The division judge bench of the Patna High Court held that the mere breach of contract cannot give rise to criminal prosecution for cheating unless the fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed.
Brief Facts:
The factual matrix of the case is that the Petitioner is involved in the construction business and entered into a sub-contract agreement with Akarshan Infra Developers Pvt Ltd. Then, the informant in order to earn profit entered into an investment agreement with the Petitioner No. 1 and he had to invest a sum of rupees 2 crores within a period of 2 months, however, he invested only 85 lakhs and that too in three months, due to which investment agreement failed. Thereafter, Petitioner no. 1 entered into a settlement agreement with Respondent no. 2 and the Petitioner had to return the amount of Rupees eighty-five lakhs to Respondent no. 2 along with interest at the rate of 9 per cent per annum, amounting to Rs. 1,09,73,000/-. However, the petitioner returned a sum of Rs. 44,00,000/- to the Respondent No. 2 in two years. Due to the dispute between the principal employer and the main contractor, the work of the housing project was stopped. The civil suit was filed by Petitioner No. 1 which was later withdrawn by Petitioner No. 1 as there was an arbitration clause in the Agreement executed between the Petitioner No. 1 company and the principal employer. Respondent no. 2 lodged the FIR for the offences punishable under Sections 406, 420 and 34 of the Indian Penal Code. The present writ application is filed in order to quash the FIR.
Contentions of the Petitioner:
The Petitioner contended that according to clause 7 of the settlement agreement, Petitioner no. 1 was supposed to pay 12 per cent of the payments received from the main contractor. It was also contended that there exists no dishonest intention to misappropriate the amount invested by Respondent No. 2. Furthermore, it was contended that In order to establish an offence under Section 420 of the Indian Penal Code, there must have been intent to commit fraud from the beginning. However, in this particular case, there was no intent to commit fraud from the beginning, and the First Information Report contains no allegations regarding this matter. The Petitioner relied upon the judgments titled Bhajan Lal v. State of Haryana, Dhar v the State of Jharkhand, Hotline Teletubes and Components Ltd. v. State of Bihar, and M/s Indian Oil Corporation v. NEPC India Ltd. And Others.
Contentions of the Respondent:
Respondent no. 2 contended that the petitioners failed to pay the profit to respondent no. 2 or return the amount as promised by way of a settlement agreement, as revealed by the First Information Report, after entering into an agreement with respondent no. 2/informant. Once the investigation was concluded, the police filed a charge sheet, determining that there was a strong case against the petitioners. They also discovered that the Judicial Magistrate had taken cognisance of the petitioner's offences.
Observations of the court:
The Hon’ble court observed that it cannot be said that Petitioner No. 1 acted dishonestly from the beginning, that is, when the investment agreement was first entered into, even if Petitioner No. 1 has not fulfilled his obligations under the settlement agreement or if there has been a breach of the agreement due to circumstances beyond his control.
The court then relied upon the judgment titled Hridaya Ranjan Prasad Verma and Others v. the State of Bihar and Another in which it was held that There is a fine line separating mere breach of contract from cheating. It depends on the accused's intention at the time of inducement, which can be assessed by his actions afterwards, though this is not the only criterion. A simple contract violation won't result in criminal charges for cheating unless there is clear evidence of fraud or dishonesty from the outset of the transaction, at which point the crime is considered to have been committed.
The court also laid down the ingredients of section 405 of the Indian penal code
- a person should have been entrusted with property or with any dominion over property
- that person should dishonestly misappropriate or convert to his own use that property, or dishonestly use or dispose of that property or wilfully suffer any other person so to do
- that such misappropriation, conversion, use, or disposal should be in violation of any direction of law prescribing the mode in which such trust is to be discharged or of any legal contract made, which the person has made, touching the discharge of such trust.
It was noted that a civil dispute has been given the nature of a criminal dispute because respondent no. 2/informant is claiming that petitioner no. 1 has not paid or refunded the remaining amount as stipulated in the settlement agreement, even though it is acknowledged that petitioner no. 1 has paid respondent no. 2/informant Rs. 44,05,000/-.
Based on these considerations, the court was of the view that the basic ingredients of Section 406 and/or 420 of the Indian Penal Code are not fulfilled in the present case and the issuance of summonses to the petitioners, passed by learned Judicial Magistrate is not sustainable in the eyes of law.
The decision of the court:
With the above direction, the court quashed the FIR as well as the summonses issued to the petitioners. The court allowed the application.
Case Title: Nilesh Singh Solanki Vs The State of Bihar
Coram: Hon’ble Mr. Justice Anil Kumar Sinha
Case No.: Criminal Writ Jurisdiction Case No.276 of 2021
Advocates for the Petitioner: Mr. Puneet Siddhartha and Mr. Amit Kumar Singh
Advocates for the Respondent: Mr. Shiv Shankar Prasad and Mr. Md. Irshad
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