VF Brands India Private Limited & Ors. v. State of Maharashtra & Ors.

15. The complainant in short, levelled accusations against the accused nos, 1 to 7 that they committed fraud of an amount of crores of rupees. It was specifically alleged that the entire conduct of the accused revealed that from the very beginning they intended to cheat complainant company for a huge amount and from the entire transaction, there was a wrongful gain a wrongful loss to complainant company as they had parted with huge amount of money and the accused nos, 1 to 7 having conjointly and severally committed serious offences punishable under various sections of IPC, the offence was sought to be registered. 9th The complaint was supported by an affiavit filed by the complainant Rajesh Parmanand Shah, the Director of M/s. Krysh Retail Private Limited.

16. According to Mr. Parab, on one hand, the complainant has preferred to follow the route of Section 156(3) of Cr.P.C. which has resulted in filing of a chargesheet but, on the other hand, he has chosen to invoke the Arbitration clause in the agreement and the proceedings had resulted into an Award passed on 14.05.2020. It is the case of Mr. Parab that the amounts due under the Award has also been paid to the Respondents. Submitting that no offence under Section 406 and 420 is made out against the Petitioners in Criminal Writ Petition No. 3301 of 2018, it is his specific contention that the role attributed to the Petitioner NO. 2-Mr. Boopathy K, Petitioner No. 3-Mr. Pankaj Agarwal and Petitioner No. 5-Mr. Sunit Roy in the complaint, is very specific when the complainant had alleged that Boopathy K. had offered the stores and managed the entire finance and accounts whereas Mr. Sunit Roy and Pankaj Agarwal, accused no. 4, is head of VF Brands. Taking us through the complaint, it is the submission of Mr. Parab that no specific role is assigned to these accused persons/Petitioners, which would establish the charge under Section 120-B read with Section 34 of the IPC. 9th

17. Mr. Kushal Mor, who represent the Petitioner Mr. Pranav Kulkarni, would rely upon clause 3.[6] of the agreement and would submit that till filing of FIR, the reconciliation of accounts was done. He would submit that the Petiitoners all the while rendered cooperation in the investigation and despite this, accused no. 2 Mr. Boopathy K. was arrested on 30.10.2018 and on 02.11.2018, the Bombay High Court passed an Order directing that no coercive steps be taken against the Petitioners. By issuing summons under Section 91 of Cr.P.C., certain documents were sought from the company which were duly complied with. Mr. Mor would specifically submit that after almost two years of Section 91 summons being issued, the Investigating Officer issued another summons under Section 41(A)(1) of Cr.P.C. seeking identical documents from his clients and despite the chargesheet being filed on completion of investigation on 03.01.2022, on 11.11.2023, the Investigating Officer issued summons under Section 41(A). It is his specific contention that even on 16.01.2024, Mr. Puneet Khosla, Mr. Sunit Roy, Mr. Kanchan Pant, Mr. Pranav Kulkarni and Mr. Pankaj Agarwal, attended the Police Station on 16.01.2024 and rendered their cooperation. But, they were made to sit in the Police Station with purpose of harassment. It is worth to note that Sessions Court granted interim protection to Mr. Pranav Kulkarni on 23.12.2022 and Mr. Pankaj Agarwal was also protected by order dated 26.12.2022. 9th Even Mr. Mor would submit that there was no clause in the agreement which guaranteed 30% returns and when the claim was stacked by the complainant before the Arbitral Tribunal, the same was dealt with according to the Arbitration and Conciliation Act, 1996.

