State Bank of India v. Shyama Devi

A bank clerk, Kapil Deo Shukla, took money that a customer's husband meant for her savings account. He made false entries in her pass book to hide it. The Supreme Court held that the bank was not liable for the Rs 11,000 in dispute, because the clerk had not acted in the course of his employment.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

State Bank of India — appellant; successor of the Imperial Bank of India, at whose Allahabad Branch the account was held.

Shyama Devi — respondent; the plaintiff, who held Savings Bank Account No. 9001 (the headnote gives 90001).

Bhagwati Prasad — her husband; the main witness for the plaintiff. He did business as Bhagwati Prasad and Sons.

Kapil Deo Shukla (K.D. Shukla) — a permanent clerk of the Bank, also known as Lal Babu; a close neighbour of the respondent and a friend of her husband. He is not a party.

Procedural History

1. On 30 November 1948 the respondent filed a petition in forma pauperis for Rs 15,547/10/-, with pendente lite and future interest. It was registered as a regular suit in 1950 (Sarkaria, J.).
2. On 8 July 1952 the trial court decreed the suit for two items, Rs 10,040/10/-. Simple interest ran at Rs 1/8/- per cent per annum from 1 January 1946 to 14 August 1947, and at a second rate (printed garbled in the source) from 15 August 1947 to December 1948. After that it ran at 6% per annum on the decretal amount, after deducting Rs 1,986/2/- paid during the suit. It awarded proportionate costs (Sarkaria, J.).
3. The Bank appealed to the Allahabad High Court (First Appeal No. 343 of 1952). The respondent filed cross-objections on Rs 4,000 and Rs 105 (Sarkaria, J.).
4. The High Court, by judgment of 3 March 1964, dismissed the Bank's appeal, allowed the cross-objections and decreed Rs 14,145/10/-. Interest ran at Rs 1/8/- per cent per annum to 14 August 1947 and at 6% from 15 August 1947 to 1 December 1948, then pendente lite at 6%. It deducted Rs 1,986/2/- paid on 16 September 1950 and awarded costs of both courts (Sarkaria, J.).
5. The Bank appealed to this Court on a certificate under Article 133 of the Constitution, read with Sections 109 and 110 of the Code of Civil Procedure (Sarkaria, J.).
6. This Court allowed the appeal on 5 May 1978 (Sarkaria, J.).

