The Hindu Business Line : Into the easy-hearted man and hugged into snares

"BEFORE the starry threshold of Jove's court," is how John Milton's poetic masque Comus begins. Equally interesting is the verdict in the Essar Oil Ltd case that came a few weeks ago from the airy threshold of the apex court. Though you would find that the judgment in the latest issue of Supreme Court Revenue Cases relates to Customs duty, there is enough to engage the accountants in the text because Justices Arijit Pasayat and C. K. Thakker have discussed an important word at length: `Fraud'.

The case has much masala to fill a book: There are overzealous officers, import of machinery worth Rs 600 crore, cheque for Rs 60 crore for duty payable, funds unavailable at the bank to honour the cheque, information engineering to ensure that dishonour intimation gets delayed, bank strike, Budget enhancing the duty in the meantime, and so on. A race against distance, days, funds, tax, and, as it ultimately turned out, conscience too.

Two sides of argument

Earlier, the company had obtained a favourable ruling from the Tribunal that the cheque date (February 25, 1999) was the date of duty payment since the cheque had not been `dishonoured'.

On this, Mr R. Mohan, the Additional Solicitor General, arguing for the Department, submitted that the Tribunal had `lightly brushed aside' various points, such as that there was "fraudulent misdeclaration about availability of funds" and "manipulation of records". Instead, the Tribunal recorded findings "based on conjectures and/or surmises", said Mr Mohan.

In sum, the Revenue's argument was that this was a case where the declaration was done with fraudulent intention, with planned design to evade duty. Arguing from company's side was Mr Dushyant Dave who said that the declaration about availability of funds was "really not relevant".

He contended that the statute insisted the only consequence of non-payment of duty in time to be levy of interest. "The view of the Tribunal is a possible view and, therefore, no interference is called for," he added.

Deceit + injury = fraud

Judges of the apex court gave careful consideration to both sides of the argument and went on to define fraud as `intention to deceive'; "whether it is from any expectation of advantage to the party himself or from the illwill towards the other is immaterial."

About a decade ago, the apex court had held in S. P. Changalvaraya Naidu vs Jagannath that fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. "It is a deception in order to gain by another's loss. It is a cheating intended to get an advantage."

In the Essar case, Justices Pasayat and Thakker dissected fraud into its two elements, viz. "deceit, and injury to the person deceived". Now, what is `deceit'? It means "leading a man into damage by wilfully or recklessly causing him to believe and act on falsehood."

And, "injury is something other than economic loss, that is, deprivation of property, whether movable or immovable or of money and it will include any harm whatever caused to any person in body, mind, reputation or such others."

Thus, injury is "a non-economic or non-pecuniary loss". Deceiver's benefit or advantage is a loss to the deceived. "Even in those rare cases where there is a benefit or advantage to the deceiver, but no corresponding loss to the deceived, the second condition is satisfied," said the judges, citing precedents.

Fraud vitiates every solemn act, observed the judges. "Fraud and justice never dwell together." Misrepresentation too amounts to fraud; there have been decisions that granted relief in certain instances of `innocent misrepresentation' too. A collusion or conspiracy with a view to deprive the rights of the others in relation to a property would render the transaction void ab initio, reads the judgment.

"Although in a given case a deception may not amount to fraud, fraud is anathema to all equitable principles and any affair tainted with fraud cannot be perpetuated or saved by the application of any equitable doctrine including res judicata," as observed in Ram Chandra Singh vs Savitri Devi, about a year ago.

Fraud defined

A host of `fraud' definitions are found in the verdict: Fraud is an act committed by a party to a contract with intent to deceive another (Indian Contract Act, 1872). Fraud is an act or omission to act or concealment by which one person obtains an advantage against conscience over another or which equity or public policy forbids as being prejudicial to another (Webster's Third New International Dictionary).

Fraud is an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or surrender a legal right; a false representation of a matter of fact whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury (Black's Legal Dictionary).

Fraud is criminal deception, use of false representation to gain unjust advantage; dishonest artifice or trick (Concise Oxford Dictionary).

A representation is deemed to have been false, and therefore a misrepresentation, if it was at the material date false in substance and in fact (Halsbury's Laws of England).

Travelling back in time to the late 19th century, the judges drew wisdom from the famous English case on the subject, Derry vs Peek: "Fraud is proved when it is shown that a false representation has been made i) knowingly, or ii) without belief in its truth, or iii) recklessly, careless whether it be true or false."

Comus in court!

Among the quotes is one from the apex court's verdict in Shrisht Dhawan vs Shaw Brothers in 1992 that cites Michael Levi likening a fraudster to Milton's sorcerer Comus, "who exulted in his ability to wing into the easy hearted man and trap him into snares."

Comus, you'd learn from encyclopaedia, is the name of a Roman god, with the portfolio of `mirth and revelry'. However, in Milton's work of 1634, Comus is the mischievous son of Bacchus and Circe.

For the literary-minded, here's a snatch of Comus's lines from the poem:

Thus I hurl

My dazzling spells into the spongy air,

Of power to cheat the eye with blear illusion,

And give it false presentments, lest the place

And my quaint habits breed astonishment,

And put the damsel to suspicious flight;

Which must not be, for that's against my course.

I, under fair pretence of friendly ends,

And well-placed words of glozing courtesy,

Baited with reasons not unplausible,

Wind me into the easy-hearted man,

And hug him into snares.

The verdict

Assurance to provide funds can, by no stretch of imagination, be the same as funds already available, said the court.

A communiqué of the company dated March 3, 1999, had spoken of no funds being available for the cheque already given, and there was anxiety to clear the imported goods before the Budget proposals were out.

The court also found evidence of officers `acting in undue haste' and resorting to `backdating'. People involved "had played major roles in the whole game of fraud and deception," said the judges, setting aside the earlier of the Tribunal.

A case not for the easy-hearted!

AccountSpeak@TheHindu.co.in

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