the question whether the allegations made in the D complaint, when taken on their face value as true and correct, constitute offences defined under sections 378, 403, 405, 415 and 425 !PC? Learned counsel for the appellant restricted his submissions only to sections 405, 415 and 425, thereby fairly conceding that the averments in the complaint do not contain the averments necessary to make out the ingredients of the offence of theft (section 378) or dishonest misappropriation of property (section 403). E Section 378
15. Section 378 defines theft. It states : "whoever, intending to take dishonestly any movable property out of the possession of any person F without that person's consent, moves that property in order to such taking, is said to commit theft." The averments in the complaint clearly show that neither the aircrafts nor their engines were ever in the possession of IOC. It is admitted that they were in the possession of NEPC India at all relevant times. The question of NEPC committing theft of something in its own possession does not arise. The appellant has therefore rightly not pressed the G matter with reference to section 378. Section 403
16. Section 403 deals with the offence of dishonest misappropriation of property. It provides that "whoever dishonestly misappropriates or converts H A to his own use any movable property", shall be punished with imprisonment of either description for a term which may extend to 2 years or with fine or both. The basic requirement for attracting the section are : (i) the movable property in question should belong to a person other than the accused; (ii) the accused should wrongly appropriate or convert such property to his own B use; and (iii) there should be dishonest intention on the part of the accused. Here again the basic requirement is that the subject matter of dishonest misappropriation or conversion should be someone else's movable property. When NEPC India owns/possesses the aircraft, it obviously cannot 'misappropriate or convert to its own use' such aircraft or parts thereof. Therefore section 403 is also not attracted. c Section 405
17. We will next consider whether the allegations in the complaint make out a case of criminal breach of trust under section 405 which is extracted below: "405. Criminal breach of trust-Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits "criminal breach of trust". A careful reading of th~ section shows that a criminal breach of trust involves the following ingredients : (a) a person should have been entrusted with F property, or entrusted with dominion over property; (b) that person should dishonestly misappropriate or convert to his own use that property, or dishonestly use or dispose of that property or willfully suffer any other person to do so; ( c) that such misappropriation, conversion, use or disposal should be in violation of any direction of law prescribing the mode in which G such trust is to be discharged, or of any legal contract which the person has made, touching the discharge of such trust. The following are examples (which include the illustrations under section 405) where there is 'entrustment': (i) An 'Executor' of a will, with reference to the estate of the deceased bequeathed to legatees. …. 719 (ii) A 'Guardian' with reference to a property of a minor or person A of unsound mind. (iiO A 'Trustee' holding a property in trust, with reference to the beneficiary. (iv) A 'Warehouse Keeper' with reference to the goods stored by a depositor. (v) A carrier with reference to goods entrusted for transport belonging to the consignor/consignee . (vi) A servant or agent with reference to the property of the master or principal. (vii) A pledgee with reference to the goods pledged by the owner/ borrower. (viii) A debtor, with reference to a property held in trust on behalf of the creditor in whose favour he has executed a deed of pledge- cum-trust. (Under such a deed, the owner pledges his movable D property, generally vehicle/machinery to the creditor, thereby delivering possession of the movable property to the creditor and the creditor in tum delivers back the pledged movable property to the debtor, to be held in trust and operated by the debtor).
18. In Chelloor Mankkal Narayan Jttiravi Nambudiri v. State of E Travancore, Cochin, AIR (1953) SC 478, this Court held: " … to constitute an offence of criminal breach of trust, it is essential that the prosecution must prove first of all that the accused was entrusted with some property or with any dominion or power over it. It has to be established further that in respect of the property so F entrusted, there was dishonest misappropriation or dishonest conversion or dishonest use or disposal in violation of a direction of law or legal contract, by the accused himself or by someone else which he willingly suffered to do. It follows almost axiomatically from this definition that the ownership G or beneficial interest in the property in respect of which criminal breach of trust is alleged to have been committed, must be in some person other than the accused and the latter must hold it on account of some person or in some way for his benefit." [Emphasis supplied] In Jaswantrai Manila/ Akhaney v. State of Bombay, AIR (1956) SC 575, this Court held reiterated that the first ingredient to be proved in respect of a criminal breach of trust is 'entrustment'. It, however, clarified: " .. But when S. 405 which defines "criminal breach of trust" speaks of a person being in any manner entrusted with property, it does not contemplate the creation of a trust with all the technicalities of the law of trust. It contemplates the creation of a relationship whereby the owner of prope1ty makes it over to another person to be retained by c him until a certain contingency arises or to be disposed of by him on the happening of a certain event."
