Supreme Court quashes criminal charges in property dispute: Mitesh Kumar J. Sha vs. State of Karnataka (26 October 2021)

Date of the Judgment: 26 October 2021
Citation: 2021 INSC 751
Judges: S. Abdul Nazeer, J., Krishna Murari, J.
Can a civil dispute over a property sale be escalated into a criminal case? The Supreme Court of India recently addressed this question, ruling in favor of the appellants and quashing criminal charges. The core issue revolved around whether the sale of certain flats by a developer, allegedly exceeding their agreed share, constituted a criminal offense or a mere breach of contract. The bench, comprising Justices S. Abdul Nazeer and Krishna Murari, delivered a unanimous judgment, with Justice Krishna Murari authoring the opinion.

Case Background

In 2013, Respondent No. 2 entered into a Joint Development Agreement (JDA) with Rajarajeshwari Buildcon Private Ltd., where the Appellants were directors. The agreement was for developing a property either as residential apartments or as a mix of residential and commercial units. A General Power of Attorney (GPA) was also executed on the same day. A Supplementary Agreement followed, specifying the shares of each party in the developed area.

In 2015, a Memorandum of Understanding (MoU) authorized the builder company to sell 8000 sq. ft. of Respondent No. 2’s share to facilitate a loan repayment to Religare Finvest Ltd. The Appellants were to obtain NOC for 15 flats by paying Rs. 40,00,000/- for each flat. The Appellants claimed a verbal agreement allowed them to sell additional flats to adjust for loan payments made to Religare Finvest Ltd.

The builder company sold two flats to Respondent No. 2’s relatives and one to Smt. Yashoda Sundararajan. The company then asked Respondent No. 2 to register these sales and make further payments to Religare Finvest Ltd. However, Respondent No. 2 revoked the GPA, alleging non-adherence to the JDA terms. The company initiated arbitration proceedings, while Respondent No. 2 filed a police complaint, claiming the sale of flats exceeded the agreed share.

The police complaint led to an FIR against the Appellants under Section 420 read with Section 34 of the Indian Penal Code (IPC). A charge sheet was later filed for offenses under Sections 406, 419, and 420 read with Section 34 of the IPC. The High Court of Karnataka dismissed the Appellants’ petition to quash the FIR and charge sheet.

Timeline

Course of Proceedings

The Appellants initially approached the High Court of Karnataka seeking to quash the FIR and charge sheet filed against them. The High Court dismissed their petition, observing that the dispute regarding the sale of flats was not resolved by the arbitrator and that there were allegations of the Appellants selling flats contrary to the terms of the MoU. Aggrieved by this decision, the Appellants filed a Special Leave Petition before the Supreme Court.

In the arbitration proceedings, the arbitrator partly allowed the claims of both the Appellants and Respondent No. 2, holding that the unilateral revocation of the GPA by Respondent No. 2 was illegal. However, the arbitrator did not address the issue of the sale of excess flats, as Respondent No. 2 had withdrawn this claim from the arbitration proceedings, reserving the right to pursue it in separate civil proceedings. Respondent No. 2 challenged the arbitral award under Section 34 of the Arbitration Act.

Legal Framework

The case involves the following sections of the Indian Penal Code, 1860:

• Section 405: Criminal breach of trust – Defines criminal breach of trust as the dishonest misappropriation or conversion of property by someone entrusted with it. “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”.”
• Section 406: Punishment for criminal breach of trust – Specifies the punishment for criminal breach of trust, which can extend to three years of imprisonment, a fine, or both. “Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.”
• Section 419: Punishment for cheating by personation – Deals with cheating by impersonating someone else, with a punishment of up to three years of imprisonment, a fine, or both. “Whoever cheats by personation shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.”
• Section 420: Cheating and dishonestly inducing delivery of property – Defines cheating and dishonestly inducing someone to deliver property, with a punishment of up to seven years of imprisonment and a fine. “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.”
• Section 34: Acts done by several persons in furtherance of common intention – When a criminal act is done by several persons in furtherance of the common intention of all, each of such persons is liable for that act in the same manner as if it were done by him alone.

Arguments

Appellants’ Arguments:

• The Appellants argued that the dispute was civil in nature, concerning the alleged sale of flats beyond the agreed share. They contended that Respondent No. 2 was trying to give a criminal color to a civil dispute.
• They submitted that the issue of alienation of flats was not addressed by the arbitrator because Respondent No. 2 had withdrawn his claim regarding the flats from the arbitration, with the liberty to pursue it in civil proceedings.
• The Appellants argued that since Respondent No. 2 decided to pursue his claim through a civil suit, the criminal complaint on the same issue should be quashed.
• They relied on the judgment in Prof. R. K. Vijayasarathy & Anr. Vs. Sudha Seetharam & Anr. to support their argument that a civil matter should not be given a criminal cloak.
• The Appellants contended that the dispute arose from a variation in the supplementary agreement, where an additional 8000 sq. ft was verbally agreed to be allotted to the Petitioner Company in lieu of partial payment made to Religare Finvest Ltd.

