http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 14  

CASE NO.: Appeal (crl.)  834 of 2002

PETITIONER: M/s Indian Oil Corporation

RESPONDENT: M/s NEPC India Ltd., & Ors.

DATE OF JUDGMENT: 20/07/2006

BENCH: H. K. Sema & R. V. Raveendran

JUDGMENT: JUDGMENT

With Criminal Appeal No. 833 of 2002

RAVEENDRAN, J.

       These appeals are filed against the common order dated  29.3.2001 passed by the Madras High Court allowing Crl.O.P.  Nos.2418 of 1999 and 1563 of 2000. The  said two petitions were filed  by the respondents herein under section 482 of Criminal Procedure  Code (’Code’ for short) for quashing the complaints filed by the  appellant against them in C.C. No.299 of 1999 on the file of Judicial  Magistrate No.6, Coimbatore and C.C. No. 286 of 1998 on the file of  Judicial Magistrate, Alandur (Chennai).  

2.      The appellant (Indian Oil Corporation, for short ’IOC’) entered  into two contracts, one with the first respondent (NEPC India Ltd.) and  the other with its sister company Skyline NEPC Limited (’Skyline’ for  short) agreeing to supply to them aviation turbine fuel and aviation  lubricants (together referred to as "aircraft fuel"). According to the  appellant, in respect of the aircraft fuel supplied under the said  contracts, the first respondent became due in a sum of  Rs.5,28,23,501.90 and  Skyline became due in a sum of  Rs.13,12,76,421.25 as on 29.4.1997.

3.      The first respondent hypothecated its two Fokker F27-500  Aircrafts, bearing Registration No. VT-NEJ (12684) and VT-NEK  (10687) to the appellant under Deed of Hypothecation dated 1.5.1997,  to secure the outstanding amounts. Clause (2) of the said Deed  provided that the two aircrafts with all parts and accessories stood  hypothecated to IOC by way of charge and as security for payment of  the amounts due, with effect from the date of hypothecation. Clause  (3) read with the schedule set out the instalments schedule for  payment of the amount due. Under clause (6), NEPC India declared  that it would not assign, sell, pledge, charge, underlet or otherwise  encumber or part with the possession, custody or beneficial interest in  respect of the two aircrafts without the previous written consent of  IOC. It also undertook not to do any act which may diminish the value  of the hypothecated property without clearing the entire outstanding  amount. Clause (9) provided that if NEPC India failed to pay any of the  instalments with interest within the stipulated time, or if any  undertaking or assurance given by NEPC India was found to be false,  IOC shall have the "right to take possession of the hypothecated  property" and sell the same by public auction or by private contract  and appropriate the sale proceeds towards the outstanding dues  without recourse to court of law. Clause 12 confirmed that NEPC India  had handed over the title deeds relating to the aircraft to IOC, and  agreed to receive them back only after paying the amounts due. It is

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 14  

stated that Skyline also hypothecated its aircraft (VT-ECP) under a  separate Hypothecation Deed dated 14.5.1997. It is further stated that  a tripartite agreement dated 6.5.1997 was entered among IOC, NEPC  India and Skyline setting out the mode of payment of the dues and  recovery in the event of default.  

4.      As NEPC India failed to pay the first two instalments as per  schedule, IOC stopped supply of aircraft fuel on 3.6.1997. However,  subsequently, under a fresh agreement dated 20.9.1997, a revised  payment schedule was agreed and IOC agreed to re-commence supply  of aircraft fuel on ’cash and carry’ basis. Even this arrangement came  to an end as the instalments were not paid.  

5.      Apprehending that NEPC India may remove the hypothecated  aircraft (VT-NEJ) from Coimbatore Airport to a place outside its reach,  IOC filed C.S. No.425 of 1997 in the Madras High Court seeking a  mandatory injunction to the Airport Authority of India and Director  General of Civil Aviation to detain the said aircraft stationed at  Coimbatore Airport, under section 8 of the Aircraft Act, 1934, so as to  enable it to take possession thereof. The High Court granted an  interim injunction on 16.9.1997 restraining NEPC India from removing  the aircraft (VT-NEJ) from Coimbatore Airport. In regard to the other  hypothecated aircraft (VT-NEK) kept at Meenambakkam (Chennai)  Airport, IOC filed a suit (OS No.3327/1998) in the City Civil Court,  Chennai for a similar mandatory injunction.  

