Mere Failure to Return Contractual Money Not Criminal Breach of Trust: Supreme Court

The Supreme Court has said that for invoking the offence of criminal breach of trust, it is necessary to show that the accused was entrusted with property or had dominion over it, and that such property was dishonestly misappropriated or converted in violation of a legal contract or direction of law.

Mere retention of money due under a contract does not constitute criminal breach of trust without proof of dishonest intention in the disposal or retention of such property, Court said.

A Bench of Justices B V Nagarathna and Ujjal Bhuyan quashed criminal proceedings against a Chennai-based couple, finding that the allegations of cheating and criminal breach of trust over a refundable security deposit under a property development agreement did not disclose any criminal intent from the inception of the contract.

Cheating and criminal breach of trust

Court explained that to constitute the offence of cheating, it must be established that the accused, by way of deception, fraudulently or dishonestly induced a person to deliver property or perform an act which they otherwise would not have performed. Such dishonest intention must exist at the time of making the representation or promise, and mere subsequent failure to keep a promise does not create criminal liability, it said.

Court held that the ingredients for cheating were not satisfied in the present case, while pointing out the distinction between a breach of contract and an offence under Section 420 of the IPC [corresponding to Section 318(4) of the Bharatiya Nyaya Sanhita (BNS)].

"Where allegations in an FIR or complaint, if accepted at face value, do not disclose the commission of a cognizable offence or merely represent a civil dispute arising out of a breach of contract, the court is obligated to exercise its inherent powers to quash such proceedings to prevent the abuse of the process of law and secure the ends of justice," the Bench said.

Court also held that a mere allegation of dishonest intention to retain a refundable security deposit and cause wrongful loss to the complainant could not sustain the criminal proceedings.

"Therefore, a mere bald and omnibus allegation against the accused with regard to their dishonest intention to misappropriate the refundable security deposit, uncorroborated with any cogent material, cannot by itself sustain the charge under Section 405 of IPC against them," Court said.

What was the dispute?

As per the facts of the case, the complainant, the Joint Managing Director and authorised representative of M/s Barath Building Construction (India) Pvt Ltd, entered into a joint development agreement in 2012 concerning a 0.5-acre plot in Kancheepuram. The accused, G Swaminathan and his wife S Radhika Malini, were paid a refundable security deposit of Rs 3 crore through two cheques.

The complainant subsequently became aware that in 2018, the accused had cancelled the GPA executed in favour of the complainant and, on the same day, sold the disputed property to Smt Banumathi through a sale deed.

The complainant filed a police complaint and also sent a legal notice to the accused seeking a refund of the Rs 3 crore security deposit. The accused refused to refund the amount.

After the complaint filed before the Commissioner of Police was closed, an application under Section 156(3) of the Code of Criminal Procedure, 1973 was filed, resulting in a direction for registration of an FIR in 2021.

A charge sheet was filed in 2023 before the trial court against the accused under Sections 406, 420 read with Sections 109 and 34 of the IPC [corresponding to Sections 316, 318(4), 49 and 3(5) of the BNS, respectively].

Why did the Madras High Court refuse to quash the case?

The Madras High Court had refused to quash the criminal proceedings against the accused.

It recorded that the accused, being the owners of the disputed property, were aware that it was an unapproved property and, despite such knowledge, entered into a Joint Development Agreement with the complainant and received Rs 3 crore as a refundable security deposit.

Later, the planning permission sought by the construction company was rejected. The complainant repeatedly requested the accused to return the security deposit, but the amount was never returned.

Challenging the high court order, the accused submitted before the Supreme Court that the dispute was completely contractual in nature. There was no allegation that, at the time of execution of the Joint Development Agreement, they had a fraudulent or dishonest intention to cheat the complainant.

It was also submitted that there was an unexplained delay of eight years in filing the FIR and that the FIR was an afterthought, having been filed after the complainant suffered adverse orders in arbitration proceedings.

The accused further argued that the complainant had challenged the award passed by the arbitrator and that if he was dissatisfied with any other monetary relief or damages apart from the refundable security deposit, the proper recourse was to avail civil remedies rather than initiate parallel criminal proceedings.

The complainant, however, argued that where there is evidence of dishonest intention and clear prima facie allegations of mens rea and fraudulent inducement from the inception, the matter must be tried as a criminal case even if it also gives rise to a civil dispute.

The dispute's nature

The Supreme Court rejected the allegation of dishonest intention against the accused and found that the dispute was essentially civil in nature.

Court also found that the complainant had failed to carry out comprehensive due diligence before entering into the Joint Development Agreement with the accused. In these circumstances, any subsequent defects or legal flaws concerning the disputed property could not be used by the complainant as a means to criminally prosecute the accused owners, it said.

"The dispute between the parties is essentially civil in nature. The subsequent sale of the subject property by the accused to a third party may give rise to a cause of action on the civil side to the complainant but not a case of cheating or criminal breach of trust as the said act of sale per se is not a criminal act," the Bench said.

Court held that continuation of the criminal proceedings would be nothing but a sheer abuse of the process of law, as none of the offences invoked in the FIR and charge sheet appeared to be made out against the accused.

The Supreme Court accordingly set aside the judgment and final order dated March 28, 2025 passed by the Madras High Court and allowed the petition filed under Section 482 of the CrPC.

It quashed all consequential proceedings arising from the 2021 FIR, including the charge sheet dated March 23, 2023 and the criminal case pending before the Metropolitan Magistrate for Special Court CCB, CBCID, Egmore, Chennai, against G Swaminathan and S Radhika Malini under Sections 406, 420 read with Sections 109 and 34 of the IPC.

Case Title: G Swaminathan & Another Vs The State, Represented by Sub Inspector of Police & Another

Bench: Justices B V Nagarathna and Ujjal Bhuyan

Date of Judgment: July 31, 2026