Loan Default Alone Cannot Sustain Cheating or Criminal Breach of Trust, Holds Jharkhand High Court, Quashing Complaint Against Borrower
The Jharkhand High Court quashed criminal proceedings against a borrower who defaulted on a cooperative society loan, finding no allegation of deception at the transaction's inception and no dishonest misappropriation of entrusted property.
The High Court of Jharkhand at Ranchi has quashed criminal proceedings, including a cognisance order dated 31 December 2023, arising from a loan default involving a cooperative society. Justice Anil Kumar Choudhary, sitting singly, held that a borrower who avails a loan and fails to repay the full amount cannot be prosecuted for cheating under Section 420 of the Indian Penal Code or criminal breach of trust under Section 406 of the Indian Penal Code in the absence of any allegation of deception at the inception of the transaction or dishonest misappropriation of entrusted property. The court allowed Cr.M.P. No. 733 of 2025 filed by Bimlendu Shekhar Jha, a resident of Narayanpur, Jasidih, Deoghar, invoking the jurisdiction of this court under Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023.
The Complaint and the Cognisance Order
Bimlendu Shekhar Jha, then working with Bank of India, Deoghar Branch, had availed a loan of Rs. 9,30,000/- from the Deoghar Zila (Shahri Kshetra) Rastriyakrit Bank Karmchari Bachat Evam Sakh Swavlambi Sahkari Samiti Ltd., Deoghar — a cooperative society. He repaid Rs. 7,50,000/- of that sum. A balance of Rs. 4,85,000/-, at an interest rate of 10.5%, remained outstanding.
The Secretary of the cooperative society lodged Complaint Case No. 832 of 2021 before the learned Sub-Divisional Judicial Magistrate, Deoghar. On the basis of the complaint, the complainant's statement on solemn affirmation, and the statements of inquiry witnesses, the S.D.J.M., Deoghar found a prima facie case and by order dated 31 December 2023 took cognisance of offences punishable under Sections 406 and 420 read with Section 34 of the IPC against the petitioner.
Jha challenged that order and the entire criminal proceedings before the High Court, praying for their quashing under Section 528 of the B.N.S.S., 2023.
Arguments Before the Court
Mr. Pran Pranay, appearing for the petitioner, advanced three principal contentions.
On the charge of cheating, counsel relied on the Supreme Court's decision in Umashankar Gopalika v. State of Bihar, reported in (2005) 10 SCC 336, for the proposition that a breach of contract amounts to cheating only where deception was played at the very inception of the transaction. If the intention to cheat developed later, it does not constitute the offence under Section 420 IPC. Counsel submitted that no allegation existed against the petitioner of having played any deception since the beginning of the transaction.
On the charge of criminal breach of trust, counsel placed reliance on Binod Kumar and Others v. State of Bihar and Another, reported in (2014) 10 SCC 663, where the Supreme Court held that to make out a case of criminal breach of trust it is not sufficient to show that money has been retained; it must also be shown that the accused dishonestly disposed of the property or dishonestly retained the same. Counsel submitted that no allegation of dishonest misappropriation of any entrusted property had been made against the petitioner.
Counsel additionally cited Indian Oil Corporation v. NEPC India Ltd and Others, reported in (2006) 6 SCC 736, where the Supreme Court observed that courts should exercise their power under Section 250 Cr.P.C. more frequently where they discern malice, frivolousness, or ulterior motives on the part of the complainant.
Counsel further submitted that by the time the matter was heard, the petitioner had cleared all dues of the loan amount.
The learned Special Public Prosecutor and the counsel for Opposite Party No. 2 — the complainant Nand Lal Baliyase — opposed the petition vigorously. They contended that the averments in the complaint, the statement on solemn affirmation, and the inquiry witnesses' statements were sufficient to constitute both offences under Sections 420 and 406 IPC. They submitted that the S.D.J.M. had committed no illegality in finding a prima facie case and that the petition be dismissed as being without merit.
How the Court Reasoned
Justice Choudhary began by setting out the governing legal position from the Supreme Court's decision in Satish Chandra Ratan Lal Shah v. State of Gujarat & Anr., reported in (2019) 9 SCC 148. That decision reaffirmed two distinct propositions.
On criminal breach of trust: the law recognises a difference between simple payment or investment of money and entrustment of money or property. A mere breach of a promise, agreement, or contract does not, ipso facto, constitute the offence of criminal breach of trust under Section 405 IPC without a clear case of entrustment.
On cheating: “the mere inability of the appellant to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction.” The court in that case had held that even if all the facts in the complaint were taken at face value, no dishonest representation or inducement could be found or inferred.
Turning to the facts of the present case, Justice Choudhary identified a fundamental difficulty with the complaint. The sole allegation against the petitioner was that he availed a loan, repaid part of it, and left a balance outstanding. There was no allegation that the petitioner had played any deception since the beginning of the transaction. There was no allegation of dishonest misappropriation of any entrusted property.
On the Section 406 charge specifically, the court drew an important distinction about the nature of a loan. A person who takes a loan cannot be said to have been entrusted with the loan amount in the sense in which the word “entrusted” is used in Section 405 IPC. The reason is that a borrower is free to use the amount taken as per his own will — unlike a case of true entrustment, where the person holding the property cannot deal with it without the approval of the person who entrusted it. This distinction, the court held, is fatal to the Section 406 charge on the facts presented.
On the Section 420 charge, the court applied the settled requirement that mens rea — specifically a fraudulent or dishonest intention — must be shown to have existed at the very inception of the transaction. The complaint carried no such allegation.
Taken together, the court held that even accepting the entire allegations in the complaint as true in their entirety, neither the offence under Section 406 nor the offence under Section 420 IPC was made out against the petitioner. In those circumstances, continuation of the criminal proceedings would amount to an abuse of the process of law.
Outcome
Justice Anil Kumar Choudhary allowed Cr.M.P. No. 733 of 2025 by order dated 28 July 2026. The entire criminal proceedings in Complaint Case No. 832 of 2021, including the order dated 31 December 2023 passed by the learned S.D.J.M., Deoghar taking cognisance of offences under Sections 406 and 420/34 IPC against the petitioner, were quashed and set aside.