After that, Kalyan starts loving Latha deeply and he contracts a new palace on the name of her love called "Prem Nagar". Keshav Varma witnesses all this and runs to tell his mother. He conjures a story about Latha having stolen his wife's jewelry. Hearing this, Kalyan becomes suspicious of Latha. He asks Latha about it, but she runs away utterly dejected that he could suspect her of such wrongdoing. Fortunately, Kalyan overhears his servant Dasu (Rajababu) whisper to another about Keshav's malicious plan.