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Bank Doesn’t Hold Customer Deposit in Trust; Banker – Depositor Relationship That of Creditor – Debtor: Supreme Court

Team SoOLEGAL 29 Dec 2021 3:09pm

Bank Doesn’t Hold Customer Deposit in Trust; Banker – Depositor Relationship That of Creditor – Debtor: Supreme Court

NEW DELHI: The Supreme Court has stated that money placed by a client in a bank is not held as a trustee by the bank, but rather becomes a part of the banker’s fund, which is contractually obligated to pay the sum put by a customer to him on demand at the stipulated rate of interest.

The observation was made by a bench comprised of Chief Justice of India NV Ramana, Justice Surya Kant, and Justice Hima Kohli while hearing the appeal of a former bank manager who was convicted of criminal breach of trust, cheating and falsification of accounts under Section – 409, 420 and 477(A) of the Indian Penal Code.

The Court observed that:
“…it is fruitful to point out that the banker is one who receives money to be drawn out again when the owner has occasion for it. Since the present case involves a conventional bank transaction, it may be further noted that in such situations, the customer is the lender and the bank is the borrower, the latter being under a super added obligation of honoring the customer’s cheque up to the amount of the money received and still in the banker’s hand. The money that a customer deposits in a bank is not held by the latter on trust for him. It becomes a part of the banker’s funds who is under a contractual obligation to pay the sum deposited by a customer to him on demand with the agreed rate of interest. Such a relationship between the customer and the Bank is one of a creditor and a debtor. The bank is liable to pay money back to the customers when called upon, but until it’s called upon to pay it, the bank is entitled to utilize the money in any manner for earning profit.”

Factual Background
C. Vinay Kumar (Accused Number – 3), the treasurer of the Nishta Education Academy, established current account number – 282 in his position as an authorized signatory of the Academy in Sri Rama Grameena Bank, Nizamabad Branch. An initial deposit of Rs. 5, 00,000 /- was made to open the account.

The appellant (N. Raghavender), Accused number – 1, was the bank’s Branch Manager and the brother – in – law of accused number – 3. The appellant and the accused number – 2 (A Sandhya Rani), who worked as a clerk – cum – cashier in the same bank from 1992 to 1996, allegedly abused their respective positions in the bank and conspired with accused number – 3 by allowing withdrawals of up to Rs. 10, 00,000 /- from the Academy’s account, despite the fact that the account lacked the necessary funds.

The accused’s alleged method was that the Appellant, in his function as a Branch Manager, issued three loose – leaf cheques’ and, notwithstanding withdrawal of the specified amount, the debit was purposefully not put into the ledger book. The endorsement on the third cheque issued by the Appellant revealed that the payment was made in the name of the Accused number – 3, but the signature on the cheque did not match that of Accused number – 3.

The appellant was also accused of prematurely shutting two FDRs on February 24th, 1995 and February 25th, 1995 for a total of Rs. 10,00,000/- and Rs. 4,00,000/- in the name of B Satyajit Reddy. According to the vouchers supplied by the bank, a total of Rs. 14, 00,000/- was credited to account, but only Rs. 4, 00,000/- was recorded in the ledger. The remaining Rs. 10, 00,000/- were reportedly applied to the 1994 covert withdrawal from account.

When the Auditor discovered the anomalies, the appellant was transferred from the Nizamabad Branch to the Head Office, and an internal investigation was launched. As a result, the Chairman of the Bank filed a formal complaint with the Superintendent of Police, Central Bureau of Investigation in Hyderabad.

The CBI filed a case under Sections – 409,477(A), and 120(B) of the IPC, as well as Section 13(2) read with 13(1)(c) and (d) of the PC Act. Following the investigation and submission of the charge sheet, the Special Judge CBI charged the appellant and co – accused.

Following that, on March 28th, 2020, the special judge categorically acquitted all of the accused of offences under Section 120(B) of the IPC and Section 13(2) r/w Section 13(1)(c) of the PC Act. Accused number – 2 and accused number – 3 were also cleared of all other accusations, however the appellant was found guilty of offenses punishable under Sections 420, 409 and 477(A) IPC, as well as Section 13(2) r/w Section 13(1)(d) of the PC Act.

Dissatisfied with the Trial Court’s decision, the appellant petitioned the High Court, but the High Court, while agreeing with the findings, held that the appellant had used his official position as the Bank Manager to prematurely encash the two FDRs and then transfer the money to the Academy’s account. The appellant appealed the High Court’s decision to the Supreme Court.