Respondent No. 2’s Arguments:

• Respondent No. 2 argued that the builder company, entitled to sell only 9 flats, had executed sale deeds for 13 flats, selling 4 flats in excess of their share.
• He contended that the sale of the 4 excess flats (Flat Nos. 002, 301, 304 & 404) was beyond the Appellants’ company’s authorization, constituting cheating.
• Respondent No. 2 argued that the focus should be on whether the complaint discloses ingredients of a criminal offense, not on the defenses available to the accused.
• He relied on the judgment in State of Karnataka Vs. M. Devendrappa & Anr., stating that the complaint should be examined to see if it spells out the ingredients of a criminal offense.
• Respondent No. 2 argued that the Appellants could not evade criminal liability simply because a civil suit for recovery of the property had been filed.
• He cited Priti Saraf & Anr. Vs. State of NCT of Delhi & Anr., stating that the presence of a civil remedy or arbitration does not preclude criminal proceedings if the complaint discloses a criminal offense.
• Respondent No. 2 contended that the cause of action in civil and criminal proceedings were separate, and the liability for breach of agreement was independent of the liability for committing an offense under Sections 405 and 415 of the IPC.
• He also relied on Sri Krishna Agencies Vs. State of Andhra Pradesh & Anr., arguing that criminal proceedings cannot be quashed solely because the dispute was referred to arbitration.
• Respondent No. 2 argued that the sale deed in respect of 8000 sq. ft. could not be executed by the Appellants as Respondent No. 2 had not given GPA to sell the said area.

Respondent No. 1’s Arguments:

• The State of Karnataka argued that the High Court had correctly held that there were clear allegations of the Appellants executing sale deeds without authority.
• They submitted that the facts disclosed the ingredients of offenses punishable under Sections 406, 419, and 420 read with Section 34 of the IPC.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for determination:

1. Whether the necessary ingredients of offenses punishable under Sections 406, 419, and 420 of the Indian Penal Code are prima facie made out?
2. Whether the sale of excess flats, even if made, amounts to a mere breach of contract or constitutes an offense of cheating?
3. Whether the dispute is one of an entirely civil nature and therefore liable to be quashed?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following cases and legal provisions:

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 Prof. R. K. Vijayasarathy & Anr. Vs. Sudha Seetharam & Anr. [(2019) SCC Online SC 208]* to emphasize that a civil matter should not be given a criminal cloak. The Court distinguished the facts of the present case from those in State of Karnataka Vs. M. Devendrappa & Anr. [(2002) 3 SCC 89]* and Priti Saraf & Anr. Vs. State of NCT of Delhi & Anr. [2021 SCC Online SC 206]* stating that in those cases, the ingredients of a criminal offense were clearly made out, unlike the present case. The Court also distinguished the facts of the present case from Sri Krishna Agencies Vs. State of Andhra Pradesh & Anr. [(2009) 1 SCC 69]*, stating that although criminal proceedings can continue despite arbitration, the ingredients of a criminal offense must be present, which was not the case here. The Court relied on Hridaya Ranjan Prasad Verma & Ors. Vs. State of Bihar & Anr. [(2000) 4 SCC 168]* to emphasize the distinction between a breach of contract and cheating, stating that the intention of the accused at the time of the inducement is crucial. The Court cited M/s Indian Oil Corporation Vs. M/s. NEPC India Ltd & Ors. [(2006) 6 SCC 736]* to highlight the growing tendency to convert civil disputes into criminal cases and to discourage such practices. The Court referred to G. Sagar Suri and Anr. Vs. State of UP and Ors. [(2000) 2 SCC 636]* to emphasize the need for caution while exercising jurisdiction under Section 482 of the CrPC. The Court applied the principles laid down in State of Haryana & Ors. Vs. Ch. Bhajan Lal and Ors. [(1992) SCC (Cri) 426]* to determine that the case fell under the categories where the High Court could exercise its inherent powers to quash the proceedings. The Court also relied on Randheer Singh Vs. The State of U.P. & Ors. [Criminal Appeal No. 932 of 2021 (decided on 02.09.2021)]* to reiterate that criminal proceedings must not be used as instruments of harassment.

What weighed in the mind of the Court?

The Supreme Court’s decision to quash the criminal proceedings was primarily driven by the absence of dishonest intention on the part of the Appellants. The Court emphasized that the dispute was essentially civil, arising from a contractual disagreement over the sale of flats. The Court found that there was no evidence to suggest that the Appellants acted with a fraudulent or dishonest intent, which is a crucial element for offenses like criminal breach of trust and cheating. The Court also highlighted the fact that Respondent No. 2 had withdrawn his claim regarding the sale of excess flats from the arbitration proceedings, choosing to pursue it in civil proceedings instead. This indicated that the dispute was primarily contractual and civil in nature, and the criminal proceedings were an attempt to give a criminal color to a civil dispute.