18. Mr. Ponda, who represent Mr. Puneet Khosla, has urged that he was not the Managing Director of VF Brands till the dispute arose and Mr. Ponda has relied upon the decision of the Apex Court in Iridium India Telecom Ltd. vs. Motorola Incorporated & Ors.1, which, according to him, continue to be a good law which has decided on the position, whether corporate body/the company can be arraigned as accused in an offence requiring mens rea, i.e. particular state of mind (like dishonesty) particularly in the offences alleged to be committed in relation to the business of the company. He would also place reliance upon the decision in the case of Maksud Saiyed vs. State of Gujarat[2] by submitting that summoning of an accused in a criminal case is a serious matter and criminal law cannot be set into motion as a matter of course specifically in exercise of powers under Section 156(3) by the Magistrate. He would submit that it is imperative for the Magistrate to inquire in the nature of allegations made in the complaint and the evidence in support thereof and to ascertain whether that evidence would be sufficient in bringing home the charge to the accused and the Magistrate has to carefully scrutinise the evidence and

9th may even put questions to the complainant and the witnesses, to elicit answers to find out the truthfulness of the allegations or otherwise and this test, according to Mr. Ponda, is not satisfied in the present case. According to him, as far as Mr. Puneet Khosla is concerned, he is not a signatory to the Franchise Agreement and, therefore, the accusation that the complainant was induced to invest money with VF Brands do not apply to him as he came in picture as a Managing Director only in

2017. Mr. Ponda would also place reliance upon the decision of the Apex Court in Sanjay Dutt & Ors. vs. The State of Haryana & anr.[3] decided on 02.01.2025, in submitting that a Director may be vicariously be held liable if the company itself is liable in the first place and mere authorization of an act at the behest of the company or the exercise of a supervisory role over certain actions or activities of the company is not enough to render a Director vicariously liable. According to Mr. Ponda, there must exist something something to show that such actions of the Director stemmed from their personal involvement and arose from actions or conduct falling outside the scope of its routine corporate duties. Thus, where the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect, as there has to be a specific act attributed to the Director or any other

3 Criminal Appeal No. 11/2025 (@SLP(Crl) No. 7464/2024) 9th person allegedly in control and management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company. It is with this aforesaid argument advanced on behalf of the Petitioners, the chargesheet is prayed to be quashed and set aside.

19. Learned Senior Counsel Mr. Sudeep Pasbola, representing Respondent no. 2, on the other hand, has vehemently opposed the applications by submitting that in the complaint, the complainant has brought about the inducement and it is alleged that though it was assured that the business would render more than 30% profit, this clause was not stipulated in the Franchise Agreement, intentionally, so as to deny this benefit to the complainant. According to Mr. Pasbola, since the Respondent no. 2 was in loss since 2017 and the stores were returned along with the goods, but his grievance is that the assured return on income was not released in favour of the complainant instead the accused started forging records and he would rely upon some statement of Mr. Kewalchandra in the chargesheet where he made reference to certain bills which were received. Mr. Pasbola would rely upon the forensic audit which is a part of the chargesheet. As regards Puneet Khosla, Mr. Pasbola denied that he was not in action as he would submit that he was very much there though not in the capacity of Managing Director but during the period from 2009 to 2013 he was 9th with the parent company and in fact he was responsible for the initial inducement to the company of Respondent no. 2.

20. Mr. Subodh Desai, learned Senior Counsel representing the Respondent No. 2 in WPCR No.3301 of 2018 and WPCR No. 5109 of 2018, and adopted the arguments of Mr. Pasbola in submitting that it would be ultimately at the end of the trial, the charge shall either stand proved or disapproved when at present that chargesheet comprise of all the statement which demonstrate inducement and the forgery committed by the accused. According to Mr. Desai, he is conscious of the fact that criminal proceedings are not recovery proceedings and for recovery of the money, he has already approached the Arbitral Tribunal but as far as criminal culpability is concerned, the complainant has rightly approached the Magistrate who directed an FIR to be registered as prior to registration of the complaint, the arbitration was invoked on 22.09.2017 and the Award passed was on the breach of contract. In any case, that the forensic report being included as a part of the chargesheet, according to Mr. Desai, it will have to be decided in trial to establish the criminal applicability on the part of the accused, particularly when they face accusations under Sections 406, 420, 467, 468 and 471 read with Section 34 of the IPC.

