The Supreme Court has clarified that dishonour of a post-dated cheque, by itself, does not establish dishonest intention under Section 420 of the Indian Penal Code. The Court held that to constitute cheating, the prosecution must prove fraudulent intent at the very beginning of the transaction. A mere failure to fulfil a promise later does not meet this requirement.
A Bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra allowed an appeal challenging a Madras High Court order that had refused to quash cheating charges.
Background of the Dispute
The case arose from a financial arrangement linked to a film project. The appellant sought funds from the complainant to produce a movie and offered a share in profits. The complainant initially invested money based on an assurance of a 30% return. Later, the complainant advanced additional funds in expectation of a higher share.
The project failed to generate profits. The appellant then issued two post-dated cheques of Rs. 24 lakh each to repay the principal amount. Both cheques were dishonoured due to insufficient funds. Consequently, the complainant alleged cheating and criminal breach of trust.
After completing the investigation, the police filed a final report. The appellant approached the High Court and sought quashing of the proceedings.
The High Court quashed the charge under Section 406 IPC. However, it allowed prosecution under Section 420 IPC to continue, holding that the material disclosed inducement and misrepresentation.
Supreme Court Reaffirms Legal Position on Cheating
The Supreme Court set aside the High Court’s ruling and reiterated the settled principles governing cheating. The Bench emphasised that the offence requires dishonest or fraudulent intention at the time of making the promise.
The Court relied on Iridium India Telecom Ltd. v. Motorola Inc. (2011) 1 SCC 74 and Vesa Holdings Pvt. Ltd. v. State of Kerala (2015) 8 SCC 293. It clarified that breach of contract or non-fulfilment of a promise does not automatically amount to cheating.
The Bench also examined the nature of the transaction. It noted that the investment related to a film project, which involves inherent commercial risk.
“Movie making is a high-risk business. No one can be sure whether a movie would earn profits or would be a flop.”
The Court observed that the film was completed and released. Therefore, it found no basis to conclude that the appellant made a false promise at the outset.
Post-Dated Cheques and Criminal Liability
The Court drew a clear distinction between inducement and subsequent repayment arrangements. It found that the appellant issued the post-dated cheques only to discharge an existing liability.
Therefore, the dishonour of those cheques could not retroactively establish dishonest intention at the beginning of the transaction.
The Bench explained:
“Ordinarily, post-dated cheques are issued either by way of security to discharge an existing or future liability or to discharge the liability at some point of time in future. It is quite possible that at the time of issuance of a post-dated cheque, the drawer may have reason to believe that he would have sufficient balance in his account by the date of the cheque. Therefore, in our view, dishonour of a post- dated cheque by itself is not sufficient to presume existence of a dishonest intention on part of its drawer.”
The Court further clarified that dishonour of a cheque may attract proceedings under Section 138 of the Negotiable Instruments Act. However, it does not automatically give rise to prosecution for cheating.
Dispute Found to Be Civil in Nature
The Court concluded that the dispute arose from a failed commercial venture and remained civil in nature. It held that continuing criminal proceedings in such circumstances would amount to an abuse of process.
Accordingly, the Supreme Court quashed the proceedings under Section 420 IPC and found that the High Court had failed to assess the absence of dishonest intention at the inception of the transaction.
Case: V Ganesan v State
For Petitioner: Mr. S. Nagamuthu, Senior Advocate, with Mr. M.P. Parthiban, AOR and arguing counsel, Mr. Ankur Prakash, Mrs. Priyanka Singh, Mr. Bilal Mansoor, Mr. Shreyas Kaushal, Mr. S. Geyolin Selvam and Mr. Alagiri K, Advocates.
For Respondents: Mr. V. Krishnamurthy, Senior Additional Advocate General and arguing counsel, with Mr. Sabarish Subramanian, AOR, Mr. Vishnu Unnikrishnan, Ms. Azka Sheikh Kalia, Ms. Jahnavi Taneja and Mr. Danish Saifi, Advocates.
