The Supreme Court has clarified that a mere breach of contract or the failure to fulfil a promise, especially in a high-risk commercial venture, does not automatically give rise to a criminal offence of cheating under Section 420 of the IPC. For an offence of cheating to be established, it is imperative for the complainant to demonstrate that the accused possessed a fraudulent or dishonest intention at the very inception of the transaction when the inducement was made.
The Apex Court ruled that the subsequent dishonour of a post-dated cheque, issued to discharge a pre-existing liability rather than as an initial inducement, is insufficient in itself to prove the existence of such dishonest intention from the beginning. Where the facts of a case primarily disclose a civil dispute, criminal proceedings should not be sustained, and the High Court ought to exercise its inherent powers to quash them to prevent an abuse of the process of law.
On criminal breach of trust, a Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Manoj Misra concurred with the High Court’s finding that no offence under Section 406 IPC was made out because the essential element of ‘entrustment’ of property was absent in the transaction between the parties. On cheating and dishonest intention, the Bench reiterated that a crucial ingredient for the offence of cheating is the existence of a fraudulent or dishonest intention at the time of making the promise or inducement.
A mere subsequent failure to keep a promise cannot be the sole basis to infer that such dishonest intention existed from the very beginning, added the Bench, while emphasising that every breach of contract does not amount to cheating; it becomes cheating only if deception was played at the very inception of the transaction.
On the nature of the business transaction, the Bench observed that the High Court had overlooked the fundamental nature of the transaction. Movie-making is an inherently high-risk business where returns are not guaranteed. When an individual agrees to invest in a movie for a share of the profits, they are knowingly taking the risk of a possible zero return. This commercial risk is a vital factor in determining whether the dispute is civil or criminal in nature.
On the fulfilment of the promise, the Bench noted that the appellant did not make a false promise to make a movie, as the movie was, in fact, completed and released. Regarding the promise of sharing profits, the prosecution made no allegation that the movie actually generated any profits. Therefore, the failure to share profits, in this context, does not prove an initial dishonest intention.
On the dishonour of post-dated cheques, the Bench clarified that the two post-dated cheques were not issued as an inducement to secure the funds but were given later to discharge an existing liability after the complainant objected to the movie’s release. The dishonour of such post-dated cheques, while potentially giving rise to an action under Section 138 of the Negotiable Instruments Act, 1881, does not ipso facto constitute cheating. This is because a post-dated cheque does not represent that there are sufficient funds at the time of issuance, and for cheating, the dishonest intention must be present from the very beginning.
Briefly, the prosecution’s case is that the appellant, was producing a movie and, facing a shortage of funds, requested the de-facto complainant to lend him money. The initial lending was based on an assurance that the money would be returned with a 30% share in the movie’s profits. Subsequently, more money was lent on the promise of an additional 17% share in profits.
The complainant first paid Rs. 19.60 Lakhs and later another Rs. 27 Lakhs. When the complainant objected to the movie’s release, the appellant issued two post-dated cheques of Rs. 24 lakhs each to return the principal amount. These cheques were subsequently dishonoured due to insufficient funds.
Consequently, a police report was filed, leading to proceedings against the appellant for offences under Sections 406 (criminal breach of trust) and 420 (cheating) of the IPC. Challenging the same, the appellant filed a petition in the High Court of Madras to quash these proceedings. The High Court partially allowed the petition by quashing the offence under Section 406 IPC but declined to quash the proceedings for the offence of cheating under Section 420 IPC.
Appearances:
AOR M.P. Parthiban, along with Advocates Priyaranjani Nagamuthu, Bilal Mansoor, Shreyas Kaushal, S. Geyolin Selvam, Alagiri K, Shivansh Sharma, and Abhishek S, for the Appellant
Senior AAG V.krishnamurthy and AOR Sabarish Subramanian, along with Advocates Vishnu Unnikrishnan, Azka Sheikh Kalia, and Jahnavi Taneja, for the Respondent