6.      IOC filed the two complaints against NEPC India and its two  Directors (respondents 2 & 3 herein) in July, 1998 under section 200  of Code of Criminal Procedure alleging unauthorized removal of the  engines and certain other parts from the two hypothecated aircraft.  They are :  

(i)  C.C. No. 299 of 1999 before the Judicial Magistrate No.6,  Coimbatore, regarding Aircraft bearing No. VT-NEJ.  

(ii)   C.C. No. 286 of 1998 before the Judicial Magistrate, Alandur  (Chennai) regarding aircraft  bearing No. VT \026 NEK.

The relevant averments in the complaint in C.C. No.299/1999  (Coimbatore Court) reads as under :-  

"The complainant states that on 24.4.98, IOC had come to know  that NEPC India Limited in total disregard to the orders of the  Hon. High Court, Madras had clandestinely removed both the  engines and certain other parts from the Aircraft VT-NEJ Aircraft  Sl.No. 10684 (Fokker F27-500) stationed at the Coimbatore  Airport, Coimbatore\005\005\005\005\005\005\005  

The complainant states that, besides the above, the act of NEPC  India Limited in removing the engines and certain other parts  from the Aircraft VT-NEJ Aircraft Sl. No. 10684 (Fokker F27- 500) stationed at the Coimbatore Airport, Coimbatore is against  the terms of the hypothecation deed dated 01.5.1997 and  20.9.1997 will amount to theft, criminal breach of trust, and  cheating which are offences punishable under section 378  (Theft), 403 (Dishonest Misappropriation of Property), 405  (Criminal Breach of Trust), 415 (Cheating), 425 (Mischief) of the  Indian Penal Code. No notice was given to IOC in this regard."  

The relevant averments in the complaint in C.C. No.286/1998 (Alandur  Court) read as under  :-  "\005 With a view to defeat the said right of IOC (that is right to  take possession and sell the aircraft), NEPC India removed the  engines of the Aircraft (VT-NEK) stationed at the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 14  

Meenambakkam Airport\005\005\005\005\005\005\005\005  

The complainant states that, the act of NEPC India Limited in  removing the engines and certain other parts from the Aircraft  VT-NEK Aircraft Sl. No. 10687 (Fokker F27-500) stationed at the  Meenabakkam Airport, Chennai is against the terms of the  hypothecation deed dated 1.5.1997 as well as the terms of the  agreement dated 20.9.1997 and will amount to offences  punishable under section 378 (Theft), 403(Dishonest  Misappropriation of Property), 405 (Criminal Breach of Trust),  415 (Cheating), 425 (Mischief) of the India Penal Code. No  notice was given to IOC in this regard."  

Both the complaints also contain the following common allegations :  "The complainant states that the accused had with fraudulent  intention to cheat and defraud IOC had induced IOC to resume  supply of Aircraft fuel on Cash and Carry basis, by undertaking  to clear the outstanding amount of Rs.18 crores approximately  within the time stipulated in the hypothecation agreements.  However, the accused had failed to clear the said outstanding  amounts and had breached the terms of the hypothecation  agreements. Subsequently on 20.9.2007, an agreement was  entered into between IOC and M/s NEPC India Limited. As per  the terms of the above agreement M/s NEPC India Limited had  agreed to clear the outstanding amount of Rs.18 crores  approximately due to IOC from M/s NEPC India Limited and M/s  Skyline NEPC Limited within a time frame. However, M/s NEPC  India Limited had failed to keep up the schedule of payments  mentioned in the said agreements.

The facts narrated above will clearly show that IOC has got  every right to take possession of the Aircraft VT-NEK as well as  VT-NEJ. Only with a view to defeat the said right of IOC, M/s  NEPC India has removed the engines of the aircraft. \005\005\005.."

