Court Observes Mere Failure to Pay Contractual Dues Does Not Amount to Cheating Unless Dishonest Intention Exists From Beginning of Transaction
Shimla: The Himachal Pradesh High Court has quashed criminal proceedings initiated against officials of a hydel power project company, holding that a dispute arising out of contractual payment obligations cannot be converted into a criminal case in the absence of allegations showing dishonest intention from the very beginning of the transaction.
Justice Rakesh Kainthla of the Himachal Pradesh High Court, while deciding Cr. MMO No. 686 of 2025 titled Saurav Banerjee & Others vs State of H.P. & Another on 30.09.2026, allowed the petition filed by the accused persons seeking quashing of FIR and consequential proceedings.
The Court quashed FIR No. 58 dated 08.06.2025 registered at Police Station Tissa, District Chamba, Himachal Pradesh, for offences punishable under Sections 420 and 506 read with Section 120B of the Indian Penal Code (IPC). The High Court held that the allegations primarily reflected a dispute relating to non-payment of contractual dues and did not disclose the essential ingredients required to constitute offences of cheating or criminal intimidation.
Background of the Dispute
The criminal proceedings originated from a dispute concerning an 8 MW Chamba Hydel Power Project situated in Tehsil Churah, District Chamba, Himachal Pradesh. According to the complaint, the project was allotted to Chamba Hydel Power Project Pvt. Ltd. and the company approached the informant for carrying out civil construction work. The informant alleged that one of the petitioners, Saurav Banerjee, invited him to undertake the work on behalf of the company and assured him that the company was financially sound and payments would be made regularly.
The documents of the company were allegedly shown to the informant and the work was allotted through a letter dated 09.10.2014 signed by Saurav Banerjee. The informant claimed that he completed the work under the supervision of the company’s engineer and an amount of ₹1,44,41,288.12 remained payable towards balance payment. It was further alleged that despite repeated requests and correspondence, the payment was not released and the company ultimately abandoned the project.
The informant also claimed losses due to deployment of machinery at the project site amounting to approximately ₹78 lakh. The complaint further alleged that when payment was demanded, threats were extended and therefore criminal action was sought against the company officials.
FIR Registered Against Company Officials
Based on the complaint, the police registered FIR No. 58 dated 08.06.2025 at Police Station Tissa, District Chamba. The FIR invoked:
- Section 420 IPC relating to cheating;
- Section 506 IPC relating to criminal intimidation;
- Section 120B IPC relating to criminal conspiracy.
The police commenced investigation after registration of the FIR. Aggrieved by the criminal proceedings, the petitioners approached the High Court seeking exercise of inherent jurisdiction for quashing of the FIR and all consequential proceedings.
Petitioners’ Defence Before High Court
The petitioners contended that the criminal proceedings were an abuse of the process of law as the dispute was purely contractual and civil in nature. It was submitted that:
- Chamba Hydel Power Project Pvt. Ltd. was incorporated on 17.12.2011;
- A tripartite agreement was executed between the State of Himachal Pradesh through the Directorate of Energy, M/s Trident Power System and Chamba Hydel Power Project on 16.03.2012;
- A detailed implementation agreement was also executed on the same date.
The petitioners stated that the informant had approached the company in 2013 and submitted a quotation for carrying out construction work. According to the petitioners, payments had been made to the informant from time to time for the work executed. It was further argued that the project suffered damage due to massive floods in 2016, resulting in abandonment of the work, and ultimately the project was terminated on 23.07.2019. The petitioners argued that the informant was attempting to recover alleged contractual dues by initiating criminal proceedings.
It was submitted that there was no allegation in the FIR showing that the company or its officials had dishonest intention at the time of entering into the agreement. Therefore, according to the petitioners, the matter was a civil dispute relating to contractual payments and could not be converted into criminal prosecution.
State Opposes Quashing of FIR
The State opposed the petition. It was argued that the allegations contained in the FIR disclosed commission of cognisable offences. The State submitted that the informant had been induced to undertake the work on the assurance that payments would be made, but subsequently payment was not released. It was further submitted that allegations regarding threats and criminal conspiracy were also mentioned in the FIR. The State argued that the matter was still at the investigation stage and the proceedings should not be quashed at that stage.
Respondent’s Stand
Respondent No. 2 also opposed the petition.
It was argued that the FIR disclosed commission of criminal offences and the existence of a civil remedy could not by itself be a ground for quashing criminal proceedings.
It was further argued that the High Court should exercise its extraordinary jurisdiction sparingly, particularly when investigation was underway.
High Court Examines Principles Governing FIR Quashing
The High Court examined the settled principles relating to exercise of inherent jurisdiction for quashing criminal proceedings. The Court referred to the judgment of the Supreme Court in B.N. John vs State of U.P., which reiterated the principles laid down in State of Haryana vs Ch. Bhajan Lal. The Supreme Court in Bhajan Lal had identified circumstances where criminal proceedings could be quashed, including cases where:
- Allegations in the FIR, even if accepted in entirety, do not constitute an offence;
- Allegations do not disclose a cognisable offence;
- Proceedings are maliciously instituted or amount to abuse of process of law.
