Supreme Court Quashes Cheating and Breach of Trust Charges in Investment Dispute: Vijay Kumar Ghai & Ors. vs. The State of West Bengal & Ors. (2022) INSC 171

Introduction

Date of the Judgment: 22nd March 2022

Citation: (2022) INSC 171

Judges: S. Abdul Nazeer, J., Krishna Murari, J.

Can a commercial dispute be twisted into a criminal case? The Supreme Court of India recently addressed this question in a case involving allegations of cheating and criminal breach of trust arising from a failed investment. The core issue revolved around whether a breach of contract in a commercial transaction should be treated as a criminal offense. The judgment was delivered by a two-judge bench comprising Justice S. Abdul Nazeer and Justice Krishna Murari, with Justice Krishna Murari authoring the opinion.

Case Background

M/s. Priknit Retails Limited, later renamed Priknit Apparels, was a company engaged in the manufacture and trade of apparels. In January 2008, SMC Global Securities Ltd, through its authorized representative (Respondent No. 2), decided to invest ₹2.5 crore in Priknit Apparels in exchange for 250,000 equity shares. An allotment letter was issued on March 29, 2008, confirming the share allocation. A Memorandum of Understanding (MOU) was signed on August 20, 2009, regarding the investment.

When the company failed to launch an Initial Public Offering (IPO) as agreed, Respondent No. 2 issued a legal notice on December 6, 2011. The appellants denied the allegations. Subsequently, Respondent No. 2 filed a police complaint in New Delhi on January 6, 2012, which was transferred due to jurisdictional issues. Another complaint was filed with the Economic Offences Wing (EOW) on April 11, 2012, and later transferred to PS Darya Ganj, New Delhi. Respondent No. 2 also filed a complaint under Section 156(3) of the Code of Criminal Procedure (Cr.P.C) before the Tis Hazari Court, New Delhi, on June 6, 2012, seeking registration of a First Information Report (FIR). Additionally, another complaint was filed under Section 68 of the Companies Act read with Section 200 of Cr.P.C, which is still pending.

The Metropolitan Magistrate (MM), Tis Hazari, dismissed the plea for FIR registration on February 28, 2013, observing that the dispute was civil in nature. Despite this, Respondent No. 2 filed a second complaint on March 28, 2013, at PS Bowbazar, Kolkata, under Sections 406, 409, 420, 468, 120B, and 34 of the Indian Penal Code (IPC), based on the same cause of action. This resulted in FIR No. 168 under Sections 406, 420, and 120B of the IPC. The police filed a closure report on March 4, 2014, stating the dispute was civil. However, Respondent No. 2 filed a protest petition, which was allowed by the Chief Metropolitan Magistrate (CMM), Kolkata, on March 8, 2016, directing further investigation. The complaint in Delhi was withdrawn on September 9, 2016.

The appellants then received notices under Section 41(a) Cr.P.C to appear before the Investigation Officer (IO) at PS Bowbazar. The CMM, Calcutta, took cognizance of the offense on February 14, 2017. Aggrieved, the appellants filed a quashing petition (CRR No. 731 of 2017) before the High Court of Calcutta, which was ultimately dismissed on October 1, 2019.

Timeline

Course of Proceedings

The Metropolitan Magistrate (MM), Tis Hazari Court, New Delhi, rejected the Respondent’s plea for registration of an FIR, stating that the dispute was civil in nature. This order was not challenged and attained finality. Subsequently, the Respondent filed a complaint at PS Bowbazar, Kolkata, which was converted into an FIR. The police initially filed a closure report, which was challenged by the Respondent through a protest petition. The Chief Metropolitan Magistrate (CMM), Kolkata, allowed the protest petition and directed further investigation. The High Court of Calcutta initially stayed the criminal proceedings, observing that the Respondent had also filed a complaint at Delhi on the same allegations, indicating an intent to harass the Appellants. However, the High Court eventually dismissed the quashing petition, stating that the continuation of criminal proceedings would not be an abuse of the process of the court.

Legal Framework

The case primarily involves Sections 405, 415, and 420 of the Indian Penal Code, 1860.