19. The question is whether there is 'entrustment' in an hyputhecation? Hypothecation is a mode of creating a security without delivery of title or possession. Both ownership of the movable property and possession thereof, D remain with the debtor. The creditor has an equitable charge over the property and is given a right to take possession and sell the hypothecated movables to recover his dues (note : we are not expressing any opinion on the question whether possession can be taken by the creditor, without or with recourse to a court of law). The creditor may also have the right to claim payment from the sale proceeds (if such proceeds are identifiable and available). The following E definitions of the term 'hypothecation' in P. Ramanatha Aiyar's Advanced Law Lexicon (Third (2005) Edition, Vol.2, Pages 2179 and 2180) are relevant "Hypothecation : It is the act of pledging an asset as security for borrowing, without parting with its possession or ownership. The borrower enters into an agreement with the lender to hand over the possession of the hypothecated asset whenever called upon to do so. The charge of hypothecation is then converted into that of a pledge and the lender enjoys the rights of a pledgee." 'Hypothecation' means a charge in or upon any movable property, existing in future, created by a borrower in favour of a secured creditor, without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property.
(Borrowed from secticn 2(n) of Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest 721 Act, 2002)" But there is no 'entrustment of the property' or 'entrustment of dominion over the property' by the hypothecatee (creditor) to the hypothecator (debtor) in an hypothecation. When possession has remained with the debtor/owner and when the creditor has neither ownership nor beneficial interest, obviously there cannot be any entrustment by the creditor.
20. The question directly arose for consideration in Central Bureau of Investigation v. Duncans Agro Industries Ltd., Calcutta, [1996) 5 SCC 591. H related to a complaint against the accused for offences of criminal breach of trust. It was alleged that a floating charge was created by the accused debtor on the goods by way of security under a deed of hypothecation, in favour C of a bank to cover credit facility and that the said goods were disposed of by the debtor. It was contended that the disposal of the goods amounted to criminal breach of trust. Negativing the said contention, this Court after stating the principle as to when a complaint can be quashed at the threshold, held thus : " ….. a serious dispute has been raised by the learned counsel …. as to whether on the face of the allegations, an offence of criminal breach of trust is constituted or not. Jn our view, the expression 'entrusted with property' or 'with any dominion over property' has been used in a wide sense in Section 405, l.P.C. Such expression includes all E cases in which goods are entrusted, that is, voluntarily handed over for a specific purpose and dishonestly disposed of in violation of law or in violation of contract. The expression 'entrusted' appearing in Section 405, l.P.C. is not necessarily a term of law. It has wide and different implications in different contexts. It is, however, necessary F that the ownership or beneficial interest in the ownership of the property entrusted in respect of which offence is alleged to have been committed must be in some person other than the accused and the latter must hold it on account of some person or in some way for his benefit. The expression 'trust' in Section 405, l.P.C. is a comprehensive expression and has been used to denote various kinds of relationship G like the relationship of trustee and beneficiary, bailor and bailee, master and servant, pledger and pledgee. When some goods are hypothecated by a person to another person, the ownership of the goods still remains with the person who has hypothecated such goods. The property in respect of which criminal breach of trust can be committed H must necessarily be the property of some person other than the accused or the beneficial interest .in or ownership of it must be in other person and the offende_r must hold such property in trust for such other person or for his benefit. In a case of pledge, the pledged articie belongs to some other person but the same is kept in trust by the pledgee. In the instant case, a floating charge was made on the goods by way of security to cover up credit facility. In our view, in such case for disposing of the goods covering the security against credit facility, the offence of criminal breach of trust is not committed." (emphasis supplied)
21. The allegations in the complaints are that aircrafts and the engines fitted therein belong to NEPC India, and that a charge was created thereon by NEPC India, in favour oflOC, by way ofhypothecation to secure repayment of the amounts due to IOC. The terms of hypothecation extracted in the complaint show that the ownership and possession of the aircrafts continued with NEPC India. Possession of the aircraft, neither actual nor symbolic, was D delivered to IOC. NEPC India was entitled to use the aircraft anJ maintain it in good state of repairs. IOC was given the right to take possession of the hypothecated aircrafts only in the event of any default as mentioned in the Hypothecation Deed. It is not the case of the IOC that it took possession of the aircraft in exercise of the right vested in it under the Deed of Hypothecation. E Thus, as the possession of the aircraft remained all alcing with NEPC India in its capacity as the owner and the Deed of Hypothecation merely created a charge over the aircrafts with a right to take possession in the event of default, it cannot be said that there wa.s either entrustment of the aircrafts or entrustment of the dominion over the aircrafts by IOC to NEPC India. The very fim requirement of section 405, that is the person accused of criminal F breach of trust must have been "entrusted with the property" or "entrusted with any dominion over property" is, therefore, absent.