21. We have perused the complaint filed before the Metropolitan Magistrate, under Section 156(3) of Cr.P.C., by Rajesh Parmanand Shah, the Director of M/s. Krysh Retail Private Limited against VF 9th Brands India Private Limited and seven other accused persons, in their capacity as employees of VF Brands. The complainant, the Director of Krysh Retail Private Limited, company being engaged in the business of running franchise stores alleged that the team headed by accused no. 2 Mr. Boopathy and and Mr. Kanchan Pant, under the direction of accused no. 3, approached to the complainant and proposed to enter into new business of running franchisee for and on behalf of VF Brands by submitting that there is a store existing in Mumbai which is being run under ‘joint venture’ between VF and Arvind Brands and they were looking for new partners for opening franchisee. Though the complainant expressed hesitancy, he was persuaded by assuring good profit margin and guaranteed return on investment and the accused represented to him that there would be minimum guaranteed profit of 30% in each year. It is upon this assurance that the complainant agreed to take over seven stores and decided to form a new company for the entire new brand of business. The complainant-company was asked to enter into an agreement in the name of new existing partnership firm and was informed that after formation of new company, VF Brand would execute new agreement with the new company. The complainant therefore took over the stores in the name of the existing partnership firm M/s Shambhulal A. Shah & Co, that somewhere in November, 2010, the new company ‘M/s Krysh Retail Private Limited’, came into existence, it sought execution of a ‘new 9th agreement’ but the complainant was asked to take over another 12 stores before new agreement was executed. More stores were acquired by the complainant but the agreement draft which was made in the month of November 2010 to be executed later, did not contain the ‘Guarantee Return Investment’ clause but the complainant was assured that a separate agreement would be executed. The gist of the complaint revolve around the failure on the part of the accused persons to abide by its commitment for the assured returns particularly when the sales of the product dropped in the later part of 2016. The complaint specifically contained the following accusations:

(XXII) That after going through the ledger the

Complainant came across many entries which were false and which had been entered although those were not suppose to be paid by the complainant Company and when it was brought to the notice of the accused; they refused to discuss the same. They stated that they would have to pay whatever had been mentioned or entered otherwise they would get the money forcefully removed from us. Complainant Mr. R.P. Shah was shocked to hear such a statement made by the accused threatening them to pay which actually amounts to cheating and later went ahead and threatened them if they don’t pay the same.

(XXIII) That at this point of time, the Complainant

Company clearly understood that the Accused VF brands India Pvt. Ltd., Boopathy K., Kanchan Pant, Pankaj Agarwal, Pranav Kulkarni, Puneet Khosla and Sunit Roy jointly and severally, from time to time, were deceiving them and other franchises holders to put in more and more money, in the name of investment and in turn, all accused were, jointly and severally deceiving complainant company where by complainant company suffered huge amount’ of wrongful loss gain to accused VF brands India Pvt. 9th Ltd. and hence the Accused have jointly and severally committed an offence which is punishable under IPC.

(XXIV) That after perusing the Account Statements which the Accused forwarded to complainant Company, the Complainant Company realised that the Accused made false and bogus back dated entries on —

1) 29/10/2016 amounting to Rs. 50,88,111/- and

2) 21/02/2017 amounting to Rs. 34,15,477/- to further deceive Complainant Company by raising false entries/ bills. In fact the accused sent account statements where they had raised bills of stores that were closed last year in 2016. To the utter shock, the Complainant Company was still being billed an stores/ locations that they did not have. For example, Complainant’s one store of Lee and and Wrangler Phoenix was shut on 25th August 2016 however invoices and other entries have been debited of Rs. 92,37,175/- in the year 2017 upto 20th March 2017. Rest the Complainant Company is still in the process of checking whether any more fraud has been done. Meanwhile Complainant Company called Mr. Pranav Kulkarni (Accused No.5) to discuss about the entries, to this he gave assurance that it’s a mischief by higher authorities and he once again assured to the Complainant Company to rectify the same, however now the accused started giving evasive answers with intention to cause. gain to themselves by creating bogus and false accounts and attempted to further deceive Complainant Company whereby Complainant Company has been caused wrongful loss and hence have committed offences punishable under I.P.C.

