State Bank of India v. Shyama Devi

Quick Summary

This case explains when a bank is responsible for its employee’s fraud. The bank employee (Shukla) took money from a customer’s family and faked entries. The Supreme Court said the bank is not liable because the fraud was done as a private act, not as part of his bank duty.

• Author: Gulzar Hashmi
• Location: India
• Published: 2025-10-25
• Keywords: bank liability, employee fraud

Issues

1. Is the bank vicariously liable when its employee misappropriates a customer’s money?
2. Were the wrongful acts done within the “course of employment”?
3. Who carries the burden to prove that the act was part of bank duty?

Rules

• Vicarious Liability: An employer is liable for a servant’s wrongful act only if it is done within the scope or course of employment—even if the act is fraudulent.
• No Liability Without Link: If the loss arises without the employer’s fault or without an employee’s fault in the course of duty, the employer is not liable.
• Course of Employment = Fact Test: Each case turns on facts—ask if the act was connected to official duty or was a personal, private dealing.

Facts (Timeline)

• Account Opening: Respondent opened a savings account at Allahabad branch; introduced by Kapil Deo Shukla, a bank employee and family friend.
• Deposits via Shukla: Respondent handed money/cheques to Shukla for deposit; passbook carried entries confirming deposits.
• Suspicion & Notice (13 Aug 1948): Respondent disputed certain entries; bank responded on 14 Aug 1948 denying some deposits.
• Suit Filed (30 Nov 1948): Respondent sought recovery of amounts with interest.
• Trial Court: Mostly accepted passbook entries; decreed part of the claim with interest.
• High Court: Dismissed bank’s appeal; allowed respondent’s cross-objections, enhancing decree.
• Supreme Court: Allowed bank’s appeal in part; rejected claim for amounts tied to Shukla’s misappropriation outside duty.

Arguments

Judgment

The Supreme Court held that the bank was not liable for the loss caused by Shukla’s misappropriation. His actions were not part of his official banking duty. He used his position and personal friendship to gain access but acted outside the course of employment.

False entries in the passbook and in a related ledger did not convert a private fraud into an official act. The crucial ₹7,000 cheque was never handled through regular bank procedure; Shukla diverted it for himself.

Ratio Decidendi

Master liable only for acts in course of employment. Fraud must be linked to the employee’s official function. Here, the link was missing; the acts were private and outside duty.

Burden of proof: The customer must show the payment was received by the employee while acting in the course of his employment. That proof failed.

Why It Matters

• Clarifies limits of bank liability for staff fraud in India.
• Separates private dealings from official banking acts.
• Guides customers and banks on safe procedures and documentation.

Key Takeaways

• Bank is not automatically liable for every staff fraud—prove the duty link.
• Personal collection by an employee at home/friend setting is a red flag.
• Keep receipts and ensure deposits go through official counters/channels.
• Passbook/ledger entries made by a rogue staff cannot alone fix liability.

Mnemonic + 3-Step Hook

Mnemonic: “DUTY-DOOR” — Duty link opens the door to liability; no duty, door stays shut.

1. Ask: Was the act part of official duty?
2. Check: Any official process (receipt, counter, records)?
3. Decide: If private dealing → no vicarious liability.

IRAC Outline

Glossary

Vicarious Liability

When the law makes the employer answerable for certain acts of the employee done in the course of duty.

Course of Employment

Acts reasonably connected to the job role and done through official process.

Private Agency

When an employee acts for someone in a personal capacity, not as part of official duty.

FAQs

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