Calcutta High Court (Appellete Side)
Reatox Resorts And Hotels Pvt. Ltd. & Ors vs Srei Equipment Finance Ltd. & Anr on 6 January, 2025
IN THE HIGH COURT AT CALCUTTA
Criminal Revisional Jurisdiction
APPELLATE SIDE
Present:
The Hon'ble Justice Shampa Dutt (Paul)
CRR 1128 of 2022
REATOX RESORTS AND HOTELS PVT. LTD. & ORS.
VS.
SREI EQUIPMENT FINANCE LTD. & ANR.
For the Petitioners : Mr. Phiroze Edulji, Senior Advocate
Mr. Sunil Singhania,
Ms. Kalpana Singhania,
Ms. Rajnandini Das.
For the Opposite Party No.1 : Mr. Satadru Lahiri,
Mr. Soumayjyoti Nandy,
Mr. Deepankar Jhakur,
Mr. Jyotirmoy Talukder.
Hearing concluded on : 11.12.2024
Judgment on : 06.01.2025
Page 2
SHAMPA DUTT (PAUL), J. :
1. The present revisional application has been preferred against an
order dated 08.02.2022 passed by the learned Metropolitan
Magistrate, 10th Court, Calcutta in complaint case no. C/S-
95394/2021 taking cognizance against the petitioners/accused
persons under Sections 406/420/506 read with Section 120B of
the Indian Penal Code, 1860 along with a prayer for quashing of
the entire proceeding in respect of the petitioners herein.
2. Vide the order under revision the learned Magistrate examined
the complainant and witnesses under Section 200 of the Code of
Criminal Procedure and issued Process against the accused
persons.
3. The case of the petitioners is as follows:-
“i. The opposite party no.1 carries on business of finance.
ii. There was an agreement between the petitioner
no.1 and the opposite party no.1 dated 17.10.2016 in
the form of a letter dated 17.10.2016 mentioning the
details of amounts agreed to be lent by the opposite
party no.1 to the petitioner no.1 with the details of the
assets of the petitioner, interest rate and number of
installments for a sum of Rs.1,14,00,000/-.
Page 3iii. Under the said agreement the petitioners agreed to
repay the said loan by way of monthly installments
as agreed between the parties as mentioned in the
Schedule thereto.
iv. The petitioner no.1 has paid installments from time to
time to the opposite party no.1 against the said loan
which was accepted by the opposite party no.1
without any demur or reservation.
v. By the letter dated 5th July, 2017, the opposite party
no.1 restructured the loan amount and the rate of
interest to the tune of Rs.1,25,53,000/- and
forwarded a revised Schedule of installments to the
petitioner no.1 for payment.
vi. No amount was paid or lent or advanced by the
opposite party to the petitioner in the month of June,
2017 as the same was merely a reschedulement of
the existing loan transaction.
vii. The opposite party no.1 once again by its letter dated
30th March, 2019 revised the repayment Schedule.
viii. A plain reading of the agreement between the parties
read with the revised Schedules makes it apparent
that the transaction between the parties is a
Page 4commercial transaction and the same is a
concluded contract between the parties.”
4. The complainant’s case in the petition of complaint is that on
the basis of an agreement the complainant-company provided
financial assistance to the accused persons but installments
were not diligently repaid and hence the present case.
5. A copy of the agreement filed shows that the agreement runs
into more than 58 pages and Clause 9.11 reads as follows:-
“9.11 Dispute Resolution Arbitration
Any disputes and/or differences arising out of or
in connection with the Agreement during its
subsistence or thereafter between the parties
including any disputes and differences relating to
the interpretation of the agreement or any clause
thereof shall be adjudicated by arbitration in
accordance with the provisions of the Arbitration
and Conciliation Act, 1996 and rules framed there
under and any amendment, modification, statutory
enactment thereto from time to time and shall be
referred to the Arbitration of a sole Arbitrator
appointed by the Company upon intimation to all
parties to this Agreement. The proceedings shall be
held at Kolkata. The cost of the proceedings shall be
borne by the parties to this Agreement. The award of
the arbitrator shall be final, conclusive and binding
on all the parties.”
Page 5
6. Learned senior counsel appearing for the petitioner has relied
upon the judgment of this Court passed in the case of
Debapratim Neogie vs. State of West Bengal & Anr. reported
in 2024 SCC OnLine Cal 3158, where in the court held:-
“22. In the present case:–
a) The company has not been made an accused,
though the agreement has been admittedly executed
between the two companies.
b) The petitioner has been made the sole accused as
a director of the company who was in-charge of its
affairs.
23. The Supreme Court in Shiv Kumar Jatia v. State
of NCT of Delhi, Criminal Appeal nos. 1263, 1264
and 1265-1267 of 2019, held:–
“27. The liability of the Directors/the controlling
authorities of company, in a corporate criminal
liability is elaborately considered by this Court in the
case of Sunil Bharti Mittal. In the aforesaid case,
while considering the circumstances when
Director/person in charge of the affairs of the
company can also be prosecuted, when the company
is an accused person, this Court has held, a
corporate entity is an artificial person which acts
through its officers, Directors, Managing Director,
Chairman, etc. If such a company commits an
offence involving mens rea, it would normally be the
intent and action of that individual who would act
on behalf of the company. At the same time it is
observed that it is the cardinal principle of criminal
jurisprudence that there is no vicarious liability
unless the Statute specifically provides for. It is
further held by this Court, an individual who has
perpetrated the commission of an offence on behalf
of the company can be made an accused, along with
the company, if there is sufficient evidence of his
active role coupled with criminal intent. Further it is
also held that an individual can be implicated in
those cases where statutory regime itself attracts
the doctrine of vicarious liability, by specifically
incorporating such a provision.
Page 6
29. By applying the ratio laid down by this Court in
the case of Sunil Bharti Mittal it is clear that an
individual either as a Director or a Managing
Director or Chairman of the company can be made
an accused, along with the company, only if there is
sufficient material to prove his active role coupled
with the criminal intent. Further the criminal intent
alleged must have direct nexus with the accused.
Further in the case of Maksud Saiyed v. State of
Gujarat this Court has examined the vicarious
liability of Directors for the charges levelled against
the Company. In the aforesaid judgment this Court
has held that, the Penal Code, 1860 does not
contain any provision for attaching vicarious liability
on the part of the Managing Director or the Directors
of the Company, when the accused is a Company. It
is held that vicarious liability of the Managing
Director and Director would arise provided any
provision exists in that behalf in the Statute. It
is further held that Statutes indisputably must
provide fixing such vicarious liability. It is also held
that, even for the said purpose, it is obligatory on the
part of the complainant to make requisite allegations
which would attract the provisions constituting
vicarious liability.
30. In the judgment of this Court in the case
of Sharad Kumar Sanghi v. Sangita Rane while
examining the allegations made against the
Managing Director of a Company, in which, company
was not made a party, this Court has held that
when the allegations made against the Managing
Director are vague in nature, same can be the
ground for quashing the proceedings under
Section 482 of Cr. P.C. In the case on hand
principally the allegations are made against the first
accused-company which runs Hotel Hyatt Regency.
At the same time, the Managing Director of such
company who is accused no. 2 is a party by making
vague allegations that he was attending all the
meetings of the company and various decisions were
being taken under his signatures. Applying the
ratio laid down in the aforesaid cases, it is
clear that principally the allegations are made
only against the company and other staff
members who are in charge of day to day
affairs of the company. In absence of specific
Page 7allegations against the Managing Director of the
company and having regard to nature of allegations
made which are vague in nature, we are of the view
that it is a fit case for quashing the proceedings, so
far as the Managing Director is concerned.”