22. Learned counsel for the appellant, however, sought to distinguish the decision in Duncan Agro on two grounds. It was pointed out that Duncan Agro itself recognizes that there can be criminal breach of trust where a G beneficial interest exists in the other person, and the offender holds the property in trust for such person. It is submitted that when the deed of hypothecation was executed by NEPC India in favour of IOC, the hypothecation created a beneficial interest in the property in favour of IOC, and vis-a-vis such 'beneficial interest' of IOC, the possession of the property by NEPC H India was in 'trust'. In support of this contention, reliance was placed on a ,… 723 decision of the Sind Judicial Commissioner in Gobindram C. Motwani v. A Emperor, (1938) 39 Cr.L.J. 509. In that case the complaint was that the accused had hypothecated the goods in their shop as collateral security against an advance and had agreed to hold the goods and proceeds thereof in trust and to pay the proceeds as and when received by them.
However, as they did not pay the proceeds, the complaint was that they committed criminal breach of trust. The Magistrate took the view that as the hypothecated goods were still B the property of the accused, they could not commit criminal breach of trust in respect of their own property. The Judicial Commissioner did not agree. He held: "The test in this case appears to me to be whether the owner of the C goods, the accused, created an equitable charge over the goods in their possession when they executed the trust receipt. If they did so, they held the goods as trustees, they were "in some manner entrusted" with the goods, and if they dealt with them in violation of the terms of the trust, they committed an offence under this section, provided they had the necessary criminal intent. I can myself see no reason D why it should be said that by this trust receipt the accused did not give a beneficial interest in the goods to the applicant and did not hold the goods, with which they were entrusted as legal owners in trust for the applicant. That being so, I think the learned Magistrate was wrong in his decision that the accused could not be guilty of criminal breach of trust because the goods were their own property." E It is evident that the said observations were made on the peculiar facts of that case where the Commissioner concluded that the goods were held by the accused in trust as trustee in view of execution of a 'Trust Receipt' by the accused.
The facts were somewhat similar to example (viii) in Para 17 above. F Further the Judicial Commissioner finally observed that there was so much room for an honest difference of opinion as to the rights and liabilities of the parties to the trust receipt that no useful purpose could be served in interfering with the order of discharge by the Magistrate. The said decision is therefore of no assistance to the appellant. If the observations reiied on by the appellant are to be interpreted as holding that the debtor holds the hypothecated goods, in trust for the creditor, then they are contrary to the decision of this Court in Duncan Agro (supra) which specifically holds that when goods are hypothecated, the owner does not hold the goods in trust for the creditor. A charge over the hypothecated A goods in favour of the creditor, cannot be said to create a beneficial interest in the creditor, until and unless the creditor in exercise of his rights under the deed, takes possession.
