Criminal Breach of Trust vs. Cheating: Decoding the Confusion

By Nikhil Varshney, Kartik Sharma & Rishita Khandelwal on August 29, 2024

Introduction

Offences such as cheating and criminal breach of trust are often invoked in Indian criminal law system. It is common practice that when a First Information Report (“FIR”) is registered under Section 406 of the Indian Penal Code, 1860 (“IPC”) (Section 316 of the Bhartiya Nyaya Sanhita, 2023 (“BNS”)) for criminal breach of trust, the same is also registered under Section 420 of IPC (Section 318 of BNS) for cheating. This practice is on account of a long-drawn confusion between the two offences, wherein the two are often equated and thus understood as offences with similar ingredients.

In a recent ruling of the Hon’ble Supreme Court in Delhi Race Club (1940) Limited v. State of Uttar Pradesh, Criminal Appeal No. 3114 of 2024 (“Delhi Race Club case”), the Apex Court dealt with it in detail and quite categorically, while also highlighting the issues that arise therefrom. The Hon’ble Court expressed urgency over the lack of clarity among police officers regarding the legal distinctions between criminal breach of trust and cheating even when IPC has been in effect for 162 years. While criticising this prevalent practice, the Hon’ble Court called for improvement in legal training of police personnels.

Case Overview

An appeal was preferred by the Delhi Race Club (1940) Ltd., its President and Secretary (“Appellants”), against an order passed by the Allahabad High Court in relation to dismissal of a quashing petition. The High Court had dismissed the Appellants’ quashing petition against a summoning order passed by the Additional Chief Judicial Magistrate, Khurja, Bulandshahar, Uttar Pradesh (“ACJM”), under Section 406 of IPC.

A private complaint was filed by one Vipin Kumar Agarwal, owner of Agarwal Udyog, (“Complainant”) against the Appellants, alleging contravention of offences punishable under Sections 406, 420 and 120-B of the IPC (Sections 316, 318 and 61(2) of BNS, respectively), which led to the summoning order. The Complainant had alleged that the Appellants had failed to pay him for the grains supplied by him as fodder for the Appellant company’s horses, thereby cheating him. Hence, the instant complaint was filed.

Supreme Court’s Critique

During the proceedings, the Division Bench of the Hon’ble Supreme Court expressed concerns over the routine/ common practice of police officers mechanically registering FIRs for both offences based solely on claims of dishonesty or fraud without proper application of mind.

The Hon’ble Court underscored the importance of police officers receiving adequate legal training to understand the critical differences between criminal breach of trust and cheating.

Understanding the Ingredients of the Offences – Criminal Breach of Trust and Cheating

Over the years, the Courts in India have laid down various ingredients that are necessary to constitute offences of criminal breach of trust and cheating. For criminal breach of trust under Section 406 of IPC, the Courts have held that the following four elements are necessary:

whoever, being in any manner, entrusted with a property or having dominion over property;
dishonestly misappropriates or converts to his own use or disposes of that property;
in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any, express or implied, direction emanating from a legal contract, and
the said misuse is to the detriment of the interest of the person entrusting that property.[1]

Likewise, for cheating, it is trite law that for an act to constitute offence under Section 420 of IPC, the below three ingredients are required to be fulfilled:

deception of any person;
fraudulently or dishonestly inducing that person against whom the offence is carried out to deliver any property to any person; and
at the time of making such inducement mens rea to deceive is present from the inception.[2]

Thus, these offences are clearly distinct, but due to the existing confusion within law enforcement agencies, several courts have had to repeatedly outline the differences between the two as was also highlighted in the Delhi Race Club case.

In Hari Prasad Chamaria v. Bishun Kumar Surekha,[3] the Hon’ble Apex Court ruled that every act of breach of trust may not culminate in a penal offence of criminal breach of trust, unless there is evidence showing manipulative act of fraudulent misappropriation. For an act of breach of trust to give rise to criminal prosecution, mens rea is essential. However, the question of mens rea arises at different stages for the offences of cheating and criminal breach of trust. In the case of cheating, the mala fide intention to deceive must be there from the inception of a transaction. On the other hand, for criminal breach of trust, a person is entrusted legally with possession of a property, which is later with mala fide intentretained or converted to its own use against the mandate of the original legal entrustment.

Further, in S.W. Palanitkar v. State of Bihar,[4] the Hon’ble Apex Court re-emphasised that both the offences are independent and distinct. The two offences cannot coexist simultaneously for the same set of facts. The Hon’ble Court reiterated that while cheating involves dishonest intention at the time of making a (false) representation, criminal breach of trust necessitates evidence of property being entrusted to someone who then misappropriates it. However, in both the offences, mens rea,i.e., intention to defraud or dishonest intention must be present, although, in the case of cheating, it must be there from the very beginning or inception.[5]

Likewise, the Hon’ble Delhi High Court in Wolfgang Reim v. State,[6] reiterated that in criminal breach of trust, the element of deception arises after the entrustment of property is given or the accused has dominion over the property, unlike in the offence of cheating for which dishonest intention is necessary from the beginning of a transaction. Hence, both the offences cannot co-exist simultaneously and are mutually exclusive.

The Ruling

In the Delhi Race Club case, the Hon’ble Apex Court ruled that for the offence of criminal breach of trust under Section 406 of IPC (Section 316 of BNS), ‘entrustment’ of property is quintessential, which is dishonestly misappropriated at a later stage. However, the instant case is a sale transaction, wherein once the property is sold, no question of entrustment arises as by way of a sale, complete ownership in the property is transferred and there is no element of entrustment of property. Further, the Hon’ble Court ruled that the instance case is a mere non-fulfilment of contract and no criminal offence of breach of trust is made out. Hence, the summoning order issued by ACJM for offence punishable under Section 406 of IPC was quashed and set aside.

Further, the Hon’ble Court, herein, also dealt with the question of vicarious liability, concerning the Appellant company’s office bearers. It reiterated the settled position of law that under the IPC, there is no provision for holding office bearers accountable for offences of cheating and/ or criminal breach of trust, unless direct allegations are made against them. Thus, in the absence of specific allegations of cheating or criminal breach of trust, they cannot be held accountable.

Conclusion

This judgement could be a course correction – as without appreciating the distinction between these offences, individuals, as well as police authorities, sometimes equate these two distinct and separate offences together. At times, Section 420 of IPC (Section 318 of BNS) is added as an offence in a FIR to keep the aspect of money laundering, since cheating is a scheduled offence under the Prevention of Money Laundering Act, 2002, and criminal breach of trust under Section 406 of IPC (Section 316 of BNS) is not.

The Delhi Race Club case serves as a reminder to ensure legal clarity and proper training within the law enforcement to maintain the integrity of judicial processes in India. With the introduction of the new criminal laws, emphasis on effective training has become imperative.

[1]Union Of India v. Chaturbhai M. Patel, AIR 1976 SC 712; Kisan Sahakari Chini Mills Limited v. Richardson and Cruddas, AIR 1997 BOM 35; Man Mohan Thapar v. State of Goa, 2008 SCC OnLine Bom 1839; S.K Alagh v. State of U.P., (2008) 5 SCC 662.

[2] N. Raghavender v. State of Andhra Pradesh, CBI, 2021 SCC OnLine SC 1232.

[3] (1973) 2 SCC 823.

[4] (2002) 1 SCC 241.

[5] Harmanpreet Singh Ahluwalia v. State of Punjab, (2009) 7 SCC 712.

[6] 2012 SCC OnLine Del 3341.

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