Submission of Counsels
Senior Advocate Siddharth Luthra, appearing for the appellant, stated that the most serious accusation leveled against the appellant was that he unauthorized closed two FDRs belonging to B Satyajit Reddy prematurely, but neither B. Satyajit Reddy was examined as a witness by the CBI nor his statement was recorded during the course of internal auditing.

Relying on the case Hari Sao & Anr V State of Bihar (1963) 3 SCC 107; and Mohammed Ibrahim & Ors V State of Bihar & Anr (2009) 8 SCC 751, Senior Counsel argues that no loss to the bank was caused as a result of the alleged misdemeanors of the appellant and thus in such circumstances, no offense could be said to have been made out against the appellant.

Drawing strength from this Court’s decision in Samsul Haque V State of Assam (2019) 18 SCC 161, it was argued that if circumstances were not presented to the accused during his examination under section 313 Cr.P.C., they must be excluded from consideration because the accused did not have the opportunity to explain them. It was further alleged that there was no mens – rea because the appellant had no advantage even if the cash was given over to Accused number 3, who had been acquitted.

ASG Jayant K Sud, appearing for the CBI, contended that it was not required to prove that the appellant obtained profit or caused any harm to the bank in order to establish mens – rea or criminality under sections – 420, 409 and 477(A) IPC. It was also his opinion that the appellant was the branch’s custodian and had to accept full responsibility for the obligations he had failed to do. ASG contended that the onus was now on the appellant to demonstrate that he had complied with all transactions honestly and that all criteria or conditions had been met.

Supreme Court’s Analysis
In the judgment written by Justice Surya Kant, the court first reviewed the elements required to establish a charge under sections 409, 420, and 477 A of the IPC.

Section – 409 IPC may not be attracted unless it is proved that the accused, a public servant, a banker, etc. was ‘entrusted’ with the property for which he is duty bound to account for and that such a person committed criminal breach of trust.

In Sadupati Nageswara Rao V State of Andhra Pradesh (2012) 8 SCC 547, the bench stated that the onus was on the prosecution to prove that the accused, a public servant or a banker, was entrusted with property for which he is legally obligated to account and that he committed criminal breach of trust.

The bench stated that entrustment of public property and dishonest misappropriation or use of public property n the manner shown in Section – 405 were a sine – qua – non for making an act punishable under section – 409 IPC (criminal breach of trust b a public servant, banker etc.) the components of the offense of ‘criminal breach of trust’ under section 405 of the Indian Penal Code were mentioned by the bench.

“The crucial word used in Section – 405 IPC is ‘dishonestly’ and therefore, it presupposes the existence of mens rea. In other words, mere retention of property entrusted to a person without any misappropriation cannot fall within the ambit of criminal breach of trust. Unless there is some actual use by the accused in violation of law or contract, coupled with dishonest intention, there is no criminal breach of trust. The second significant expression is ‘miss – appropriates’ which means improperly setting apart for one’s use and to the exclusion of the owner,” the bench observed in this regard.

The Supreme Court observed, in laying out the ingredients under section 409 of the Indian penal Code, “Accordingly, unless it is proved that the accused, a public servant or a banker etc. was ‘entrusted’ with the property which he is duty bound to account for and that such a person has committed criminal breach of trust, Section – 409 IPC may not be attracted. ‘Entrustment of Property’ is a wide and generic expression. While the initial onus lies on the prosecution to show that the property in question was entrusted to the accused, it is not necessary to prove further, the actual mode of entrustment of the property or misappropriation thereof. Where the entrustment is admitted by the accused or has been established by the prosecution, the burden then shifts on the accused to prove that the obligation Vis – a – vis the entrusted property was carried out in a legally and contractually acceptable manner.”

Unless the complaint demonstrated that the accused had dishonest or fraudulent intent ‘at the time the complainant parted with the funds,’ it would not constitute an offense under section 420 IPC and could only amount to breach of contract.

Referring to the provisions of Section – 420 IPC, the bench stated that in order to attract the provisions of Section – 420 IPC, the prosecution must show not only that the accused defrauded someone, but also that he dishonestly encouraged the person who was tricked to give property.