The term 'beneficial interest' has a specific meaning and connotation. When a trust is created vesting a property in the trustee, the right of the beneficiary against the trustee (who is the ow1.er of the trust property) is known as the 'beneficial interest'. The trustee has the power of B management and the beneficiary has the right of enjoyment. Whenever there is a breach of any duty imposed on the trustee with reference to the trust property or the beneficiary, he commits a breach of trust. On the other hand, when the owner of a goods hypothecates a movable property in favour of a creditor, no 'beneficial interest' is created in favour of the creditor nor does C the owner become a trustee in regard to the property hypothecated. The right of the creditor under a deed of hypothecation is the right to enforce the charge created under the deed of hypothecation in the manner specified in the deed and by no stretch of imagination can such right be equated to a beneficial interest of a beneficiary in a property held in trust. Therefore, the tirst contention that a creditor has a beneficial interest in the hypothecated D property and the owner is in the position of a trustee with reference to the creditor is liable to be rejected.
23. The second ground on which learned counsel for the appellant sought to distinguish Duncan Agro is that the said case dealt with a E hypothecation deed creating a floating charge, whereas the case on hand related to a fixed charge and therefore, the principle laid down in Duncan Agro will not apply. This contention is also without basis. The principle stated in Duncan Agro will apply in regard to all types of hypothecations. It makes no difference whether the charge created by the deed of hypothecation is a floating charge or a fixed charge. Where a specific existing property is F hypothecated what is created is a 'fixed' charge. The floating charge refers to a charge created generally against the assets held by the debtor at any given point of time during the subsistence of the deed of hypothecation. For example where a borrower hypothecates his stock-in-trade in favour of the Bank creating a floating charge, the stock-in-trade, held by the borrower as on the date of hypothecation may be sold or disposed of by the debtor G without reference to the creditor. But as and when new stock-in-trade is manufactured or received, the charge attaches to such future stock-in-trade until it is disposed of. The creditor has the right at any given point of time to exercise his right by converting the hypothecation into a pledge by taking possession of the stock-in-trade held by the debtor at that point of time. The H principle in Duncan Agro is based on the requirement of 'entrustment' and INDIAN OIL CORPORATION v. NEPC !NOIA LTD. [RAVEENDRAN, J.] 725 not with reference to the 'floating' nature of the charge. The second contention A also has no merit.
24. We accordingly hold that the basic and very first ingredient of criminal breach of trust, that is entrustment, is missing and therefore, even if all the allegations in the complaint are taken at their face value as true, no case of 'criminal breach of trust' as defined under section 405 !PC can be B made out against NEPC India. Section 415
25. The essential ingredients of the offence of 'cheating' are : (i) deception of a person either by making a false or misleading representation C or by other action or omission (ii) fraudulent or dishonest inducement of that person to either deliver any property or to consent to the retention thereof by any person or to intentionally induce 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 D in body, mind, reputation or property.
26. The High Court has held that mere breach of a contractual terms would not amount to cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction and in the absence of an allegation that the accused had a fraudulent or dishonest intention while E making a promise, there is no 'cheating'. The High Court has relied on several decisions of this Court wherein this Court has held that dishonest intent at the time of making the promise,'inducement is necessary, in addition to the subsequent failure to fulfil the promise. Illustrations (t) and (g) to section 415 makes this position clear : "(f) A intentionally deceives Z into a belief that A means to repay any money that Z may lend to him aud thereby dishonestly induces Z to lend him money, A not intending to repay it. A cheats." "(g). A intentionally deceives Z into a belief that A means to deliver to Z a certain quantity of indigo plant which he does not intend to G deliver, and thereby dishonestly induces Z to advance money upon the faith of such delivery. A cheats; but if A, at the time of obtaining the money, intends to deliver the indigo plant, and afterwards breaks his contract and does not deliver it, he does not cheat, but is liable only to a civil action for breach of contract."
27. In Rajesh Bajaj (supra), this Court held : "It is not necessary that a complainant should verbatim reproduce in the body of his complaint all the ingredients of the offence he is alleging. Nor is it necessary that the complainant should state in so many words that the intention of the accused was dishonest or fraudulent. .. c The crux of the postulate is the intention of the person who induces the victim of his representation and not the nature of the transaction which would become decisive in discerning whether there was commission of offence or not. The complainant has stated in the body of the complaint that he was induced to believe that respondent would honour payment on receipt of invoices, and that the complainant realised later that the intentions of the respondent were not clear. He also mentioned that respondent after receiving the goods have sold them to others and still he did not pay the money. Such avennents would primafacie make out a case for investigation by the authorities."