Facts

1. On 17 September 1945 the respondent opened Savings Bank Account No. 9001 with the Imperial Bank of India, Allahabad. K.D. Shukla, an employee of the Bank, introduced her (Sarkaria, J.).
2. Shukla was a close neighbour and a friend of her husband, Bhagwati Prasad. He was a permanent clerk who worked at different counters, but not the Savings Bank counter (Sarkaria, J.).
3. The plaint claimed four items besides Rs 1,932/2/- admitted by the Bank: Rs 105 (17 September 1945), Rs 4,000 (17 September 1945), Rs 8,000 (7 December 1945) and Rs 100 (20 June 1946) (Sarkaria, J.).
4. The four items came to Rs 12,205. The plaint said Bank employees entered them in her pass book and had confirmed and ratified the entries from time to time (Sarkaria, J.).
5. The plaint said Shukla exercised much influence on other employees, and the Bank viewed his actions with approval and acted with negligence. It said she and other constituents regarded him as a responsible employee of the Bank (Sarkaria, J.).
6. The plaint said the plaintiff often handed money and letters of instruction to Shukla. He obtained the officer's signature on the pass book. She believed the money was deposited (Sarkaria, J.).
7. In August 1946 her husband felt suspicion. She sent a notice on 13 August 1948, and the Bank replied on 14 August 1948, admitting Rs 1,932 and denying the four items (Sarkaria, J.).
8. The Bank admitted Shukla was its employee. It said he no longer served it, and that the alleged deposits were never received or ratified. It listed deposits (Rs 50 on 17 September 1945, Rs 400 on 31 January 1946, Rs 432 on 4 February 1946, Rs 1,000 on 23 April 1946 and Rs 50 on 23 July 1946) totalling Rs 1,932 (Sarkaria, J.).
9. The Bank said that if the plaintiff chose Shukla as her agent and he defrauded her, or colluded with her husband, it was not liable (Sarkaria, J.).
10. The trial issues were whether she deposited the sums, whether the pass book entries bound the Bank, and whether a deposit contravened a Bank rule (Sarkaria, J.).
11. The trial court found the Rs 105 and Rs 4,000 items not proved, and the other items proved. It said the Rules were not strictly enforced (Sarkaria, J.).
12. The High Court found the Rs 8,000 item had two parts, of which the bigger was Rs 7,000 by a cheque of Bhagwati Prasad on Bharat Bank Ltd. It found the cheque was paid to Dass Bank Ltd. and credited to Shukla's own account (Sarkaria, J.).
13. The High Court said Shukla acted in the course of his employment, and the respondent could not suffer for his fraud. It relied on the witnesses Mahadeo Prasad and Narbada Prasad (Sarkaria, J.).
14. For Rs 100, the High Court said the initials of L. Anthony were not proved forged, since he was not examined, and that if Shukla committed any fraud the Bank was liable. For Rs 4,000 it said the Bank had not disproved Bhagwati Prasad's statement by summoning the accountant of the Calcutta National Bank with his accounts. It accepted his statement that the cheque was given on 10 September 1945, and said the respondent could not suffer for Shukla's fraud in the course of his employment. For Rs 105 it accepted his statement of deposit on 7 September 1945 (Sarkaria, J.).
15. At the trial the plaintiff did not appear. Her husband said he, not she, handed over the money and letters at the counter. He denied sending money through Shukla, but admitted the plaint's paragraph 3 was correct (Sarkaria, J.).
16. He admitted Shukla lived four or five houses away and had been known to him for 10 or 11 years (Sarkaria, J.).
17. The Rs 4,000 was a crossed cheque dated 10 September 1945, drawn on his own account in favour of self. It had been credited to someone else's account in the Calcutta National Bank on 15 September 1945 (Sarkaria, J.).
18. Bhagwati Prasad produced no receipt or voucher for it. There was no entry in the cash scroll and no ledger entry showing debit and transfer (Sarkaria, J.).
19. The Bank's Savings Bank Rules 6 and 7 bar a deposit above Rs 5,000 at a time or Rs 10,000 in a year (Sarkaria, J.).
20. The Bank's witnesses said the entry of 7 December 1945 in the pass book was in Shukla's handwriting, and the initials purporting to be of Mahadeo Prasad, the Head Cashier, were forged (Sarkaria, J.).
21. Letters admitted by the High Court show the Rs 7,000 cheque (No. 620149 of 21 November 1945) was paid by Bharat Bank to Dass Bank on 21 November 1945. Dass Bank said it credited the amount to the account of Lal Babu on that date (Sarkaria, J.).

Issues Raised

1. What legal principles govern the vicarious liability of an employer for loss caused to a customer by an employee's misdemeanour or negligence?
2. Were the amounts handed to Shukla in the course of the Bank's business, or did he act as the plaintiff's agent?
3. Does the false entry of the Rs 4,000 deposit in the pass book shift the onus to the Bank?
4. Is the Bank liable for the Rs 7,000 cheque that Shukla cashed and took?

Arguments Contended

For the appellant Bank (Dr. Y.S. Chitale):

• The plaint said the plaintiff entrusted money to Shukla, her friend, for depositing. So he acted only as her agent and not in due course of employment or as the Bank's agent.
• If Shukla did not deposit the amounts, and made false entries in the pass book to cover his fraud, the Bank was not liable.
• The disputed amounts were never delivered by cheque or otherwise at the Bank's counter.
• It relied on Leesh River Tea Co. Ltd. v. British India Steam Navigation Co. Ltd. ([1966] 3 All ER 593), Ruben and Ladenburg v. Great Fingall ([1904-07] All ER 460) and Morris v. C.W. Martin and Sons Ltd. ([1965] 2 All ER 725).

For the respondent (Mr. S.P. Bhargava):

• The plaint said the Bank was responsible for its employees' acts and omissions during service. If Shukla or any other employee embezzled and defrauded the plaintiff, the Bank had to make good the loss.
• Shukla, an employee of the Bank, admittedly made the pass book entries of these deposits.
• Evidence shows Shukla had manipulated the accounts of three other depositors. The Bank reimbursed them, so the plaintiff should not be treated differently.
• Shukla could be called on to help other clerks. There could be no collusion between Bhagwati Prasad and Shukla, since no sane man would collude to cause deliberate loss to himself or his wife.
• Bhagwati Prasad said he handed the Rs 4,000 cheque at the Bank's counter. The pass book entries were, prima facie, enough to establish the claim.
• The ledger entries also showed the deposit. If Shukla or another employee made the entries falsely, the Bank was liable for its employees' fraud in the course of employment.
• In face of the pass book entries, the burden shifted to the Bank to show why it was not liable.

