Refundable security deposit dispute cannot be turned into cheating or criminal breach of trust case, Supreme Court holds

The appellants, G. Saminathan and S. Radhika Malini, owned two parcels of land measuring 43,560 square feet at Sholinganallur, Chennai. On 23 May 2012, they entered into an unregistered Joint Development Agreement with the complainant, a Joint Managing Director and authorised representative of a construction company, for developing the property into residential flats. On the same day, the appellants executed a registered General Power of Attorney in favour of the complainant and received ₹3 crore as a refundable security deposit under the agreement.

The construction company applied for planning permission, which was rejected on 26 August 2013 because the land formed part of an unapproved layout and lacked the requisite qualifying public road.

On 5 January 2018, the appellants cancelled the GPA and sold the property to a third party, Banumathi. The complainant alleged that the appellants had concealed the property’s defective status, dishonestly retained the security deposit, and sold the land during the subsistence of the development agreement.

The complainant lodged a police complaint on 9 January 2018. Following an application under Section 156(3) of the CrPC, the Magistrate directed registration of an FIR. FIR No. 181 of 2021 was registered under Sections 406 and 420 IPC, and a chargesheet was subsequently filed invoking Sections 406 and 420 read with Sections 109 and 34 IPC.

The High Court refused to quash the proceedings under Section 482 CrPC, holding that the allegations disclosed criminal breach of trust and cheating. Meanwhile, arbitration proceedings arising from the development agreement culminated in an award dated 12 April 2023 directing the complainant to return the title documents and the appellants to refund ₹3 crore; the award was challenged under Section 34 of the Arbitration and Conciliation Act, 1996.

Whether the allegations in the FIR and chargesheet prima facie constituted criminal breach of trust under Sections 405–406 IPC in respect of the refundable security deposit?

Whether the appellants’ conduct disclosed cheating under Sections 415–420 IPC, particularly a fraudulent or dishonest intention from the inception of the development agreement?

Whether continuation of the criminal proceedings, arising substantially from a contractual and arbitrable dispute, amounted to an abuse of the process of law warranting quashing under Section 482 CrPC?

Section 405 IPC requires entrustment of property or dominion over it, followed by dishonest misappropriation, conversion, use or disposal in violation of law or contract; Section 406 prescribes its punishment.

Sections 415 and 420 IPC require deception accompanied by fraudulent or dishonest inducement, including inducement to deliver property, and the dishonest intention must exist at the time of the representation or promise.

Relying on Hridaya Ranjan Prasad Verma v. State of Bihar, Dalip Kaur v. Jagnar Singh and Binod Kumar v. State of Bihar, the Court reiterated that a mere breach of contract or subsequent failure to fulfil a promise does not constitute cheating or criminal breach of trust absent the requisite dishonest intention and entrustment.

Relying on Delhi Race Club (1940) Ltd. v. State of U.P., the Court held that cheating and criminal breach of trust are conceptually distinct and cannot, on the same property and the same factual substratum, be simultaneously sustained in the manner alleged.

Under State of Haryana v. Bhajan Lal, proceedings may be quashed where the allegations, even if accepted in full, do not prima facie constitute an offence, where no offence is disclosed by the collected material, or where the prosecution is malicious or amounts to abuse of process.

The Court held that payment of ₹3 crore as a refundable security deposit under the development agreement was not, by itself, entrustment of property for the purposes of Section 405 IPC; it was paid as consideration connected with the execution of the GPA and contractual arrangement.

The FIR and chargesheet also did not identify any specific manner in which the appellants had dishonestly misappropriated, converted or disposed of the deposit in violation of the agreement. The appellants’ legal notice offering to return the security deposit further weakened the allegation of dishonest retention.

As to cheating, the parties had entered into the development arrangement, executed the GPA and acted pursuant to their respective contractual obligations. The project failed only after planning permission was refused, and the complainant had not conducted comprehensive due diligence despite the contractual allocation of responsibilities.

The subsequent cancellation of the GPA and sale of the property could potentially give rise to civil remedies, but did not, without more, establish fraudulent intention at the inception of the transaction. Since the parties had already pursued arbitration and the dispute was essentially contractual, continuation of the criminal prosecution fell within the Bhajan Lal categories warranting quashing.

The appeal was allowed; the High Court’s order dated 28 March 2025 was set aside, and the proceedings under Section 482 CrPC were allowed. FIR No. 181 of 2021, the chargesheet dated 23 March 2023, and Criminal Case No. 2776 of 2023 under Sections 406 and 420 read with Sections 109 and 34 IPC were quashed.

The Court clarified that its observations would not prejudice the parties’ pursuit of appropriate civil remedies.