Holding that a mere breach of contractual obligations cannot be prosecuted as the offence of cheating unless fraudulent or dishonest intention is shown from the inception of the transaction, the Supreme Court quashed criminal proceedings against two landowners accused of cheating a real estate developer in a failed joint development project.

A Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan held that the dispute arose out of a failed Joint Development Agreement and was essentially civil in nature, making the continuation of criminal proceedings an abuse of the process of law. Accordingly, the Court set aside the Madras High Court's order refusing to quash the case and quashed the FIR, chargesheet and all consequential criminal proceedings under Sections 406 and 420 read with Sections 109 and 34 of the Indian Penal Code.

The dispute concerned a 2012 Joint Development Agreement under which the developer paid a refundable security deposit of ₹3 crore to the landowners for developing a residential project in Chennai. The project could not proceed after the Chennai Metropolitan Development Authority rejected planning permission on the ground that the property formed part of an unapproved layout. Subsequently, the landowners cancelled the General Power of Attorney and sold the property to a third party, prompting the developer to initiate criminal proceedings alleging cheating and criminal breach of trust.

Examining the ingredients of the offence of cheating under Section 420 IPC, the Supreme Court reiterated the settled principle that dishonest intention must exist at the very inception of the transaction.

Quoting its earlier decision in Hridaya Ranjan Prasad Verma v. State of Bihar, the Court observed that "mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction."

Applying this principle, the Bench found no material to indicate that the landowners had induced the developer to enter into the agreement with fraudulent intent.

"It cannot be said that the accused at the time of entering into the agreement had a fraudulent and dishonest intention to induce the complainant to part with the refundable security deposit inasmuch as both parties, pursuant to the execution of the development agreement, acted with the intention of performing their respective contractual obligations," the Court observed.

The Court noted that the project failed only after planning permission was refused and observed that the developer itself ought to have conducted comprehensive due diligence regarding the property before entering into the venture. It held that subsequent legal defects in the property or failure to obtain statutory approvals could not, by themselves, be used to criminally prosecute the landowners.

The Bench also rejected the allegation of criminal breach of trust, holding that payment of a refundable security deposit under a development agreement did not amount to "entrustment" of property. It further noted that the landowners had offered to refund the ₹3 crore security deposit through a legal notice, subject to return of the original title documents.

Relying on its recent decision in Delhi Race Club (1940) Ltd. v. State of U.P., the Court reiterated that the offences of cheating and criminal breach of trust cannot ordinarily coexist on the same set of facts, as cheating requires dishonest intention from the outset, whereas criminal breach of trust presupposes lawful entrustment followed by dishonest misappropriation.

The Court also took note of the fact that the parties had already invoked arbitration under the development agreement and an arbitral award had been passed determining their contractual liabilities, with the award presently under challenge under Section 34 of the Arbitration and Conciliation Act.

Observing that the complainant had sought to give a criminal colour to a purely civil dispute, the Court held that the case fell within the categories identified in State of Haryana v. Bhajan Lal warranting exercise of the High Court's quashing jurisdiction. It therefore allowed the appeal while clarifying that the parties would remain free to pursue their civil remedies in accordance with law.

Case : G Saminathan & Another v The State

Citation : 2026 LiveLaw (SC) 757

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Related - Offences Of 'Cheating' & 'Criminal Breach Of Trust' Cannot Co-Exist On Same Allegations : Supreme Court