Court's Reasoning

The judgment is by Sarkaria, J. for the Bench of Ranjit Singh Sarkaria, N.L. Untwalia and P.S. Kailasam, JJ. The judgment has no numbered paragraphs, so each step ends with the judge's name.

Sarkaria, J. (for the Bench)

The pleadings and the evidence at trial

1. Noted: The plaintiff's case in the plaint differed from the case at the trial. The plaint said she often handed money and letters of instruction to Shukla. (Sarkaria, J.)
2. Noted: At the trial the plaintiff did not appear. Her husband said he handed the money and letters at the counter where Shukla and another clerk worked, and denied sending money through Shukla. (Sarkaria, J.)
3. Noted: He equivocated about whether Shukla introduced the plaintiff and identified her signature. He denied that she sent her pass book through Shukla. He conceded that if Shukla was present he may have deposited or paid some amount through him. (Sarkaria, J.)
4. Noted: Confronted with paragraph 3 of the plaint, he admitted it was correct, and that Shukla lived four or five houses from him. (Sarkaria, J.)

The legal principles

1. Held: The first principle is that the employer is not liable for the act of a servant if the loss arose without his actual fault or privity, and without the fault or neglect of his agents or servants in the course of their employment. (Sarkaria, J.)
2. Noted: Leesh River Tea Co. Ltd. v. British India Steam Navigation Co. Ltd. is the best illustration. A stevedore company's servant stole a brass plate covering a storm valve, and the ship became unseaworthy. The shipowners contended they were excepted from liability under Article IV, Rule 2(q) of the Hague Rules. (Sarkaria, J.)
3. Noted: Danckwerts, L.J. said in that House of Lords case the theft was completely outside the scope of the stevedore's employment, though the employment gave him the opportunity. Salmon, L.J. said "it is not enough that the employment merely afforded the servant or agent an opportunity of committing the crime". (Sarkaria, J.)
4. Held: It must be shown that the damage was caused by a wrongful act of the servant or agent done within the scope or course of employment, even if the wrongful act amounted to a crime. Salmon, L.J. referred to Lloyd v. Grace, Smith and Co. ([1912] A.C. 716) for this. (Sarkaria, J.)
5. Noted: In United Africa Company Ltd. v. Saka Owoade ([1955] A.C. 130), the Privy Council said a master is liable for his servant's fraud in the course of the master's business, whether or not for the master's benefit. There is no difference between fraud and any other wrong, and it "is a question of fact in each case whether it was committed in the course of the employment". (Sarkaria, J.)
6. Noted: In that case the servants of a transport contractor stole goods entrusted for carriage, in the course of their employment. The contractor was liable, applying Lloyd v. Grace, Smith and Co. (Sarkaria, J.)

Applying the principles

1. Noted: The plaint's case was that the plaintiff handed the sums to Shukla, an employee, for crediting to her account, and that he misappropriated them. (Sarkaria, J.)
2. Noted: The first question is whether the amounts were handed to Shukla in the course of the Bank's business, whether by the plaintiff or by her husband. That is, whether Shukla acted as agent of the plaintiff or of the Bank in the course of his employment. (Sarkaria, J.)
3. Noted: The trial court decided Issue 1 for the plaintiff except on Rs 4,000 and Rs 105. The High Court decided the Rs 4,000 item for the plaintiff. Since it is said the courts misread the evidence, the Court re-examines it. (Sarkaria, J.)

