Termination Of Contract By Itself Does Not Amount To Offence Of Cheating Unless Original Design To Deceive Is Alleged: Supreme Court

The Court was hearing appeals against a Jharkhand High Court judgment which had declined to quash a first information report registered under Sections 316(2), 318(4) and 3(5) of the Bharatiya Nyaya Sanhita, 2023, arising from a camphor distributorship dispute.

A Bench of Justice Sanjay Karol and Justice Augustine George Masih observed: “It is enough to say that the exercise of a power under the contractual terms is not, by itself, an act of deception. Where a contracting party brings the contract to an end in the manner the contract permits, the remedy of the other party, if the termination is wrongful, is to claim damages. To convert that into the offence of cheating, the information would have to allege facts showing that the termination was the culmination of a design formed at the outset.”

Senior Advocates Mahesh Jethmalani and Sunil Dalal appeared for the appellants, while Advocates Rajiv Shankar Dvivedi and Vishnu Sharma appeared for the respondents. 

Background

The dispute arose from a distributorship arrangement for camphor in Jharkhand. The informant alleged that he was offered distributorship for a fixed term and was promised gifts and benefits upon payment of money over that period.

According to the allegations, the informant paid ₹52,000 as token money and later paid ₹73 lakh as advance in multiple remittances. Goods worth ₹31,49,167 were supplied, after which the informant alleged that supplies were stopped when he questioned the lower rate at which goods were allegedly being supplied to others. He claimed that the balance amount of ₹41,50,833 was neither returned nor adjusted.

The appellants contended that the allegations disclosed only a dispute over price, supply and accounts arising from a written commercial contract. The informant argued that the termination of a distributorship meant to run for three years, within a short time and without proper warning, showed deliberate deception. The State also opposed quashing on the ground that the investigation was at an early stage.

Court’s Observations

The Supreme Court first examined the ingredients of cheating under Section 318(4) BNS, corresponding to Section 420 IPC. Referring to Delhi Race Club (1940) Ltd. v. State of U.P. (2024), the Court reiterated that breach of contract does not become cheating unless fraudulent or dishonest intention existed from the beginning.

The Court quoted: “In case of cheating, the intention of the accused at the time of inducement should be looked into which may be judged by a subsequent conduct, but for this, the subsequent conduct is not the sole test. Mere breach of contract cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right from the beginning of the transaction i.e. the time when the offence is said to have been committed. Therefore, it is this intention, which is the gist of the offence.”

The Court also referred to Hridaya Ranjan Prasad Verma v. State of Bihar (2000), and held that culpable intention at the time of making a promise cannot be presumed merely from failure to keep it.

Applying this principle, the Court found that the information did not contain facts from which dishonest intention at inception could be inferred.

The Court observed: “So measured, the first information report in the case at hand is wanting in the essentials of the offence punishable under Section 318(4) of the BNS. It contains no averment of fact from which a dishonest intention at the inception could be inferred. It is not alleged that the offer of distributorship was made without any intention of conferring it or that the appellants knew, when the agreement was drawn up or when any of the six remittances was received, that they would not or could not supply the goods.”

The Court said the closest allegation to a representation was that the informant would receive gifts and benefits in return for payment over the distributorship period. Even accepting this allegation as true, the Court held that it was a promise of future advantage, not an assertion of an existing fact.

The Court observed: “Accepting that averment as true, it is a promise as to the future and not an assertion as to an existing fact. A promise of future advantage becomes a deception only if it was made without any intention of performing it, and the information contains nothing from which such an absence of intention could be gathered.”

The Court further held that Section 318(4) BNS postulates deception preceding delivery of property and inducing such delivery. On the allegations in the information, the payments were made under a contract that had been entered into and acted upon.

The Court stated: “Section 318(4) of the BNS postulates a deception which precedes the delivery of property and induces it. The information points to no deception preceding the six remittances. It says only that the agreement was drawn up on 29.03.2024, signed and returned on 04.05.2024 by him, and that the remittances were made between 04.04.2024 and 26.06.2024 as advance for goods yet to be received. The payments were therefore made under the contract, and a contract lawfully entered into and acted upon is not a deception.”

The Court noted that, on the informant’s own showing, the distributorship was conferred, an agreement was executed for the full term, goods were supplied, and bills were raised. Though part performance is not always a complete answer to a cheating allegation, the Court held that in the absence of any pleaded facts showing dishonest intention at inception, fraudulent intent could not be speculated.