7.      The respondents herein filed Crl. O.P. No.1563 of 2000 and  Crl.O.P. No.2418 of 1999 respectively under section 482 of Cr.P.C. for  quashing the said two complaints on the following two grounds :  

(i)     The complaints related to purely contractual disputes of a  civil nature in respect of which IOC had already sought  injunctive reliefs and money decrees.  

(ii)    Even if all the allegations in the complaints were taken as  true, they did not constitute any criminal offence as  defined under sections 378, 403, 405, 415 or 425 IPC.   

8.      The High Court by common judgment dated 23.3.2001 allowed  both the petitions and quashed the two complaints. It accepted the  second ground urged by the Respondents herein, but rejected the first  ground. The said order of the High Court is under challenge in these  appeals. On the rival contentions urged, the following points arise for  consideration :

(i)     Whether existence or availment of civil remedy in respect  of disputes arising from breach of contract, bars remedy  under criminal law?  (ii)    Whether the allegations in the complaint, if accepted on  face value, constitute any offence under sections 378, 403,  405, 415 or 425 IPC ?

Re : Point No. (i) :

9.      The principles relating to exercise of jurisdiction under Section

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 14  

482 of the Code of Criminal Procedure to quash complaints and  criminal proceedings have been stated and reiterated by this Court in  several decisions. To mention a few - Madhavrao Jiwaji Rao Scindia v.  Sambhajirao Chandrojirao Angre [1988 (1) SCC 692], State of  Haryana vs. Bhajanlal [1992 Supp (1) SCC 335], Rupan Deol Bajaj vs.  Kanwar Pal Singh Gill [1995 (6) SCC 194], Central Bureau of  Investigation v. Duncans Agro Industries Ltd., [1996 (5) SCC 591],  State of Bihar vs. Rajendra Agrawalla [1996 (8) SCC 164], Rajesh  Bajaj v. State NCT of Delhi, [1999 (3) SCC 259], Medchl Chemicals &  Pharma (P) Ltd. v. Biological E. Ltd. [2000 (3) SCC 269], Hridaya  Ranjan Prasad Verma  v. State of Bihar [2000 (4) SCC 168], M.  Krishnan vs Vijay Kumar [2001 (8) SCC 645], and Zandu  Phamaceutical Works Ltd. v. Mohd. Sharaful Haque [2005 (1) SCC  122]. The principles, relevant to our purpose are :  

(i)     A complaint can be quashed where the allegations made in  the complaint, even if they are taken at their face value  and accepted in their entirety, do not prima facie  constitute any offence or make out the case alleged  against the accused.

For this purpose, the complaint has to be examined as a  whole, but without examining the merits of the allegations.  Neither a detailed inquiry nor a meticulous analysis of the  material nor an assessment of the reliability or  genuineness of the allegations in the complaint, is  warranted while examining prayer for quashing of a  complaint.   (ii)    A complaint may also be quashed where it is a clear abuse  of the process of the court, as when the criminal  proceeding is found to have been initiated with  malafides/malice for wreaking vengeance or to cause  harm, or where the allegations are absurd and inherently  improbable.  (iii)   The power to quash shall not, however, be used to stifle or  scuttle a legitimate prosecution. The power should be used  sparingly and with abundant caution.  (iv)    The complaint is not required to verbatim reproduce the  legal ingredients of the offence alleged. If the necessary  factual foundation is laid in the complaint, merely on the  ground that a few ingredients have not been stated in  detail, the proceedings should not be quashed. Quashing  of the complaint is warranted only where the complaint is  so bereft of even the basic facts which are absolutely  necessary for making out the offence.  (v)     A given set of facts may make out : (a) purely a civil  wrong; or (b) purely a criminal offence; or (c) a civil wrong  as also a criminal offence. A commercial transaction or a  contractual dispute, apart from furnishing a cause of action  for seeking remedy in civil law, may also involve a criminal  offence. As the nature and scope of a civil proceedings are   different from a criminal proceeding, the mere fact that the  complaint relates to a commercial transaction or breach of  contract, for which a civil remedy is available or has been  availed, is not by itself a ground to quash the criminal  proceedings. The test is whether the allegations in the  complaint disclose a criminal offence or not.  