The Rs 4,000 item

1. Noted: Bhagwati Prasad said a Rs 4,000 crossed cheque was presented to the Bank on 10 September 1945 and the deposit was shown on 17 September 1945. He said he wrote a letter in Hindi to deposit the amount in his wife's account. (Sarkaria, J.)
2. Noted: In cross-examination he said the cheque was drawn on his account in favour of self and that he crossed it. He handed it to the counter clerk, who told him to go away. On his return on 17 September the clerk asked for cash first, and he deposited Rs 415 in cash, and a new pass book was issued. (Sarkaria, J.)
3. Noted: He got no receipt, signed the cheque on its back, and denied signing it on 10 September to cash it at the Calcutta National Bank. (Sarkaria, J.)
4. Noted: Mr. A. Ganguli, the Bank's Agent in August 1946, described the deposit procedure. The voucher and cash are tendered at the cash counter. The receiving cashier counts the money, enters it in the cash scroll and signs the back of the voucher. The Head Cashier certifies it. The Banking Department official stamps it with a round received stamp bearing the date and enters it in his cash scroll. The ledger keeper and the day-book writer then make their entries. The pass book need not be lodged at the time of deposit, but must be produced for a withdrawal. The ledger keeper's signature is always taken on the cash voucher before the cashier accepts the money. The receiving cashier certifies the voucher, and the Head Cashier and the ledger keeper enter it. (Sarkaria, J.)
5. Noted: The procedure was followed for the undisputed items, but there is no evidence of it for the disputed deposits. There is no receipt or voucher, and no cash scroll entry. (Sarkaria, J.)
6. Noted: A crossed cheque drawn in favour of self could be deposited only in the drawer's or endorsee's account, and it is not explained how the Calcutta National Bank cashed it. There is no evidence of whose account it went into. (Sarkaria, J.)
7. Noted: The covering letter in Hindi was not produced, and the plaintiff did not try to call for it. No question about it was put to the Bank's officials. Bhagwati Prasad, a man of business, did not simply endorse the cheque to his wife. (Sarkaria, J.)
8. Noted: The seven day gap between the alleged presentation and the deposit entry is itself suspicious. The entry in the pass book showing Rs 4,000 on 17 September was obviously false. The cheque had already been credited to another account on 15 September 1945. (Sarkaria, J.)
9. Noted: The High Court's decree on this item proceeded mainly on the ground that the false entry in the pass book was in Shukla's hand while he was an employee. There is no matching ledger entry. (Sarkaria, J.)
10. Held: The High Court was not right to reverse the trial court's finding on the Rs 4,000. "The onus was on the plaintiff to show that she paid the amount to an employee of the Bank". The false entry could not shift the onus to the Bank. (Sarkaria, J.)

The Rs 8,000 item

1. Noted: The Rs 8,000 item had two parts: Rs 7,000 by cheque transfer and Rs 1,000 in cash. Bhagwati Prasad said on 7 December 1945 he gave a letter that Rs 7,000 be transferred, and deposited Rs 1,000 in cash. (Sarkaria, J.)
2. Noted: He did not say which employee received the cheque, where, or whether he got a voucher or receipt. He did not remember any letter from the Bank about the debit and transfer. He verified the pass book entries and made no further enquiries. (Sarkaria, J.)
3. Noted: The Bank said it could not have accepted a deposit of Rs 7,000, against Rules 6 and 7. Bhagwati Prasad said he was not aware of these Rules. (Sarkaria, J.)
4. Noted: The trial court allowed the Rs 7,000 because the entries in the pass book and the ledger account (Ex. 19) of the current account of Bhagwati Prasad and Sons supported his word of mouth. (Sarkaria, J.)
5. Noted: It did not accept the testimony of Mahadeo Prasad, then a Sub-Accountant of the Bank. He said the initials purporting to be his against the items of Rs 105, Rs 4,000, Rs 400 and Rs 432 in the ledger account were imitations. (Sarkaria, J.)
6. Noted: The High Court admitted additional evidence, being letters of 7, 18, 22 and 23 October 1946 between the Imperial Bank, Bharat Bank and Dass Bank Ltd. They show the ledger entry (Ex. P-9B) of a Rs 7,000 withdrawal on 7 December 1945 was false. (Sarkaria, J.)
7. Noted: The letter of 7 October 1946 said the Imperial Bank could not trace the cheque in its books. Bharat Bank replied on 18 October 1946 that it paid the Rs 7,000 to Dass Bank on 21 November 1945. Dass Bank replied on 23 October 1946 that it realised the amount in cash from Bharat Bank and credited it to its C.D. account of Lal Babu on 21 November 1945. It said the cheque was not presented or paid through the clearing as the Imperial Bank had said. (Sarkaria, J.)
8. Held: Two facts emerge from the letters. The Rs 7,000 cheque was not handed over in the normal course of business at the Bank for transfer to the respondent's account. It was cashed and deposited in Lal Babu alias K.D. Shukla's personal account with Dass Bank Ltd. (Sarkaria, J.)
9. Held: Bhagwati Prasad did not clearly admit handing the cheque to Shukla, but the inference is that he probably handed it after endorsing it. Shukla was not in charge of the Savings Bank counter. (Sarkaria, J.)
10. Held: The letter of 7 October 1946 shows Bhagwati Prasad advised the Bank that the cheque was sent by him for credit of his account. Presumably he sent it through Shukla as his or the plaintiff's agent. (Sarkaria, J.)
11. Held: Shukla, instead of depositing it, appropriated it. So the act causing the loss was not committed in the course of his employment. At most, being an employee and a friend of Bhagwati Prasad gave him an opportunity to commit the fraud. (Sarkaria, J.)
12. Held: The rule in Leesh River Tea Co. squarely applies. The Bank is not liable for the loss of Rs 7,000, which Shukla caused as the plaintiff's agent and not within the scope of his employment. (Sarkaria, J.)
13. Held: False and fictitious entries made by Shukla to cover his fraud, in the pass book and in the ledger account of Bhagwati Prasad and Sons, do not make the embezzlement an act in the course of his employment. (Sarkaria, J.)
14. Noted: The High Court's findings on the remaining items are not seriously disputed. (Sarkaria, J.)