22. The above complaint, with the aforesaid accusation which was registered as MECR No. 5 of 2017 invoking Section 406, 420, 467, 468 and 471, read with Section 34 of the IPC against M/s. VF Brands India Private Limited and accused nos. 2 to 7, which accused the Company and its officials who have acted in collusion by showing temptation of 9th obtaining return of 30% sale purchase transaction to the complainant’s company and preparing bogus bills in respect of supply of goods and the total taken in that respect in the ledger account and treating the ledger as real and recovering huge amount and also of preparing bills to stores which are closed and by reflecting them in the ledger account and demanding additional amount by modification in the entries and cheating by breach of trust.

23. We have also perused the chargesheed filed on completion of investigation. In order to discern whether there was any assurance of the return of investment, the franchisee agreement dated 03.11.2010 is carefully perused by us and we find the following stipulation in clause 11.2, which specifically record “No Guarantee has been given by the Company as to any assured profitability of the Franchised Showroom”, prima facie, negate the claim of the complainant about assured returns. Further, we also have a clear stand adopted by VF Brand placed before the Assistant Police Inspector, Marg Police Station, which has referred to the correspondence between the parties and it clearly record that VF Brands did not guarantee any profitability nor did it give any loss reimbursement as a policy, however, still the grievance of the complainant Mr. Rajesh Shah would be looked into. The correspondence of 28.07.2015 from VF Brands to Rajesh Shah also make it clear that the company had never committed to giving ROI of 9th 30% in respect of its sales, discounts and expenses and that is not the practice of the company. Explanation is also offered as regards the alleged arbitrary debits by stating that ledgers are maintained by SAP system which do not allow any entry to be changed or entered in backdated and clear explanation is explained in respect of debit of ₹50,88,111/-, debit of ₹34,15,477/- and debit of ₹92,19,030/-. The aforesaid stand was supported by the documents, which were forwards to the Investigating Officer. It is also the specific case of the company VF Brands that Krysh owed substantial money to VF Brands and this was computed at ₹16,54,92,174.00, under the following heads:

┌────────────────────────────────────────────────────────────────────────────────────┐
│          Sl.       Particulars of counterclaim                Amount due (INR)     │
│         No.                                                                        │
├────────────────────────────────────────────────────────────────────────────────────┤
│       1.       Krysh has failed to make payments                  5,52,57,332.00   │
│                for product stock supplied by VF                                    │
│                Brands to Krysh Retail and other                                    │
│                dues.                                                               │
│                [Breach of clause 6(b) of the                                       │
│                Franchise Agreement]                                                │
│       2.       Interest on 1 above at 24% per                     1,43,83,032.00   │
│                annum until 2 March 2018.                                           │
│       3.       Krysh has failed to provide C-                      46,57,501.00    │
│                Forms as required by contract due                                   │
│                to which VF Brands has to pay a                                     │
│                differential tax                                                    │
│                [Breach of clause 6(c) of the                                       │
│                Franchise Agreement]                                                │
│       4.       Krysh has provided unauthorized                     14,95,309.00    │
│                discounts in the Franchised                                         │
│                Showrooms                                                           │
│                [Breach of clauses 3.11, 6(a), 9.2,                                 │
│                and 12.1(ix) of the Franchise                                       │
│                                  Page 25 of 46                                     │
│                                  9th April 2025                                    │
│                        WPCR-3301-2018-5109-2018-17661-2024.doc                     │
│               Agreement]                                                           │
│       5.      Krysh has failed to properly                       8,33,00,000.00    │
│               maintain showrooms and act in the                                    │
│               best interest of VF Brands causing                                   │
│               loss to VF Brands                                                    │
│               [Breach of clauses 9.1 and 12.1(iii)                                 │
│               of the Franchise Agreement]                                          │
│       6.      Differential margin dues for stock                  63,99,000.00     │
│               lying with Krysh as of 31 July 2016,                                 │
│               which was billed at the revised                                      │
│               margin of 40% effective from 1                                       │
│               August 2016                                                          │
│                                                    Total         16,54,92,174.00   │
└────────────────────────────────────────────────────────────────────────────────────┘

