Refundable Security Deposit Paid In Lieu For GPA Execution Under Joint Development Agreement Is Not By Itself Entrustment U/S 405 IPC: Supreme Court

The Court was hearing an appeal against the Madras High Court’s refusal to quash criminal proceedings initiated under Sections 406, 420, read with Sections 109 and 34 IPC in relation to a property development dispute.

A Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan observed: “ … to constitute the offence under Section 405 of IPC, it must be proved that the accused was entrusted with the property and the property so entrusted was misappropriated, converted or disposed of by the accused with a dishonest intention and in contravention of any law or legal contract prescribing the mode in which such trust was to be discharged.”

The Bench further added: “In the present case, mere payment of a refundable security deposit by the complainant to the accused cannot be treated as entrustment of property inasmuch as the same was paid as a consideration in lieu of the execution of GPA in favour of the complainant. Even otherwise the FIR as well as the chargesheet in question are silent on the method and mode in which the appellants-accused misappropriated, converted, or disposed of the so-called entrusted property in the form of refundable security deposit for their own use to the disadvantage of the complainant in contravention of the Joint Development Agreement.”

Advocate Shashwat Singh appeared for the appellants, while Advocate Sabarish Subramanian appeared for the respondents.

Background

The dispute arose from an unregistered Joint Development Agreement for the construction and development of residential flats over a property in Chennai. A GPA was executed in favour of the complainant, after which a refundable security deposit of ₹3 crore was paid to the landowners.

The planning permission application was later rejected on the grounds that the property formed part of an unapproved layout. The complainant alleged that the accused cancelled the GPA, sold the property to a third party, and failed to return the refundable security deposit. The accused, on the other hand, relied on their legal notice calling upon the complainant to return the original title deeds and receive back the security deposit.

Court’s Observations

The Court first examined the ingredients of criminal breach of trust under Section 405 IPC and held that the offence requires more than non-return of money.

The Bench stated: “The essential ingredients for invoking Section 405 of IPC are as follows: (a) the accused was entrusted with property, or entrusted with dominion over property; (b) the accused had dishonestly misappropriated or converted to their own use that property, or dishonestly used or disposed of that property or wilfully suffer any other person to do so; and (c) such misappropriation, conversion, use or disposal should be in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract which the person has made, touching the discharge of such trust.”

The Court added that a bare allegation of dishonest retention, without cogent material showing how the money was misappropriated or converted, could not sustain a charge under Section 405 IPC.

On the allegation of cheating, the Court held that fraudulent or dishonest intention must exist at the beginning of the transaction. It relied on Hridaya Ranjan Prasad Verma v. State of Bihar (2000) and Deepak Gaba v. State of U.P. (2023).

The Bench observed: “Thus, it cannot be said that the accused at the time of entering into the agreement had a fraudulent and dishonest intention to induce the complainant to part with the refundable security deposit inasmuch as both parties, pursuant to the execution of the development agreement, acted with the intention of performing their respective contractual obligations. It is only when the planning permission application sought by the complainant came to be rejected that the project was stalled.”

The Court further noted that the developer was expected to conduct due diligence before entering into the venture, and subsequent defects in the property could not be used as a basis to criminally prosecute the owners.

Referring to Delhi Race Club (1940) Ltd. v. State of U.P. (2024), the Court held that cheating and criminal breach of trust are distinct offences and cannot be sustained simultaneously on the same factual foundation.

The Bench explained: “If there was a lawful entrustment of Rs.3,00,00,000/- (Rupees three crore) to the accused under the Joint Development Agreement, it cannot be a case of cheating and if so, the non-return of the amount by the accused as the plan sanction was not granted is not a case of criminal breach of trust. The dispute between the parties is essentially civil in nature. The subsequent sale of the subject property by the accused to a third party may give rise to a cause of action on the civil side to the complainant but not a case of cheating or criminal breach of trust as the said act of sale per se is not a criminal act.”

The Court held that the continuation of criminal proceedings would amount to abuse of process, particularly when civil remedies had already been pursued and an arbitral award had been passed determining contractual liabilities.

The Bench stated: “In our view, the complainant in the present case has sought to give a criminal colour to a purely civil dispute. We must also hasten to add that the accused, in terms of the joint development agreement, has already invoked the arbitration clause, and an arbitral award dated 12.04.2023 has already been passed by the learned arbitrator determining the liabilities of both parties in terms of their contractual obligations.”

It further held that permitting prosecution for Sections 406 and 420 IPC in these circumstances would disregard the criminal justice system.

Conclusion

The Supreme Court allowed the appeal, set aside the Madras High Court order, and quashed the criminal proceedings arising from the FIR and chargesheet. It clarified that its observations would not affect the parties’ right to pursue civil remedies, which would be decided on their own merits.

Cause Title: G. Saminathan & Another v. The State, Represented By The Sub-Inspector Of Police & Another (Neutral Citation: 2026 INSC 772)

Appearances

Appellants: Shashwat Singh, AOR, with Advocates R. Ilam Paridi, R. Vishnu Kumar, Saurav Beniwal, Sejal Nanda and Aman Kumar

Respondents: Sabarish Subramanian, AOR; Ankur S. Kulkarni, AOR, with Advocates M. Gireesh Kumar, Sanjay Singh and Sneha Mathew

Click here to read/download Judgment