The Court further said, “It is equally well – settled that the phrase ‘dishonestly’ emphasizes a deliberate intention to cause wrongful gain or wrongful loss, and when this is coupled with cheating and delivery of property, the offense becomes punishable under section 420 IPC. Contrarily, the mere breach of contract cannot give rise to criminal prosecution under section 420 IPC unless fraudulent or dishonest intention is shown right at the beginning of the transaction. It is equally important that for the purpose of holding a person guilty under Section 420, the evidence adduced must establish beyond reasonable doubt, mens rea on his part. Unless the complaint showed that the accused had dishonest or fraudulent intention ‘at the time the complainant parted with the monies’, it would not amount to an offense under Section – 420 of IPC and it may only amount to the breach of contract.”

Aspect of Fraudulent & Unlawful Withdrawal of Rupees 10 Lakhs from Current Account
On this point, the bench referred to the depositions of PW – 1 and PW – 3, who testified that in the ordinary course of business, the cheque holder should only use the cheques’ issued to him, but in certain contingencies or exceptional situations, the Bank could issue loose cheques’ as well, the top Court said.

“Since no explicit prohibition on issuing of loose cheques’ has been proved, the mere fact that the appellant issued those loose cheques’, is not sufficient to conclude that he acted unlawfully or committed a ‘criminal misconduct’.”

The Court stated that there was insufficient evidence to conclude that the cheques’ were issued without adequate monies in the account. As a result, the bench determined that the bank suffered no loss. Similarly, the court determined that there was insufficient evidence in the form of ledgers to conclude that the appellant had fabricated accounts, therefore attracting the crime under sections 477(A) IPC.

Aspects of Unauthorized Premature Encashment of 2 FDR’s Belonging to B Satyajit Reddy
In this case, the bench remarked that,

i.         B Satyajit Reddy has not filed a complaint alleging any financial loss to him.

ii.         His written pleas dated February 22 and 24 were unanswered.

iii.         The prosecution has undoubtedly proven payment of interest on those FDRs to B Satyajit Reddy even after their premature closure, but that payment was made from the appellant’s personal account, and no public cash was stripped for such payment.

iv.         B Satyajit Reddy has received interest even after the FDR’s were prematurely encashed. He may or may not have received undue monetary advantage, but he certainly did not suffer any loss.

In light of the foregoing, the bench, in admitting the appeal, stated:

·       The bank suffered no financial loss.

·       The evidence before us shows that no monetary loss was suffered by B Satyajit Reddy or any other Bank client.

·       The evidence presented to us reveals no evidence of a conspiracy amongst the accused. In the lack of any trustworthy evidence revealing a prior agreement, the High Court erred in concluding that the appellant and other accused arranged the transactions in question in order to provide an excessive benefit to accused number – 3.

·       By abusing his position as branch manager, the appellant committed sever misconduct. Regardless of the decision, the appellant’s misuse of authority certainly out the bank at danger of financial loss.

·       Despite his failure to perform his obligations, none of the offenses shown against the appellant constitute ‘criminal misconduct’ or come within the purview of Section 409, 420 and 477 (A) of the IPC.

Court criticizes CBI Investigation
The bench also observed, “We are also constrained to observe that in this case the CBI has either adopted a casual and callous approach or there was some hidden pressure to derail a fair investigation. The resultant effect is that though there is a string suspicion of criminal breach of trust, cheating and/or fabrication of the Bank records against the appellant, but such suspicion falls short of a conclusive proof to hold him guilty of the criminal charges. The best evidence having been withheld by the prosecution, the benefit of doubt must be extended to the appellant, for no conviction can be sustained on the basis of conjecture and surmises. Non – Production of the records of the bank also adversely comments on the fairness and independence of the investigation conducted in the instant case,”

Court Disapproves Appellant’s Conduct
Despite the fact that the Supreme Court acquitted the appellant by giving him the benefit of the doubt, it stated that his behavior was unworthy of a bank officer.

The Court said, “Although he was clever enough to not trespass into the prohibited area(s) of Section 409, 420 and 477 (A) IPC, he ran the risk of causing financial loss to the Bank.”

As a result, the bench determined that the appellant’s act constituted gross departmental misconduct, and that his removal from the Bank’s employment was totally warranted. As a result, the bench underlined that his acquittal would not entitle him to reinstatement.


Tagged: Supreme Court   Justice Hima Kohli   Indian Penal Code   Chief Justice of India   Justice NV Ramana   Justice Surya Kant  
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