Failure to Pay in Commercial Deal Is Not Cheating – Calcutta High Court Quashes Criminal Case, Says No Criminality in Civil Disputes

“No Dishonest Intention at Inception – Civil Liability Cannot Be Prosecuted as Crime” –  In a landmark decision Calcutta High Court decisively quashed criminal proceedings against D.K. Enterprises Pvt. Ltd. and its director, holding that a civil dispute arising from a commercial transaction cannot be dressed up as a criminal case in the absence of “fraudulent or dishonest inducement from inception.”

Delivering judgment, Justice Ajay Kumar Gupta held that the complaint filed under Sections 420, 406, 422, and 34 of the Indian Penal Code was misconceived and legally untenable, as the essential ingredients of criminal breach of trust or cheating were absent.

“Non-payment of outstanding dues or even breach of contract, in a commercial transaction, by no stretch of imagination, can be called dishonest inducement,” the Court observed, terming the proceedings an “abuse of process of law.”

The complaint in Case No. CS 41478 of 2017 was lodged by the respondent (opposite party no. 2), a supplier of Granular Activated Carbon, who alleged that D.K. Enterprises Pvt. Ltd. and its director (petitioners) had induced the supply of goods on credit between 2014 and 2016, but failed to pay an outstanding sum of Rs. 4,52,075/- despite repeated demands and a legal notice.

The complainant alleged that the petitioners introduced themselves as reputable businessmen and secured supplies based on promises of large orders and future payments, only to later deny receiving the goods. The complaint accused them of cheating, criminal breach of trust, and fraudulent denial of liability.

The petitioners, represented by Mr. Dipankar Saha, Mr. Bikash Shaw, and Mr. Subham Kr. Das, denied all allegations, contending that they were engaged solely in software development in Chennai, had no business dealings with the complainant, and were mistakenly targeted due to a similar-sounding company name located in Maharashtra. They submitted that even assuming the complaint was true, the dispute remained purely civil in nature, devoid of any criminal intent or entrustment, as required under Sections 406 and 420 IPC.

No Criminal Offence Made Out

After a detailed review of the complaint, supporting documents, and legal precedents, the High Court held that the essential elements of criminal breach of trust and cheating were clearly missing.

Referring to Hridaya Ranjan Prasad Verma v. State of Bihar (2000) 4 SCC 168, the Court reiterated that:

“There must be deception and fraudulent inducement at the very inception of the transaction to constitute the offence of cheating. A mere failure to repay a debt does not make it a criminal case.”

On the allegation under Section 406 IPC, the Court found no entrustment of property nor any dishonest misappropriation, holding that:

“The complainant’s own pleadings show that the accused had paid some amounts during the course of business. This belies any claim of dishonest retention or misappropriation.”

The Court also dismissed the claim under Section 422 IPC (dishonest or fraudulent prevention of debt or demand being available), stating that:

“There is no averment showing any deliberate act to fraudulently prevent debt recovery. Mere denial of liability is not equivalent to fraud.”

Distinction Between Civil Disputes and Criminal Offences

Relying on the Supreme Court’s decision in Delhi Race Club (1940) Ltd. v. State of U.P., (2024 SCC OnLine SC 402), the Court emphasized the fine yet crucial line between breach of contract and criminality, observing:

“For cheating under Section 420 IPC, mens rea must be present from the beginning. In contrast, criminal breach of trust under Section 406 requires entrustment and subsequent dishonest misappropriation. Both cannot co-exist on the same facts and must be proved distinctly.”

The Court cautioned against the growing trend of filing criminal complaints to coerce payment in civil disputes, stating:

“Such complaints, which are essentially civil in nature, filed under the cloak of criminal law, ought not to be entertained. Courts must prevent such misuse.”

Quoting Paramjeet Batra v. State of Uttarakhand (2013) 11 SCC 673, the Court reminded that:

“The inherent powers under Section 482 CrPC must be exercised to prevent abuse of process. If a dispute is civil and lacks criminal ingredients, the proceedings must be quashed.”

No Criminal Colour in Commercial Deal – Proceedings Quashed

The Court concluded that: “No specific act, threat, deception, or inducement has been alleged against the petitioners. The materials relied upon by the complainant, even if accepted as true, do not disclose the commission of any offence under Sections 406, 420, or 422 of IPC.”

It further noted: “Outstanding dues in a commercial transaction are matters for civil courts. Criminal law cannot be used as a tool of recovery or pressure.”

Accordingly, the entire criminal proceeding in CS 41478 of 2017 was quashed insofar as the petitioners were concerned, and all consequential orders set aside.

Business Failures Aren’t Always Criminal – Commercial Litigation Belongs in Civil Courtrooms

Justice Ajay Kumar Gupta’s judgment sends a strong message to litigants seeking to weaponize criminal law for business recovery:

“Simply because an amount remains unpaid does not convert a contractual breach into a penal offence. The substance of allegations, not their labels, determine jurisdiction.”

The Court reminded all stakeholders that criminal courts are not debt recovery forums, and proceedings lacking criminal substance must be firmly checked at the threshold.

Date of Decision: 23 July 2025