Mere breach of contract cannot give rise to criminal case for cheating:

Supreme Court
The Supreme Court recently held that mere breach of contract does not give rise
to criminal prosecution for cheating unless a fraudulent or dishonest intention
was present right from the beginning of the transaction [Sarabjit Kaur v. State
of Punjab and Another].
A division bench of Justices Abhay S Oka and Rajesh Bindal was of the view
that merely on the allegation of failure to keep up promise, criminal proceedings
cannot be initiated.
"A breach of contract does not give rise to criminal prosecution for cheating
unless fraudulent or dishonest intention is shown right at the beginning of the
transaction. Merely on the allegation of failure to keep up promise will not be
enough to initiate criminal proceedings," the Court said.
The Court also cautioned against using criminal cases to pressurise parties to
settle civil disputes.
"Criminal courts are not meant to be used for settling scores or pressurise
parties to settle civil disputes," the bench said.
By way of background, a first information report (FIR) was registered against
the accused-appellant under Sections 420 (cheating), 120B (criminal
conspiracy) and 506 (criminal intimidation) of the Indian Penal Code (IPC).
The basis of this FIR was a third complaint made by the complainant-
respondent against the appellant with regard to allegations of cheating in an
agreement to sell of a property.
In the previous two complaints which were based on the same set of facts as the
third complaint, the complainant-respondent had only made the prayer for
return of the amount paid by him in the agreement to sell with no allegation of
cheating.
Moreover, the said complaints were only directed at the property dealers and not
against the appellant.
After investigation, it was found that no no criminal offence was made out with
respect to the first complaint and the complainant was, therefore, granted the
liberty to invoke the jurisdiction of the civil court.
Similar finding was arrived at in the second complaint as well.
However, in the third complaint, the complainant had accused the appellant of
cheating and other offences. On the basis of the same, the FIR Came to be
registered against the appellant.
The appellant then moved the Punjab and Haryana High Court seeking quashing
of the FIR, but the plea was dismissed.
This was challenged before the Supreme Court.
The apex court after considering the sequence of complaints by the
complainant, observed that the effort of the complainant was merely to put
pressure on the appellant in order to get his money back.
Moreover, it was also noted that no efforts were made by the complainant to
initiate any civil proceedings against the appellant to get the sale deed executed
on the basis of the agreement to sell.
Rather, the complainant proceeded only by filing three identical criminal
complaints with the police.
Taking note that the allegations made in the complaint are civil in nature, the
Court observed:
"The entire idea seems to be to convert a civil dispute into criminal and put
pressure on the appellant for return of the amount allegedly paid. The criminal
Courts are not meant to be used for settling scores or pressurise parties to settle
civil disputes. Wherever ingredients of criminal offences are made out, criminal
courts have to take cognizance. The complaint in question on the basis of which
F.I.R. was registered was filed nearly three years after the last date fixed for
registration of the sale deed. Allowing the proceedings to continue would be an
abuse of process of the Court."
Therefore, the Court allowed the appeal and quashed the case.
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Thin Line of Difference Between Breach of Contract and Cheating
Authors, Shailesh Poria & Partner | Mumbai
Vijay Kumar Ghai & Ors. v. State of West Bengal & Ors.

Introduction
Pursuant to the recent decision of the Supreme Court in the case of Vijay Kumar
Ghai & Ors. v. The State of West Bengal
Ors1 , the Supreme Court emphasized on the fine line between breach of
contract and cheating. It has been explained that while breach of contract cannot
give rise to criminal prosecution, fraudulent or dishonest intention, it is the basis
for the offence of cheating. In parallel, the Supreme Court has also relied upon a
precedent to clarify that just because a civil remedy may be available to the
complainant, that itself cannot be a ground to quash a criminal proceeding. The
real test remains whether the allegations in the complaint disclose criminal
offense.:
The Supreme Court has also discussed the scope and powers of the High Court
u/s 482 CrPC by considering a catena of precedents in that respect. It has been
reiterated and emphasized by the Supreme Court that mere breach of contract in
itself is not a criminal offense.
Background
The present appeal was filed against the judgement and order dated October 1,
2019 passed by the High Court of Calcutta (“said judgment”) in an application
for quashing of proceedings pending before the Ld. Chief Metropolitan
Magistrate, Kolkata arising out of a case u/s 420, 406 and 120 B of the Indian
Penal Code, 1860 (“IPC”). Calcutta High Court dismissed the prayer for
quashing of proceedings and held that continuance of criminal proceedings
against the present appellant/accused would not be an abuse of the process of
the court. In Appeal, the Supreme Court, after perusing the ingredients of
offences as well as precedents on the subject, reaffirmed that mere breach of
contract does not constitute the offence of cheating.
Facts
Appellant No. 1 is the Managing Director of M/s Priknit Retails Limited (said
company) while Appellant Nos. 2 and 3 are Directors of the said company.
Respondent No. 2 i.e is an authorized representative of SMC Global Securities
Ltd., Delhi. It was mutually decided between the parties that Respondent No. 2
will invest an amount of INR 2.5 crore with the said company in lieu of which
they will be issued 2,50,000 equity shares of the said company. Accordingly
Respondent No. 2 filed their share application form along with the cheque of
INR 2.5 crore and as per an allotment letter (dated March 29, 2009) 2,50,000
shares were issued. Having failed to bring the I.P.O as per the memorandum of
understanding, Respondent No. 2 issued a legal notice.
After pursuing complaints before several law enforcement authorities,
Respondent No. 2 filed a complaint u/s 406, 409, 420, 468, 120B and 34 IPC
the with PS Bowbazar at Kolkata West Bengal (On March 28, 2013) and same
was converted to FIR No. 168 u/s 406, 420, 120B, IPC. A final closure report
(dated March 4, 2014) was filed by concerned Police Station recommending
closure of case since the entire dispute was found to be of civil nature.
Respondent No. 2 filed a protest petition with Chief Metropolitan Magistrate
(CMM) Kolkata against the closure report and vide order (dated March 8, 2016)
the protest petition came to be allowed. Notice was issued to Appellant Nos. 1
and 2 to appear before the Investigation officer.
The CMM, Calcutta took cognizance of the offence u/s 406, 420, 120B IPC in
connection with the case (dated March 28, 2013) . Being aggrieved, Appellants
filed a quashing petition u/s 482 CrPC inter alia seeking quashing of the FIR
before the Calcutta High Court.
The Calcutta High Court issued a notice to the Respondents and stayed further
proceedings of the criminal case. Respondent No. 2 filed an application for
vacation of the stay order granted by the High Court but the same was
dismissed.
However, the High Court vide impugned judgment and order (dated
01.10.2019) dismissed the quashing as well as the revision petition filed by the
Appellants. It observed that in order to exercise the power under Section 482
Cr.P.C, the only requirement is to see whether continuance of the criminal
proceedings would be a total abuse of the process of the court . In this matter,
however, the continuance of the criminal proceedings against the appellants was
in no way an abuse of the process of the court. Hence the Appellant filed a
Criminal Appeal before the Supreme Court of India.
Observation And Ratio
The Supreme Court at the outset relied on following judgments laying down
circumstances under which High court can exercise its inherent powers u/s 482
of CrPC:
– State of Haryana & Ors. v. Bhajan Lal & Ors. 1992 Supp (1) SCC 335, R.P
Kapur v. State of Punjab (1960) 3 SCR 388

