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State Of Punjab v. Pritam Chand And Others
Factual and Procedural Background
The respondents, partners of Jagdamba Rice Mills, were entrusted by the Punjab State Civil Supplies Corporation Ltd. with paddy for milling during 1983-1984. Alleging that the respondents failed to account for the paddy and misappropriated it, the Corporation initiated criminal proceedings under Section 406 of the Indian Penal Code (IPC) for criminal breach of trust. An arbitrator, appointed pursuant to a contractual clause, awarded the Corporation Rs 1,81,315.43 in a separate civil proceeding.
The Judicial Magistrate, First Class, Samana, acquitted the respondents, holding that the dispute was essentially contractual and therefore civil in nature. The State of Punjab’s appeal against the acquittal was dismissed by a Single Judge of the Punjab and Haryana High Court. The present judgment of the Supreme Court reviews the High Court’s summary dismissal of that appeal.
Legal Issues Presented
- Whether a dispute that also possesses a civil or contractual dimension can nevertheless give rise to criminal liability under Section 406 IPC.
- Whether the High Court erred in dismissing the State’s appeal without examining the statutory ingredients of criminal breach of trust and without providing adequate reasons.
Arguments of the Parties
Appellant (State of Punjab)
- The High Court’s order is unreasoned; it merely notes the civil-law aspects without analysing the ingredients of Section 406 IPC.
- Existence of a contractual breach or an arbitration award does not, by itself, bar criminal prosecution for misappropriation.
- Both the trial court and the High Court failed to apply the principles laid down by the Supreme Court in earlier cases that distinguish civil disputes from criminal misconduct.
No specific arguments of the respondents are recorded in the provided opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rajesh Bajaj v. State (NCT of Delhi), (1999) 3 SCC 259 | Civil aspects of a transaction do not automatically exclude criminal liability; cheating can arise from commercial dealings. | Cited to support the proposition that a matter having a “civil profile” may still sustain a criminal prosecution. |
| Trisuns Chemical Industry v. Rajesh Agarwal, (1999) 8 SCC 686 | Arbitration is not a substitute for criminal prosecution; investigation should not be thwarted merely because the dispute is also arbitrable. | Relied on to criticise the lower courts’ use of the arbitration award as a ground for acquittal. |
| State of Haryana v. Bhajan Lal, 1992 Supp (1) SCC 335 | Enumerates exceptional circumstances warranting quashing of criminal proceedings. | Referenced (through Trisuns Chemical) to indicate that pre-empting investigation is justified only in rare situations, not present here. |
Court's Reasoning and Analysis
The Supreme Court observed that both the trial court and the High Court treated the dispute as purely civil because of the contractual relationship and the existence of an arbitration award. This approach, the Court held, overlooked essential elements of criminal breach of trust under Sections 405 and 406 IPC—namely, entrustment and dishonest misappropriation.
The Court emphasised that its earlier decisions (Rajesh Bajaj; Trisuns Chemical) clarify that criminal proceedings are not barred merely because the conduct also constitutes breach of contract, nor does an arbitration clause immunise the alleged offender from criminal liability. The High Court had in fact acknowledged that a criminal prosecution may still lie, yet dismissed the appeal summarily on the ground that “two views are possible.” Such summary dismissal, without analysing evidence or statutory ingredients, was deemed “clearly erroneous.”
Consequently, the Supreme Court set aside the High Court’s judgment and remitted the matter for fresh consideration consistent with the legal principles governing criminal breach of trust.
Holding and Implications
HELD: The appeal is allowed; the High Court’s judgment dismissing the State’s appeal is set aside, and the matter is remitted to the High Court for a fresh, reasoned decision on merits.
Implications: The decision reinforces that co-existence of civil remedies—such as arbitration—does not foreclose criminal prosecution where ingredients of criminal breach of trust are alleged. It does not create new precedent but re-affirms existing Supreme Court jurisprudence requiring courts to examine statutory elements before discarding criminal charges as “purely civil.” The direct effect is that the High Court must now reconsider the State’s appeal with a full analysis of Section 406 IPC.
Dr. Arijit Pasayat, J.— Challenge in this appeal is to the judgment of a learned Single Judge of the Punjab and Haryana High Court dismissing the appeal filed by the State of Punjab against the judgment of acquittal recorded by the learned Judicial Magistrate, First Class, Samana.