24. In Dayle De‟ Souza v. Government of India
Through Deputy Chief Labour Commissioner (C), in
Criminal Appeal No. …. of 2021 (arising out of SLP
(CRL.) No. 3913 of 2020), decided on October 29,
2021, the Supreme Court held:–
“24. In Sharad Kumar Sanghi v. Sangita
Rane, (2015) 12 SCC 781 this Court observed that:–
“11. In the case at hand as the complainant’s initial
statement would reflect, the allegations are against
the Company, the Company has not been made a
party and, therefore, the allegations are restricted to
the Managing Director. As we have noted earlier,
allegations are vague and in fact, principally the
allegations are against the Company. There is no
specific allegation against the Managing Director.
When a company has not been arrayed as a party,
no proceeding can be initiated against it even where
vicarious liability is fastened under certain statutes.
It has been so held by a three-Judge Bench
in Aneeta Hada v. Godfather Travels and Tours (P)
Ltd. in the context of the Negotiable Instruments Act,
1881.
xx xx xx
13. When the company has not been arraigned as
an accused, such an order could not have been
passed. We have said so for the sake of
completeness. In the ultimate analysis, we are of the
considered opinion that the High Court should have
been well advised to quash the criminal proceedings
initiated against the appellant and that having not
been done, the order is sensitively vulnerable and
accordingly we set aside the same and quash the
criminal proceedings initiated by the respondent
against the appellant.”
25. This position was again clarified and reiterated
by this Court in Himanshu v. B. Shivamurthy, (2019)
3 SCC 797. The relevant portion of the judgment
reads thus:
Page 8
“6. The judgment of the High Court has been
questioned on two grounds. The learned counsel
appearing on behalf of the appellant submits that
firstly, the appellant could not be prosecuted without
the company being named as an accused. The
cheque was issued by the company and was signed
by the appellant as its Director. Secondly, it was
urged that the observation of the High Court that the
company can now be proceeded against in the
complaint is misconceived. The learned counsel
submitted that the offence under Section 138 is
complete only upon the issuance of a notice of
demand and the failure of payment within the
prescribed period. In absence of compliance with the
requirements of Section 138, it is asserted, the
direction of the High Court that the company could
be impleaded/arraigned at this stage is erroneous.
7. The first submission on behalf of the appellant is
no longer res integra. A decision of a three-Judge
Bench of this Court in Aneeta Hada v. Godfather
Travels & Tours (P) Ltd. governs the area of dispute.
The issue which fell for consideration was whether
an authorised signatory of a company would be
liable for prosecution under Section 138 of
the Negotiable Instruments Act, 1881 without the
company being arraigned as an accused. The three-
Judge Bench held thus : (SCC p. 688, para 58)
“58. Applying the doctrine of strict construction, we
are of the considered opinion that commission of
offence by the company is an express condition
precedent to attract the vicarious liability of others.
Thus, the words “as well as the company”
appearing in the section make it absolutely
unmistakably clear that when the company can be
prosecuted, then only the persons mentioned in the
other categories could be vicariously liable for the
offence subject to the averments in the petition and
proof thereof. One cannot be oblivious of the fact that
the company is a juristic person and it has its own
respectability. If a finding is recorded against it, it
would create a concavity in its reputation. There can
be situations when the corporate reputation is
affected when a Director is indicted.”
In similar terms, the Court further held : (SCC p.
688, para 59)
Page 9
“59. In view of our aforesaid analysis, we arrive at
the irresistible conclusion that for maintaining the
prosecution under Section 141 of the Act, arraigning
of a company as an accused is imperative. The other
categories of offenders can only be brought in the
drag-net on the touchstone of vicarious liability as
the same has been stipulated in the provision itself.”
xx xx xx
12. The provisions of Section 141 postulate that if
the person committing an offence under Section 138
is a company, every person, who at the time when
the offence was committed was in charge of or was
responsible to the company for the conduct of the
business of the company as well as the company,
shall be deemed to be guilty of the offence and shall
be liable to be proceeded against and punished.
13. In the absence of the company being arraigned
as an accused, a complaint against the appellant
was therefore not maintainable. The appellant had
signed the cheque as a Director of the company and
for and on its behalf. Moreover, in the absence of a
notice of demand being served on the company and
without compliance with the proviso to Section 138,
the High Court was in error in holding that the
company could now be arraigned as an accused.”
26. Applying the same proposition of law as laid
down in Aneeta Hada (supra), this Court
in Hindustan Unilever Limited v. State of Madhya
Pradesh, (2020) 10 SCC 751 applying pari materia
provision in Prevention of Food Adulteration Act,
1954, held that:
“23. Clause (a) of sub-section (1) of Section 17 of the
Act makes the person nominated to be in charge of
and responsible to the company for the conduct of
business and the company shall be guilty of the
offences under clause (b) of sub-section (1) of Section
17 of the Act. Therefore, there is no material
distinction between Section 141 of the NI Act and
Section 17 of the Act which makes the company as
well as the nominated person to be held guilty of the
offences and/or liable to be proceeded and punished
accordingly. Clauses (a) and (b) are not in the
alternative but conjoint. Therefore, in the absence of
the company, the nominated person cannot be
convicted or vice versa. Since the Company was not
Page 10convicted by the trial court, we find that the finding
of the High Court to revisit the judgment will be
unfair to the appellant-nominated person who has
been facing trial for more than last 30 years.
Therefore, the order of remand to the trial court to fill
up the lacuna is not a fair option exercised by the
High Court as the failure of the trial court to convict
the Company renders the entire conviction of the
nominated person as unsustainable.”
27. In terms of the ratio above, a company being a
juristic person cannot be imprisoned, but it can be
subjected to a fine, which in itself is a punishment.
Every punishment has adverse consequences, and
therefore, prosecution of the company is mandatory.
The exception would possibly be when the company
itself has ceased to exist or cannot be prosecuted
due to a statutory bar. However, such exceptions are
of no relevance in the present case. Thus, the
present prosecution must fail for this reason as
well.”
25. Therefore, in the absence of the company being
arraigned as an accused, a proceeding only against
the petitioner as director, in-charge of the affairs of
the company is not maintainable (Dayle De‟
Souza v. Government of India Through Deputy Chief
Labour Commissioner (C), (Supra)).
26. Admittedly there is a sub-lease agreement dated
17.11.2014 between the companies relating to
supply of electricity to the extent of 60KW to be given
to the Sub-lease/opposite party/complainant. A
Deed of Sub-lease was executed between the
companies on 21.04.2015 to give effect to the said
agreement on 09.04.2016, an Agreement executed
between Neogie Auto Pvt. Ltd. and Reliance
Corporate IT Park Limited, to provide additional
37KW of electricity to Reliance. Clause T of the
said agreement provides for an arbitration
clause.
27. The complainant/opposite party without
(invoking the Arbitration Clause in the agreement
dated 09.04.2016 has initiated the Criminal
Complaint.
28. The following judgments have been relied
upon by the petitioner:–
Page 11
i) In Sarabjit Kaur v. State of Punjab, (2023) 5 SCC
360, decided on March 1, 2023, the Supreme Court
held:–
“13. A breach of contract does not give rise to
criminal prosecution for cheating unless fraudulent
or dishonest intention is shown right at the
beginning of the transaction. Merely on the
allegation of failure to keep up promise will not be
enough to initiate criminal proceedings. From the
facts available on record, it is evident that
Respondent 2 had improved his case ever since the
first complaint was filed in which there were no
allegations against the appellant rather it was only
against the property dealers which was in
subsequent complaints that the name of the
appellant was mentioned. On the first complaint, the
only request was for return of the amount paid by
Respondent 2. When the offence was made out on
the basis of the first complaint, the second complaint
was filed with improved version making allegations
against the appellant as well which was not there in
the earlier complaint. The entire idea seems to be to
convert a civil dispute into criminal and put pressure
on the appellant for return of the amount allegedly
paid. The criminal courts are not meant to be used
for settling scores or pressurise parties to settle civil
disputes. Wherever ingredients of criminal offences
are made out, criminal courts have to take
cognizance. The complaint in question on the basis
of which FIR was registered was filed nearly three
years after the last date fixed for registration of the
sale deed. Allowing the proceedings to continue
would be an abuse of process of the court.”
ii) In M.N.G. Bharateesh Reddy v. Ramesh
Ranganathan, 2022 SCC OnLine SC 1061, decided
on August 18, 2022, the Supreme Court held:–
“13. The ingredients of the offence of cheating are
spelt out in Section 415 of the IPC. Section 415 is
extracted below:
“415. Cheating – Whoever, by deceiving any
person, fraudulently or dishonestly induces the
person so deceived to deliver any property to any
person, or to consent that any person shall retain
any property, or intentionally induces the person so
deceived to do or omit to do anything which he
Page 12would not do or omit if he were not so deceived, and
which act or omission causes or is likely to cause
damage or harm to that person in body, mind,
reputation or property, is said to “cheat”.