24. The most important aspect of the whole discord between the parties is that, Krysh Retail Private Limited had approached the Arbitral Tribunal, when the dispute arose between them revolving around the Franchise Agreement dated 03.11.2010, which contained arbitration clause. The sole Arbitrator Mr. M. Dhyan Chinappa, Senior Advocate to whom the dispute was referred to, entered the reference on 31.10.2017 and pronounced his Award on 14.05.2020. The copy of the Award is placed on record in Criminal Writ Petition (St.) No. 17661 of 2024 and we find that the claimant Krysh Retail Private Limited staked the claim for compensation and also reimbursement towards discounts, promotions and return of investment. The sole arbitrator therefore formulated various issues, the primary and relevant one being: 9th

1. …

2. Whether the Claimant proves that there were various misrepresentations made by the Respondent before and after execution of the Franchise Agreement dated 03.11.2010, and if so what is the effect of such misrepresentations?

3. …

4. Whether the Claimant proves that the Respondent assured Return on Investment to induce the Claimant to enter into the franchise and whether there was an agreement on the Respondent making payment against Return of Investment and if so to what sum?

5. Whether the Claimant proves that it has suffered operational losses and if so, is the Respondent liable to make good such operational losses and to what sum?

6. Whether the Claimant is entitled to compensation towards rent from the Respondent and if so to what sum?

7. …

8. …

9. Whether the Claimant is entitled to reimbursement towards discounts, promotions, and VAT reimbursements from the Respondent and if so to what sum?

10. Whether the Claimant proves that the Respondent resorted to wrongful and arbitrary debits and therefore entitled to reimbursement from the Respondent and if so to what sum? Before the Tribunal, VF Brands also raised a counter claim and the following issues were settled to be approved by it: 9th

39. Time and again, it has been reiterated by the higher Courts that a civil dispute cannot be given a criminal colour and in case of C. Subbiah alias Kadambur Jayaraj & Ors. vs. Superintendent of Police and Others[7], the Apex Court has clearly ruled that the allegations which gave cause to the complainant to sue the accused in a Civil Court cannot be given colour of criminal proceedings. The Court has deprecated and cautioned about converting purely civil disputes into criminal cases merely on the pretext that civil law matters are time consuming and do not adequately protect the interests of lenders/creditors. It relied upon the observations in its earlier decision

9th in the case of Indian Oil Corporation vs. NEPC India Ltd., & Ors.[8] to the following effect: “13..... Any effort to settle civil disputes and claims, which do not involve any criminal offence, by applying pressure though criminal prosecution should be deprecated and discouraged.”

40. Another angle and which is of great relevance is about the accused nos. 2 to 7 being arraigned as accused, when the company itself is impleaded as accused no. 1. Mr. Ponda has invoked the principle laid down in Iridium India Telecom Ltd (supra), in which the exposition of company law with regard to corporate criminal liability has been expanded by holding that a corporation may be criminally liable for crimes which involve a specific element of intent as well for those which do not, and, although some crimes require such a personal, malicious intent, that a corporation is considered incapable of committing them, nevertheless, under the proper circumstances the criminal intent of its agent may be imputed to it so as to render it liable, the requisites of such imputation being essentially the same as those required to impute malice to corporations in civil actions. The position in this regard in India was also focused upon with reference to the decision of the Constitution Bench in the case of Standard 8 2006(6) SC 736 9th Chartered Bank vs. Directorate of Enforcement[9], to the effect that, “There is no dispute that a company is liable to be prosecuted and punished for criminal offences. Although there are earlier authorities to the effect that corporations cannot commit a crime, the generally accepted modern rule is that except for such crimes as a corporation is held incapable of committing by reason of the fact that they involve personal malicious intent, a corporation may be subject to indictment or other criminal process, although the criminal act is committed through its agents.”