28. In Hridaya Ranjan Prasad Verma (supra), this Court held : "On a reading of the section it is manifest that in the definition there are set forth two separate classes of acts which the person deceived may be induced to do. In the first place he may be induced fraudulently or dishonestly to deliver any property to any person. The second class of acts set forth in 'the section is the doing or omitting to do anything which the person deceived would not do or omit to do if he were not so deceived. In the first class of cases the inducing must be fraudulent or dishonest. In the second class of acts, the inducing must be intentional but not fraudulent or dishonest. In determining the question it has to be kept in mind that the distinction between mere breach of contract and the offence of cheating is a fine one. It depends upon the intention of the accused at the time to inducement which may be judged by his subsequent conduct but for this subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed. Therefore it is the int~ntion which is the gist of the offence. To hold a person guilty of cheating it is necessary to show that he had 727 fraudulent or dishonest intention at the time of making the promise. A From his mere failure to keep up promise subsequently such a culpable intention right at the beginning, that is, when he made the promise cannot be presumed."
29. Jn this case, the complaints clearly allege that the accused with fraudulent intention to cheat and defraud the IOC, had induced IOC to resume B supply of aircraft fuel on cash and carry basis, by entering into a further agreement dated 20.9.1997 and undertaking to clear the outstanding amount of Rs.18 crores approximately within the time stipulated in the Hypothecation Agreements. The sum and subst~mce of the said allegation read with other averments extracted above, is that NEPC India, having committed default in C paying the sum ofRs.18 crores, entered into a fresh agreement dated 20.9.1997 agreeing to clear the outstanding as per a fresh schedule, with the dishonest and fraudulent intention of pre-empting and avoiding any action by lOC in terms of the hypothecation deeds to take possession of the aircrafts. Though the supplies after 20.9.1997 were on cash and carry basis, the fraudulent intention is alleged to emanate from the promise under the said agreement to D make payment, thereby preventing immediate seizure (taking possession) of the aircrafts by IOC. This allegation made in addition to the allegation relating to removal of engines, has been lost sight of by the High Court. All that is to be seen is whether the necessary allegations exist in the complaint to bring the case within section 415. We are clearly of the view that the allegations in the complaint constitute such an offence. We are not concerned with the E proof of such allegations or ultimate outcome of trial at this stage. Section 425
30. Section 425 IPC provides : "Whoever, with intent to cause, or F knowing that he is likely to cause, wrongful loss or damage to the public or to any person, causes the destruction of any property, or any such change in any property or in the situation thereof as dest.-oys or diminishes its value or utility, or affects it injuriously, commits "mischief'. The three ingredients of the Section are : (i) intention to cause or knowledge that he is likely to cause wrongful loss or damage to the public or to any person; (ii) causing G destruction of some property or any change in the property or in the situation thereof; and (iii) the change so made destroying or diminishing the value or utility or affecting it injuriously. For the purpose of section 425, ownership or possession of the property are not relevant. Even if the property belongs to the accused himself, ifthe ingredients are made out, mischief is committed, H A as is evident from illustrations (d) and (e) to section 425. The complaints clearly allege that NEPC India removed the engines thereby making a change in the aircrafts and that such removal has diminished the value and utility of the aircrafts and affected them injuriously, thereby causing loss and damage to IOC, which has the right to possess the entire aircraft. The allegations clearly constitute the offence of 'mischief. Here again, we are not concerned B with the proof o~ ultimate decision. Conclusion :
31. In view of the above discussion, we find that the High Court was not justified in quashing the complaints/criminal proceedings in entirety. The C allegations in the complaint are sufficient to constitute offences under sections 415 and 425 ofIPC. We accordingly allow these appeals in part and set aside the order of the High Court insofar it quashes the complaint under sections 415 and 425. As a consequence, the Judicial Magistrate, Coimbatore and the Judicial Magistrate, Alandur before whom the matters were pending, shall D proceed with the matters in accordance with law in regard to the complaints filed by IOC in so far as offences under sections 415 and 425 of IPC. Parties to bear their respective costs. N.J. Appeals partly allowed.