Mahaveer Raj Kothari vs State on 3 July, 2017

S.B. Criminal Revision No. 428 / 1994
Mahaveer Raj Kothari S/o Navratan Mal Kothari

State of Rajasthan

For Petitioner(s) : None present.

For Respondent(s) : Mr.J.P.S.Choudhary, Public Prosecutor.

1. Ganga Ram Goyal, an employee of the Rajasthan Financial

Corporation lodged FIR Ex.P3 informing that the petitioner,

carrying on business under the name M/s Maya Photostat, had

obtained a loan in sum of ₹25,000 on 16.5.1981 from the

Corporation. He had executed, apart from loan documents, a deed

of hypothecation. That credit being in default, on 25.2.1983 the

photostat machine was taken to into possession after breaking

open the locks of the premises where from business of photo

copying was carried on. It was found that the machine which was

hypothecated was missing. FIR for offences punishable under

sections 406 and 420 IPC was registered.

2. The loan application has been proved as Ex.P14 at the trial.

The sanction granted by Rajasthan Financial Corporation has been

proved as Ex.P15. As per Ex.P15 the petitioner was required to
(2 of 6)

execute, amongst others, a deed of hypthecation. The same is


3. Vide impugned decision dated 6.7.1992 the learned Trial

Judge has convicted the petitioner for offences punishable under

Sections 406 and 420 IPC and vide order on sentence of even date

has sentenced the petitioner to undergo RI for a period of one and

half year for the offence punishable under Section 420 IPC and for

a period of one year for the offence punishable under Section 406

IPC. The learned Appellate Court, vide impugned decision dated

15th December, 1994, has acquitted the petitioner for the offence

punishable under Section 420 IPC but has maintained the

conviction as also the sentence for the offence punishable under

Section 406 IPC.

4. At the outset the impugned decisions are liable to be set

aside for the simple reason the two decisions have ignored the law

on the subject of entrustment. Though delivered later, the

decisions reported as 1996(5) SCC 591 Central Bureau of

Investigation V/s Duncans Agro Industries Ltd., Calcutta

and 2006(6) SCC 736 Indian Oil Corporation V/s NEPC India

Ltd. ors. are relevant. In relation to hypothecated machinery or

goods which were disposed by the debtor, on the applicability of

Section 406 IPC the Supreme Court noted the definition of

criminal breach of trust as per Section 405 of the Penal Code.

Paras 23 to 26 of the decision in Indian Oil Corporation’s case

need to be noted. They read as under:-

“23. In Chelloor Mankkal Narayan Ittiravi Nambudiri v. State of
Travancore Cochin [AIR 1953 SC 478], this Court held : (AIR
p.484, para 21)
(3 of 6)

“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 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 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)

24. In Jaswantrai Manilal Akhaney v. State of Bombay [AIR
1956 SC 575], this Court reiterated that the first ingredient to
be proved in respect of a criminal breach of trust is
“entrustment”. It, however, clarified : (SCR p.499)
“.. But when Section 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 property
makes it over to another person to be retained by him until a
certain contingency arises or to be disposed of by him on the
happening of a certain event.”

25. The question is whether there is “entrustment” in an
hypothecation? Hypothecation is a mode of creating a security
without delivery of title or possession. Both, ownership of the
movable property and possession thereof, 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 definitions of the
term ‘hypothecation’ in P. Ramanatha Aiyar’s Advanced Law
Lexicon (3rd Edn. (2005) .2, pp. 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
(4 of 6)

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 section 2(n) of Securitisation and Reconstruction of
Financial Assets Enforcement of Security Interest Act,

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.

26. The question directly arose for consideration in Central
Bureau of Investigation v. Duncans Agro Industries Ltd. [1996
(5) SCC 591]. It 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 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 :(SCC pp.607-08, para 27)
“(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. In our
view, the expression ‘entrusted with property’ or ‘with any
dominion over property’ has been used in a wide sense
in Section 405 I.P.C. Such expression includes all 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 I.P.C. is not necessarily a term of
law. It has wide and different implications in different
(5 of 6)

contexts. It is, however, necessary 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 I.P.C. is a
comprehensive expression and has been used to denote
various kinds of relationship 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 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 offender
must hold such property in trust for such other person or for
his benefit. In a case of pledge, the pledged article 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)

5. Suffice it to highlight that hypothecation is a mode of

creating a security without delivery of title or possession. Both

ownership of the movable property and the possession thereof

remained with the debtor. The question of there being any criminal

breach of trust therefore does not arise.

6. Regrettably this important aspect has been overlooked by

the learned Trial Judge and by the learned Appellate Judge.

7. That apart a critical feature of the evidence has been over

looked by both courts. The critical feature is Ex.P4, an auction

notice by the Rajasthan Financial Corporation. It invites offers for

purchase of a photostat machine which was seized after breaking

open the locks of the business premises of the petitioner. PW5
(6 of 6)

Sohan Raj is the landlord of the shop examined by the

prosecution. He has categorically deposed that in his presence

officers of the Corporation broke open the lock and amongst

others seized a photostat machine. He has not said that no

photostat machine was seized and that what was seized was only

the cabinet thereof.

8. Thus for two reasons the revision has to be allowed. The first

reason is that pertaining to the hypothecated goods the charge for

the offence punishable under Section 406 IPC itself could not be

framed. Much less a conviction sustained. Secondly, for the

evidence noted hereinabove.

9. The revision is allowed. The impugned decision dated

6.7.1992 and the order of sentence of even date convicting the

petitioner for the offence punishable under Section 406 IPC is set

aside and so is the appellate judgment dated 15.12.1994 which

has sustained the conviction for the said offence. I note that the

decision of the trial court convicting petitioner for the offence

punishable under Section 420 IPC has been set aside by the

appellate judgment dated 15.12.1994 and the State has not filed

any cross petition.

10 The petitioner is acquitted of the offences charged of. The

bail bonds and the surety bonds furnished by the petitioner when

he was admitted to bail are discharged.



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