Explanation – A dishonest concealment of facts is a
deception within the meaning of this section.”
14. The ingredients of the offence under Section 415
emerge from a textual reading. Firstly, to constitute
cheating, a person must deceive another. Secondly,
by doing so the former must induce the person so
deceived to (i) deliver any property to any person; or
(ii) to consent that any person shall retain any
property; or (iii) intentionally induce the person so
deceived to do or omit to do anything which he
would not do or omit if he were not so deceived and
such an act or omission must cause or be likely to
cause damage or harm to that person in body, mind,
reputation or property.
15. Section 420 deals with cheating and dishonestly
inducing delivery of property. It reads as follows:
“420. Cheating and dishonestly inducing
delivery of property – Whoever cheats and thereby
dishonestly induces the person deceived to deliver
any property to any person, or to make, alter or
destroy the whole or any part of a valuable security,
or anything which is signed or sealed, and which is
capable of being capable of converting into a
valuable security, shall be punished with
imprisonment of either description for a term which
may extend to seven years, and shall also be liable
to fine.”
16. In Hridaya Ranjan Prasad Verma v. State of
Bihar, a two-judge bench of this Court interpreted
sections 415 and 420 of IPC to hold that fraudulent
or dishonest intention is a precondition to constitute
the offence of cheating. The relevant extract from the
judgment reads thus:
“14. On a reading of the section it is manifest that in
the definition there are set forth two separate
classes of acts which the person deceived may be
induced to do. In the first place he may be induced
fraudulently or dishonestly to deliver any property to
any person. The second class of acts set forth in the
section is the doing or omitting to do anything which
Page 13the person deceived would not do or omit to do if he
were not so deceived. In the first class of cases the
inducing must be fraudulent or dishonest. In the
second class of acts, the inducing must be
intentional but not fraudulent or dishonest.
15. In determining the question it has to be kept in
mind that the distinction between mere breach of
contract and the offence of cheating is a fine one. It
depends upon the intention of the accused at the
time of inducement which may be judged by his
subsequent conduct but for this subsequent conduct
is not the sole test. 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, that is the time when the offence
is said to have been committed. Therefore it is
the intention which is the gist of the offence.
To hold a person guilty of cheating it is
necessary to show that he had fraudulent or
dishonest intention at the time of making the
promise. From his mere failure to keep up
promise subsequently such a culpable intention
right at the beginning, that is, when he made
the promise cannot be presumed.”
(emphasis supplied)
17. In Dalip Kaur v. Jagnar Singh a two-judge bench
of this Court held that a dispute arising out of a
breach of contract would not amount to an offence of
cheating under section 415 and 420. The relevant
extract is as follows:
“9. The ingredients of Section 420 of the Penal
Code are:
“(i) Deception of any persons;
(ii) Fraudulently or dishonestly inducing any person
to deliver any property; or
(iii) To consent that any person shall retain any
property and finally intentionally inducing that
person to do or omit to do anything which he would
not do or omit.”
10. The High Court, therefore, should have posed a
question as to whether any act of inducement on the
part of the appellant has been raised by the second
Page 14
respondent and whether the appellant had an
intention to cheat him from the very inception. If the
dispute between the parties was essentially a
civil dispute resulting from a breach of
contract on the part of the appellants by non-
refunding the amount of advance the same
would not constitute an offence of cheating.
Similar is the legal position in respect of an
offence of criminal breach of trust having
regard to its definition contained in
Section 405 of the Penal Code. (See Ajay
Mitra v. State of M.P. [(2003) 3 SCC 11 : 2003 SCC
(Cri) 703])”
(emphasis supplied)
18. Applying the above principles, the ingredients of
Sections 415 and 420 are not made out in the
present case. The grievance of the first respondent
arises from the termination of his services at the
hospital. The allegations indicate that there was an
improper billing in respect of the surgical services
which were rendered by the complainant at the
hospital. At the most, the allegations allude to a
breach of terms of the Consultancy Agreement by
the Appellant, which is essentially in the nature of a
civil dispute.
19. The allegations in the complaint are conspicuous
by the absence of any reference to the practice of
any deception or dishonest intention on behalf of the
Appellant. Likewise, there is no allegation that the
complainant was as a consequence induced to
deliver any property or to consent that any person
shall retain any property or that he was deceived to
do or omit to do anything which he would have not
done or omitted to do if he was not so deceived. The
conspicuous aspect of the complaint which needs to
be emphasized is that the ingredients of the offence
of cheating are absent in the averments as they
stand.
20. Section 405 of the IPC deals with criminal
breach of trust and reads as follows:
“405. Criminal breach of trust – Whoever, being
in any manner entrusted with property, or with any
dominion over property, dishonestly misappropriates
or converts to his own use that property, or
dishonestly uses or disposes of that property in any
Page 15direction of law prescribing the mode in which such
trust is to be discharged, or of any legal contract,
express or implied, which he has made touching the
discharge of such trust, or willfully suffers any other
person so to do, commits “criminal breach of trust”.”
21. The offence of criminal breach of trust contains
two ingredients : (i) entrusting any person with
property, or with any dominion over property; and (ii)
the person entrusted dishonestly misappropriates or
converts to his own use that property to the
detriment of the person who entrusted it.
22. In Anwar Chand Sab Nanadikar v. State of
Karnataka a two-judge bench restated the essential
ingredients of the offence of criminal breach of trust
in the following words:
“7. The basic requirement to bring home the
accusations under Section 405 are the requirements
to prove conjointly (1) entrustment, and (2) whether
the accused was actuated by the dishonest intention
or not misappropriated it or converted it to his own
use to the detriment of the persons who entrusted it.
As the question of intention is not a matter of direct
proof, certain broad tests are envisaged which
would generally afford useful guidance in deciding
whether in a particular case the accused had mens
rea for the crime.”
23. In Vijay Kumar Ghai v. State of West
Bengal two-judge bench held that entrustment of
property is pivotal to constitute an offence under
section 405 of the IPC. The relevant extract reads as
follows:
“28. “Entrustment” of property under Section 405 of
the Penal Code, 1860 is pivotal to constitute an
offence under this. The words used are, “in any
manner entrusted with property”. So, it extends to
entrustments of all kinds whether to clerks,
servants, business partners or other persons,
provided they are holding a position of “trust”. A
person who dishonestly misappropriates property
entrusted to them contrary to the terms of an
obligation imposed is liable for a criminal breach of
trust and is punished under Section 406 of the Penal
Code.”
Page 16
24. None of the ingredients of the offence of criminal
breach of trust have been demonstrated on the
allegations in the complaint as they stand. The first
respondent alleges that the Appellant caused breach
of trust by issuing grossly irregular bills, which
adversely affected his professional fees. However,
an alleged breach of the contractual terms does not
ipso facto constitute the offence of the criminal
breach of trust without there being a clear case of
entrustment. No element of entrustment has been
prima facie established based on the facts and
circumstances of the present matter. Therefore, the
ingredients of the offence of criminal breach of trust
are ex facie not made out on the basis of the
complaint as it stands.”
iii) In Vijay Kumar Ghai v. State of West
Bengal, (2022) 7 SCC 124, decided on March 22,
2022, the Supreme Court held:–
“24. This Court in G. Sagar Suri v. State of U.P. [G.
