Imp. Rulings - Avoidance Applications & Forming an Opinion by RP

Imp. Rulings - Avoidance Applications & Forming an Opinion by RP

Index;

1. NCLT Kolkata (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017]

2. NCLT Kolkata (06.05.2022) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021INC.P (IB) No.204/KB/2019] 

3. SCI  (2015.01.09) Sunil Bharti Mittal Vs. CBI [2015 INSC 18, (2015) 4 SCC 609]

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1). NCLT Kolkata (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017] held that;

6.7. ``According to regulation 35A(1) of the CIRP Regulations, the Resolution Professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A(2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.

6.8. Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirty fifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.

6.9. Even if we go by the decision of the Hon’ble NCLAT in Aditya Kumar Tibrewal RP Vs. Om Prakash Pandey, Suspended Director 2 that the timeframe is directory, we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions mentioned hereinabove.

6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected. “

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2). NCLT Kolkata (06.05.2022) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021INC.P (IB) No.204/KB/2019] wherein it was held;

• # 16. ``We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. It was the duty of the RP to come to conclusive determination before filing an application with the Adjudicating Authority. Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.’’

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3). SCI  (2015.01.09) Sunil Bharti Mittal Vs. CBI [2015 INSC 18, (2015) 4 SCC 609] held that;

• ”47. . . . . . .  It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the order itself. The order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against the accused, though the order need not contain detailed reasons. A fortiori, the order would be bad in law if the reason given turns out to be ex facie incorrect.”

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Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# 35A. Preferential and other transactions.

(1) On or before the seventy fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66.

(2) Where the resolution profesional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date 95[***].

(3) Where the resolution professional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirtieth day of the insolvency commencement date.]

(3A) The resolution professional shall forward a copy of the application to the prospective resolution applicant to enable him to consider the same while submitting the resolution plan within the time initially stipulated.

(4) The creditors shall provide to the resolution professional, relevant extract from the audits of the corporate debtor, conducted by the creditors such as stock audit, transaction audit, forensic audit, etc.

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Analysis

1.  As per Regulations read with the decisions of the coordinate benches of NCLT (Doctrine of Binding Precedent)  it is mandatory for RP (Resolution Professional) to form an opinion and make a determination  before filing an avoidance application. 

2. RP’s report of forming an opinion & determination must exhibit application of mind with sufficient reasons for filing of avoidance application, as ruled by Hon’ble Supreme Court in the matter of Sunil Bharti Mittal Vs. CBI [2015 INSC 18, (2015) 4 SCC 609] 

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Template counter/defence;

Miscellaneous/Other binding precedents, impugning the maintainability of the captioned IA - 

a.  RP’s Report of opinion & determination (Statutory requirement Section 43 read with CIRP Regulation 35) are missing in the present case.

• 43. Preferential transactions and relevant time -

• (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.

b.  NCLAT (25.01.2024) in Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors..[Comp. App (AT) (Ins) No. 1343 of 2019] held that;

• We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period…

 

c. It is a settled position of law, that any opinion has to be formed after due application of mind and has to have a foundational basis in the act/ rules. In the facts of the present case an adverse opinion is sought to be enforced basis the reason which ex-facie is/are incorrect, the rigours of the law apply with a greater force, as is being ratiocinated of Hon’ble Supreme Court ruling in the matter of SCI (2015.01.09) Sunil Bharti Mittal Vs. CBI (2015) 4 SCC 609];

• That an opinion is to be formed only after due application of mind that there is sufficient basis for accusatorial/adversarial proceeding to be pursued and formation of such an opinion is to be stated in the underlying order/document itself. And fortiori, the same would be bad in law if the reason given turns out to be ex facie incorrect to the governing act/regulation.

 

d. Bare reading of the captioned IA suggests; the applicant has abdicated the mandate of 35 A (1) of the CIRP Regulations, except for repeating the observations by the Forensic Auditor – hence the captioned application failing the test of 35 A (1) of the CIRP Regulations – the same is not maintainable. The relevant binding precedents capsulated infra:

• NCLT Kolkata (06.05.2022) in Jitendra Lohia vs. Nikhil Chowdhury and others [I.A.(IB) No. 208/KB/2021 INC.P (IB) No.204/KB/2019] wherein it was held;

# 16. ``We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. It was the duty of the RP to come to conclusive determination before filing an application with the Adjudicating Authority. Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35 A (2) of the CIRP Regulations”.