10.     While on this issue, it is necessary to take notice of a growing  tendency in business circles to convert purely civil disputes into  criminal cases. This is obviously on account of a prevalent impression  that civil law remedies are time consuming and do not adequately   protect the interests of lenders/creditors. Such a tendency is seen in  several family disputes also, leading to irretrievable break down of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 14  

marriages/families. There is also an impression that if a person could  somehow be entangled in a criminal prosecution, there is a likelihood  of imminent settlement. Any effort to settle civil disputes and claims,  which do not involve any criminal offence, by applying pressure though  criminal prosecution should be deprecated and discouraged. In G.  Sagar Suri vs. State of UP [2000 (2) SCC 636], this Court observed :  

"It is to be seen if a matter, which is essentially of civil nature,  has been given a cloak of criminal offence. Criminal proceedings  are not a short cut of other remedies available in law. Before  issuing process a criminal court has to exercise a great deal of  caution. For the accused it is a serious matter. This Court has  laid certain principles on the basis of which High Court is to  exercise its jurisdiction under Section 482 of the Code.  Jurisdiction under this Section has to be exercised to prevent  abuse of the process of any court or otherwise to secure the  ends of justice."

While no one with a legitimate cause or grievance should be prevented  from seeking remedies available in criminal law, a complainant who  initiates or persists with a prosecution, being fully aware that the  criminal proceedings are unwarranted and his remedy lies only in civil  law, should himself be made accountable, at the end of such  misconceived criminal proceedings, in accordance with law. One  positive step that can be taken by the courts, to curb unnecessary  prosecutions and harassment of innocent parties, is to exercise their  power under section 250 Cr.P.C. more frequently, where they discern  malice or frivolousness or ulterior motives on the part of the  complainant. Be that as it may.     

11.     Coming to the facts of this case, it is no doubt true that IOC has  initiated several civil proceedings to safeguard its interests and recover  the amounts due. It has filed C.S. No.425/1997 in the Madras High  Court and O.S. No.3327/1998 in the City Civil Court, Chennai seeking  injunctive reliefs to restrain the NEPC India  from removing its aircrafts   so that it can exercise its right to possess the Aircrafts. It has also filed  two more suits for recovery of the amounts due to it for the supplies  made, that is CS No.998/1999 against NEPC India (for recovery of  Rs.5,28,23,501/90) and CS No.11/2000 against Skyline (for recovery  of Rs.13,12,76,421/25), in the Madras High Court. IOC has also  initiated proceedings for winding up NEPC India and filed a petition  seeking initiation of proceedings for contempt for alleged disobedience  of the orders of temporary injunction. These acts show that civil  remedies were and are available in law and IOC has taken recourse to  such remedies. But it does not follow therefrom that criminal law  remedy is barred or IOC is estopped from seeking such remedy.  

12.     The respondents, no doubt, have stated that they had no  intention to cheat or dishonestly divert or misappropriate the  hypothecated aircraft or any parts thereof. They have taken pains to  point out that the aircrafts are continued to be stationed at Chennai  and Coimbatore Airports; that the two engines of VT-NEK though  removed from the aircraft, are still lying at Madras Airport; that the  two DART 552 TR engines of VT-NEJ were dismantled for the purpose  of overhauling/repairing; that they were fitted to another Aircraft (VT- NEH) which had been taken on lease from ’M/s Aircraft Financing and  Trading BV’ and that the said Aircraft (VT-NEH) has been detained by  the lessor for its dues; that the two engines which were meant to be  fitted to VT-NEJ (in places of the removed engines), when sent for  overhauling to M/s Hunting Aeromotive, U.K., were detained by them  on account of a dispute relating to their bills; and that in these peculiar  circumstances beyond their control, no dishonest intent could be  attributed to them. But these are defences that will have to be put  forth and considered during the trial. Defences that may be available,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 14  

or facts/aspects when established during the trial, may lead to  acquittal, are not grounds for quashing the complaint at the threshold.  At this stage, we are only concerned with the question whether the  averments in the complaint spell out the ingredients of a criminal  offence or not.  