Sagar Suri v. State of U.P., (2000) 2 SCC 636 : 2000
SCC (Cri) 513] observed that it is the duty and
obligation of the criminal court to exercise a great
deal of caution in issuing the process, particularly
when matters are essentially of civil nature.
25. This Court has time and again cautioned about
converting purely civil disputes into criminal cases.
This Court in Indian Oil Corpn. [Indian Oil
Corpn. v. NEPC India Ltd., (2006) 6 SCC 736 : (2006)
3 SCC (Cri) 188] noticed the prevalent impression
that civil law remedies are time consuming and do
not adequately protect the interests of
lenders/creditors. The Court further observed
that: (Indian Oil Corpn. case [Indian Oil
Corpn. v. NEPC India Ltd., (2006) 6 SCC 736 : (2006)
3 SCC (Cri) 188], SCC p. 749, para 13)
“13. … Any effort to settle civil disputes and claims,
which do not involve any criminal offence, by
applying pressure through criminal prosecution
should be deprecated and discouraged.”
27. Section 405 IPC defines “criminal breach of
trust” which reads as under:
“405. Criminal breach of trust.–Whoever, being
in any manner entrusted with property, or with any
dominion over property, dishonestly misappropriates
Page 17or converts to his own use that property, or
dishonestly uses or disposes of that property in
violation of any direction of law prescribing the mode
in which such trust is to be discharged, or of any
legal contract, express or implied, which he has
made touching the discharge of such trust, or
wilfully suffers any other person so to do, commits
“criminal breach of trust”.”
The essential ingredients of the offence of criminal
breach of trust are:
(1) The accused must be entrusted with the property
or with dominion over it,
(2) The person so entrusted must use that property,
or;
(3) The accused must dishonestly use or dispose of
that property or wilfully suffer any other person to
do so in violation,
(a) of any direction of law prescribing the mode in
which such trust is to be discharged, or;
(b) of any legal contract made touching the discharge
of such trust.
28. “Entrustment” of property under Section 405 of
the Penal Code, 1860 is pivotal to constitute an
offence under this. The words used are, “in any
manner entrusted with property”. So, it extends to
entrustments of all kinds whether to clerks,
servants, business partners or other persons,
provided they are holding a position of “trust”. A
person who dishonestly misappropriates property
entrusted to them contrary to the terms of an
obligation imposed is liable for a criminal breach of
trust and is punished under Section 406 of the Penal
Code.
29. The definition in the section does not restrict the
property to movables or immovables alone. This
Court in R.K. Dalmia v. Delhi Admn. [R.K.
Dalmia v. Delhi Admn., (1963) 1 SCR 253 : AIR 1962
SC 1821] held that the word “property” is used in
the Code in a much wider sense than the expression
“movable property”. There is no good reason to
restrict the meaning of the word “property” to
movable property only when it is used without any
qualification in Section 405.
Page 18
30. In Sudhir Shantilal Mehta v. CBI [Sudhir
Shantilal Mehta v. CBI, (2009) 8 SCC 1 : (2009) 3
SCC (Cri) 646] it was observed that the act of
criminal breach of trust would, inter alia mean using
or disposing of the property by a person who is
entrusted with or has otherwise dominion thereover.
Such an act must not only be done dishonestly but
also in violation of any direction of law or any
contract express or implied relating to carrying out
the trust.
31. Section 415 IPC defines “cheating” which reads
as under:
“415. Cheating.–Whoever, by deceiving any
person, fraudulently or dishonestly induces the
person so deceived to deliver any property to any
person, or to consent that any person shall retain
any property, or intentionally induces the person so
deceived to do or omit to do anything which he
would not do or omit if he were not so deceived, and
which act or omission causes or is likely to cause
damage or harm to that person in body, mind,
reputation or property, is said to “cheat”.”
The essential ingredients of the offence of cheating
are:
1. Deception of any person
2.(a) Fraudulently or dishonestly inducing that
person–
(i) to deliver any property to any person; or
(ii) to consent that any person shall retain any
property; or
(b) intentionally inducing that person to do or omit to
do anything which he would not do or omit if he
were no so deceived, and which act or omission
causes or is likely to cause damage or harm to that
person in body, mind, reputation or property.
32. A fraudulent or dishonest inducement is an
essential ingredient of the offence. A person who
dishonestly induces another person to deliver any
property is liable for the offence of cheating.
33. Section 420 IPC defines “cheating and
dishonestly inducing delivery of property” which
reads as under:
Page 19
“420. Cheating and dishonestly inducing
delivery of property.–Whoever cheats and
thereby dishonestly induces the person deceived to
deliver any property to any person, or to make, alter
or destroy the whole or any part of a valuable
security, or anything which is signed or sealed, and
which is capable of being converted into a valuable
security, shall be punished with imprisonment of
either description for a term which may extend to
seven years, and shall also be liable to fine.”
34. Section 420 IPC is a serious form of cheating
that includes inducement (to lead or move someone
to happen) in terms of delivery of property as well as
valuable securities. This section is also applicable to
matters where the destruction of the property is
caused by the way of cheating or inducement.
Punishment for cheating is provided under this
section which may extend to 7 years and also
makes the person liable to fine.
35. To establish the offence of cheating in inducing
the delivery of property, the following ingredients
need to be proved:
(i) The representation made by the person was false.
(ii) The accused had prior knowledge that the
representation he made was false.
(iii) The accused made false representation with
dishonest intention in order to deceive the person to
whom it was made.
(iv) The act where the accused induced the person to
deliver the property or to perform or to abstain from
any act which the person would have not done or
had otherwise committed.
36. As observed and held by this Court in R.K.
Vijayasarathy v. Sudha Seetharam [R.K.
Vijayasarathy v. Sudha Seetharam, (2019) 16 SCC
739 : (2020) 2 SCC (Cri) 454], the ingredients to
constitute an offence under Section 420 are as
follows:
(i) a person must commit the offence of cheating
under Section 415; and
(ii) the person cheated must be dishonestly induced
to:
Page 20
(a) deliver property to any person; or
(b) make, alter or destroy valuable security or
anything signed or sealed and capable of being
converted into valuable security. Thus, cheating is
an essential ingredient for an act to constitute an
offence under Section 420 IPC.
37. The following observation made by this Court
in Uma Shankar Gopalika v. State of Bihar [Uma
Shankar Gopalika v. State of Bihar, (2005) 10 SCC
336 : (2006) 2 SCC (Cri) 49] with almost similar facts
and circumstances may be relevant to note at this
stage : (SCC pp. 338-39, paras 6-7)
“6. Now the question to be examined by us is as to
whether on the facts disclosed in the petition of the
complaint any criminal offence whatsoever is made
out much less offences under Sections 420/120-
BIPC. The only allegation in the complaint petition
against the accused persons is that they assured
the complainant that when they receive the
insurance claim amounting to Rs. 4,20,000, they
would pay a sum of Rs. 2,60,000 to the complainant
out of that but the same has never been paid. … It
was pointed out on behalf of the complainant that
the accused fraudulently persuaded the complainant
to agree so that the accused persons may take steps
for moving the consumer forum in relation to the
claim of Rs. 4,20,000. It is well settled that every
breach of contract would not give rise to an offence
of cheating and only in those cases breach of
contract would amount to cheating where there was
any deception played at the very inception. If the
intention to cheat has developed later on, the same
cannot amount to cheating. In the present case, it
has nowhere been stated that at the very inception
that there was intention on behalf of the accused
persons to cheat which is a condition precedent for
an offence under Section 420 IPC.
