Supreme Court quashes FIR in contractual dispute: Kapil Agarwal vs. Sanjay Sharma (2021)

Introduction

Date of the Judgment: 01 March 2021
Citation: (2021) INSC 142
Judges: Dr. Dhananjaya Y. Chandrachud, J. and M.R. Shah, J.

Can a criminal case be initiated when a similar complaint is already being examined by a magistrate? The Supreme Court of India recently addressed this question in a case involving a dispute between a company and its distributor. The court quashed a First Information Report (FIR), emphasizing that criminal proceedings should not be used to harass individuals, especially when a civil dispute is involved. This judgment underscores the importance of preventing the misuse of criminal law for settling business disagreements.

The bench comprised of Justice Dr. Dhananjaya Y. Chandrachud and Justice M.R. Shah. The majority opinion was authored by Justice M.R. Shah.

Case Background

The case involves a dispute between M/s Varun Beverages Ltd. (VBL), a franchisee of PepsiCo India, and its distributor, Sanjay Sharma. In 2013, VBL appointed Sharma as a distributor in Loni, Ghaziabad. However, in 2014, VBL terminated the distributorship, citing non-payment of dues by Sharma. According to VBL, after reconciling accounts, Sharma owed Rs. 9,46,280. Sharma issued a cheque for this amount, which was dishonored due to insufficient funds. Subsequently, VBL filed a criminal complaint against Sharma under Section 138 of the Negotiable Instruments Act, 1881. Sharma, in turn, filed a complaint against VBL officers alleging misappropriation of funds. This led to a series of legal actions, including an application under Section 156(3) of the Code of Criminal Procedure, 1973 by Sharma, seeking an FIR against VBL and its officers.

Timeline:

Course of Proceedings

Initially, Sharma filed an application under Section 156(3) of the Code of Criminal Procedure, 1973, seeking directions to the police to register an FIR against the appellants. The Magistrate, instead of directing the police to register an FIR, decided to treat the application as a complaint case. Sharma then filed a criminal revision application before the Sessions Court, which set aside the Magistrate’s order and remanded the matter back for reconsideration. The Magistrate sought an action report from the police, and these proceedings were pending. After approximately two years, Sharma lodged the impugned FIR against the appellants under Sections 406 and 420 of the Indian Penal Code, 1860, with similar allegations as in his Section 156(3) application. The High Court of Judicature at Allahabad dismissed the appellants’ writ petition to quash the FIR, stating that the FIR prima facie disclosed a cognizable offense. This led to the appeal before the Supreme Court.

Legal Framework

The case involves several key legal provisions:

• Section 406 of the Indian Penal Code, 1860: This section deals with the punishment for criminal breach of trust.
• Section 420 of the Indian Penal Code, 1860: This section deals with the punishment for cheating and dishonestly inducing delivery of property.
• Section 138 of the Negotiable Instruments Act, 1881: This section deals with the offense of dishonor of a cheque for insufficiency of funds.
• Section 156(3) of the Code of Criminal Procedure, 1973: This section allows a Magistrate to order an investigation by the police.
• Section 210 of the Code of Criminal Procedure, 1973: This section outlines the procedure to be followed when there is a complaint case and a police investigation in respect of the same offense. It states:

  “210. Procedure to be followed when there is a complaint case and police investigation in respect of the same offence – (1) When in a case instituted otherwise than on a police report (hereinafter referred to as a complaint case), it is made to appear to the Magistrate, during the course of the inquiry or trial held by him, that an investigation by the police is in progress in relation to the offence which is the subject- matter of the inquiry or trial held by him, the Magistrate shall stay the proceedings of such inquiry or trial and call for a report on the matter from the police officer conducting the investigation.
  (2) If a report is made by the investigating police officer under section 173 and on such report cognizance of any offence is taken by the Magistrate against any person who is an accused in the complaint case, the Magistrate shall inquire into or try together the complaint case and the case arising out of the police report as if both the cases were instituted on a police report.
  (3) If the police report does not relate to any accused in the complaint case or if the Magistrate does not take cognizance of any offence on the police report, he shall proceed with the inquiry or trial, which was stayed by him, in accordance with the provisions of this Code.”

These provisions are part of the framework of criminal law in India, designed to address offenses related to fraud, breach of trust, and financial transactions.

