The Supreme Court has ruled that mere failure to repay money in a commercial transaction cannot amount to the offence of cheating under Section 420 of the Indian Penal Code, unless the complainant can demonstrate that the accused had a fraudulent or dishonest intention at the very inception of the transaction.
The judgment was delivered by a division bench comprising Justice Joymalya Bagchi and Justice Pamidighantam Sri Narasimha in the case titled Manish vs State of Maharashtra and Anr., Criminal Appeal arising out of SLP (Crl) No. 10931 of 2022.
Case Background
The case arose from a business dispute between the appellant Manish and the complainant Nitin, s/o Murlidhar Agrawal, who supplied coal to the appellant between November 2015 and June 2017 on credit terms of 15 days. Initially, Manish made partial payments, but over time, he defaulted, resulting in a due of ₹76.82 lakhs.
In July 2020, following a legal notice and negotiations, a notarized agreement was signed by the parties under which Manish agreed to repay ₹80 lakhs in five installments. Only ₹5 lakhs was paid, and the balance remained unpaid.
When no police action followed the complainant’s approach, he moved the Judicial Magistrate First Class, Nagpur, under Section 156(3) CrPC, resulting in registration of FIR No. 80/2022 at Lakadganj Police Station under Section 420 IPC and filing of a charge-sheet.
The appellant moved the Bombay High Court (Nagpur Bench) seeking quashing of the FIR under Section 482 CrPC, but the High Court dismissed his plea, holding that the allegations revealed a prima facie case of cheating.
Important Legal Issues
The Supreme Court was called upon to examine:
- Whether the transaction was purely civil in nature or if it constituted criminal cheating under Section 420 IPC.
- Whether dishonest intention at the inception of the transaction was made out.
- Whether failure to repay as per a subsequent agreement can attract criminal liability.
Key Observations of the Court
The Court emphasized the distinction between a civil breach of contract and criminal deception. It relied on established precedents, including Hridaya Ranjan Prasad Verma v. State of Bihar and Sarabjit Kaur v. State of Punjab, to state that:
“Mere breach of promise to repay per se does not infer dishonest intention.”
The bench clarified that for a case of cheating to be made out, there must be:
“Dishonest representation at the inception of the transaction that induces the other party to part with property.”
Referring to illustration (g) of Section 415 IPC, the Court explained:
“If A, at the time of obtaining the money, intends to deliver the goods and later defaults, he is not guilty of cheating but only of civil breach.”
On the contrary, the Court noted that in this case:
- Manish had been a businessman with mortgaged properties.
- He had repaid loans until 2016 and was even granted additional loans by banks in 2018.
- There was no material to show that he was insolvent or financially incapable at the inception of the coal transactions.
- No further supplies were made after the 2020 agreement, so there was no inducement or wrongful loss thereafter.
Importantly, the Court stated:
“Failure to pay due to unfortunate business losses cannot be clothed with culpability, and the process of criminal law utilized to recover outstanding dues.”
Decision of the Court
The Supreme Court found the High Court’s refusal to quash the FIR erroneous. It held that the materials on record did not support the inference that Manish had dishonest intent at the start of the transaction.
Accordingly, the Court allowed the appeal and passed the following order:
“The impugned order is set aside and the proceeding arising out of FIR No. 80/2022, dated 11th February, 2022, registered under Section 420 IPC, at Police Station Lakadganj, Nagpur is hereby quashed.”
The Court also disposed of any pending applications.