7. In our view petition of complaint does not disclose
any criminal offence at all much less any offence
either under Section 420 or Section 120-BIPC and
the present case is a case of purely civil dispute
between the parties for which remedy lies before a
civil court by filing a properly constituted suit. In our
opinion, in view of these facts allowing the police
investigation to continue would amount to an abuse
Page 21
of the process of court and to prevent the same it
was just and expedient for the High Court to quash
the same by exercising the powers under
Section 482 Cr. P.C. which it has erroneously
refused.”
38. There can be no doubt that a mere breach of
contract is not in itself a criminal offence and gives
rise to the civil liability of damages. However, as
held by this Court in Hridaya Ranjan Prasad
Verma v. State of Bihar [Hridaya Ranjan Prasad
Verma v. State of Bihar, (2000) 4 SCC 168 : 2000
SCC (Cri) 786], the distinction between mere breach
of contract and cheating, which is criminal offence,
is a fine one. While breach of contract cannot give
rise to criminal prosecution for cheating, fraudulent
or dishonest intention is the basis of the offence of
cheating. In the case at hand, complaint filed by
Respondent 2 does not disclose dishonest or
fraudulent intention of the appellants.
39. In Vesa Holdings (P) Ltd. v. State of Kerala [Vesa
Holdings (P) Ltd. v. State of Kerala, (2015) 8 SCC
293 : (2015) 3 SCC (Cri) 498], this Court made the
following observation : (SCC pp. 297-98, para 13)
“13. It is true that a given set of facts may make out
a civil wrong as also a criminal offence and only
because a civil remedy may be available to the
complainant that itself cannot be ground to quash a
criminal proceeding. The real test is whether the
allegations in the complaint disclose the criminal
offence of cheating or not. In the present case, there
is nothing to show that at the very inception there
was any intention on behalf of the accused persons
to cheat which is a condition precedent for an
offence under Section 420 IPC. In our view, the
complaint does not disclose any criminal offence at
all. Criminal proceedings should not be encouraged
when it is found to be mala fide or otherwise an
abuse of the process of the court. The superior courts
while exercising this power should also strive to
serve the ends of justice. In our opinion, in view of
these facts allowing the police investigation to
continue would amount to an abuse of the process of
the court and the High Court
committed [Maniprasad v. State of Kerala, 2011 SCC
OnLine Ker 4251] an error in refusing to exercise the
Page 22
power under Section 482 Cr. P.C. to quash the
proceedings.”
40. Having gone through the complaint/FIR and
even the charge-sheet, it cannot be said that the
averments in the FIR and the allegations in the
complaint against the appellant constitute an offence
under Sections 405 and 420, IPC, 1860. Even in a
case where allegations are made in regard to failure
on the part of the accused to keep his promise, in the
absence of a culpable intention at the time of making
promise being absent, no offence under
Section 420 IPC can be said to have been made out.
In the instant case, there is no material to indicate
that the appellants had any mala fide intention
against the respondent which is clearly deductible
from the MoU dated 20-8-2009 arrived at between
the parties.”
iv) Vivo Communication Device (P) Ltd. v. State of
W.B., 2023 SCC OnLine Cal 49 (Para 11, 18, 19, 37).
v) Jully Techi v. State of W.B., 2019 SCC OnLine Cal
588 (Para 5, 6, 17, 18, 22).
vi) Anand Kumar Mohatta v. State (NCT of Delhi),
Department of Home, (2019) 11 SCC 706.
29. The following judgments have been relied
upon by the opposite party/complainant:–
i) In Soumajit Bag v. State of West Bengal, 2023
SCC OnLine Cal 1577, the Court came to the finding
that there is prima materials on record making out a
criminal offence.
ii) Trisuns Chemical Industry v. Rajesh
Agarwal, (1999) 8 SCC 686.
“A. Criminal Procedure Code, 1973 – S. 482 –
Quashing of complaint or FIR – Cheating alleged –
criminal prosecution, held, cannot be thwarted
merely because civil proceedings are also
maintainable – Existence of an arbitration clause in
the contract for supply of goods between appellant
Company and another company, held, not a
sufficient ground for quashing the complaint filed by
the appellant against the supplier company alleging
cheating by supplying inferior goods – Penal Code,
1860, Ss. 415 and 420 – Arbitration – Generally –
Page 23
Possibility of cannot thwart criminal proceedings –
Arbitrator not competent to adjudge an offence.”
iii) S.W. Palanitkar v. State of Bihar, (2002) 1 SCC
241.
“E. Penal Code, 1860 – Ss. 405, 406 and 420 –
Prosecution under – Agreement providing for remedy
of arbitration no bar – Agreement in relation to
commercial transaction containing an arbitration
clause – Criminal Prosecution for breach of such
contract, if such breach even prima facie constituted
a criminal offence, held, not barred merely because
of the presence of the arbitration clause in the
agreement – Criminal Procedure Code, 1973,
Ss. 200, 203 and 204 – Arbitration and Conciliation
Act, 1996, Ss. 7 and 8.”
Rest of the judgment divide as to when an offence
under Sections 406/420 IPC is made out.
iv) Rajesh Bajaj v. State NCT of Delhi, (1999) 3 SCC
259.
“B. Criminal Procedure Code, 1973 – S. 2(d) –
“Complaint” – Not essential that it should
verbatim contain all the ingredients of the
offence alleged so long as the factual
foundation for the offence has been
laid…………….
It is not necessary that a complainant should
verbatim reproduce in the body of his complaint all
the ingredients of the offence he is alleging. Nor is it
necessary that the complainant should state in so
many words that the intention of the accused was
dishonest or fraudulent. Splitting up of the definition
into different components of the offence to make a
meticulous scrutiny, whether all the ingredients
have been precisely spelled out in the complaint, is
not the need at this stage. If factual foundation for
the offence has been laid in the complaint the court
should not hasten to quash criminal proceedings
during investigation stage merely on the premise
that one or two ingredients have not been stated
with details. For quashing an FIR (a step which is
permitted only in extremely rare cases) the
information in the complaint must be so bereft of
even the basic facts which are absolutely necessary
for making out the offence.
Page 24
(Para 9)
It may be that the facts narrated in the present
complaint would as well reveal a commercial
transaction or money transaction. But that is hardly
a reason for holding that the offence of cheating
would elude from such a transaction. In fact, many a
cheatings were committed in the course of
commercial and also money transactions.
(Para 10)
The crux of the postulate is the intention of the
person who induces the victim of his representation
and not the nature of the transaction which would
become decisive in discerning whether there was
commission of offence or not. The complainant has
stated in the body of the complaint that he was
induced to believe that the respondent would honour
payment on receipt of invoices, and that the
complainant realised later that the intentions of the
respondent were not clear. He also mentioned that
the respondent after receiving the goods had sold
then to others and still he did not pay the money.
Such averments would prima facie make out a case
for investigation by the authorities.
(Para 11)
In the present case the High Court seems to have
adopted a strictly hypertechnical approach and
sieved the complaint through a cullendar of finest
gauzes for testing the ingredients under
Section 415 IPC. Such an endeavour may be
justified during trial, but certainly not during the
stage of investigation. At any rate, it is too
premature a stage for the High Court to step in and
stall the investigation by declaring that it is a
commercial transaction simpliciter wherein no
semblance of criminal offence is involved.
(Para 12)
State of Haryana v. Bhajan Lal, 1992 Supp (1) SCC
335 : 1992 SCC (Cri) 426, relied on.”
v) Indian Oil Corpn. v. NEPC India Ltd., (2006) 6 SCC
736.