# 17. We are not convinced by the way the RP has proceeded against the respondent by way of this application. The allegations and averments made in the application do not constitute any action or prompt this Adjudicating Authority to proceed against these respondents under the sections under which the application has been moved.

e. In the facts of the present case, para 4 of the captioned IA avers that the public announcement is dated: 20.04.2023 and the captioned IA is filed on 16.05.2024. Hence pertinent to rely upon the ruling of Hon’ble NCLT Kolkata, (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017]. Relevant ruling extracted subsequently;

• 6.7. ``According to regulation 35 A (1) of the CIRP Regulations, the Resolution Professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A (2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.

 6.8. Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirty fifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.

6.9.  . ., we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions mentioned hereinabove.

6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected.

6.2 IA I.A. (IB) No. 346/KB/2019 is accordingly dismissed.

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M.Suresh Khatri & Anr. Vs. Directorate of Enforcement Rep. by the Deputy Director GOI. - No report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence by adducing evidence and this opportunity has to be given to the prosecution in this case too.

 High Court Madras (23.02.2021) in M.Suresh Khatri & Anr. Vs. Directorate of Enforcement Rep. by the Deputy Director GOI. [CRL.O.P.Nos.20127 & 25688 of 2018] held that;

• It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the order itself. The order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against the accused, though the order need not contain detailed reasons. A fortiori, the order would be bad in law if the reason given turns out to be ex facie incorrect.

• No report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence by adducing evidence and this opportunity has to be given to the prosecution in this case too.

Excerpts of the Order;    

For the sake of convenience, the parties will be referred to by their names.

# 2. On a complaint lodged by the General Manager, State Bank of India (SBI), Chennai, the CBI registered an FIR in Crime No.RC.05/E/2018/CBI/BS&FC/BLR on 21.03.2018 for the offences under Sections 120-B, 420, 467, 468 and 471 IPC read with Sections 13(2) and 13(1)(d) of the Prevention of Corruption Act, 1988, against M/s.Kanishk Gold Pvt. Ltd. (in short “KGPL”), Chennai and five named accused. The sum and substance of the allegations in the FIR is that, during 2011, a consortium of 14 banks with SBI as the lead bank, had sanctioned working capital credit facilities which KGPL (A1) had allegedly diverted, resulting in loss to the banks to the tune of Rs.824.15crores as on 31.12.2017. Since the FIR disclosed the commission of a 'schedule offence' under the Prevention of Money Laundering Act, 2002 (in short “the PML Act”), the Enforcement Directorate registered a case in ECIR No.CEZOI/ 07/2018 on 22.03.2018, conducted investigation under the PML Act, collected materials and filed a complaint in C.C.No.13 of 2018 in the Court of the Principal Sessions Judge (Special Court), Chennai, against KGPL (A1), Bhoopesh Kumar Jain (A2), Mohanlal Jewellers Pvt. Ltd. (in short “MJPL”) (A3), Suresh Khatri (A4) and T.K.S.Pugazhendi (A5) for the offence under Section 3 read with 4 of the PML Act, for quashing which, MJPL (A3) has filed Crl.O.P.No.25688 of 2018 and Suresh Khatri (A4) has filed Crl.O.P.No.20127 of 2018 under Section 482 Cr.P.C.

# 3. Heard Mr.A.Ramesh, learned Senior Counsel representing Mr.Jayesh B.Dolia, learned counsel on record for MJPL (A3) and Suresh Khatri (A4) and Mr.R.Sankaranarayanan, learned Additional Solicitor General assisted by Mr.N.Ramesh, learned Special Public Prosecutor appearing for the Enforcement Directorate.

4. Before adverting to the submissions raised at the Bar, it is necessary to set out the allegations against the accused. The fact that the CBI registered a case which disclosed a 'schedule offence' under the PML Act is not in dispute. MJPL (A3) and Suresh Khatri (A4) have not been shown as accused in the FIR that has been registered by the CBI. The allegations against KGPL (A1) and the other accused in the present case are that, KGPL (A1) had obtained huge loans from the consortium of banks for their business purpose, which they diverted into the account of MJPL (A3) and that the amounts so diverted, being proceeds of crime, was projected as untainted money.