The Court observed: “Part performance is not, of itself, a conclusive answer to a charge of cheating. But where the information pleads no fact whatever pointing to dishonesty at the inception and the conduct, it does plead, is consistent with an intention to perform, an initial fraudulent intent becomes a matter of speculation rather than of allegation.”

The Court also considered the attending circumstances from the record and noted that the earlier communications after termination did not mention the alleged unreturned advance, which was raised later in the information report.

Turning to Section 316(2) BNS, corresponding to criminal breach of trust, the Court held that the more basic defect was absence of entrustment. It explained that money paid as price of goods, or in advance for supply, passes to the supplier as consideration under a contract.

The Court observed: “Criminal breach of trust presupposes entrustment, which requires that the beneficial interest in the property remain with the person handing it over, the recipient taking no more than custody or dominion for the benefit of another. Money paid to a supplier as the price of goods, or in advance of their supply, passes to the supplier as his own; he holds it as consideration under a contract, and is neither trustee nor bailee of it. If he takes the money and does not deliver, he is in breach of his contract but has not committed a breach of trust, because there was no trust.”

The Court found no averment that money or goods were handed over to any appellant to be held on behalf of the informant, applied only to a specified purpose, or returned in specie.

The Court held: “In the absence of such an averment, the ingredient of entrustment is simply not pleaded, and the offence under Section 316(2) of the BNS cannot be said to be disclosed upon any reading of the information.”

The Court also noted that the information alleged both cheating and criminal breach of trust on the same set of facts. Referring to Delhi Race Club, it held that the two offences are antithetical in their legal structure.

The Court observed: “In cheating, the property is parted with because the owner has been deceived, and the dishonest intention exists at the inception. In criminal breach of trust, the property comes lawfully into the hands of the accused and is dishonestly dealt with thereafter. The registration of the first information report for both offences upon one indivisible set of allegations is an indication that the allegations were not measured against the ingredients of either.”

The Court rejected the argument that a first information report need not be encyclopaedic, holding that the defect was not lack of detail but absence of the essential ingredients of the offences alleged.

The Court stated: “The complaint here is not that the information lacks detail. It is that the information, however detailed as to remittances and bills, does not allege the one thing without which cheating cannot exist, namely, a dishonest intention at the time of the inducement; and does not allege the one thing without which criminal breach of trust cannot exist, namely, entrustment.”

The Supreme Court held that if any amount was due to the informant, the law provided an effective civil or contractual remedy. What the law did not permit was use of criminal proceedings to compel payment in a commercial dispute.

The Court observed: “If the respondent No. 2 is right that Rs. 41,50,833/- is due to him, the law affords him a remedy, and an effective one. What it does not afford him is the use of the criminal process to compel its payment. Stripped of its conclusions, the information asserts that money was paid, that goods of a lesser value were delivered, that supplies ceased, and that the difference has not been returned. Each of those assertions, if established, will be the foundation of a claim and not of a crime.”

The Court held that permitting the proceedings to continue would allow a written commercial contract dispute to be pursued through criminal law.

The Court concluded on this aspect: “Taking the allegations in the first information report at their face value and accepting them in their entirety, this Court is satisfied that the ingredients of the offence punishable under Section 318(4) of the BNS are not made out, no fact being alleged from which a dishonest or fraudulent intention at the inception could be inferred; and that the ingredients of the offence punishable under Section 316(2) BNS are not made out, entrustment not being alleged at all.”

Conclusion

The Supreme Court allowed the appeals, set aside the Jharkhand High Court judgment, and quashed the first information report and all proceedings arising from it. The Court clarified that nothing in its judgment would be treated as an expression of opinion on the merits of any civil, arbitral or other proceeding between the parties.

Cause Title: Parag Kishore Satoskar and Others v. State of Jharkhand and Another (Neutral Citation: 2026 INSC 846)

Appearances

Appellants: Senior Advocates Mahesh Jethmalani and Sunil Dalal, with Ravi Sharma, AOR, and Advocates Darshan Upadhyay, Anjani Kumar Rai, Praphull Kumar, Faizan Shaukat Ali and Satish Shukla

Respondents: Rajiv Shankar Dvivedi, Advocate; Vishnu Sharma, Standing Counsel; Madhusmita Bora, AOR, with Advocates Pavithra V. and Vaibhav Chechi; Ana Upadhyay, Anupriya Poddar, Shubhansh Patel and Rajaswi Vatsa, Advocates; Siddhesh Shirish Kotwal, AOR

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