Alerts & Updates 1st Apr 2022

Thin Line Of Difference Between Breach Of Contract And Cheating


Shailesh Poria Partner | Mumbai

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Vijay Kumar Ghai & Ors. v. The State of West Bengal & Ors.

  • Introduction

    Pursuant to the recent decision of the Supreme Court in the case of Vijay Kumar Ghai & Ors. v. The State of West Bengal

    • Ors1 , the Supreme Court emphasized on the fine line between breach of contract and cheating. It has been explained that while breach of contract cannot give rise to criminal prosecution, fraudulent or dishonest intention, it is the basis for the offence of cheating. In parallel, the Supreme Court has also relied upon a precedent to clarify that just because a civil remedy may be available to the complainant, that itself cannot be a ground to quash a criminal proceeding. The real test remains whether the allegations in the complaint disclose criminal offense.:

    The Supreme Court has also discussed the scope and powers of the High Court u/s 482 CrPC by considering a catena of precedents in that respect. It has been reiterated and emphasized by the Supreme Court that mere breach of contract in itself is not a criminal offense.

  • Background

    The present appeal was filed against the judgement and order dated October 1, 2019 passed by the High Court of Calcutta (“said judgment”) in an application for quashing of proceedings pending before the Ld. Chief Metropolitan Magistrate, Kolkata arising out of a case u/s 420, 406 and 120 B of the Indian Penal Code, 1860 (“IPC”). Calcutta High Court dismissed the prayer for quashing of proceedings and held that continuance of criminal proceedings against the present appellant/accused would not be an abuse of the process of the court. In Appeal, the Supreme Court, after perusing the ingredients of offences as well as precedents on the subject, reaffirmed that mere breach of contract does not constitute the offence of cheating.

  • Facts
    • Appellant No. 1 is the Managing Director of M/s Priknit Retails Limited (said company) while Appellant Nos. 2 and 3 are Directors of the said company. Respondent No. 2 i.e is an authorized representative of SMC Global Securities Ltd., Delhi. It was mutually decided between the parties that Respondent No. 2 will invest an amount of INR 2.5 crore with the said company in lieu of which they will be issued 2,50,000 equity shares of the said company. Accordingly Respondent No. 2 filed their share application form along with the cheque of INR 2.5 crore and as per an allotment letter (dated March 29, 2009) 2,50,000 shares were issued. Having failed to bring the I.P.O as per the memorandum of understanding, Respondent No. 2 issued a legal notice.
    • After pursuing complaints before several law enforcement authorities, Respondent No. 2 filed a complaint u/s 406, 409, 420, 468, 120B and 34 IPC the with PS Bowbazar at Kolkata West Bengal (On March 28, 2013) and same was converted to FIR No. 168 u/s 406, 420, 120B, IPC. A final closure report (dated March 4, 2014) was filed by concerned Police Station recommending closure of case since the entire dispute was found to be of civil nature.
    • Respondent No. 2 filed a protest petition with Chief Metropolitan Magistrate (CMM) Kolkata against the closure report and vide order (dated March 8, 2016) the protest petition came to be allowed. Notice was issued to Appellant Nos. 1 and 2 to appear before the Investigation officer.
    • The CMM, Calcutta took cognizance of the offence u/s 406, 420, 120B IPC in connection with the case (dated March 28, 2013) . Being aggrieved, Appellants filed a quashing petition u/s 482 CrPC inter alia seeking quashing of the FIR before the Calcutta High Court.
    • The Calcutta High Court issued a notice to the Respondents and stayed further proceedings of the criminal case. Respondent No. 2 filed an application for vacation of the stay order granted by the High Court but the same was dismissed.
    • However, the High Court vide impugned judgment and order (dated 01.10.2019) dismissed the quashing as well as the revision petition filed by the Appellants. It observed that in order to exercise the power under Section 482 Cr.P.C, the only requirement is to see whether continuance of the criminal proceedings would be a total abuse of the process of the court . In this matter, however, the continuance of the criminal proceedings against the appellants was in no way an abuse of the process of the court. Hence the Appellant filed a Criminal Appeal before the Supreme Court of India.
  • Observation And Ratio
    • The Supreme Court at the outset relied on following judgments laying down circumstances under which High court can exercise its inherent powers u/s 482 of CrPC:

    – State of Haryana & Ors. v. Bhajan Lal & Ors. 1992 Supp (1) SCC 335, R.P Kapur v. State of Punjab (1960) 3 SCR 388

    – Inder Mohan Goswami & Anr. v. State of Uttaranchal & Ors. (2007) 12 SCC 1

    – Indian Oil Corp v. NEPC India Ltd. & Ors. (2006) 6 SCC 736

    – State of Madhya Pradesh v. Awadh Kishore Gupta & Ors. (2004) 1 SCC 691

    – G Sagar Suri & Anr. v. State of UP & Ors (2000) 2 SCC 636

    • The Supreme Court noted that the courts have time and again cautioned about converting purely civil disputes into criminal cases. The Supreme Court relied upon Indian Oil Corp v. NEPC India Ltd. & Ors. (2006) 6 SCC 736 for the same.
    • It was further observed that it is necessary to examine the ingredients of the offences in question. After perusal of the provision and supporting precedents on the same, the Supreme Court drew up following nuances of the offense of criminal breach of trust:-

    – The accused must be entrusted with the property or with dominion over it,

    – The person so entrusted must use that property, or

    – The accused must dishonestly use or dispose of that property or wilfully suffer any other person to do so in violation:

    (i) of any direction of law prescribing the mode in which such trust is to be discharged, or

    (iI) of any legal contract made touching the discharge of such trust.

    • Furthermore, the Supreme Court noted that in order to establish the offence of cheating in inducing the delivery of property, the following ingredients need to be proved:-

    – The representation made by the person was false

    – The accused had prior knowledge that the representation he made was false

    – The accused made false representation with dishonest intention in order to deceive the person to whom it was made

    – The act where the accused induced the person to deliver the property or to perform or to abstain from any act which the person would have not done or had otherwise committed

    • The Supreme Court held that mere breach of contract of contract in itself is not a criminal offense. There is a fine difference between breach of contract and cheating. It has been explained that while breach of contract cannot give rise to criminal prosecution, fraudulent or dishonest intention is the basis for the offence of cheating. More specifically, it has been held as follows:

     34. There can be no doubt that a mere breach of contract is not in itself a criminal offence and gives rise to the civil liability of damages. However, as held by this court in Hridaya Ranjan Prasad Verma & Ors. Vs. State of Bihar & Anr. (2000) 4 SCC 168, the distinction between mere breach of contract and cheating, which is criminal offence, is a fine one. While breach of contract cannot give rise to criminal prosecution for cheating, fraudulent or dishonest intention is the basis of the offence of cheating. In the case at hand, complaint filed by the Respondent No. 2 does not disclose dishonest or fraudulent intention of the appellants.

     Thus, in view of these facts and circumstances, the Supreme Court set aside the order dated 1.10.2019 passed by the Calcutta High Court as well as quashed the FIR and proceedings before the CMM, Kolkata, West Bengal.

  • Key Takeaways
    • There is a fine line of difference between breach of contract and cheating wherein the latter is supposed to contain fraudulent or dishonest intention in order to constitute an offence of cheating.
    • At the same time, mere availability of a civil remedy will not prejudice a potential criminal prosecution if all the ingredients of a crime are met. Hence, due care and attention needs to be taken while pursuing criminal proceedings.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at or write to our authors:

    Shailesh Poria, Partner – Email – Akash Manwani, Associate – Email –

  • Reference

    [1]Criminal Appeal No. 463 of 2022 (arising out of SLP (Crl.) No. 10951 of 2019 on 22nd March 2

Disclaimer: The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.