41. Mr. Ponda has also placed reliance upon the decision in the case of Maksud Saiyed (supra), which has examined the aspect of vicarious liability of Directors for the charges levelled against the company. Holding that in absence of requisite allegations with regard to correct statutory provisions, the Penal Code does not contain any provision for attaching vicarious liability on part of the Managing Director or Directors of the company when the accused is a company. With these observations, while dealing with a complaint under Section 156(3), the Apex Court has ruled that the Magistrate should have examined whether the complaint made the Directors personally liable and if it was not so, the issuance of process against them could not be 9 2005(4) SCC 530 9th sustained and it was quashed by invoking power under Section 482 with the specific following observations:

43. In the wake of the aforesaid position, we find substance in the submissions of Mr. Ponda that in absence of any material in the chargesheet to establish or attribute a particular act to either of the Petitioners-VF Brands, they do not deserve prosecution on the basis of the material collected in the chargesheet.

44. The Petitioners have approached before us by praying for exercise of inherent powers under Section 482. Though it is a well settled norm that this power shall be exercised carefully and with great caution, the exercise of this power is permitted, to give effect to an order under the Code and to prevent abuse of the process of the Court and otherwise secure the ends of justice. While exercising the said power, the Court must ensure that the criminal prosecution is not used as an instrument of harassment or for seeking private vendetta or with an ulterior motive to pressurise the accused or to convert a civil dispute into that of a criminal offence. On the basis of the evidence that has been collected and compiled in the chargesheet, when we have perused the background in which the complaint is filed and when we have apprised ourselves with the Award which was passed, when the arbitration was invoked by the 9th complainant, we find the present case to be a fit case for exercise of our power, since it manifestly appears to us that continuation of the criminal proceedings despite availing the remedy of Arbitration proceedings is nothing but abuse of process of law by the complainant. The allegations in the MECR and now the material in the chargesheet even taken at their best value and accepted in entirety do not constitute an offence, which the Petitioners are being made to face on filing of the chargesheet. We are of the clear view that allowing the proceedings to continue would be and abuse of process of the Court and ends of justice demands that the proceedings against them be quashed and set aside, as we find that the police machinery through the Magistrate has been used as a weapon of harassment or persecution. Had the Magistrate applied his mind to the complaint to ascertain whether the ingredients of the offence under which the FIR is directed to be registered are made out, probably, this stage could not have arrived. By way of interim order, this Court has already stayed the proceedings pursuant to the filing of chargesheet against the Petitioners and since we find that from reading of the complaint, prima facie, no offence is made out under Sections 406, 420, 467, 468 and 471, read with Section 34 of the IPC and since the machinery of the criminal Court cannot be utilized for ulterior purpose particularly when the remedy available under the agreement itself was resorted to and even the complainant had received the amount under the Award, we 9th are inclined to quash and set aide the order passed by the Magistrate as well as the FIR being MECR No. 5 of 2017 dated 23.11.2017 registered on behalf of the Respondent no. 2 qua the Petitioners. We also quash and set aside the chargesheet dated 03.01.2022 filed in furtherance of the registration of the MECR against the Petitioners. Since the proceedings emanated from the order passed by the Chief Metropolitan Magistrate dated 06.11.2017, who has failed to exercise due diligence before directing registration of the MECR as no ingredients of the offence under Sections 406, 420, 467, 468 and 471, read with Section 34 of the IPC are made out against the Petitioners, even the said order is quashed and set aside.

45. The Criminal Writ Petitions are made absolute in the aforesaid terms.

SHYAM C. CHANDAK, J BHARATI DANGRE, J 9th