# 5. In the complaint in C.C.No.13 of 2018, the Enforcement Directorate has given the following flowcharts : . . . . . . .

# 6. In paragraph 14.4 of the complaint, it is more clearly stated as under :

• “14.4. On the basis of the Transaction Testing conducted by the Forensic Audit Team on the sample purchase transactions made by KGPL, the Forensic Audit made the following observation :

• “Mohanlal Jewellers Pvt. Ltd.: We received 3 purchase invoices of the party (Mohanlal Jewellers) amounting to a total of Rs.52.98 Crores. However, the borrower (KGPL) has not provided the purchase order, document evidencing receipt of goods and gold purity certificate, if any” 

• The Forensic Audit has further reported that on examination of the Purchase Register, it was noticed that the total purchases made by KGPL for the review period from April 01, 2009 to June 30, 2017, amounted to Rs.10,134 Crores. Further, on analysing the yearly purchase it was observed that Rs.6984 Crores, i.e., about 69% of the total purchases were made in the period FY 2013-14 to FY 2017- 18 (uptill 18th May 2017) revealed that purchases of top ten parties constitute about 65.71% of the total purchases in that period, and M/s.Mohanlal Jewellers Pvt. Ltd., are one among them, who had sold 1089105.37 gms of Gold Bullions valued at Rs.318.75 Crores to KGPL. KGPL had made the payments from their various bank accounts held inside the consortium, out of working capital borrowings, for the purchase of the Gold Bullions from M/s.Mohanlal Jewellers Pvt. Ltd. which is to the tune of Rs.318.75 Crores during the above mentioned period. The amounts were paid through RTGS into the account of M/s.Mohanlal Jewellers Pvt. Ltd. held in HDFC Bank, ITC Centre, Anna Salai, Chennai, (now transferred to R.K.Salai Branch), with Account Number 00040460000335. The purchases of Gold Bullions were made only on Sale Invoice/Vouchers issued by the Seller, viz.,M/s.Mohanlal Jewellers Pvt. Ltd. and no other documents/records for the receipt of goods in to the premises of either to the factory or corporate office of KGPL, as observed by the Forensic Audit in their Report.”

# 7. The Enforcement Directorate found Fixed Deposits to the tune of around Rs.143 crores (to be more specific, Rs.143,58,41,369.90) held in HDFC Bank, which were categorized as a part of proceeds of the crime. Thus, from the above, the crux of the allegations against MJPL (A3) and its Managing Director, Suresh Khatri (A4) is that, from the loans given to KGPL (A1), a sum of Rs.318.75 crores was transferred into the account of MJPL (A3) for the alleged purchase of gold bullions, but actually, no purchase was made and out of Rs.318.75crores. A sum of Rs.143 crores was found to be parked in the HDFC Bank in the form of 22 fixed deposits. The Enforcement Officer passed an order of interim attachment of the said 22 fixed deposits under Section 5 of the PML Act. But, the Adjudicating Authority, by order dated 17.10.2018, set aside the order of interim attachment under Section 8 of the PML Act. Challenging the same, the Enforcement Directorate has filed an appeal in the Appellate Tribunal at New Delhi in FPA-PMLA-2731/CHN/2018 & MP-PMLA-5309/CHN/2018, wherein, an order of status quo has been passed on 11.02.2018, which reads as under :

• “... ... In the meanwhile, notice be issued to respondent No.4 i.e. Mohanlal Jewellers Pvt. Ltd. for the next date. 'Status quo' shall be maintained by the appellant and respondent no.4 with regard to the attached properties.”

# 8. Mr.A.Ramesh, with great pains, took this Court through the attachment order dated 17.10.2018 and submitted that, when the Adjudicating Authority himself has held that the 22 fixed deposits with the HDFC bank are not proceeds of crime and that, the deposits were created with the loans provided by the HDFC bank, then, the prosecution of MJPL (A3) and Suresh Khatri (A4) under the PML Act is misconceived. 

# 9. Before the Adjudicating Authority, it was the case of the MJPL (A3) that for the amounts received by them from KGPL (A1), gold bullion was actually delivered to them in accordance with the trade practice that prevails amongst the bullion traders and that, the transaction between KGPL (A1) and MJPL (A3) will be squarely covered under Section 33 of the Sale of Goods Act, 1930. It is true that the Adjudicating Authority has relied upon Section 33 of the Sale of Goods Act, 1930 and has held that MJPL (A3) had delivered the gold bullions to KGPL (A1), on receipt of monies from them.

