Mere breach of a lease, absent dishonest intention from inception, does not constitute cheating.

Haier Appliances India Pvt. Ltd. entered into a three-year lease agreement with SMCG Warehousing LLP on 20 January 2020 in respect of a warehouse at Sankhrail Industrial Park, with an option for extension.

After SMCG informed Haier that the property would be sold, the property was sold to Ganesh Devcon Private Limited on 22 July 2020. Haier vacated the premises on 30 July 2020, terminated its lease, and received refund of the adjusted security deposit from SMCG.

Ganesh Devcon alleged that it purchased the property on the representation that Haier would continue as lessee for the duration of the lease and that Haier thereafter dishonestly refused to execute a fresh lease. On this basis, a complaint under Sections 406 and 420 IPC was filed against Haier, its directors and employees, pursuant to which the Magistrate took cognizance and issued process.

Haier approached the High Court under its revisional jurisdiction seeking quashing of Complaint Case No. 348 of 2020 and the orders passed therein.

Whether the allegations in the complaint, taken at their face value, disclosed the ingredients of cheating under Section 420 IPC, particularly deception and dishonest intention at the inception of the transaction?

Whether the allegations disclosed criminal breach of trust under Section 406 IPC when the petitioner was neither the owner of the property nor a party to the agreement between the complainant and SMCG?

Whether continuation of the criminal proceeding amounted to an abuse of the process of court warranting exercise of the High Court’s quashing jurisdiction?

The Court applied Sections 406 and 420 of the Indian Penal Code, 1860.

Criminal breach of trust under Section 406 requires entrustment of property and dishonest misappropriation or conversion thereof; cheating under Sections 415 and 420 requires deception, fraudulent or dishonest inducement, and consequent delivery of property or an act or omission causing harm.

Relying on Hridaya Ranjan Prasad Verma v. State of Bihar, the Court reiterated that fraudulent or dishonest intention must exist at the time the representation or promise is made, and that a mere subsequent breach of contract does not constitute cheating.

The Court also referred to Delhi Race Club (1940) Ltd. v. State of Uttar Pradesh, concerning the impermissibility of mechanically invoking Sections 406 and 420 IPC on the same factual basis.

Applying State of Haryana v. Bhajan Lal, the Court held that proceedings may be quashed where the allegations, even if accepted in their entirety, do not prima facie constitute an offence or are inherently improbable and continuation would amount to abuse of process.

The Court found that the only contractual relationship involving Haier was its lease with SMCG; Haier was not a party to the sale agreement or any lease agreement between SMCG and Ganesh Devcon, and no written assurance by Haier to Ganesh Devcon was identified in the complaint or materials.

The contemporaneous communications showed that the existing lease was to be terminated first and that any fresh lease would arise only upon subsequent mutual confirmation, which never occurred.

The security deposit was adjusted and refunded through a demand draft after termination of the lease, and the property was vacated.

Accordingly, there was no material indicating that Haier had deceived or dishonestly induced Ganesh Devcon at the inception of the transaction, nor was any property of Ganesh Devcon entrusted to Haier.

At its highest, the dispute concerned the alleged non-performance of a proposed or contemplated commercial arrangement, for which civil remedies could be pursued; it did not satisfy the statutory ingredients of cheating or criminal breach of trust.

The Magistrate’s issuance of process was therefore held to be mechanical and unsustainable.

The criminal revision was allowed, and Complaint Case No. 348 of 2020 pending before the Judicial Magistrate, 4th Court, Howrah, together with the proceedings against the petitioner company, was quashed.