The High Court observed that the present petition had to be examined within these legal parameters.
Essential Ingredients of Cheating Under Section 420 IPC
A major issue before the High Court was whether allegations in the FIR constituted an offence of cheating. The Court referred to the settled legal position that for establishing cheating, the prosecution must show:
- Deception of a person;
- Fraudulent or dishonest inducement;
- Such inducement must have caused delivery of property or an act causing damage.
The Court referred to Supreme Court judgments explaining that dishonest intention must exist from the very beginning of the transaction. The Court noted that a mere failure to fulfil a promise or contractual obligation does not automatically constitute cheating. The distinction between a civil breach of contract and criminal cheating depends upon the intention of the accused at the time when the promise was made.
Court Finds Absence of Allegation of Initial Dishonest Intention
After examining the FIR, the High Court found that the allegations did not indicate that the company or its officials had dishonest intention when the contract was entered into. The Court noted that the FIR itself referred to an outstanding balance amount, which indicated that payments had been made earlier. The Court observed that the FIR was silent regarding any dishonest intention existing from the beginning of the transaction.
The Court held that failure to make payment for completed work, arising out of contractual circumstances, would not constitute cheating but would amount to a civil dispute between parties. The informant had an available civil remedy for recovery of dues, and the same could not be converted into criminal proceedings by invoking Section 420 IPC.
Criminal Proceedings Cannot Be Used for Recovery of Money
The High Court relied upon several Supreme Court judgments emphasising that criminal law cannot be used as a pressure mechanism for settlement of civil disputes. The Court referred to the judgment in R.K. Vijayasarathy vs Sudha Seetharam, where the Supreme Court observed that while exercising inherent jurisdiction, courts can examine whether a matter essentially civil in nature has been given the appearance of a criminal offence. Where ingredients of a criminal offence are absent, continuation of criminal proceedings would amount to abuse of process of law.
The Court also referred to Sarabjit Kaur vs State of Punjab, observing that breach of contract does not result in criminal prosecution for cheating unless fraudulent or dishonest intention is shown at the beginning of the transaction.
Allegation of Multiple Complaints Not Sufficient
The State and respondent also relied upon allegations that other persons had complained regarding non-payment by the company. The High Court rejected this argument, observing that such allegations were not part of the present FIR. The Court held that non-payment to several persons would not by itself establish that the company had dishonest intention from the beginning of the transaction.
The Court observed that criminal liability cannot be presumed merely because contractual payments could not be made.
Court Examines Section 506 IPC Allegation
The High Court also examined the allegation of criminal intimidation. The Court noted that for an offence under Section 506 IPC, the prosecution must establish that:
- A threat was given;
- The threat related to injury to person, reputation or property;
- The threat was intended to cause alarm.
The Court observed that the FIR did not specifically mention that the informant was alarmed by the alleged threat.
Therefore, the essential ingredients of criminal intimidation were not satisfied.
High Court Quashes FIR and Proceedings
After considering the entire material, the High Court concluded that even if the allegations in the FIR were accepted, they did not constitute the offences alleged. The Court held that the dispute was essentially contractual and civil in nature.
Accordingly, the High Court allowed the petition and quashed:
- FIR No. 58 dated 08.06.2025 registered at Police Station Tissa, District Chamba, Himachal Pradesh; and
- All consequential proceedings arising out of the said FIR qua the petitioners.
Counsel Appearing Before High Court
For the petitioners:
Mr. Sartej Narula, Senior Advocate, along with Ms. Sakshi Sharma, Ms. Shalini and Ms. Nandini, Advocates.
For respondent No.1/State:
Mr. Jitender Sharma, Additional Advocate General.
For respondent No.2:
Mr. Virender Thakur, Advocate.
Conclusion
The Himachal Pradesh High Court’s decision in Saurav Banerjee & Others vs State of H.P. & Another reiterates the settled principle that criminal proceedings cannot be used as a substitute for civil remedies arising out of contractual disputes. The Court examined the allegations relating to an 8 MW hydel power project and found that the dispute primarily concerned alleged outstanding contractual payments. Since the FIR itself indicated a balance payment dispute and did not contain allegations showing dishonest intention at the inception of the transaction, the Court held that the ingredients of cheating were not established. The judgment reinforces that every breach of contract does not amount to a criminal offence. Criminal prosecution requires the presence of criminal intent and statutory ingredients of the offence. By quashing the FIR and consequential proceedings, the High Court protected the principle that criminal law should not be used as a mechanism for recovery of contractual dues where the dispute is essentially civil in nature.
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