“A. Criminal Procedure Code, 1973 S. 482 –
Petition under S. 482 Cr. P.C. for quashing
criminal complaint alleging commission of
Page 25various offences under Penal Code – Disputes
arising from breach of contract – Civil remedy
available and availed of – Remedy under
criminal law, held not barred if the allegations
disclose a criminal offence Allegations
contained in the complaint, taken on their face
value, if, on facts, constituted offences
under Penal Code – Maintainability of the
petition under S. 482 However, current practice
of misuse of criminal process to put undue
pressure in civil disputes deprecated – Penal
Code, 1860, Ss. 378, 403, 405, 415 and 425.”
vi) State of M.P. v. Awadh Kishore Gupta, (2004) 1
SCC 691 : Para – 8, 11, 13.
30. Thus with the judgments relied upon by both
sides, the principle guiding such cases remains the
same.
31. In the present case admittedly there were
agreements between the parties (companies) since
the year 2014. The present case has been initiated
in 2018.
32. As such it is clear that the parties had no
disputes during their initial period of
contract. Thus there are no materials to support the
contention of the opposite party that the petitioner
had intention to deceive/cheat right from the
inception of the agreement.
33. The case of entrustment also is absent as the
transaction between the parties was only on the
basis of the agreements, for letting out their
premises (the petitioner company’s).
34. In A. Ayyasamy v. A. Paramasivam, (2016) 10
SCC 386 : AIR 2016 SC 4675, decided on
4th October, 2016, the Supreme Court held:–
“The two courts below have preferred to adopt the
dicta laid down in N. Radhakrishnan while
dismissing the application of the appellant under
Section 8 of the Act holding that as there are serious
allegations as to fraud and malpractices committed
by the appellant in respect of the finances of the
partnership firm and the case does not warrant to be
tried and decided by the arbitrator and a civil court
would be more competent which has the requisite
means to decide such complicated matter. In this
Page 26backdrop, it would be appropriate to revisit the
law on this aspect before adverting to the
question as to whether the approach of the
High Court was correct in following the
judgment in N. Radhakrishnan in the instant
case.
In this behalf, we have to begin our discussion with
the pertinent observation that insofar as
the Arbitration and Conciliation Act, 1996 is
concerned, it does not make any specific provision
excluding any category of disputes terming them to
be non-arbitrable. Number of pronouncements have
been rendered laying down the scope of judicial
intervention, in cases where there is an arbitration
clause, with clear and unambiguous message that in
such an event judicial intervention would be very
limited and minimal. However, the Act contains
provisions for challenging the arbitral awards. These
provisions are Section 34 and Section 48 of the Act.
Section 34(2)(b) and Section 48(2) of the Act, inter
alia, provide that an arbitral award may be set
aside if the Court finds that the „subject matter of the
dispute is not capable of settlement by arbitration
under the law for the time being in force.‟ Even when
such a provision is interpreted, what is to be shown
is that there is a law which makes subject matter of
a dispute incapable of settlement by arbitration. The
aforesaid position in law has been culled out from
the combined readings of Sections 5, 16 and 34 of
the Act. When arbitration proceedings are triggered
by one of the parties because of the existence of an
arbitration agreement between them, Section 5 of the
Act, by a non-obstante clause, provides a clear
message that there should not be any judicial
intervention at that stage scuttling the arbitration
proceedings. Even if the other party has objection to
initiation of such arbitration proceedings on the
ground that there is no arbitration agreement or
validity of the arbitration clause or the competence of
the Arbitral Tribunal is challenged, Section 16, in
clear terms, stipulates that such objections are to be
raised before the Arbitral Tribunal itself which is to
decide, in the first instance, whether there is any
substance in questioning the validity of the
arbitration proceedings on any of the aforesaid
grounds. It follows that the party is not allowed to
Page 27rush to the Court for an adjudication. Even after the
Arbitral Tribunal rules on its jurisdiction and decides
that arbitration clause is valid or the Arbitral
Tribunal is legally constituted, the aggrieved party
has to wait till the final award is pronounced and
only at that stage the aggrieved party is allowed to
raise such objection before the Court in proceedings
under Section 34 of the Act while challenging the
arbitral award. The aforesaid scheme of the Act is
succinctly brought out in the following discussion by
this Court in Kvaerner Cementation India
Ltd. v. Bajranglal Agarwal [3]:
“3. There cannot be any dispute that in the absence
of any arbitration clause in the agreement, no
dispute could be referred for arbitration to an
Arbitral Tribunal. But, bearing in mind the very
object with which the Arbitration and Conciliation
Act, 1996 has been enacted and the provisions
thereof contained in Section 16 conferring the power
on the Arbitral Tribunal to rule on its own
jurisdiction, including ruling on any objection with
respect to existence or validity of the arbitration
agreement, we have no doubt in our mind that the
civil court cannot have jurisdiction to go into that
question.
4. A bare reading of Section 16 makes it explicitly
clear that the Arbitral Tribunal has the power to rule
on its own jurisdiction even when any objection with
respect to existence or validity of the arbitration
agreement is raised, and a conjoint reading of sub-
sections (2), (4) and (6) of Section 16 would make it
clear that such a decision would be amenable to be
assailed within the ambit of Section 34 of the Act.
5. In this view of the matter, we see no infirmity in
the impugned order so as to be interfered with by
this Court. The petitioner, who is a party to the
arbitral proceedings may raise the question of
jurisdiction of the arbitrator as well as the objection
on the ground of nonexistence of any arbitration
agreement in the so-called dispute in question, and
on such an objection being raised, the arbitrator
would do well in disposing of the same as a
preliminary issue so that it may not be necessary to
go into the entire gamut of arbitration proceedings.”
Aforesaid is the position when Arbitral Tribunal is
Page 28
constituted at the instance of one of the parties and
other party takes up the position that such
proceedings are not valid in law.
What would be the position in case a suit is filed by
the plaintiff and in the said suit the defendant files
an application under Section 8 of the Act questioning
the maintainability of the suit on the ground that
parties had agreed to settle the disputes through the
means of arbitration having regard to the existence
of an arbitration agreement between them?
Obviously, in such a case, the Court is to pronounce
upon arbitrability or non-arbitrability of the disputes.
In the instant case, there is no dispute about the
arbitration agreement inasmuch as there is a
specific arbitration clause in the partnership deed.
However, the question is as to whether the dispute
raised by the respondent in the suit is incapable of
settlement through arbitration. As pointed out above,
the Act does not make any provision excluding any
category of disputes treating them as non-arbitrable.
Notwithstanding the above, the Courts have held
that certain kinds of disputes may not be capable of
adjudication through the means of arbitration. The
Courts have held that certain disputes like criminal
offences of a public nature, disputes arising out of
illegal agreements and disputes relating to status,
such as divorce, cannot be referred to arbitration.
Following categories of disputes are generally
treated as non-arbitrable[4]:
(i) patent, trademarks and copyright;
(ii) anti-trust/competition laws;
(iii) insolvency/winding up;
(iv) bribery/corruption;
(v) fraud;
(vi) criminal matters.
Fraud is one such category spelled out by the
decisions of this Court where disputes would be
considered as non-arbitrable.
„Fraud‟ is a knowing misrepresentation of the truth
or concealment of a material fact to induce another
to act to his detriment. Fraud can be of diffeent
forms and hues. Its ingredients are an intention to
Page 29
deceive, use of unfair means, deliberate concealment
of material facts, or abuse of position of confidence.
The Black’s Law Dictionary defines „fraud‟ as a
concealment or false representation through a
statement or conduct that injures another who relies
on it[5]. However, the moot question here which has
to be addressed would be as to whether mere
allegation of fraud by one party against the other
would be sufficient to exclude the subject matter of
dispute from arbitration and decision thereof
necessary by the civil court.
