The Supreme Court has reiterated that a mere breach of contractual obligations does not amount to the offence of cheating unless it is established that the accused had a fraudulent or dishonest intention from the very inception of the transaction. Holding that a failed joint development agreement gave rise to a purely civil dispute, the Court quashed criminal proceedings initiated against two landowners by a real estate developer.
A Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan allowed the appeal and set aside the Madras High Court’s order refusing to quash the proceedings. The Court consequently quashed the FIR, chargesheet and all consequential criminal proceedings registered under Sections 406 and 420 read with Sections 109 and 34 of the Indian Penal Code (IPC).
The dispute arose from a 2012 Joint Development Agreement (JDA) under which a developer paid a refundable security deposit of Rs 3 crore to the landowners for the construction of a residential project in Chennai. The project failed after the Chennai Metropolitan Development Authority (CMDA) refused planning permission, holding that the land formed part of an unapproved layout. Thereafter, the landowners revoked the General Power of Attorney and sold the property to a third party, prompting the developer to file a criminal complaint alleging cheating and criminal breach of trust.
Examining the ingredients of the offence under Section 420 IPC, the Supreme Court reaffirmed the settled principle that dishonest intention must exist at the very beginning of the transaction. Referring to its judgment in Hridaya Ranjan Prasad Verma v. State of Bihar, the Court observed that a breach of contract cannot be converted into a criminal prosecution for cheating unless fraudulent intent is shown to have existed at the inception.
Applying this principle, the Bench found no material to suggest that the landowners had induced the developer to enter into the agreement with a dishonest or fraudulent intention. It observed that both parties had entered into the development agreement with the genuine intention of performing their respective contractual obligations and that the project failed only after statutory approval was denied.
The Court further held that the developer ought to have undertaken adequate due diligence regarding the legal status of the property before investing in the project. It observed that the subsequent discovery of legal defects or the failure to obtain planning permission could not, by itself, give rise to criminal liability against the landowners.
Rejecting the allegation of criminal breach of trust under Section 406 IPC, the Court held that payment of a refundable security deposit under a development agreement did not amount to “entrustment” of property, which is an essential ingredient of the offence. It also noted that the landowners had offered to refund the ₹3 crore deposit through a legal notice, subject to the return of the original title documents.
The Bench relied on its recent judgment in Delhi Race Club (1940) Ltd. v. State of Uttar Pradesh to reiterate that the offences of cheating and criminal breach of trust ordinarily cannot coexist on the same set of facts. While cheating requires dishonest intention from the outset, criminal breach of trust presupposes lawful entrustment followed by dishonest misappropriation.
The Court also took note of the fact that the parties had already invoked arbitration under the Joint Development Agreement and that an arbitral award determining their contractual rights and liabilities had been passed, which was under challenge in proceedings under Section 34 of the Arbitration and Conciliation Act.
Observing that the complainant had sought to give a criminal colour to what was essentially a contractual dispute, the Supreme Court held that the case fell within the categories laid down in State of Haryana v. Bhajan Lal warranting the exercise of the High Court’s power to quash criminal proceedings. Accordingly, it allowed the appeal while clarifying that the parties remained free to pursue their civil remedies in accordance with law.
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