Supreme Court Quashes Cheating FIR, Affirms Business Failure Not Necessarily Criminal.


02 April 2025 Criminal Appeals & Suspension of Sentence >> Criminal Law   |   FIR >> Criminal Law  

In Manish v/s State of Maharashtra & Another., the Supreme Court of India has set aside a judgment of the Bombay High Court at Nagpur, quashing a First Information Report (FIR) registered against the appellant under Section 420 of the Indian Penal Code (IPC). The apex court held that mere failure to pay dues arising from a commercial transaction, especially when attributed to business setbacks, does not automatically amount to cheating. The court emphasized that for a commercial dispute to attract penal consequences, there must be evidence of dishonest representation at the inception of the transaction with the intention to induce the other party to part with property.

The case originated from a complaint filed by the second respondent, alleging that the appellant had misrepresented himself as a reputable businessman and induced the respondent to sell coal between 2015 and 2017 on credit. Despite initial payments, a significant amount of Rs. 76,82,883/- became due. Subsequently, a notarized agreement was executed in July 2020, wherein the appellant agreed to repay Rs. 80,00,000/- in installments. After paying an initial sum of Rs. 5,00,000/-, the appellant defaulted on the remaining amount, leading the respondent to file a criminal complaint.


 

 

The Magistrate directed the registration of an FIR, and a charge-sheet was filed against the appellant under Section 420 IPC. The appellant's plea to quash the charge-sheet was rejected by the High Court, which held that the allegations prima facie disclosed ingredients of cheating, particularly based on the appellant's admission in the notarized agreement of having induced the coal supply through false representation.

However, the Supreme Court, analyzing the trajectory of events, noted that the business relationship spanned over two years, with the respondent continuing to supply coal despite breaches in the credit limit. The court referred to the established legal principle that a commercial dispute can have criminal implications only if the offending party made a dishonest representation at the beginning of the transaction, inducing the other party to act in a way they otherwise would not have.

The court distinguished this from a mere breach of contract that would only give rise to civil remedies. It highlighted illustration (g) of Section 415 IPC, which clarifies that if the intention to fulfill the contract exists at the time of the agreement, a subsequent breach does not constitute cheating.

The Supreme Court found that the materials collected during the investigation did not support the claim of dishonest intention from the outset. Bank records indicated that the appellant possessed substantial properties and enjoyed the confidence of his bankers until 2016, even receiving an additional loan in 2018. There was no evidence of the appellant's utter insolvency or bankruptcy that he had knowingly concealed to induce the respondent into the commercial arrangement.

The court stated that the High Court erred in concluding that the appellant's representation of being a creditworthy businessman was deceptive merely because he failed to honor the subsequent repayment agreement. The apex court reiterated that a mere breach of a promise to repay does not inherently imply a dishonest intention. Furthermore, there was no allegation that the respondent parted with further property or suffered wrongful loss after the execution of the repayment agreement.

The appellant's explanation of business setbacks and losses in the coal trade was also noted by the Supreme Court, which emphasized that failure to pay due to unfortunate business losses should not be criminalized. The process of criminal law cannot be utilized as a tool for recovering outstanding dues in such scenarios.

Distinguishing the present case from precedents cited by the respondent, the Supreme Court found no evidence that the appellant was in dire financial straits at the time of the initial coal supply or that there was any fraudulent diversion of funds or goods.

For these reasons, the Supreme Court set aside the impugned order of the High Court and quashed the criminal proceedings arising out of FIR No. 80/2022.

This judgment underscores the crucial distinction between commercial disputes and criminal offenses, cautioning against the misuse of criminal law to resolve business disagreements in the absence of clear evidence of dishonest intention from the inception of the transaction.


Section 415., Indian Penal Code - 1860  

Section 420., Indian Penal Code - 1860  

Indian Penal Code, 1860