• Section 405 IPC defines Criminal Breach of Trust as, “Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits “criminal breach of trust”.” The essential elements are entrustment of property, and dishonest use or disposal of that property in violation of law or contract.
• Section 415 IPC defines Cheating as, “Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to “cheat”.” The key elements are deception and fraudulent or dishonest inducement causing damage.
• Section 420 IPC defines Cheating and dishonestly inducing delivery of property as, “Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.” This section deals with serious forms of cheating involving delivery of property.

Arguments

Appellants’ Arguments:

• The appellants argued that Respondent No. 2 engaged in forum shopping by filing two complaints on the same cause of action, one in Delhi and another in Kolkata. The complaint in Kolkata was filed while the Delhi complaint was pending, and this fact was suppressed.
• The complaint filed in Kolkata was a reproduction of the Delhi complaint, with only the place of occurrence changed to create jurisdiction.
• The allegations were purely contractual disputes of a civil nature, and the breach of contract did not amount to cheating under the IPC. There were no allegations of fraudulent or dishonest intentions at the time of the representation.
• The High Court failed to recognize that the delayed allotment of shares and the failure to bring out an IPO were commercial disputes. A mere failure to keep a promise does not create a presumption of dishonest intention.
• The Appellants relied on V.Y.Jose & Anr. Vs. State of Gujarat & Anr., Murari Lal Gupta Vs. Gopi Singh; K. Jayaram and Ors. Vs. Bangalore Development Authority & Ors.; Union of India and Ors. Vs. Shantiranjan Sarkar to support their arguments.

Respondents’ Arguments:

• The respondents argued that the complaint disclosed all the ingredients of the alleged offenses, and the criminal proceedings were not initiated with mala fide intentions. The complaint in Delhi was not decided on merit, and therefore, a fresh complaint was permissible.
• The complaint in Kolkata was filed after the Delhi court rejected the prayer under Section 156(3) Cr.P.C. To avoid multiplicity of proceedings, the Delhi complaint was withdrawn after the Kolkata Court allowed further investigation.
• Two complaints can co-exist if their scope is different. Civil and criminal remedies are not mutually exclusive. The complainant specifically alleged that the accused persons induced him to part with ₹2.5 crore on a false promise of share allotment.
• The respondents relied on K. Jagadish Vs. Udaya Kumar G.S. & Anr., V. Ravi Kumar Vs. State and Ors.; Indian Oil Corporation Vs. NEPC India Ltd. & Ors.; A.V. Mohan Rao & Anr. Vs. M Kishan Rao & Anr. to support their arguments.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a dedicated section. However, the core issue that the court addressed was:

• Whether the criminal proceedings initiated against the appellants for offenses under Sections 406, 420, and 120B of the IPC, based on allegations of breach of contract and failure to fulfill promises in a commercial transaction, are maintainable.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Cases:
  • Union of India & Ors. Vs. Cipla Ltd. & Anr. [(2017) 5 SCC 262] – Discussed the concept of forum shopping and its various forms. Supreme Court of India
  • Krishna Lal Chawla & Ors. Vs. State of U.P. & Anr. [(2021) 5 SCC 435] – Observed that multiple complaints by the same party against the same accused in respect of the same incident is impermissible. Supreme Court of India
  • T.T. Antony Vs. State of Kerala & Ors. [(2001) 6 SCC 181] – Held that there can be no second FIR where the information concerns the same cognizable offence. Supreme Court of India
  • K. Jayaram and Ors. Vs. Bangalore Development Authority & Ors. [2021 SCC OnLine SC 1194] – Stressed the need to disclose details of all legal proceedings to avoid multiplicity. Supreme Court of India
  • State of Haryana & Ors. Vs. Bhajan Lal & Ors. [1992 Supp (1) SCC 335] – Defined the scope of the High Court’s powers under Section 482 Cr.P.C. to quash FIRs. Supreme Court of India
  • R.P. Kapur Vs. State of Punjab [(1960) 3 SCR 388] – Summarized categories of cases where inherent power can and should be exercised to quash the proceedings. Supreme Court of India
  • Inder Mohan Goswami & Anr. Vs. State of Uttaranchal & Ors. [(2007) 12 SCC 1] – Observed that the powers possessed by the High Court under Section 482 of the Code are very wide and the very plenitude of the power requires great caution in its exercise. Supreme Court of India
  • Indian Oil Corpn. v NEPC India Ltd. & Ors. [(2006) 6 SCC 736] – Formulated guiding principles for the exercise of jurisdiction under Section 482 of the Code of Criminal Procedure 1973. Supreme Court of India
  • State of Madhya Pradesh Vs. Awadh Kishore Gupta & Ors. [(2004) 1 SCC 691] – Observed that the powers possessed by the High Court under Section 482 of the Code are very wide and the very plenitude of the power requires great caution in its exercise. Supreme Court of India
  • G. Sagar Suri & Anr. Vs. State of UP & Ors. [(2000) 2 SCC 636] – Observed that it is the duty and obligation of the criminal court to exercise a great deal of caution in issuing the process, particularly when matters are essentially of civil nature. Supreme Court of India
  • R K Dalmia vs Delhi Administration [(1963) 1 SCR 253] – Held that the word ‘property’ is used in the Code in a much wider sense than the expression ‘moveable property’. Supreme Court of India
  • Sudhir Shantilal Mehta Vs. CBI [(2009) 8 SCC 1] – It was observed that the act of criminal breach of trust would, Interalia mean using or disposing of the property by a person who is entrusted with or has otherwise dominion thereover. Supreme Court of India
  • Prof. R.K. Vijayasarathy & Anr. Vs. Sudha Seetharam & Anr. [(2019) 16 SCC 739] – Discussed the essential ingredients to constitute an offense under Section 420. Supreme Court of India
  • Uma Shankar Gopalika Vs. State of Bihar & Anr. [(2005) 10 SCC 336] – Observed that every breach of contract would not give rise to an offence of cheating and only in those cases of breach of contract would amount to cheating where there was any deception played at the very inception. Supreme Court of India
  • Hridaya Ranjan Prasad Verma & Ors. Vs. State of Bihar & Anr. [(2000) 4 SCC 168] – Held that the distinction between mere breach of contract and cheating, which is criminal offence, is a fine one. Supreme Court of India
  • Vesa Holdings Pvt. Ltd. & Anr. Vs. State of Kerala & Ors. [(2015) 8 SCC 293] – Observed that a given set of facts may make out a civil wrong as also a criminal offence and only because a civil remedy may be available to the complainant that itself cannot be ground to quash a criminal proceeding. Supreme Court of India
  • V.Y.Jose & Anr. Vs. State of Gujarat & Anr. [(2009) 3 SCC 78] – Cited by the Appellants to support their arguments. Supreme Court of India
  • Murari Lal Gupta Vs. Gopi Singh [(2005) 13 SCC 699] – Cited by the Appellants to support their arguments. Supreme Court of India
  • K. Jayaram and Ors. Vs. Bangalore Development Authority & Ors. [2021 SCC OnLine SC 1194] – Cited by the Appellants to support their arguments. Supreme Court of India
  • Union of India and Ors. Vs. Shantiranjan Sarkar [(2009) 3 SCC 90] – Cited by the Appellants to support their arguments. Supreme Court of India
  • K. Jagadish Vs. Udaya Kumar G.S. & Anr. [(2020) 14 SCC 552] – Cited by the Respondents to support their arguments. Supreme Court of India
  • V. Ravi Kumar Vs. State and Ors. [(2019) 14 SCC 568] – Cited by the Respondents to support their arguments. Supreme Court of India
