Court’s Decision:
The Bombay High Court, Aurangabad Bench, exercised its powers under Section 482 of the Criminal Procedure Code (Cr.P.C.) and quashed the criminal prosecution against the applicants. The prosecution was initiated under Sections 420 (cheating) and 406 (criminal breach of trust) of the Indian Penal Code (IPC) due to the alleged non-refund of a security deposit of ₹51,00,000 and unpaid commission. The Court ruled that the dispute between the parties was of a civil nature and there was insufficient evidence to support a criminal charge of fraud or breach of trust.
Facts:
The dispute arose from a franchisee agreement entered into between M/s Agrawal Retails (the informant’s firm) and AN Retail Ventures Pvt. Ltd. (ANR). The informant deposited ₹51,00,000 as a security deposit, as per the terms of the franchisee agreement. The agreement involved three franchisee outlets, which were supposed to be operated under the brand “Cotton World” through ANR, a franchisee company of Lekhraj Corp Pvt. Ltd. (LCPL).
The applicants, directors of ANR, made arrangements to operate the franchisee outlets, provided stock, and leased premises for business operations. However, issues arose when ANR allegedly failed to refund the security deposit and commission payments that were due to the informant. The franchisee agreement was terminated prematurely, and the informant alleged that the applicants were acting with fraudulent intent from the beginning.
The informant filed an FIR on June 14, 2021, accusing the applicants of cheating under Section 420 and criminal breach of trust under Section 406 of the IPC, claiming that ₹59,23,000 was owed to him, including the security deposit and commission.
Issues:
- Whether the actions of the applicants constituted the offence of cheating under Section 420 of IPC?
- Whether the applicants committed criminal breach of trust under Section 406 of IPC by withholding the security deposit?
Petitioner’s Arguments:
The petitioners (applicants) argued that the dispute between the parties was primarily of a civil nature. They contended that the allegations of cheating and breach of trust were unfounded, as there was no fraudulent or dishonest intention at the time of entering into the franchisee agreements. The petitioners further argued that the non-refund of the security deposit and commission could be attributed to a disagreement over the settlement of accounts, which is typical in business transactions, and does not automatically imply criminal conduct.
They also pointed out that a civil suit had already been filed by the informant against ANR, and hence, the criminal prosecution was an attempt to pressure them into settling the civil dispute through unlawful means.
Respondent’s Arguments:
The respondent (informant) contended that the applicants acted dishonestly. He claimed that the franchisee agreements were terminated prematurely, in violation of the lock-in period, and that the security deposit was not refunded, despite contractual obligations. The respondent further argued that the applicants had fraudulent intentions from the beginning, as evidenced by the termination of the agreement without cause and their failure to pay the commission.
The respondent asserted that even though a civil remedy existed, the applicants’ actions were criminal, and they should not be exonerated from prosecution merely because a civil case was pending.
Analysis of the Law:
The court analyzed the relevant provisions under Sections 420 and 406 of the IPC, both of which require the presence of dishonest or fraudulent intent to constitute an offence.
- Section 420 (Cheating) requires that the accused induce someone to deliver property (such as money) by fraudulent means. The offence depends on the intention of the accused at the time of inducement and requires that the dishonest or fraudulent intention must exist at the beginning of the transaction. Mere failure to perform an agreement does not automatically amount to cheating unless fraudulent intent is shown.
- Section 406 (Criminal Breach of Trust) involves the misappropriation or conversion of property entrusted to a person, with dishonest intent. It focuses on whether the person entrusted with property (in this case, the security deposit) dishonestly retained or misappropriated it.
The court referred to various judgments that clarified these elements of the offences.
Precedent Analysis:
The court relied heavily on previous Supreme Court rulings to clarify the distinction between a breach of contract and criminal offences like cheating or breach of trust:
- Hridaya Ranjan Prasad Verma v. State of Bihar (2000): The Court held that the distinction between breach of contract and cheating is subtle. For cheating, fraudulent or dishonest intention must be present from the beginning of the transaction, and mere failure to keep promises cannot be construed as cheating.
- Satishchandra Ratanlal Shah v. State of Gujarat (2019): This ruling reiterated that inability to return money does not amount to cheating unless fraudulent intent is established from the beginning of the transaction.
- Raju Krishna Shedbalkar v. State of Karnataka (2024): The Court reaffirmed that criminal prosecution for cheating cannot proceed unless there is clear evidence of fraudulent intent from the very initiation of the transaction.
Court’s Reasoning:
The court found that the applicants had made all the necessary arrangements for operating the franchisee outlets, including leasing the premises and providing stock. The applicants also made efforts to settle the dispute with the informant through communications regarding reconciliation. These actions indicated that there was no dishonest intent at the beginning of the transaction.
Furthermore, the court noted that the franchisee agreement was terminated in accordance with the terms of the MOU and the dispute was centered around the settlement of accounts. The court emphasized that the failure to refund the security deposit was not indicative of fraud but rather a civil dispute over financial matters.
The court also pointed out that the legal notice issued by the informant prior to filing the FIR did not allege criminal conduct, and only raised issues of contractual obligations. This further supported the view that the dispute was civil, not criminal.
Conclusion:
The High Court concluded that the dispute between the parties was a civil matter concerning the non-refund of the security deposit and commission. The court quashed the criminal proceedings, stating that the prosecution was based on a civil dispute dressed in criminal terms, which amounted to an abuse of the judicial process.
Implications:
This judgment reinforces the principle that civil disputes should not be converted into criminal cases unless there is clear evidence of criminal intent. The Court discouraged the growing tendency of labeling civil matters as criminal disputes to expedite resolutions, emphasizing that criminal law should not be used as a shortcut for settling contractual disagreements. It also reiterates the importance of judicial caution when dealing with such cases to avoid the misuse of criminal proceedings.