Breach of Contract Alone Doesn’t Attract Cheating — Criminal Law Not Meant for Settling Civil Scores Supreme Court Quashes FIR in Business Dispute

“It is the intention which is the gist of the offence. From mere failure to keep a promise subsequently, one cannot presume fraudulent or dishonest intention at the time of making the promise” — Supreme Court

In a significant judgment Supreme Court of India quashed an FIR and criminal proceedings lodged five years after a commercial transaction, ruling that "a mere breach of contract, howsoever serious, does not constitute cheating in criminal law unless it is shown that fraudulent intention existed at the inception of the agreement." The Court held that criminal proceedings initiated over contractual disputes amount to misuse of criminal law and must be struck down to protect the sanctity of civil remedies.

“Criminal Justice System Cannot Be Converted Into a Weapon for Harassment in Commercial Disputes” — Supreme Court Warns Against Weaponizing FIRs

The Supreme Court sharply criticized the growing trend of civil disputes being converted into criminal prosecutions, cautioning that such misuse of the system causes undue harassment and burden on courts. The bench comprising Justice B.V. Nagarathna and Justice R. Mahadevan declared:

“The machinery of criminal justice is being misused by certain persons for their vested interests and for achieving their oblique motives.”

The case arose from a 2017 business deal in which M/s Soma Stone Crusher had ordered a stone crushing machine (“ruula set fitting”) from M/s Saini Engineering Works, operated by the appellant’s brother. Though an advance was initially paid by cheque, the cheque was subsequently stopped, and a cheque bounce case under Section 138 NI Act was already pending.

Five years later, in 2023, the buyer approached the police alleging that the machine delivered was under-capacity and defective, claiming losses of ₹50 lakhs, and filed an FIR under Sections 420 and 120B of IPC, alleging cheating and criminal conspiracy.

“Delay of Five Years in Lodging FIR Shows Abuse of Process — Allegations Are Vague, Mala Fide, and Civil in Nature”

The Court found the delay of more than five years in initiating criminal proceedings to be suspicious and indicative of malafide intent, likely triggered by the earlier cheque bounce litigation initiated by the appellants. The FIR and chargesheet, according to the Court, lacked any specific allegation that could show fraudulent inducement or dishonest intention at the inception of the transaction.

“There is no allegation in the complaint indicating either expressly or impliedly any intentional deception or fraudulent/dishonest intention on the part of the appellants.”

The Court further stated that: “Mere vague allegations with respect to failure of delivery or defect in performance do not satisfy the test of dishonest inducement to deliver a property or part with a valuable security as enshrined under Section 420 IPC.”

The bench made it clear that where parties enter into a commercial contract, and a dispute arises from alleged non-performance, the aggrieved party must resort to civil proceedings and not the criminal justice system.

“Prima Facie Offence Not Made Out — No Criminal Case Can Be Allowed to Proceed Just Because a Party Felt Cheated After Business Fails”

Invoking the well-established principles laid down in State of Haryana v. Bhajan Lal, the Court noted that the FIR did not disclose any criminal offence even on its face. It categorized the case as one where the allegations were purely civil in nature, and their continuation would amount to an abuse of process of law.

“We are of the firm opinion that to continue the criminal proceedings against the appellants herein would cause undue harassment to them... and no prima facie case for the offence under Section 420 IPC is made out.”

The Court also emphasized that there is no law that compels criminal courts to entertain grievances arising out of failed business expectations. Instead, it reiterated that the criminal courts must be vigilant against "vexatious prosecutions" where parties try to gain undue advantage by threatening the accused with arrest and trial under criminal law.

Criminal Law Is Not a Substitute for Civil Remedies — FIR, Chargesheet and Criminal Case Quashed

The Supreme Court concluded that the dispute over performance of machinery delivery and quality was contractual and civil in nature, and that the criminal case was filed with mala fide intent to harass. The FIR, the police chargesheet, and all proceedings arising from them were declared null and void.

“It is neither expedient nor in the interest of justice to permit the present prosecution to continue... Such criminal proceedings would amount to sheer abuse of the process of court.”

Date of Decision: September 15, 2025