13.     The High Court was, therefore, justified in rejecting the  contention of the respondents that the criminal proceedings should be  quashed in view of the pendency of several civil proceedings.  

Re : Point No.(ii)  

14.     This takes us to the question whether the allegations made in  the complaint, when taken on their face value as true and correct,  constitute offences defined under sections 378, 403, 405, 415 and 425  IPC ? Learned counsel for the appellant restricted his submissions only  to sections 405, 415 and 425, thereby fairly conceding that the  averments in the complaint do not contain the averments necessary to  make out the ingredients of the offence of theft (section 378) or  dishonest misappropriation of property (section 403).  

Section 378

15.     Section 378 defines theft. It states : "whoever, intending to take  dishonestly any movable property out of the possession of any person  without that person’s consent, moves that property in order to such  taking, is said to commit theft." The averments in the complaint clearly  show that neither the aircrafts nor their engines were ever in the  possession of IOC. It is admitted that they were in the possession of  NEPC India at all relevant times. The question of NEPC committing  theft of something in its own possession does not arise. The appellant  has therefore rightly not pressed the matter with reference to section  378.

Section 403

16.     Section 403 deals with the offence of dishonest misappropriation  of property. It provides that "whoever dishonestly misappropriates or  converts to his own use any movable property", shall be punished with  imprisonment of either description for a term which may extend to 2  years or with fine or both. The basic requirement for attracting the  section are : (i) the movable property in question should belong to a  person other than the accused; (ii) the accused should wrongly  appropriate or convert such property to his own use; and (iii) there  should be dishonest intention on the part of the accused. Here again  the basic requirement is that the subject matter of dishonest  misappropriation or conversion should be someone else’s movable  property. When NEPC India owns/possesses the aircraft, it obviously  cannot ’misappropriate or convert to its own use’ such aircraft or parts  thereof. Therefore section 403 is also not attracted.  

Section 405

17.     We will next consider whether the allegations in the complaint  make out a case of criminal breach of trust under section 405 which is  extracted below :

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 14  

"405. Criminal breach of trust. \026 Whoever, being in any  manner entrusted with property, or with any dominion  over property, dishonestly misappropriates or converts to  his own use that property, or dishonestly uses or disposes  of that property in violation of any direction of law  prescribing the mode in which such trust is to be  discharged, or of any legal contract, express or implied,  which he has made touching the discharge of such trust,  or wilfully suffers any other person so to do, commits  "criminal breach of trust".

A careful reading of the section shows that a criminal breach of trust  involves the following ingredients : (a) a person should have been  entrusted with property, or entrusted with dominion over property; (b)  that person should dishonestly misappropriate or convert to his own  use that property, or dishonestly use or dispose of that property or  willfully suffer any other person to do so; (c) that such  misappropriation, conversion, use or disposal should be in violation of  any direction of law prescribing the mode in which such trust  is to be  discharged, or of any legal contract which the person has made,  touching the discharge of such trust. The following are examples  (which include the illustrations under section 405) where there is  ’entrustment’ :  

(i)     An ’Executor’ of a will, with reference to the estate of the  deceased bequeathed to legatees.  (ii)    A ’Guardian’ with reference to a property of a minor or  person of unsound mind.  (iii)   A ’Trustee’ holding a property in trust, with reference to  the beneficiary.  (iv)    A ’Warehouse Keeper’ with reference to the goods stored  by a depositor.  (v)     A carrier with reference to goods entrusted for transport  belonging to the consignor/consignee.  (vi)    A servant or agent with reference to the property of the  master or principal.  (vii)   A pledgee with reference to the goods pledged by the   owner/borrower.  (viii)  A debtor, with reference to a property held in trust on  behalf of the creditor in whose favour he has executed a  deed of pledge-cum-trust. (Under such a deed, the owner  pledges his movable property, generally vehicle/machinery  to the creditor, thereby delivering possession of the  movable property to the creditor and the creditor in turn  delivers back the pledged movable property to the debtor,   to be held in trust and operated by the debtor).  

