It has to be acknowledged, appreciated and applauded right at the outset that in a landmark and laudable judgment titled Satishchandra Ratanlal Shah v State of Gujarat and another in Criminal Appeal No. 9 of 2019 [arising out of SLP (Cri) No. 5223 of 2018] delivered on January 3, 2019 held explicitly that inability of a person to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction. There can be no denying or disputing it! This noteworthy and commendable judgment authored by Justice NV Ramana for himself and Justice Mohan M Shantanagoudar of the Apex Court were dealing with an appeal against a High Court order refusing to quash summons issued to the accused in a cheating case.

As we see, it is first and foremost pointed out in para 1 that, "Leave granted". It is then pointed out in para 2 that, "The present appeal is preferred against the impugned judgment, dated 12.04.2018, passed by the High Court of Gujarat, in Criminal Miscellaneous Application No. 4033 of 2012, wherein the High Court has dismissed appellant's application seeking quashing of the order framing the charges dated 04.12.2013 by the Additional Chief Metropolitan Magistrate in Criminal Case No. 388 of 2012."

Be it noted, para 3 then stipulates that, "It is pertinent to note the facts giving rise to the appeal in a detailed manner. The respondent no. 2- complainant is the director of a money lending company by the name of Dharshan Fiscal Pvt. Ltd. The appellant, who is a retired bank employee, approached the complainant's company in the month of January 2008 for a loan of Rs. 27,00,000/-. Accordingly, the respondent no. 2 transferred the funds as a loan, which was to be repaid by the appellant within a year with interest. Thereafter, the appellant has not repaid the amount back to the respondent no. 2. Further, respondent no. 2 alleged that when he approached the appellant, he was threatened by the appellant with dire consequences. Thereafter, the respondent no. 2 filed a complaint based on which the FIR bearing I/C.R. No. 22/2012, dated 25.01.2012, was filed before the Kagdapith Police Station, Ahmedabad, against the present appellant under Section 406, 409, 417, 420, 294(b) and 506(2) of IPC. On 23.02.2012, the appellant was enlarged on bail by the High Court after being arrested on 29.01.2012. The appellant preferred an application under Section 482 of the Cr.P.C. for the quashing of the FIR bearing I/C.R. No. 22/2012."

As it turned out, it is then envisaged in para 4 that, "The charge sheet No. 28 of 2012 dated 01.03.2012, came to be filed against the appellant under Sections 406, 420 and 417 of IPC. Pursuant to the same, the Magistrate issued summons. The appellant alleged that on 04.12.2013, he was given a copy of the said charge sheet and that the charges were framed by the Metropolitan Magistrate on the same day in a blank sheet without giving him an opportunity of being heard, as the appellant was unaccompanied by any counsel. The appellant alleges that the same was in violation of Section 239 of the Criminal Procedure Code."

To put things in perspective, we then see that it is stated in para 5 that, "In light of the aforesaid developments, the appellant filed an application seeking amendment of the prayer in Criminal Miscellaneous Application no. 4033 of 2012 wherein he sought for the inclusion of prayer seeking to quash and set aside the charge sheet no. 28/2012 in FIR No. I/C.R. No. 22/2012 and the charges framed by the Metropolitan Magistrate vide order dated 04.12.2013 and all further proceeding carried out in Criminal Case no. 388/2012 pending before the Additional Metropolitan Magistrate."

It cannot be lost on us that it is then observed in para 6 that, "It is pertinent to note that, simultaneously respondent no. 2 had preferred a summary suit in Summary Civil Suit no. 928/2011 seeking the recovery of Rs. 33,46,225/- which was inclusive of the interest upon the principal amount. The same was admitted on 25.04.2011 and is still pending before the City Civil Judge, Ahmedabad."

Going forward, we then see that para 7 stipulates that, "Vide order dated 12.04.2018, the High Court dismissed the quashing petition preferred by the appellant and directed the trial court to complete the trial within three months. The High Court further went on to observe that, prima facie an offence of cheating under Section 420 is made out but charge under Section 406 pertaining to criminal breach of trust is not applicable in the given factual scenario. However, the High Court did not remove the charges under Section 406 and observed that no case has been made out to get the charges quashed. Aggrieved by the aforesaid dismissal, the appellant has preferred the present Special Leave Petition."

Needless to say, para 8 while elaborating on what counsel on behalf of appellant urged spells out that, "The counsel on behalf of the appellant has urged that a perusal of the complaint would reveal that the allegations as contained in the complaint are civil in nature and the requisite averments so as to make out a case of cheating are absent. Hence, prima facie does not disclose the commission of the alleged offence. Moreover, it is pertinent to note that after filing Summary Suit No. 928 of 2011 on 21.04.2011, the complainant has filed the written complaint dated 05.01.2012 and has attempted to give the cloak of a criminal offence to the present case which is purely civil in nature, just to harass the appellant. Lastly, the criminal complaint filed by the respondent no. 2 is initiated after a lapse of more than three years from the date of offence i.e. 21.03.2008."

Interestingly enough, we then see how para 9 brings out that, "On the contrary, the counsel on behalf of respondent no. 2, while supporting the judgment of the High Court has stated that the appellant had fraudulent intention from the beginning having induced the respondent no. 2 to lend the aforesaid amount of Rs. 27 lacs. Further, the appellant never had the intention to repay the loan even though multiple requests were made to him. The counsel pressed that whether the intention was to cheat from the inception or not is a question of fact and the same can only be decided by trial after appreciating the entire evidence."

