Mere Inability To Repay Loan Does Not Constitute 'Cheating': SC [Read Judgment]

Mere Inability To Repay Loan Does Not Constitute

“The mere inability of the appellant to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, as it is this mens rea which is the crux of the offence.”

The Supreme Court, in a judgment delivered last month, observed that inability of a person to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or diishonest intention is shown right at the beginning of the transaction.

In Satishchandra Ratanlal Shah vs. State of Gujarat, the bench comprising Justice NV Ramana and Justice Mohan M. Shantanagoudar was dealing with an appeal against a High Court order refusing to quash summons issued to the accused in a cheating case.

The bench noted the following undisputed facts of the case: that the dispute arises out of a loan transaction between the parties, that the parties knew each other before lending the loan, further that the complainant has instituted a summary civil suit which is still pending adjudication. Taking note of these, the bench said:

"The law clearly recognizes a difference between simple payment/investment of money and entrustment of money or property. A mere breach of a promise, agreement or contract does not, ipso facto, constitute the offence of the criminal breach of trust contained in Section 405 IPC without there being a clear case of entrustment."

The court also observed that, in this case, no property was entrusted to the accused at all which he dishonestly converted for his own use so as to satisfy the ingredients of Section 405 punishable under Section 406 of IPC. Referring to charge under Section 415 IPC, the bench said that the distinction between mere breach of contract and cheating would depend upon the fraudulent inducement and mens rea. It said:

"In the case before us, admittedly the appellant was trapped in economic crisis and therefore, he had approached the respondent no. 2 to ameliorate the situation of crisis. Further, in order to recover the aforesaid amount, the respondent no. 2 had instituted a summary civil suit seeking recovery of the loan amount which is still pending adjudication. The mere inability of the appellant to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, as it is this mens rea which is the crux of the offence. Even if all the facts in the complaint and material are taken on their face value, no such dishonest representation or inducement could be found or inferred. "

The court added that Section 415 IPC criminalize only those breaches of contract which are accompanied by fraudulent, dishonest or deceptive inducements, which resulted in involuntary and inefficient transfers, under Section 415 of IPC.

The bench then quashed the complaint, setting aside the High Court order.

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