# 10. The short question is, whether the criminal Court is bound by these findings of the Adjudicating Authority or inter alia can this Court proceed to quash the criminal prosecution, based on such findings of the Adjudicating Authority, especially, when the matter is pending before the Appellate Tribunal.

# 11. Mr.A.Ramesh placed strong reliance on various judgments, to drive home the point that the findings of the Adjudicating Authority, in certain circumstances, can form the basis for quashing the parallel criminal prosecution. In recent times, the bedrock case on this subject is the judgment of the Supreme Court in Radheshyam Kejriwal Vs. State of West Bengal and Another [(2011) 3 SCC 581], wherein, the Supreme Court has quashed the prosecution under Section 56 of the Foreign Exchange Regulation Act, 1973 (In short “FERA”) against the accused therein, on the findings of the Adjudicating Authority that there was no violation of the provisions of the FERA. The ratio of the various judgments on this subject has been succinctly culled out by the Supreme Court in paragraph 38 of the said judgment.

# 12. Mr.A.Ramesh placed further reliance upon the judgment of the Supreme Court in Ashoo Surendranath Tewari Vs. Deputy Superintendent of Police, EOW, DBI and Another [(2020) 9 SCC 636], wherein, the Supreme Court has quashed the prosecution under the Prevention of Corruption Act, 1988, based on the report of the Chief Vigilance Commissioner. Thus, relying upon the aforesaid rulings and other connected rulings, Mr.A.Ramesh contended that in the teeth of the findings of the Adjudicating Authority exonerating MJPL (A3) and Suresh Khatri (A4) that the 22 fixed deposits are not proceeds of crime, the prosecution of MJPL (A3) and Suresh Khatri (A4) deserves to be quashed. 

# 13. Per contra, Mr.R.Sankaranarayanan refuted the aforesaid contentions and stated that when the Directorate has taken the order of the Adjudicating Authority on appeal, this Court cannot quash the prosecution. He further contended that the scheme of adjudication under the PML Act is substantially different from the scheme that obtains in enactments like the FERA, the Customs Act, the Central Excise Act, etc. He also placed strong reliance on Section 48 of the Evidence Act, 1872 and submitted that, any custom or usage or right etc. has to be proved by the person who asserts it, in the manner known to law before the criminal Court and a finding by an Adjudicating Authority on such a matter is not conclusive and is not binding with criminal Court.

# 14. This Court gave its anxious consideration to the rival submissions.

# 15. To recapitulate, the allegation against MJPL (A3) is that, KGPL (A1) had parked a sum of Rs.318.75 crores that was taken by them as loan from the banks into the accounts of MJPL (A3), out of which, a sum of Rs.143 crores is in the form of 22 fixed deposits. It is the specific case of the prosecution that no gold bullion was in fact supplied by MJPL (A3) and only a paper transaction was effected. Thus, the 22 fixed deposits for a sum of Rs.143 crores represents only part of the proceeds of crime. This is a seriously contested and a disputed question of fact between the Enforcement Directorate and MJPL (A3). The Adjudicating Authority has accepted the version of MJPL (A3), by relying upon a certain trade practice and also by relying upon Section 33 of the Sale of Goods Act. 

# 16. As rightly pointed by Mr.Sankaranarayanan, a custom or usage in a particular trade, has to be proved in the manner set out in Section 48 of the Evidence Act and the Court cannot take judicial notice of it. Before the Adjudicating Authority, MJPL (A3) and HDFC bank played the same tune and they were on the same page obviously because, the HDFC bank did not want to lose Rs.143 crores as it had given loans to MJPL (A3). 

# 17. Unlike the FERA, the Customs Act and the Central Excise Act, where the Adjudicating Authority deals completely with the confiscation proceedings, under the PML Act, the Adjudicating Authority interferes only to confirm the interim order of attachment passed by the Enforcement Officer under Section 5 of the PML Act. In other words, under Section 5 of the PML Act, the Enforcement Officer has the power to pass an interim order of attachment, to safeguard the proceeds of crime from disappearing and the Adjudicating Authority, who exercises powers under Section 8 of the PML Act decides, whether the interim attachment was proper or improper. He has no authority to confiscate the proceeds of crime and that power is vested once again with the Special Court under Section 8(5) to (8) of the PML Act.