Arguments

Appellants’ Arguments:

• The appellants argued that the FIR was an abuse of the legal process, converting a civil dispute into a criminal case. They contended that the dispute was purely contractual, involving recovery of commission and discounts on sales.
• They highlighted that no civil proceedings were initiated for the recovery of the alleged dues, suggesting that the FIR was filed to harass and extort money.
• The appellants pointed out the non-disclosure of the pending Section 156(3) application and the ongoing case under Section 138 of the Negotiable Instruments Act, 1881 in the FIR.
• They argued that the FIR was filed after the police report on the Section 156(3) application went against the complainant, indicating an attempt to circumvent the legal process.
• The appellants contended that even if the allegations in the FIR were taken at face value, no offense under Sections 406 or 420 of the Indian Penal Code, 1860 was made out. They argued that the allegations were against the company, not them in their personal capacity.
• They submitted that the essential ingredients of cheating under Section 420 of the Indian Penal Code, 1860, were missing, as there was no allegation of deception or fraudulent inducement.
• The appellants relied on several judgments, including G. Sagar Suri v. State of U.P. (2000) 2 SCC 636, Jetking Infotrain Ltd. v. State of U.P. (2015) 11 SCC 730, Uma Shankar Gopalika v. State of Bihar (2005) 10 SCC 336, Mohd. Ibrahim v. State of Bihar (2009) 8 SCC 751, Vesa Holdings (P) Ltd. v. State of Kerala (2015) 8 SCC 293, Robert John D’Souza v. Stephen V. Gomes (2015) 9 SCC 96, State of Haryana v. Bhajan Lal, 1992 Supp. (1) SCC 33, S.K. Alagh v. State of U.P. (2008) 5 SCC 662, Sardar Singh v. State of Haryana (1977) 1 SCC 463, Maksud Saiyed v. State of Gujarat (2008) 5 SCC 688, and Sushil Sethi v. State of Arunachal Pradesh (2020) 3 SCC 240 to support their arguments.

Respondent’s Arguments:

• The respondent argued that the FIR disclosed a cognizable offense and the High Court rightly refused to quash it.
• He stated that he was constrained to file the application under Section 156(3) of the Code of Criminal Procedure, 1973, after failing to recover the money due to him.
• The respondent contended that the Magistrate’s order treating the application under Section 156(3) as a complaint case was incorrect, and the Sessions Court rightly set it aside.
• He submitted that the FIR was filed due to the Magistrate’s delay in passing an order on the closure report submitted by the police.
• The respondent argued that the FIR disclosed offenses under Sections 467, 468, and 471 of the Indian Penal Code, 1860, in addition to Sections 406 and 420, due to the alleged forgery of a blank cheque.
• He stated that the company owed him Rs. 31,12,375.06 towards commission, which was held in trust but not paid, constituting cheating and breach of trust.
• The respondent argued that the delay in lodging the FIR was explainable and not fatal to the prosecution.
• He contended that Section 210 of the Code of Criminal Procedure, 1973, allows for the registration of an FIR even during the pendency of a complaint case.
• The respondent argued that the non-mention of the pending Section 156(3) application in the FIR was not prejudicial to the appellants.
• He submitted that the absence of the company as an accused in the FIR was not a valid ground for quashing the FIR, as the police or the trial court could add the company later.
• The respondent argued that the appellants could not claim immunity for their offenses simply because they had filed a complaint against the respondent under Section 138 of the Negotiable Instruments Act, 1881.
• He contended that the appellants had acknowledged the dues through emails and hard copies, which they were now disputing.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the impugned FIR is an abuse of the process of law.
2. Whether the High Court was right in refusing to quash the FIR.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

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 G. Sagar Suri v. State of U.P. (2000) 2 SCC 636 and Jetking Infotrain Ltd. v. State of U.P. (2015) 11 SCC 730* to support its view that the subsequent FIR was an abuse of process of law.
• The court cited Uma Shankar Gopalika v. State of Bihar (2005) 10 SCC 336* to highlight that the dispute was essentially a civil one given a criminal color.
• The court used Mohd. Ibrahim v. State of Bihar (2009) 8 SCC 751*, Vesa Holdings (P) Ltd. v. State of Kerala (2015) 8 SCC 293*, and Robert John D’Souza v. Stephen V. Gomes (2015) 9 SCC 96* to emphasize that the essential ingredients of the offense of cheating were missing in the FIR.
• The court relied on State of Haryana v. Bhajan Lal, 1992 Supp. (1) SCC 33* to support the quashing of the FIR.
• The court cited S.K. Alagh v. State of U.P. (2008) 5 SCC 662*, Sardar Singh v. State of Haryana (1977) 1 SCC 463*, and Maksud Saiyed v. State of Gujarat (2008) 5 SCC 688* to support the argument that vicarious liability cannot be extended to the directors of a company.
• The court used Sushil Sethi v. State of Arunachal Pradesh (2020) 3 SCC 240* to support the argument that when the main allegations are against the company, the company should be made an accused.
• The court cited Parbatbhai Aahir v. State of Gujarat (2017) 9 SCC 641* to highlight the inherent powers of the High Court under Section 482 of the Code of Criminal Procedure, 1973.