In Abdul Kadir Shamsuddin Bubere v. Madhav
Prabhakar Oak [6], serious allegations of fraud were
held by the Court to be a sufficient ground for not
making a reference to arbitration. Reliance in that
regard was placed by the Court on a decision of the
Chancery Division in Russell v. Russell [7]. That was
a case where a notice for the dissolution of a
partnership was issued by one of the partners, upon
which the other partner brought an action alleging
various charges of fraud, and sought a declaration
that the notice of dissolution was void. The partner
who was charged with fraud sought reference of the
disputes to arbitration. The Court held that in a case
where fraud is charged, the Court will in general
refuse to send the dispute to arbitration. But where
the objection to arbitration is by a party charging the
fraud, the Court will not necessarily accede to it and
would never do so unless a prima facie case of fraud
is proved.
The aforesaid judgment was followed by this Court
in N. Radhakrishnan while considering the matter
under the present Act. In that case, the respondent
had instituted a suit against the appellant, upon
which the appellant filed an application under
Section 8 of the Act. The applicant made serious
allegations against the respondents of having
committed malpractices in the account books, and
manipulation of the finances of the partnership firm.
This Court held that such a case cannot be properly
dealt with by the arbitrator, and ought to be settled
by the Court, through detailed evidence led by both
parties.
When the case involves serious allegations of fraud,
the dicta contained in the aforesaid judgments
Page 30
would be understandable. However, at the same
time, mere allegation of fraud in the pleadings by
one party against the other cannot be a ground to
hold that the matter is incapable of settlement by
arbitration and should be decided by the civil court.
The allegations of fraud should be such that not only
these allegations are serious that in normal course
these may even constitute criminal offence, they are
also complex in nature and the decision on these
issues demand extensive evidence for which civil
court should appear to be more appropriate forum
than the Arbitral Tribunal. Otherwise, it may become
a convenient mode of avoiding the process of
arbitration by simply using the device of making
allegations of fraud and pleading that issue of fraud
needs to be decided by the civil court. The judgment
in N. Radhakrishnan does not touch upon this
aspect and said decision is rendered after finding
that allegations of fraud were of serious nature.
As noted above, in Swiss Timing Ltd. case, single
Judge of this Court while dealing with the same
issue in an application under Section 11 of the Act
treated the judgment in N. Radhakrishnan as per
incuriam by referring to the other judgments in the
case of P. Anand Gajapathi Raju v. P.V.G. Raju
[8] and Hindustan Petroleum Corpn. Ltd. v. Pinkcity
Midway Petroleums [9]. Two reasons were given in
support which can be found in para 21 of the
judgment which makes the following reading:
“21. This judgment was not even brought to the note
of the Court in N. Radhakrishnan’s case. In my
opinion, judgment in N. Radhakrishnan’s case is per
incuriam on two grounds; Firstly, the judgment
in Hindustan Petroleum Corpn. Ltd., though referred
has not been distinguished but at the same time is
not followed also. The judgment in P. Anand
Gajapathi Raju Was not even brought to the notice of
this Court. Therefore, the same has neither been
followed nor considered. Secondly, the provision
contained in Section 16 of the Arbitration Act, 1996
were also not brought to the notice by this Court.
Therefore, in my opinion, the judgment in N.
Radhakrishnan does not lay down the correct law
and cannot be relied upon.” We shall revert to the
question of per incuriam at a later stage. At this
juncture, we may point out that the issue has been
Page 31revisited by another Division Bench of this Court
in Booz Allen & Hamilton Inc. v. SBI Home Finance
Limited [10]. In this case, one of the questions that
had arisen for determination was, in the context of
Section 8 of the Act, as to whether the subject matter
of the suit was „arbitrable‟ i.e. capable of being
adjudicated by a private forum (Arbitral Tribunal). In
this context, the Court carried out detailed
discussion on the term „arbitrability‟ by pointing out
three facets thereof, viz.:
1) whether the disputes are capable of adjudication
and settlement by arbitration?
2) whether the disputes are covered by the
arbitration agreement?
3) whether the parties have referred the disputes to
arbitration?
As we are concerned with the first facet of the
arbitrability of dispute, on this aspect the Court
pointed out that in those cases where the subject
matter falls exclusively within the domain of public
fora, viz. the Courts, such disputes would be non-
arbitrable and cannot be decided by the Arbitral
Tribunal but by the Courts alone. The justification
and rationale given for adjudicating such disputes
through the process of Courts, i.e. public fora, and
not by Arbitral Tribunals, which is a private forum,
is given by the court in the following manner:
“35. The Arbitral Tribunals are private fora chosen
voluntarily by the parties to the dispute, to
adjudicate their disputes in place of courts and
tribunals which are public fora constituted under the
laws of the country. Every civil or commercial
dispute, either contractual or non-contractual, which
can be decided by a court, is in principle capable of
being adjudicated and resolved by arbitration unless
the jurisdiction of the Arbitral Tribunals is excluded
either expressly or by necessary implication.
Adjudication of certain categories of proceedings are
reserved by the legislature exclusively for public fora
as a matter of public policy. Certain other categories
of cases, though not expressly reserved for
adjudication by public fora (courts and tribunals),
may by necessary implication stand excluded from
the purview of private fora. Consequently, where the
cause/dispute is inarbitrable, the court where a suit
Page 32
is pending, will refuse to refer the parties to
arbitration, under Section 8 of the Act, even if the
parties might have agreed upon arbitration as the
forum for settlement of such disputes.
36. The well-recognised examples of non-arbitrable
disputes are : (i) disputes relating to rights and
liabilities which give rise to or arise out of criminal
offences; (ii) matrimonial disputes relating to divorce,
judicial separation, restitution of conjugal rights,
child custody; (iii) guardianship matters; (iv)
insolvency and winding-up matters; (v) testamentary
matters (grant of probate, letters of administration
and succession certificate); and (vi) eviction or
tenancy matters governed by special statutes where
the tenant enjoys statutory protection against
eviction and only the specified courts are conferred
jurisdiction to grant eviction or decide the disputes.
37. It may be noticed that the cases referred to
above relate to actions in rem. A right in rem is a
right exercisable against the world at large, as
contrasted from a right in personam which is an
interest protected solely against specific individuals.
Actions in personam refer to actions determining the
rights and interests of the parties themselves in the
subject-matter of the case, whereas actions in rem
refer to actions determining the title to property and
the rights of the parties, not merely among
themselves but also against all persons at any time
claiming an interest in that property.
Correspondingly, a judgment in personam refers to a
judgment against a person as distinguished from a
judgment against a thing, right or status and a
judgment in rem refers to a judgment that
determines the status or condition of property which
operates directly on the property itself. (Vide Black’s
Law Dictionary.)
38. Generally and traditionally all disputes relating
to rights in personam are considered to be amenable
to arbitration; and all disputes relating to rights in
rem are required to be adjudicated by courts and
public tribunals, being unsuited for private
arbitration. This is not however a rigid or inflexible
rule. Disputes relating to subordinate rights in
personam arising from rights in rem have always
been considered to be arbitrable.” The Law
Page 33
Commission has taken note of the fact that there is
divergence of views between the different High
Courts where two views have been expressed, one
is in favor of the civil court having jurisdiction in
cases of serious fraud and the other view
encompasses that even in cases of serious fraud, the
Arbitral Tribunal will rule on its own jurisdiction. It
may be pertinent here to reproduce the observations
of the Law Commission as contained in paragraphs
50 & 51 of the 246th Law Commission Report, which
are as under:
“-50. The issue of arbitrability of fraud has arisen on
numerous occasions and there exist conflicting
decisions of the Apex Court on this issue. While it
has been held in Bharat Rasiklal v. Gautam
Rasiklal, (2012) 2 SCC 144 that when fraud is of
such a nature that it vitiates the arbitration
agreement, it is for the Court to decide on the
validity of the arbitration agreement by determining
the issue of fraud, there exists two parallel lines of
judgments on the issue of whether an issue of fraud
is arbitrable.