# 18. In a given case, the Special Court can proceed with the trial, even if the Enforcement Officer had not passed any order under Section 5 of the PML Act. Neither in Radheshyam Kejriwal (supra) nor in Ashoo Surendranath Tewari (supra), the Supreme Court has held as a matter of thumb rule that whenever an Adjudicating Authority exonerates a person, its findings are binding on the criminal Court. In both the cases, the Supreme Court went deeply into the adjudication order and thereafter, quashed the prosecutions by holding that no useful purpose would be served by prosecuting the offender, in the light of the findings of the Adjudicating Authority.

# 19. In the case at hand, the picture is totally different. The criminal Court can independently come to a conclusion that the 22 fixed deposits were proceeds of crime and they were projected as untainted money from MJPL (A3) and Suresh Khatri (A4). The other distinguishing feature in this case is that, the total proceeds of crime is Rs.318.75crores, out of which, the 22 fixed deposits represent only Rs.143 crores and for the balance amount which has gone into the kitty of MJPL (A3), they can be prosecuted as abettors of the offence of money laundering committed by KGPL (A1). Lastly, the order of the Adjudicating Authority in this case, has not attained finality and the same is pending before the Tribunal and therefore, on this ground too, the criminal prosecution cannot be quashed.

# 20. Mr.A. Ramesh placed strong reliance on the order of cognizance dated 13.07.2018 passed by the Special Court while taking the complaint on file and submitted that the said order does not reflect application of mind. It is his main grievance that this Court had earlier failed to appreciate the fact that a three Judge Bench had decided the case in Sunil Bharti Mittal Vs. CBI [(2015) 4 SCC 609] and that judgment has to be relied upon as laying down the law on the subject and not any subsequent judgment of a two Judge Bench.

# 21. Mr.A.Ramesh further submitted that Sunil Bharti Mittal (supra) has been subsequently considered by the Supreme Court in Mehmood Ul Rehman Vs. Khazir Mohammad Tunda and Others [(2015) 12 SCC 420], where the cognizance order has been quashed, on the ground that it did not reflect application of mind. He shoved up his arguments by placing reliance on a judgment of the Karnataka High Court in S.C.Jayachandran Vs. Enforcement Directorate (W.P.No.18442 of 2017 decided on 17.12.2020), wherein, a learned Singe Judge has quashed the order of cognizance, by relying upon the judgment of the Supreme Court in Sunil Bharti Mittal (supra) and has directed the trial Court to pass orders afresh.

# 22. In criminal law, the principle of stare decisis cannot be mechanically applied. In Sunil Bharti Mittal (supra), the CBI had filed a charge sheet against Bharti Cellular Ltd. and other telecom companies and one Shyamal Ghosh. While taking cognizance, the Special Judge added Sunil Bharti Mittal, Chairman-cum-Managing Director of Bharti Cellular Ltd. and issued process to him. This was the subject matter of the challenge before the Supreme Court. The Supreme Court went into the charge sheet that was filed by the CBI and found that the CBI themselves had come to the opinion that there was no material to implicate Sunil Bharti Mittal. In fact, in paragraph 32 of the judgment, the Supreme Court held as follows :

• ”32. The fulcrum of the issue before us is the validity of that part of the impugned order vide which the two appellants who were not named in the charge-sheet, have been summoned by the Special Judge, for the reasons given therein.”

After discussing the facts, the Supreme Court held in paragraph 53 as under:

• ”53. However, the words “sufficient ground for proceeding” appearing in Section 204 are of immense importance. It is these words which amply suggest that an opinion is to be formed only after due application of mind that there is sufficient basis for proceeding against the said accused and formation of such an opinion is to be stated in the order itself. The order is liable to be set aside if no reason is given therein while coming to the conclusion that there is prima facie case against the accused, though the order need not contain detailed reasons. A fortiori, the order would be bad in law if the reason given turns out to be ex facie incorrect.”

