Supreme Court Holds That Failure to Pay Sale Price Cannot Constitute Criminal Breach of Trust Under Section 406 IPC
Background and Genesis of the Dispute
The Supreme Court of India recently adjudicated a significant appeal arising from a commercial dispute that had been wrongly channelled into the criminal justice system. The case — Delhi Race Club (1940) Ltd. & Ors. Vs State of Uttar Pradesh & Anr. — involved a supplier of horse feed who had been doing business with the Delhi Race Club since 1990, supplying consignments of barley, oats and other grain used for the horses maintained at the Club.
Around 1995, the then-officials of the Club reportedly instructed the supplier to redirect all invoices to the Delhi Horse Trainers Association, a separate entity. The supplier, Mr. Vipin Kumar Agarwal, proprietor of Agarwal Udyog, Khurja, complied with this arrangement and continued regular supplies. Payments were received consistently until 2017, after which an outstanding balance of Rs. 9,11,434/- accumulated and remained unpaid despite repeated demands, a legal notice issued on 18 June 2020, and applications made to local police authorities.
Unable to recover the amount through informal channels, Mr. Agarwal filed a private criminal complaint before the Additional Chief Judicial Magistrate, Khurja, Bulandshahar, alleging commission of offences punishable under Section 406 (criminal breach of trust), Section 420 (cheating), and Section 120B (criminal conspiracy) of the Indian Penal Code, 1860.
Proceedings Before the Magistrate
The Magistrate, rather than immediately issuing process, appropriately initiated a magisterial inquiry under Section 202 of the Code of Criminal Procedure, 1973 (CrPC). In the course of this inquiry, statements were recorded from two witnesses — Ankit Agarwal, son of the complainant, who confirmed the outstanding dues and alleged collusion between the two organisations, and Manish Kumar Sharma, a bookkeeper employed at Agarwal Udyog for seventeen years, who corroborated the facts relating to supply and non-payment.
On 28.02.2023, the Additional Chief Judicial Magistrate passed an order summoning the accused — Delhi Race Course Club, Delhi Race Horse Trainers Association, and individuals including J.S. Bedi, H.K. Uppal, Kazim Ali Khan, and Sanjeev Charan — to face trial, but only for the offence under Section 406 IPC (criminal breach of trust), notwithstanding that the complaint had alleged three distinct offences.
The Allahabad High Court's Flawed Reasoning
The appellants — Delhi Race Club (1940) Ltd. and its office-bearers — challenged the summoning order before the High Court of Judicature at Allahabad by filing an application under Section 482 CrPC, seeking quashing of the Magistrate's order. The High Court, by its order dated 03.04.2024, declined to interfere.
The High Court reasoned that the invoices raised by the complainant in favour of the Association, on the oral direction of the Club, reflected prima facie mala fide conduct on the part of the Company. It further observed that the Club and the Association did not appear to be truly separate legal entities, and that the deliberate non-payment of Rs. 9,11,434/- indicated intentional withholding. On this basis, the High Court found no legal infirmity in the summoning order warranting interference under Section 482 CrPC.
The Supreme Court did not agree.