More importantly, the Bench then goes on to rightly point out in para 10 that, "Before we analyse the case, it is to be noted that the criminal application preferred by the accused before the High Court was against the order of the Trial Court at the stage of framing of charges, wherein it is the duty of the court to apply its judicial mind to the material placed before it and comes to a clear conclusion that a prima facie case has been made out against the accused. An order for framing of charges is of serious concern to the accused as it affects his liberty substantially. Courts must therefore be cautious that their decision at this stage causes no irreparable harm to the accused."

What's more, the Bench then goes on to add in para 11 that, "Coming to the aspect of quashing of the charges, it is well settled that such exercise needs to be undertaken by the High Court in exceptional cases. It is also well settled that the framing of charges being initial stages in the trial process, the court therein cannot base the decision of quashing the charge on the basis of the quality or quantity of evidence rather the enquiry must be limited to a prima facie examination. [refer to State of Bihar vs. Ramesh Singh, 1977 CriLJ 1606]."

More pertinently, it is then further added in para 12 that, "Having observed the background principles applicable herein, we need to consider the individual charges against the appellant. Turning to Section 405 read with 406 of IPC, we observe that the dispute arises out of a loan transaction between the parties. It falls from the record that the respondent no. 2 knew the appellant and the attendant circumstances before lending the loan. Further it is an admitted fact that in order to recover the aforesaid amount, the respondent no. 2 had instituted a summary civil suit which is still pending adjudication. The law clearly recognizes a difference between simple payment/investment of money and entrustment of money or property. A mere breach of a promise, agreement or contract does not, ipso facto, constitute the offence of the criminal breach of trust contained in Section 405 IPC without there being a clear case of entrustment."

Continuing in the same vein, it is then added in para 13 while lamenting and acknowledging that, "In this context, we may note that there is nothing either in the complaint or in any material before us, pointing to the fact that any property was entrusted to the appellant at all which he dishonestly converted for his own use so as to satisfy the ingredients of Section 405 punishable under Section 406 of IPC. Hence the learned Magistrate committed a serious error in issuing process against the appellants for the said offence. Unfortunately, the High Court also failed to correct this manifest error."

Having said this, it is then stated in para 14 that, "Now coming to the charge under Section 415 punishable under Section 420 of IPC. In the context of contracts, the distinction between mere breach of contract and cheating would depend upon the fraudulent inducement and mens rea. (See Hridaya Ranjan Prasad Verma v. State of Bihar, (2000) 4 SCC 168). In the case before us, admittedly the appellant was trapped in economic crisis and therefore, he had approached the respondent no. 2 to ameliorate the situation of crisis. Further, in order to recover the aforesaid amount, the respondent no. 2 had instituted a summary civil suit seeking recovery of the loan amount which is still pending adjudication. The mere inability of the appellant to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, as it is this mens rea which is the crux of the offence. Even if all the facts in the complaint and material are taken on their face value, no such dishonest representation or inducement could be found or inferred."
Not stopping here, the Bench then proceeding ahead notes in para 15 that, "Moreover, this Court in a number of cases has usually cautioned against criminalizing civil disputes, such as breach of contractual obligations [refer to Gian Singh v. State of Punjab, (2012) 10 SCC 303]. The legislature intended to criminalize only those breaches which are accompanied by fraudulent, dishonest or deceptive inducements, which resulted in involuntary and in-efficient transfers under Section 415 of IPC."

While giving a rap on the knuckles to the High Court, the Apex Court Bench then minces no words in clearly and categorically holding in para 16 that, "However, the High Court appears to have been carried away by the moral element involved in the breach of promise and made certain observations. Being a policy consideration, such suggestion need to be restricted. The aforementioned observations of the High Court were not only unnecessary for the adjudication of this matter, but the same could have been understood as casting some kind of aspersions on the accused. This clearly reflected a loaded dice situation against the appellant herein."

Furthermore, it is then held in para 17 that, "In our considered opinion, the High Court should have maintained judicial restraint and desisted from making such general observations at this stage of the criminal proceeding, as they may had a bearing on the adjudication of the trial. Therefore, the observations made in paragraphs 42 and 43 of the impugned judgment stand expunged."

In addition to what has been stated above, the Bench then underscored in para 18 that, "In view of the above, we are unable to uphold the impugned order passed by the High Court in Criminal Miscellaneous Application No. 4033 of 2012 and the same is hereby set aside. The application filed by the appellant under Section 482 of Cr.P.C. is allowed and the proceedings initiated based on the FIR instituted at the instance of respondent no. 2 are hereby quashed." Lastly, it is then stated in para 19 that, "The appeal is allowed in the aforesaid terms."

In essence, the Apex Court Bench very clearly and convincingly lays down in simple and plain language that, "Mere inability to repay loan does not constitute cheating". There has to be a fraudulent or dishonest intention that must be shown right at the beginning of the transaction as it is this mens rea which is the crux of the offence. Only then can it give rise to a case for a criminal prosecution for cheating!

This is exactly what Justice NV Ramana and Justice Mohan M Shantanagoudar of the Apex Court have laid down rightly in this noteworthy and commendable judgment! It must be always borne in mind by all judges of all courts right from top to bottom before delivering any judgment in a case like this!

Sanjeev Sirohi, Advocate,
s/o Col BPS Sirohi, A 82, Defence Enclave,
Sardhana Road, Kankerkhera, Meerut – 250001, Uttar Pradesh