1. you're using the enterprise API, the client soap stack is going to base64 encode the array of bytes you set as the body for you, you're code is going to end up double encoding.
2. Don't set the bodyLength, the server will set it based on the body during the save.
3. "txt" is not a content-type, type "text/plain"
4. CRDocuments is not a valid FolderId, either query for a folderId from the Folder object, or use the UsersId, to create a document in the users private documents folder.

Thanx Ron I implemented all your suggestions and even then I am still getting an error please could you see what I am doing wrong??
Here is the whole code:

private void createDocument()
    {
        try {
            getUserInput("Hit enter to upload file......");
            String strDoc = "this is a test file that I am trying to make. ";
            System.out.println(strDoc);
            //Retrieve Folder for file upload
            Folder folder = null;
            QueryResult qr = binding.query("Select Id, Name from Folder Where Name = 'TestSumiran'");
            if (qr.getSize() > 0)
            {
                folder = (Folder) qr.getRecords(0);
            }
            System.out.println("folder name id:" + folder.getName());
            //Create document object
            if(folder != null)
            {
                System.out.println("Folder was not null");
                com.sforce.soap.enterprise.sobject.Document document = new com.sforce.soap.enterprise.sobject.Document();
                document.setName("Test");
                document.setBody(strDoc.getBytes());
             
                document.setFolder(folder);
                document.setContentType("text/plain");
          
                documents = new com.sforce.soap.enterprise.sobject.Document[1];
                documents[0] = document;
               
                // create the object(s) by sending the array to the web service
               
                SaveResult[] sr = binding.create(documents);
                System.out.println("The number of the document is:"+sr.length);
                System.out.println();
                System.out.println("The body length is:"+document.getBodyLength());
                System.out.println("The text in the body is:"+document.getBody());
            
                for (int j = 0; j <sr.length; j++)
                {
                    if (sr[j].isSuccess())
                    {
                        System.out.println("A document was created with an id of: " + sr[j].getId());
                    }
                    else
                    {
                        for (int i = 0; i < sr[j].getErrors().length; i++)
                        {
                            com.sforce.soap.enterprise.Error err = sr[j].getErrors()[i];
                            System.out.println("Errors were found on item " + new Integer(j).toString());
                            System.out.println("Error code is: " + err.getStatusCode().toString());
                            System.out.println("Error message: " + err.getMessage());
                        }
                    }
                }
                getUserInput("\nHit return to continue...");
            }
        } catch (ApiFault af) {
            System.out
                    .println("\nFailed to create account, error message was: \n"
                            + af.getExceptionMessage());
            getUserInput("\nHit return to continue...");
        } catch (Exception ex) {
            System.out
                    .println("\nFailed to create account, error message was: \n"
                            + ex.getMessage());
            getUserInput("\nHit return to continue...");
        }
    }

and the error that i get is:

Errors were found on item 0
Error code is: INVALID_FIELD_FOR_INSERT_UPDATE
Error message: Document: bad field names on insert/update call: Folder