18.     In Chelloor Mankkal Narayan Ittiravi Nambudiri v. State of  Travancore, Cochin [AIR 1953 SC 478], this Court held :  

"\005 to constitute an offence of criminal breach of trust, it is  essential that the prosecution must prove first of all that the  accused was entrusted with some property or with any dominion  or power over it. It has to be established further that in respect  of the property so entrusted, there was dishonest  misappropriation or dishonest conversion or dishonest use or  disposal in violation of a direction of law or legal contract, by the  accused himself or by someone else which he willingly suffered  to do.  

It follows almost axiomatically from this definition that the  ownership or beneficial interest in the property in respect of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 14  

which criminal breach of trust is alleged to have been  committed, must be in some person other than the accused and  the latter must hold it on account of some person or in some  way for his benefit."  

[Emphasis supplied]

In Jaswantrai Manilal Akhaney v. State of Bombay [AIR 1956 SC 575],  this Court reiterated that the first ingredient to be proved in respect of  a criminal breach of trust is ’entrustment’. It, however, clarified :

"\005.. But when S. 405 which defines "criminal breach of trust"  speaks of a person being in any manner entrusted with  property, it does not contemplate the creation of a trust with all  the technicalities of the law of trust. It contemplates the  creation of a relationship whereby the owner of property makes  it over to another person to be retained by him until a certain  contingency arises or to be disposed of by him on the happening  of a certain event."  

19.     The question is whether there is ’entrustment’ in an  hypothecation? Hypothecation is a mode of creating a security without  delivery of title or possession. Both ownership of the movable property  and possession thereof, remain with the debtor. The creditor has an  equitable charge over the property and is given a right to take  possession and sell the hypothecated movables to recover his dues  (note : we are not expressing any opinion on the question whether  possession can be taken by the creditor, without or with recourse to a  court of law). The creditor may also have the right to claim payment  from the sale proceeds (if such proceeds are identifiable and  available). The following definitions of the term ’hypothecation’ in P.  Ramanatha Aiyar’s Advanced Law Lexicon (Third (2005) Edition, Vol.2,  Pages 2179 and 2180) are relevant :

"Hypothecation : It is the act of pledging an asset as security for  borrowing, without parting with its possession or ownership. The  borrower enters into an agreement with the lender to hand over  the possession of the hypothecated asset whenever called upon  to do so. The charge of hypothecation is then converted into  that of a pledge and the lender enjoys the rights of a pledgee."

’Hypothecation’ means a charge in or upon any movable  property, existing in future, created by a borrower in favour of a  secured creditor, without delivery of possession of the movable  property to such creditor, as a security for financial assistance  and includes floating charge and crystallization of such charge  into fixed charge on movable property. (Borrowed from section  2(n) of Securitisation and Reconstruction of Financial Assets &  Enforcement of Security Interest Act, 2002)"  

But there is no ’entrustment of the property’ or ’entrustment of  dominion over the property’ by the hypothecatee (creditor) to the  hypothecator (debtor) in an hypothecation. When possession has  remained with the debtor/owner and when the creditor has neither  ownership nor beneficial interest, obviously there cannot be any  entrustment by the creditor.  

20.     The question directly arose for consideration in Central Bureau of  Investigation v. Duncans Agro Industries Ltd., Calcutta [1996 (5) SCC  591]. It related to a complaint against the accused for offences of  criminal breach of trust. It was alleged that a floating charge was  created by the accused debtor on the goods by way of security under a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 14  

deed of hypothecation, in favour of a bank to cover credit facility and  that the said goods were disposed of by the debtor. It was contended  that the disposal of the goods amounted to criminal breach of trust.  Negativing the said contention, this Court after stating the principle as  to when a complaint can be quashed at the threshold, held thus :