  • Indian Oil Corporation Vs. NEPC India Ltd. & Ors. [(2006) 6 SCC 736] – Cited by the Respondents to support their arguments. Supreme Court of India
  • A.V. Mohan Rao & Anr. Vs. M Kishan Rao & Anr. [(2002) 6 SCC 174] – Cited by the Respondents to support their arguments. Supreme Court of India
• Legal Provisions:
  • Section 156(3) of the Code of Criminal Procedure (Cr.P.C) – Deals with the power of a Magistrate to order an investigation.
  • Section 41(a) of the Code of Criminal Procedure (Cr.P.C) – Deals with notice of appearance before police officer.
  • Section 405 of the Indian Penal Code (IPC) – Defines Criminal Breach of Trust.
  • Section 415 of the Indian Penal Code (IPC) – Defines Cheating.
  • Section 420 of the Indian Penal Code (IPC) – Defines Cheating and dishonestly inducing delivery of property.
  • Section 120B of the Indian Penal Code (IPC) – Defines criminal conspiracy.
  • Section 482 of the Code of Criminal Procedure (Cr.P.C) – Deals with the inherent powers of the High Court.
  • Section 173(8) of the Code of Criminal Procedure (Cr.P.C) – Deals with further investigation.
  • Section 68 of the Companies Act – Relating to buy-back of securities.
  • Section 200 of the Code of Criminal Procedure (Cr.P.C) – Deals with examination of complainant.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Union of India & Ors. Vs. Cipla Ltd. & Anr. [(2017) 5 SCC 262]* to discuss the concept of forum shopping, observing that the Respondent had indulged in the same.
• The Court cited Krishna Lal Chawla & Ors. Vs. State of U.P. & Anr. [(2021) 5 SCC 435]* to state that multiple complaints by the same party against the same accused in respect of the same incident is impermissible.
• The Court relied on T.T. Antony Vs. State of Kerala & Ors. [(2001) 6 SCC 181]* to state that there can be no second FIR where the information concerns the same cognizable offence.
• The Court relied on K. Jayaram and Ors. Vs. Bangalore Development Authority & Ors. [2021 SCC OnLine SC 1194]* to stress the need to disclose details of all legal proceedings to avoid multiplicity.
• The Court cited State of Haryana & Ors. Vs. Bhajan Lal & Ors. [1992 Supp (1) SCC 335]* to define the scope of the High Court’s powers under Section 482 Cr.P.C. to quash FIRs.
• The Court relied on R.P. Kapur Vs. State of Punjab [(1960) 3 SCR 388]* to summarize categories of cases where inherent power can and should be exercised to quash the proceedings.
• The Court cited Inder Mohan Goswami & Anr. Vs. State of Uttaranchal & Ors. [(2007) 12 SCC 1]* to observe that the powers possessed by the High Court under Section 482 of the Code are very wide and the very plenitude of the power requires great caution in its exercise.
• The Court relied on Indian Oil Corpn. v NEPC India Ltd. & Ors. [(2006) 6 SCC 736]* to formulate guiding principles for the exercise of jurisdiction under Section 482 of the Code of Criminal Procedure 1973.
• The Court cited State of Madhya Pradesh Vs. Awadh Kishore Gupta & Ors. [(2004) 1 SCC 691]* to observe that the powers possessed by the High Court under Section 482 of the Code are very wide and the very plenitude of the power requires great caution in its exercise.
• The Court relied on G. Sagar Suri & Anr. Vs. State of UP & Ors. [(2000) 2 SCC 636]* to observe that it is the duty and obligation of the criminal court to exercise a great deal of caution in issuing the process, particularly when matters are essentially of civil nature.
• The Court cited R K Dalmia vs Delhi Administration [(1963) 1 SCR 253]* to hold that the word ‘property’ is used in the Code in a much wider sense than the expression ‘moveable property’.
• The Court relied on Sudhir Shantilal Mehta Vs. CBI [(2009) 8 SCC 1]* to observe that the act of criminal breach of trust would, Interalia mean using or disposing of the property by a person who is entrusted with or has otherwise dominion thereover.
• The Court cited Prof. R.K. Vijayasarathy & Anr. Vs. Sudha Seetharam & Anr. [(2019) 16 SCC 739]* to discuss the essential ingredients to constitute an offense under Section 420.
• The Court relied on Uma Shankar Gopalika Vs. State of Bihar & Anr. [(2005) 10 SCC 336]* to observe that every breach of contract would not give rise to an offence of cheating and only in those cases of breach of contract would amount to cheating where there was any deception played at the very inception.
• The Court cited Hridaya Ranjan Prasad Verma & Ors. Vs. State of Bihar & Anr. [(2000) 4 SCC 168]* to hold that the distinction between mere breach of contract and cheating, which is criminal offence, is a fine one.
• The Court relied on Vesa Holdings Pvt. Ltd. & Anr. Vs. State of Kerala & Ors. [(2015) 8 SCC 293]* to observe that a given set of facts may make out a civil wrong as also a criminal offence and only because a civil remedy may be available to the complainant that itself cannot be ground to quash a criminal proceeding.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