The above passage should be seen from the context it was stated. It was stated in the context in which, Sunil Bharti Mittal was not an accused in the charge sheet and he was included as an accused by the Special Judge, while taking cognizance of the offence disclosed in the charge sheet. Similarly, in Mehmood Ul Rehman (supra), the Supreme Court dealt with a private complaint for defamation. It may be pertinent to extract paragraph 21 of the said judgment :

• ”21. Under Section 190(1)(b) CrPC, the Magistrate has the advantage of a police report and under Section 190(1)(c) CrPC, he has the information or knowledge of commission of an offence. But under Section 190(1)( a ) CrPC, he has only a complaint before him . The Code hence specifies that “a complaint of facts which constitute such offence”. Therefore, if the complaint, on the face of it, does not disclose the commission of any offence, the Magistrate shall not take cognizance under Section 190(1)(a) CrPC. The complaint is simply to be rejected.” (emphasis supplied)

# 23. However, very recently in State of Gujarat Vs. Afroz Mohammed Hasanfatta [(2019) 20 SCC 539], the Supreme Court, in paragraph 22, held as follows :

• “22. In summoning the accused, it is not necessary for the Magistrate to examine the merits and demerits of the case and whether the materials collected is adequate for supporting the conviction. The court is not required to evaluate the evidence and its merits. The standard to be adopted for summoning the accused under Section 204 CrPC is not the same at the time of framing the charge. For issuance of summons under Section 204 CrPC, the expression used is “there is sufficient ground for proceeding…”; whereas for framing the charges, the expression used in Sections 240 and 246 IPC is “there is ground for presuming that the accused has committed an offence…”. At the stage of taking cognizance of the offence based upon a police report and for issuance of summons under Section 204 CrPC, detailed enquiry regarding the merits and demerits of the case is not required. The fact that after investigation of the case, the police has filed charge-sheet along with the materials thereon may be considered as sufficient ground for proceeding for issuance of summons under Section 204 CrPC.“

The above statement of law cannot be distinguished by contending that it would apply only for a police report because, all investigations culminate in the investigating agencies filing either a police report or a complaint with the materials collected by them, for the Court to take cognizance thereon. 

# 24. In a simple private complaint case, the Magistrate may not have any materials dehors the sworn statement of the complainant to take cognizance of the offences alleged in the complaint. In such cases, it will be desirable, if the Magistrate passes an order giving reasons for taking cognizance of the offence and issuing process. In this case, along with the complaint, the Enforcement Directorate has filed 56 documents and also the statements recorded under the PML Act, in support of the allegations in the complaint.

# 25. The Supreme Court was aware that in a private complaint, apart from the complaint, there will not be any other material before the Magistrate, while taking cognizance. This is clear from the underlined portion in paragraph 21 of Mehmood Ul Rehman (supra). Superadded, we cannot lose sight of the following judgments of the Supreme Court, wherein, it has been held in no uncertain terms that failure of the Magistrate to pass a detailed cognizance order, will not vitiate the act of taking cognizance: U.P. Pollution Control Board Vs. Mohan Meakins Ltd. and others [(2000) 3 SCC 745] Kanti Bhadra Shah and another Vs. State of West Bengal [(2000) 1 SCC 722] Dy. Chief Controller of Imports & Exports Vs. Roshanlal Agarwal and others [(2003) 4 SCC 139] Jagdish Ram Vs. State of Rajasthan and another [(2004) 4 SCC 432] Bhushan Kumar and another Vs. State (NCT of Delhi) and another [(2012) 5 SCC 424] In Bhushan Kumar (supra), the Supreme Court has held in unequivocal terms that the summoning order under Section 204 Cr.P.C. requires no explicit reasons to be stated because, it is imperative that the Magistrate must have taken notice of the accusations and applied his mind to the allegations made in the police report and the materials filed therewith. Illustration (e) to Section 114 of the Evidence Act says, "The Court may presume that judicial and official acts have been regularly performed". In view of the above discussions, the cognizance order in this case does not deserve to be quashed.

# 26. Finally, Mr.A.Ramesh assailed the prosecution by submitting that the entire prosecution is founded upon a forensic audit report, but, the report itself says that, it cannot be used for any judicial purpose. This Court is unable to persuade itself to agree with the above submission because, the forensic audit report had triggered the investigation and no report can ever form the only basis for convicting a person of an offence. The prosecution has to prove the offence, by adducing evidence and this opportunity has to be given to the prosecution in this case too. In the result, the prosecution of MJPL (A3) and Suresh Khatri (A4) cannot be said to be unfounded and accordingly, these Criminal Original Petitions are dismissed. Connected Crl.M.Ps are closed.

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