The Court also expressed concern over the growing trend of converting civil disputes into criminal cases, emphasizing that criminal proceedings should not be used as a means to harass parties or to gain an advantage in civil disputes. The Court reiterated that criminal proceedings should only be initiated when there is a clear indication of a criminal offense, and not as a shortcut to resolving civil disputes.

The Court’s reasoning was based on a careful analysis of the facts and the relevant legal provisions. The Court found that the Appellants had not acted with a dishonest or fraudulent intention, which is a necessary ingredient for offenses like criminal breach of trust and cheating. The Court also noted that the dispute was essentially contractual, arising from a disagreement over the sale of flats. The Court emphasized that criminal proceedings should not be used to harass parties in civil disputes or to gain an advantage in civil proceedings.

The Court considered the arguments of both sides, including the fact that the Respondent No. 2 had withdrawn his claim regarding the sale of excess flats from the arbitration proceedings. The Court also took into account the fact that the Appellants had first resorted to arbitration proceedings for redressal of the dispute, while the Respondent No. 2 had filed the criminal complaint later. The Court concluded that the criminal proceedings were an attempt to give a criminal color to a civil dispute, which was not permissible under the law.

The Court also discussed the distinction between a mere breach of contract and the offense of cheating, citing the case of Hridaya Ranjan Prasad Verma & Ors. Vs. State of Bihar & Anr. [(2000) 4 SCC 168]*. The Court emphasized that for a person to be guilty of cheating, it is necessary to show that they had a fraudulent or dishonest intention at the time of making the promise. In this case, the Court found no evidence of such intention.

The Court also highlighted the growing tendency to convert civil disputes into criminal cases, citing the case of M/s Indian Oil Corporation Vs. M/s. NEPC India Ltd & Ors. [(2006) 6 SCC 736]*. The Court stated that such practices should be discouraged, and that criminal proceedings should not be used as a shortcut to resolving civil disputes.

The Court also referred to the categories of cases where the High Court can exercise its inherent powers under Section 482 of the CrPC to secure the ends of justice, as laid down in the case of State of Haryana & Ors. Vs. Ch. Bhajan Lal and Or s. [(1992) SCC (Cri) 426]*. The Court found that the present case fell within those categories, as the criminal proceedings were an abuse of the process of the court.

The Court’s decision was based on a careful analysis of the facts and the relevant legal principles. The Court found that the necessary ingredients for a criminal offense were not made out, and that the dispute was essentially civil in nature. The Court also emphasized that criminal proceedings should not be used as a means to harass parties or to gain an advantage in civil disputes.

Ratio Decidendi

The Supreme Court’s decision in Mitesh Kumar J. Sha vs. State of Karnataka establishes the following key legal principles:

• Civil disputes should not be given a criminal color: The Court reiterated that civil disputes, particularly those arising from contractual disagreements, should not be escalated into criminal cases unless there is clear evidence of a criminal offense.
• Dishonest intention is crucial for criminal offenses: For offenses like criminal breach of trust and cheating, a dishonest or fraudulent intention at the time of the transaction is a necessary ingredient. Mere breach of contract does not constitute a criminal offense.
• Criminal proceedings should not be used to harass parties: The Court emphasized that criminal proceedings should not be used as a means to harass parties or to gain an advantage in civil disputes.
• High Courts can quash criminal proceedings in civil disputes: The Court upheld the power of the High Courts to quash criminal proceedings under Section 482 of the CrPC when they are an abuse of the process of the court, particularly in cases where the dispute is essentially civil in nature.
• Arbitration does not bar criminal proceedings if criminal offense is made out: The Court recognized that the presence of an arbitration clause does not bar criminal proceedings if the complaint discloses a criminal offense, however, the ingredients of a criminal offense must be made out.

Obiter Dicta

In addition to the ratio decidendi, the Supreme Court also made the following observations, which are considered obiter dicta:

• Growing tendency to convert civil disputes into criminal cases: The Court expressed concern over the growing tendency to convert civil disputes into criminal cases, emphasizing that such practices should be discouraged.
• Criminal proceedings should not be used as a shortcut: The Court reiterated that criminal proceedings should not be used as a shortcut to resolving civil disputes.
• Careful exercise of inherent powers: The Court emphasized that the inherent powers of the High Court under Section 482 of the CrPC must be exercised with great care, and the High Court should see if a matter of civil nature has been given a criminal cloak.

Conclusion

The Supreme Court’s judgment in Mitesh Kumar J. Sha vs. State of Karnataka serves as a significant reminder that civil disputes should not be given a criminal color unless there is clear evidence of a criminal offense. The Court emphasized that dishonest intention is a necessary ingredient for offenses like criminal breach of trust and cheating, and that mere breach of contract does not constitute a criminal offense. The judgment also highlights the importance of exercising caution when initiating criminal proceedings, particularly in cases where the dispute is essentially civil in nature. This decision reinforces the principle that criminal proceedings should not be used as a means to harass parties or to gain an advantage in civil disputes, and it underscores the importance of preserving the integrity of the criminal justice system.