• Forum Shopping: The Court strongly condemned the practice of forum shopping, noting that the Respondent had filed two complaints on the same cause of action, with the second complaint being a mere reproduction of the first with a change in the place of occurrence. This was seen as an attempt to harass the Appellants and an abuse of the legal process.
• Civil vs. Criminal Dispute: The Court emphasized that the core of the dispute was a breach of contract, which is a civil matter. The Court found that there was no evidence of dishonest or fraudulent intentions at the time of the agreement, which is a necessary element for the offense of cheating under Section 420 of the IPC. The Court observed that a mere failure to keep a promise does not automatically amount to a criminal offense.
• Lack of Criminal Intent: The Court highlighted that for an offense under Section 420 of the IPC to be established, there must be evidence of deception and dishonest inducement. The Court found that the complaint did not establish that the Appellants had any dishonest intention from the beginning when they entered into the agreement with the Respondent. The failure to launch an IPO and the delayed allotment of shares were considered breaches of contract, but not criminal acts.
• Abuse of Process: The Court was of the view that allowing criminal proceedings to continue in such a case would be an abuse of the process of the court. The Court reiterated that the criminal process should not be used to settle civil disputes or to harass parties.

Final Decision

The Supreme Court allowed the appeals and quashed the criminal proceedings initiated against the appellants. The Court held that the dispute was primarily civil in nature and that the criminal proceedings were an abuse of the process of the court.

Ratio Decidendi

The ratio decidendi of the case can be summarized as follows:

• Forum Shopping is Impermissible: Filing multiple complaints on the same cause of action, with the intent to harass the accused, is an abuse of the legal process.
• Breach of Contract is Not Necessarily a Criminal Offence: A breach of contract does not automatically amount to cheating or criminal breach of trust. There must be evidence of dishonest or fraudulent intent at the inception of the agreement.
• Criminal Proceedings Should Not Be Used to Settle Civil Disputes: The criminal process should not be used to settle civil disputes or to harass parties.
• Importance of Criminal Intent: For an offense under Section 420 of the IPC to be established, there must be evidence of deception and dishonest inducement from the beginning.
• Inherent Power of the High Court: The High Court has the power to quash criminal proceedings under Section 482 of the Cr.P.C. when it is evident that the dispute is civil in nature and the continuation of criminal proceedings would be an abuse of the process of the court.

Obiter Dicta

While the core of the judgment focused on the main issue, the court also made some observations that can be considered as obiter dicta:

• Caution in Issuing Process: The court emphasized that criminal courts must exercise caution when issuing process, particularly in cases that appear to be civil in nature.
• Distinction between Civil and Criminal Wrongs: The court reiterated that a given set of facts may make out a civil wrong as well as a criminal offense, but the mere availability of a civil remedy is not a ground to quash a criminal proceeding if the ingredients of the criminal offense are made out.
• Need for Disclosure of Legal Proceedings: The court stressed the need to disclose details of all legal proceedings to avoid multiplicity and abuse of the legal process.

Conclusion

In Vijay Kumar Ghai & Ors. vs. The State of West Bengal & Ors., the Supreme Court reaffirmed that criminal proceedings should not be used to settle civil disputes. The Court quashed the criminal charges against the appellants, holding that the dispute was primarily a breach of contract and lacked the necessary elements of criminal intent for offenses under Sections 406 and 420 of the IPC. The judgment serves as a reminder that a mere breach of contract does not automatically constitute a criminal offense and that forum shopping is an abuse of the legal process. The Court underscored the importance of establishing dishonest or fraudulent intent at the outset for a finding of cheating and emphasized the need for caution in issuing criminal process, particularly in cases that appear to be civil in nature. This case reinforces the principle that the criminal justice system should not be used to harass parties or to settle commercial disputes that lack a criminal element.