Section 420 IPC: When Can a Contractual Dispute Amount to Cheating? Supreme Court Explains

The Supreme Court has held that for an offence under Sections 417 and 420 of the Indian Penal Code, 1860 [now Section 318(2), Section 318(4) of the Bharatiya Nyaya Sanhita, 2023, respectively], fraudulent or dishonest intention must exist at the inception of the transaction and must have induced the complainant to part with property.

A Bench of Justices Vikram Nath and Sandeep Mehta emphasised that a subsequent failure to perform a contractual obligation cannot, by itself, give rise to an inference of such dishonest intention.

Dealing with an appeal filed by Indroneel Goho, Court found that the allegations arising from a failed commercial transaction did not satisfy the essential ingredients of cheating at the inception of the contract.

When can a contractual dispute amount to cheating?

Court held that a high court may exercise its inherent powers under Section 482 of the Code of Criminal Procedure, 1973 [now Section 582 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS)], to quash criminal proceedings where the allegations merely reflect a contractual dispute and fail to establish the essential ingredients of the criminal offence alleged.

In the present case, Court found that the criminal proceedings arose from a purely civil and contractual dispute and that their continuation would amount to an abuse of the process of law.

The appeal arose from the judgment and order dated May 13, 2025, passed by the Gauhati High Court, Kohima Bench, which dismissed the petition filed by Goho under Section 482 of CrPC seeking quashing of a 2022 criminal case pending before the Judicial Magistrate First Class, Dimapur, Nagaland.

The case involved offences punishable under Sections 417 and 420 of the IPC.

Background of the dispute

The appellant served as the Chief Executive Officer of Darjeeling Organic Tea Estates Private Limited and was authorised to act on behalf of the company.

Respondent No. 1, proprietor of C.R. Traders, entered into negotiations with the company concerning the Jamguri Tea Estate in Golaghat, Assam. Before execution of the agreement, respondent No. 1 addressed a communication dated May 31, 2021, to UCO Bank concerning the tea estate and its mortgage with the bank.

A Memorandum of Understanding (MoU) was subsequently executed between the company and C.R. Traders on June 1, 2021. Goho signed the MoU on behalf of the company in his capacity as its authorised signatory.

Pursuant to the MoU, respondent No. 1 transferred Rs 40 lakh to the company's bank account on June 7, 2021, in two transactions.

Disputes subsequently arose between the parties concerning performance of their obligations under the MoU. The agreement was eventually terminated on account of the alleged failure of respondent No. 1 to fulfil her obligations.

On August 17, 2022, respondent No. 1 instituted a criminal complaint against Goho before the Judicial Magistrate First Class, Dimapur.

It was alleged that Goho had induced her to part with Rs 40 lakh by representing that the Jamguri Tea Estate belonged to the company, whereas it was owned by Bhumya Tea Company Private Limited and was the subject matter of proceedings involving UCO Bank.

On the basis of these allegations, offences under Sections 417 and 420 of the IPC were alleged against Goho.

By an order dated September 21, 2022, the Judicial Magistrate First Class, Dimapur, found prima facie grounds to proceed against Goho for offences under Sections 417 and 420 IPC and issued summons to him.

Goho thereafter approached the high court under Section 482 of CrPC seeking quashing of the criminal proceedings.

He contended that the dispute arose out of a purely contractual transaction, that the MoU had been entered into by the company and not by him in his personal capacity, and that the Rs 40 lakh had been transferred directly to the company's account. He also pointed out that the company itself had not been arrayed as an accused.

The Gauhati High Court dismissed the petition on May 13, 2025, holding that a prima facie case under Sections 417 and 420 IPC was made out. It also held that the existence of an arbitration clause in the MoU did not, by itself, constitute a ground for quashing the criminal proceedings.

For cheating, dishonest intention must exist at the beginning of the transaction

Having perused the record, Court said the distinction between a breach of contract and the offence of cheating was well settled.

"For an offence under Sections 417 and 420 of IPC, the fraudulent or dishonest intention must exist at the inception of the transaction and must have induced the complainant to part with property. A subsequent failure to perform a contractual obligation cannot, by itself, give rise to an inference of such intention," the Bench said.

Court referred to its 2026 judgment in G Saminathan and Another v. State, represented by the Sub-Inspector of Police and Another, wherein it reiterated that to establish the offence of cheating, the complainant must show fraudulent or dishonest intention at the time when the promise or representation was made.

Applying these principles, Court held that the complaint did not disclose the necessary ingredients of cheating against Goho.

It noted that the MoU had been entered into by the companies and that the money had been transferred directly into the company's bank account.

"There is no allegation that the appellant received or appropriated any part thereof for his personal benefit," the Bench observed.

Court further held that whether the termination of the MoU was valid and whether respondent No. 1 was entitled to a refund of the amount paid or any other relief were matters carrying civil consequences.

Such disputes, it said, could not assume a criminal character merely because the contractual relationship subsequently failed.

The Bench also clarified that the existence of an arbitration clause was not the decisive issue.

"The High Court was correct in observing that the existence of an arbitration clause does not, by itself, bar criminal proceedings. That proposition, however, does not answer the real question. The Court must first determine whether the allegations disclose the essential ingredients of the criminal offence alleged. In the present case, the material does not disclose sufficient factual foundation to infer that the appellant, at the inception of the transaction, acted with the dishonest intention necessary to constitute cheating," it said.

Court therefore held that continuation of the criminal proceedings would amount to giving a predominantly contractual dispute the colour of a criminal prosecution.

It held that the ingredients of Sections 417 and 420 IPC were not made out against Goho and that continuation of the proceedings would amount to an abuse of the process of law.

TCourt accordingly allowed the appeal, set aside the high court's judgment and quashed the pending criminal proceedings.

It, however, clarified that the order would not preclude respondent No. 1 from pursuing any remedy available in law in respect of her civil or contractual claims.

Case Title: Indroneel Goho Vs Razouvonuo Thong & Anr

Bench: Justices Vikram Nath and Sandeep Mehta

Date of Judgment: September 29, 2026