In this context, a 2 judge bench of the Supreme
Court, while adjudicating on an application under
section 8 of the Act, in Radhakrishnan v. Maestro
Engineers, (2010) 1 SCC 72 held that an issue of 28
fraud is not arbitrable. This decision was ostensibly
based on the decision of the three judge bench of the
Supreme Court in Abdul Qadir v. Madhav
Prabhakar, AIR 1962 SC 406. However, the said 3
judge bench decision (which was based on the
finding in Russel v. Russel [[L.R.] 14 Ch.D. 471]) is
only an authority for the proposition that a party
against whom an allegation of fraud is made in a
public forum, has a right to defend himself in that
public forum. Yet, following Radhakrishnan, it
appears that issues of fraud are not arbitrable.
51. A distinction has also been made by certain High
Courts between a serious issue of fraud and a mere
allegation of fraud and the former has been held to
be not arbitrable (See Ivory Properties and Hotels
Private Ltd. v. Nusli Neville Wadia, (2011) 2 Arb LR
479 (Bom); C.S. Ravishankar v. C.K.
Ravishankar, (2011) 6 Kant LJ 417). The Supreme
Court in Meguin GMBH v. Nandan Petrochem
Page 34
Ltd., 2007 (5) R.A.J 239 (SC), in the context of an
application filed under section 11 has gone ahead
and appointed an arbitrator even though issues of
fraud were involved. Recently, the Supreme Court in
its judgment in Swiss Timing Ltd. v. Organising
Committee, Arb. Pet. No. 34/2013 dated
28.05.2014, in a similar case of exercising
jurisdiction under section 11, held that the judgment
in Radhakrishnan is per incuriam and, therefore, not
good law.” A perusal of the aforesaid two
paragraphs brings into fore that the Law
Commission has recognized that in cases of serious
fraud, courts have entertained civil suits. Secondly,
it has tried to make a distinction in cases where
there are allegations of serious fraud and fraud
simplicitor. It, thus, follows that those cases
where there are serious allegations of fraud,
they are to be treated as non-arbitrable and it
is only the civil court which should decide such
matters. However, where there are allegations
of fraud simplicitor and such allegations are
merely alleged, we are of the opinion it may
not be necessary to nullify the effect of the
arbitration agreement between the parties as
such issues can be determined by the Arbitral
Tribunal.
Before we apply the aforesaid test to the facts of the
present case, a word on the observations in Swiss
Timing Ltd.’s case to the effect that judgment of N.
Radhakrishnan was per incuriam, is warranted. In
fact, we do not have to labour on this aspect as this
task is already undertaken by this Court in State of
West Bengal v. Associated Contractors [11]. It has
been clarified in the aforesaid case that Swiss
Timings Ltd. was a judgment rendered while dealing
with Section 11(6) of the Act and Section 11
essentially confers power on the Chief Judge of
India or the Chief Justice of the High Court as a
designate to appoint an arbitrator, which power has
been exercised by another Hon’ble Judge as a
delegate of the Chief Justice. This power of
appointment of an arbitrator under Section 11 by the
Court, notwithstanding the fact that it has been held
in SBP & Co. v. Patel Engineering Ltd. [12] as a
judicial power, cannot be deemed to have
precedential value and, therefore, it cannot be
Page 35
deemed to have overruled the proposition of law laid
down in N. Radhakrishnan.
In view of our aforesaid discussions, we are of
the opinion that mere allegation of fraud
simplicitor may not be a ground to nullify the
effect of arbitration agreement between the
parties. It is only in those cases where the
Court, while dealing with Section 8 of the Act,
finds that there are very serious allegations of
fraud which make a virtual case of criminal
offence or where allegations of fraud are so
complicated that it becomes absolutely
essential that such complex issues can be
decided only by civil court on the appreciation
of the voluminous evidence that needs to be
produced, the Court can sidetrack the
agreement by dismissing application under
Section 8 and proceed with the suit on merits.
It can be so done also in those cases where
there are serious allegations of
forgery/fabrication of documents in support of
the plea of fraud or where fraud is alleged
against the arbitration provision itself or is of
such a nature that permeates the entire
contract, including the agreement to arbitrate,
meaning thereby in those cases where fraud
goes to the validity of the contract itself of the
entire contract which contains the arbitration
clause or the validity of the arbitration clause
itself. Reverse position thereof would be that
where there are simple allegations of fraud
touching upon the internal affairs of the party
inter se and it has no implication in the public
domain, the arbitration clause need not be
avoided and the parties can be relegated to
arbitration. While dealing with such an issue
in an application under Section 8 of the Act,
the focus of the Court has to be on the question
as to whether jurisdiction of the Court has
been ousted instead of focusing on the issue as
to whether the Court has jurisdiction or not. It
has to be kept in mind that insofar as the
statutory scheme of the Act is concerned, it
does not specifically exclude any category of
cases as non-arbitrable. Such categories of non-
arbitrable subjects are carved out by the
Page 36
Courts, keeping in mind the principle of
common law that certain disputes which are of
public nature, etc. are not capable of
adjudication and settlement by arbitration and
for resolution of such disputes, Courts, i.e.
public for a, are better suited than a private
forum of arbitration. Therefore, the inquiry of
the Court, while dealing with an application
under Section 8 of the Act, should be on the
aforesaid aspect, viz. whether the nature of
dispute is such that it cannot be referred to
arbitration, even if there is an arbitration
agreement between the parties. When the case
of fraud is set up by one of the parties and on
that basis that party wants to wriggle out of
that arbitration agreement, a strict and
meticulous inquiry into the allegations of fraud
is needed and only when the Court is satisfied
that the allegations are of serious and
complicated nature that it would be more
appropriate for the Court to deal with the
subject matter rather than relegating the
parties to arbitration, then alone such an
application under Section 8 should be rejected.
When we apply the aforesaid principles to the
facts of this case, we find that the only
allegation of fraud that is levelled is that the
appellant had signed and issued a cheque of
Rs. 10,00,050/- dated 17.06.2010 of „Hotel
Arunagiri‟ in favour of his son without the
knowledge and consent of the other partners
i.e. the respondents. It is a mere matter of
accounts which can be looked into and found
out even by the arbitrator. It does not involve
any complex issue. If such a cheque is issued
from the hotel account by the appellant in
favour of his son, it is easy to prove the same
and then the onus is upon the appellant to
show as to what was the reason for giving that
amount from the partnership firm to his son
and he will have to account for the same.
Likewise, the allegation of the respondents
that daily collections are not deposited in the
bank accounts is to be proved by the
respondents which is again a matter of
accounts.”
Page 37
7. The dispute in the present case is based on an agreement for
financial assistance and alleged default in repayment, which
is a case of mere allegation of fraud simpliciter and thus
arbitrable.
8. In the present case, the allegations are not so serious that it
cannot be taken care of by an arbitrator if the parties invoke
the Arbitration clause. The complainant/opposite party no.
1 also has the avenue of the Civil Courts for the grievances
as made out, there being no prima facie materials to show
any criminal intent on the part of the petitioner or the
company.
9. The materials on record prima facie do not contain the
ingredients required for the offences alleged and as such,
continuation of the said proceeding in the present case shall be
an abuse of the process of law/court.
10. CRR 1128 of 2022 is allowed.
11. The proceeding including the order dated 08.02.2022 passed by
the learned Metropolitan Magistrate, 10th Court, Calcutta in
complaint case no. C/S-95394/2021 taking cognizance against
the petitioners/accused persons under Sections 406/420/506
read with Section 120B of the Indian Penal Code, 1860, is
hereby quashed in respect of the petitioners namely Reatox
Resorts and Hotels Private Limited, Vandana Sujeet Savant
and Atul Dattaram Shirodkar.
Page 38
12. All connected applications, if any, stand disposed of.
13. Interim order, if any, stands vacated.
14. Copy of this judgment be sent to the learned Trial Court for
necessary compliance.
15. Urgent certified website copy of this judgment, if applied for, be
supplied expeditiously after complying with all, necessary legal
formalities.
(Shampa Dutt (Paul), J.)