The Supreme Court, after considering the facts and arguments, concluded that the subsequent FIR filed by the respondent was an abuse of the legal process. The court noted that the dispute was essentially civil in nature, and the criminal proceedings were initiated to harass the appellants. The court emphasized that the inherent jurisdiction under Section 482 of the Code of Criminal Procedure, 1973, and Article 226 of the Constitution of India, are designed to prevent the degeneration of criminal proceedings into tools of harassment. The court found that the FIR was filed after a period of two years, with similar allegations as in the application under Section 156(3) of the Code of Criminal Procedure, 1973. The court also noted that the respondent did not mention the pending application under Section 156(3) or the complaint under Section 138 of the Negotiable Instruments Act, 1881, in the FIR.

The court observed that the Magistrate’s order to treat the application under Section 156(3) as a complaint case was set aside by the Sessions Court and the matter was remanded back to the Magistrate. The court stated that the respondent was not proceeding further with the application under Section 156(3), which was pending for five years. The court stated that the FIR was filed with a view to harass the appellants. The court stated that the High Court should have exercised its powers under Article 226 of the Constitution of India or Section 482 of the Code of Criminal Procedure, 1973, to quash the FIR to secure the ends of justice.

The court quoted the following from the judgment:

“Thus, merely because on the same set of facts with the same allegations and averments earlier the complaint is filed, there is no bar to lodge the FIR with the police station with the same allegations and averments.”

“As observed and held by this Court in catena of decisions, inherent jurisdiction under Section 482 Cr.P.C. and/or under Article 226 of the Constitution is designed to achieve salutary purpose that criminal proceedings ought not to be permitted to degenerate into weapon of harassment.”

“Under the circumstances, the impugned FIR is nothing but an abuse of process of law and can be said to be filed with a view to harass the appellants.”

What weighed in the mind of the Court?

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

• Abuse of Process: The court strongly felt that the FIR was an abuse of the legal process, intended to harass the appellants rather than address a genuine criminal offense. The court emphasized that criminal proceedings should not be used to settle civil disputes.
• Pendency of Other Proceedings: The court noted the existence of the pending application under Section 156(3) of the Code of Criminal Procedure, 1973, and the complaint under Section 138 of the Negotiable Instruments Act, 1881, indicating that the respondent was using multiple legal avenues to pursue the same grievance.
• Delay in Filing FIR: The court observed that the FIR was filed after a significant delay of two years, raising concerns about the respondent’s motives.
• Nature of the Dispute: The court recognized that the underlying dispute was contractual and civil in nature, involving the recovery of commission and discounts.
• Non-disclosure: The court noted that the respondent did not disclose the pending Section 156(3) application and the complaint under Section 138 of the Negotiable Instruments Act, 1881, in the FIR, indicating an attempt to circumvent the legal process.
• Lack of Criminal Element: The court found that the allegations in the FIR did not establish the essential elements of the offenses under Sections 406 and 420 of the Indian Penal Code, 1860, particularly the lack of deception or fraudulent inducement.
• Vicarious Liability: The court emphasized that the directors of the company could not be held vicariously liable for the actions of the company, as the main allegations were against the company, not the individuals.
• Inherent Powers of the High Court: The court highlighted the inherent powers of the High Court under Section 482 of the Code of Criminal Procedure, 1973, and Article 226 of the Constitution of India, to prevent the abuse of legal process and ensure justice.

These factors collectively led the court to conclude that the FIR was an abuse of the legal process and should be quashed to prevent harassment and ensure the proper administration of justice.

Final Order

The Supreme Court allowed the appeal and quashed the impugned FIR. The court held that the High Court should have exercised its powers under Article 226 of the Constitution of India or Section 482 of the Code of Criminal Procedure, 1973, to quash the FIR. The court emphasized that the criminal proceedings ought not to be permitted to degenerate into a weapon of harassment. The court stated that the impugned FIR was nothing but an abuse of the process of law and was filed with a view to harass the appellants.

Flowchart of the Case

Ratio of the Case

Conclusion

The Supreme Court’s judgment in the case of Kapil Agarwal and others vs. Sanjay Sharma and others is a significant reminder that criminal proceedings should not be used as a tool for harassment or to settle civil disputes. The court’s decision to quash the FIR underscores the importance of preventing the misuse of criminal law and protecting individuals from unwarranted legal action. The judgment highlights the need for a clear distinction between civil and criminal matters and emphasizes that the inherent powers of the High Court under Section 482 of the Code of Criminal Procedure, 1973, and Article 226 of the Constitution of India, should be exercised to prevent the abuse of the legal process. This case serves as a crucial precedent for similar disputes, reinforcing the principle that criminal law should be reserved for genuine criminal offenses, not for resolving business disagreements or recovering debts. The court’s emphasis on the need to establish the essential elements of criminal offenses and the limitations on vicarious liability further clarifies the legal landscape in such matters. Overall, the judgment reinforces the principles of justice, fairness, and the proper administration of law.