– Inder Mohan Goswami & Anr. v. State of Uttaranchal & Ors. (2007) 12 SCC 1
– Indian Oil Corp v. NEPC India Ltd. & Ors. (2006) 6 SCC 736
– State of Madhya Pradesh v. Awadh Kishore Gupta & Ors. (2004) 1 SCC 691
– G Sagar Suri & Anr. v. State of UP & Ors (2000) 2 SCC 636
The Supreme Court noted that the courts have time and again cautioned about
converting purely civil disputes into criminal cases. The Supreme Court relied
upon Indian Oil Corp v. NEPC India Ltd. & Ors. (2006) 6 SCC 736 for the
same.
It was further observed that it is necessary to examine the ingredients of the
offences in question. After perusal of the provision and supporting precedents
on the same, the Supreme Court drew up following nuances of the offense of
criminal breach of trust:-
– The accused must be entrusted with the property or with dominion over it,
– The person so entrusted must use that property, or
– The accused must dishonestly use or dispose of that property or wilfully suffer
any other person to do so in violation:
(i) of any direction of law prescribing the mode in which such trust is to be
discharged, or
(iI) of any legal contract made touching the discharge of such trust.
Furthermore, the Supreme Court noted that in order to establish the offence of
cheating in inducing the delivery of property, the following ingredients need to
be proved:-
– The representation made by the person was false
– The accused had prior knowledge that the representation he made was false
– The accused made false representation with dishonest intention in order to
deceive the person to whom it was made
– The act where the accused induced the person to deliver the property or to
perform or to abstain from any act which the person would have not done or had
otherwise committed
The Supreme Court held that mere breach of contract of contract in itself is not
a criminal offense. There is a fine difference between breach of contract and
cheating. It has been explained that while breach of contract cannot give rise to
criminal prosecution, fraudulent or dishonest intention is the basis for the
offence of cheating. More specifically, it has been held as follows:
“34. There can be no doubt that a mere breach of contract is not in itself a
criminal offence and gives rise to the civil liability of damages. However, as
held by this court in Hridaya Ranjan Prasad Verma & Ors. Vs. State of Bihar &
Anr. (2000) 4 SCC 168, the distinction between mere breach of contract and
cheating, which is criminal offence, is a fine one. While breach of contract
cannot give rise to criminal prosecution for cheating, fraudulent or dishonest
intention is the basis of the offence of cheating. In the case at hand, complaint
filed by the Respondent No. 2 does not disclose dishonest or fraudulent
intention of the appellants.”

Thus, in view of these facts and circumstances, the Supreme Court set aside the
order dated 1.10.2019 passed by the Calcutta High Court as well as quashed the
FIR and proceedings before the CMM, Kolkata, West Bengal.

Key Takeaways
There is a fine line of difference between breach of contract and cheating
wherein the latter is supposed to contain fraudulent or dishonest intention in
order to constitute an offence of cheating.
At the same time, mere availability of a civil remedy will not prejudice a
potential criminal prosecution if all the ingredients of a crime are met. Hence,
due care and attention needs to be taken while pursuing criminal proceedings.
We trust you will find this an interesting read. For any queries or comments on
this update, please feel free to contact us at [email protected] or write to our
authors:
Shailesh Poria, Partner – Email – [email protected] Akash Manwani,
Associate – Email – [email protected]
Reference
[1]Criminal Appeal No. 463 of 2022 (arising out of SLP (Crl.) No. 10951 of
2019 on 22nd March 2

Disclaimer: The information provided in this update is intended for

informational purposes only and does not constitute legal opinion or advice.
Readers are requested to seek formal legal advice prior to acting upon any of the
information provided herein.