Disposal

1. Held: The Court allows the defendant's appeal and dismisses the plaintiff's claim for Rs 11,000, being Rs 4,000 plus Rs 7,000, with interest. (Sarkaria, J.)
2. Held: The High Court's decretal amount is reduced by Rs 11,000 and interest on it. There is no order as to costs. (Sarkaria, J.)

Authorities

• Leesh River Tea Co. Ltd. and Others v. British India Steam Navigation Co. Ltd. ([1966] 3 All E.R. 593): an employer is not liable where the employment merely gave the servant the opportunity. Followed and applied to the Rs 7,000.
• Lloyd v. Grace, Smith and Co. ([1912] A.C. 716; the headnote gives 636): a master is liable for a servant's wrong, even a crime, done in the course of employment. Noted (Sarkaria, J.).
• United Africa Company Ltd. v. Saka Owoade ([1955] A.C. 130): a master is liable for a servant's fraud in the course of business. Noted (Sarkaria, J.).
• Ruben and Ladenburg v. Great Fingall ([1904-07] All E.L.R. 460) and Morris v. C.W. Martin and Sons Ltd. ([1965] 2 All E.L.R. 725): cited by the appellant (Sarkaria, J.).
• Names as spelt in the source text: United Africa Company Ltd. v. Baka Owoade (in the Court's text); Leesh River Tea Co. Lid & Ors. v. British India Steam Navigation Co. Ltd.; Lloyd V. Grace, Smith & Co.; United Africa Co. Ltd. v. Saka Owoada; Ruben and Ladenburg v. Great Fingall(2).

Provisions mentioned

• Article 133, Constitution; Section 109 and Section 110, Code of Civil Procedure: certificate of appeal from the High Court.
• Rules 6 and 7, Savings Bank Rules of the Bank: no deposit above Rs 5,000 at a time or Rs 10,000 in a year.
• Article IV, Rule 2(q), Hague Rules: exception for loss arising without the actual fault of the carrier or its agents, discussed in Leesh River Tea Co.

Judgement

1. The defendant's appeal is allowed.
2. The plaintiff's claim for Rs 11,000 (Rs 4,000 plus Rs 7,000) and interest on it is dismissed.
3. The decretal amount granted by the High Court is reduced by Rs 11,000 and interest on it.
4. There is no order as to costs.

Legal Principle / Ratio

An employer is liable for a servant's wrong, even a fraud, only if it was done within the scope or course of employment. An opportunity given by the employment is not enough, and the plaintiff bears the onus of showing that the amount was received by an employee in the course of employment. In the Court's words, "it is not enough that the employment merely afforded the servant or agent an opportunity of committing the crime".

Critical Analysis

Analysis based on the judgment text.

The decision turns on the facts of how the money moved. The Court inferred that Shukla got the cheque as an agent of the plaintiff, from the letters showing the cheque was cashed in his own account and the letter of 7 October 1946. It did not find that the husband and Shukla colluded.

The pass book entries did not decide the matter. The Court held the entry of Rs 4,000 false and held that it did not shift the onus. It gave the same reasoning about the fictitious entries for the Rs 7,000.

Three other depositors were reimbursed. The respondent argued that the Bank reimbursed three depositors whose accounts Shukla manipulated. The judgment does not comment on this point.

Significance

• The Court set out the three principles on the vicarious liability of an employer for an employee's wrong, including fraud.
• It held that an employment that gives the servant only an opportunity does not make the employer liable.
• It held that a false entry by the employee does not shift the onus of proof on the customer's claim to the bank.

Exam-Important Points

• Facts in one line: a bank clerk took a customer's cheque and made false pass book entries. The Court held the bank not liable for Rs 11,000.
• Rule: the employer is liable for a servant's fraud done in the course of employment, whether or not for the master's benefit.
• Rule: the fact that employment gave the opportunity to commit the fraud is not enough.
• Rule: whether the wrong was in the course of employment is a question of fact in each case.
• Trap: a false entry made by the employee does not shift the onus to the bank.
• Costs: no order as to costs.

Prepared from the full text of the judgment. Paragraph numbers follow the official Supreme Court judgment text; law reports may number the same paragraph differently.