Contractual Loan Dispute Over Alleged Excess Charges Not Cheating Or Breach Of Trust: Calcutta High Court Quashes Case

Observing that a dispute arising out of foreclosure charges and alleged excess recovery under a loan agreement is essentially contractual in nature and cannot be converted into a criminal prosecution for cheating or criminal breach of trust, the Calcutta High Court has quashed criminal proceedings initiated against Tata Capital Finance Ltd. and its officials. The Court held that even an alleged violation of regulatory or RBI guidelines would not, by itself, attract penal consequences under Sections 420 or 406 IPC in the absence of fraudulent intent or entrustment.

Justice Chaitali Chatterjee Das allowed a criminal revision petition challenging a Magistrate's order taking cognizance and issuing summons in a case alleging wrongful recovery of about ₹16.45 lakh at the time of foreclosure of housing loans.

The complainant had availed two loans from the finance company against residential property and later opted for takeover/foreclosure of the loan through another financial institution. It was alleged that despite an assurance that no foreclosure charges would be levied, the company realised excess amounts while closing the account, causing wrongful loss to the borrower. On this basis, a complaint was lodged alleging offences under Sections 420, 406 and 34 IPC.

The petitioners contended that the relationship between the parties was governed entirely by the loan agreement, which expressly provided for foreclosure/pre-payment charges. They also pointed out that the agreement contained an arbitration clause and that the dispute, at best, concerned contractual interpretation and calculation of dues. It was further argued that the police report merely referred to alleged violation of RBI/NHB guidelines, which could entail regulatory consequences but not criminal liability.

Examining the loan sanction letter and agreement clauses, the High Court noted that foreclosure charges were specifically contemplated under the contract. The Court also observed that the transactions pre-dated certain regulatory circulars relied upon by the investigating officer. More importantly, it found that the complaint did not disclose the essential ingredients of either cheating or criminal breach of trust.

The Court reiterated that for cheating under Section 420 IPC, dishonest or fraudulent intention must exist from the very inception of the transaction, and mere subsequent disputes over accounts or charges cannot establish criminality. As regards Section 406 IPC, it held that “entrustment” is sine qua non, and amounts paid under a loan contract do not constitute entrustment in a fiduciary sense. The petitioners were merely a loan sanctioning authority and there was no allegation of misappropriation of entrusted property.

Relying on the principle that criminal law should not be used to settle contractual scores, the Court held that a “contractual dispute or breach of contract per se should not lead to initiation of a criminal proceeding.” It further observed that offences under Sections 406 and 420 IPC cannot ordinarily be invoked together on the same set of facts.

Holding that the Magistrate failed to properly assess these aspects before issuing process, the Court set aside the order taking cognizance and quashed the entire proceedings.

Case Title: M/s. Tata Capital Finance Ltd. & Ors. v. State of West Bengal & Anr.

Case No.: CRR 2354 of 2023

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