2. The respondents were charged for the alleged commission of offence punishable under Section 406 of the Penal Code, 1860 (in short “IPC”). They were partners of one Jagdamba Rice Mills to whom paddy was entrusted for milling by the Punjab State Civil Supplies Corpn. Ltd. (in short “the Corporation”) during the year 1983-1984. It was alleged that the accused failed to account for the paddy and thus misappropriated the same. Pursuant to the arbitration clause between the parties, an arbitrator was appointed and an award of Rs 1,81,315.43 was rendered in favour of the Corporation.
3. The trial court acquitted the accused on the ground that the matter arose out of breach of contract, the same was of civil nature and a criminal case against the accused was not made out.
4. The High Court endorsed the view and dismissed the appeal.
5. In support of the appeal, the learned counsel for the State submitted that the High Court's judgment is totally unreasoned as no reason has been indicated. Merely because there was allegedly a breach of contract, that cannot in all cases rule out criminal prosecution. It is pointed out that even the arbitration award on which reliance has been placed by the trial court to direct acquittal, was a factor in favour of the Corporation and without examining the ingredients of Section 406 IPC the trial court and the High Court directed acquittal.
6. Section 406 IPC deals with punishment for criminal breach of trust. In a case under Section 406 the prosecution is required to prove that the accused was entrusted with property or he had dominion over the property and that the accused misappropriated or converted the property to his own use or used or disposed of the property or wilfully suffered any person to dispose of the property dishonestly or in violation of any direction of law prescribing the mode in which the entrusted property should be dealt with or any legal contract express or implied which he had entered into relating to carrying out of the trust.
7. Criminal breach of trust is defined in Section 405 IPC. The ingredients of offence under Section 405 are: (i) entrusting any person with property or with dominion over the property, (ii) the person entrusted (a) dishonestly misappropriated or converted to his own use the property, or (b) dishonestly used or disposed of the property or wilfully suffered any other person so to do in violation (i) of any direction of law prescribing the mode in which such mode (sic trust) is to be discharged or (ii) of any legal contract made touching the discharge of trust.
8. In Rajesh Bajaj v. State (NCT of Delhi) (1999) 3 SCC 259 it was held as follows:
“10. 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. One of the illustrations set out under Section 415 of the Penal Code [Illustration (f)] is worthy of notice now:
‘(f) A intentionally deceives Z into a belief that A means to repay any money that Z may lend to him and thereby dishonestly induces Z to lend him money, A not intending to repay it. A cheats.’ ”
While dealing with a case under Section 482 of the Code of Criminal Procedure, 1973 (in short “the Code”) this Court referred to the aforesaid judgment and held that “merely because an act has a civil profile is not sufficient to denude it of its criminal outfit”.
9. In Trisuns Chemical Industry v. Rajesh Agarwal (1999) 8 SCC 686 it was noted as follows:
“9. We are unable to appreciate the reasoning that the provision incorporated in the agreement for referring the disputes to arbitration is an effective substitute for a criminal prosecution when the disputed act is an offence. Arbitration is a remedy for affording reliefs to the party affected by breach of the agreement but the arbitrator cannot conduct a trial of any act which amounted to an offence albeit the same act may be connected with the discharge of any function under the agreement. Hence, those are not good reasons for the High Court to axe down the complaint at the threshold itself. The investigating agency should have had the freedom to go into the whole gamut of the allegations and to reach a conclusion of its own. Pre-emption of such investigation would be justified only in very extreme cases as indicated in State of Haryana v. Bhajan Lal 1992 Supp (1) SCC 335.”
(underlined for emphasis)
10. These aspects were not considered by the trial court and, therefore, the High Court should not have in a summary manner dismissed the appeal after having recorded that a criminal case may arise even when breach of contract is also there and there is no bar for prosecution under the criminal law. Having said so, the High Court came to an abrupt conclusion that because two views are possible as to whether the allegation made was of a civil dispute or of a criminal nature, no interference was called for. The approach is clearly erroneous. Therefore, we set aside the impugned judgment of the High Court and remit the matter to it for fresh consideration in accordance with law.
11. The appeal is allowed to the aforesaid extent.
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