"\005\005\005.a serious dispute has been raised by the learned  counsel \005\005 as to whether on the face of the allegations,  an offence of criminal breach of trust is constituted or  not. In our view, the expression ’entrusted with property’  or ’with any dominion over property’ has been used in a  wide sense in Section 405, I.P.C. Such expression  includes all cases in which goods are entrusted, that is,  voluntarily handed over for a specific purpose and  dishonestly disposed of in violation of law or in violation  of contract. The expression ’entrusted’ appearing in  Section 405, I.P.C. is not necessarily a term of law. It has  wide and different implications in different contexts. It is,  however, necessary that the ownership or beneficial  interest in the ownership of the property entrusted in  respect of which offence is alleged to have been  committed must be in some person other than the  accused and the latter must hold it on account of some  person or in some way for his benefit. The expression  ’trust’ in Section 405, I.P.C. is a comprehensive  expression and has been used to denote various kinds of  relationship like the relationship of trustee and  beneficiary, bailor and bailee, master and servant,  pledger and pledgee. When some goods are  hypothecated by a person to another person, the  ownership of the goods still remains with the  person who has hypothecated such goods. The  property in respect of which criminal breach of trust  can be committed must necessarily be the property  of some person other than the accused or the  beneficial interest in or ownership of it must be in  other person and the offender must hold such  property in trust for such other person or for his  benefit. In a case of pledge, the pledged article belongs  to some other person but the same is kept in trust by the  pledgee. In the instant case, a floating charge was  made on the goods by way of security to cover up  credit facility. In our view, in such case for  disposing of the goods covering the security against  credit facility, the offence of criminal breach of trust  is not committed." (emphasis supplied)

21.     The allegations in the complaints are that aircrafts and the  engines fitted therein belong to NEPC India, and that a charge was  created thereon by NEPC India, in favour of IOC, by way of  hypothecation to secure repayment of the amounts due to IOC. The  terms of hypothecation extracted in the complaint show that the  ownership and possession of the aircrafts continued with NEPC India.   Possession of the aircraft, neither actual nor symbolic, was delivered to  IOC. NEPC India was entitled to use the aircraft and maintain it in  good state of repairs. IOC was given the right to take possession of  the hypothecated aircrafts only in the event of any default as  mentioned in the Hypothecation Deed. It is not the case of the IOC  that it took possession of the aircraft in exercise of the right vested in  it under the Deed of Hypothecation. Thus, as the possession of the  aircraft remained all along with NEPC India in its capacity as the owner  and the Deed of Hypothecation merely created a charge over the  aircrafts with a right to take possession in the event of default, it

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 14  

cannot be said that there was either entrustment of the aircrafts or  entrustment of the dominion over the aircrafts by IOC to NEPC India.  The very first requirement of section 405, that is the person accused  of criminal breach of trust must have been "entrusted with the  property" or "entrusted with any dominion over property" is, therefore,  absent.  

22.     Learned counsel for the appellant, however, sought to  distinguish the decision in Duncan Agro on two grounds. It was pointed  out that Duncan Agro itself recognizes that there can be criminal  breach of trust where a beneficial interest exists in the other person,  and the offender holds the property in trust for such person. It is  submitted that when the deed of hypothecation was executed by NEPC  India in favour of IOC, the hypothecation created a beneficial interest  in the property in favour of IOC, and vis-‘-vis such ’beneficial interest’  of IOC, the possession of the property by NEPC India was in ’trust’. In  support of this contention, reliance was placed on a decision of the  Sind Judicial Commissioner in Gobindram C. Motwani v. Emperor :  (1938) 39 Cr.L.J. 509. In that case the complaint was that the accused  had hypothecated the goods in their shop as collateral security against  an advance and had agreed to hold the goods and proceeds thereof in  trust and to pay the proceeds as and when received by them.  However, as they did not pay the proceeds, the complaint was that  they committed criminal breach of trust. The Magistrate took the view  that as the hypothecated goods were still the property of the accused,  they could not commit criminal breach of trust in respect of their own  property. The Judicial Commissioner did not agree. He held :

"The test in this case appears to me to be whether the  owner of the goods, the accused, created an equitable  charge over the goods in their possession when they  executed the trust receipt. If they did so, they held the  goods as trustees, they were "in some manner entrusted"  with the goods, and if they dealt with them in violation of  the terms of the trust, they committed an offence under  this section, provided they had the necessary criminal  intent. I can myself see no reason why it should be said  that by this trust receipt the accused did not give a  beneficial interest in the goods to the applicant and did  not hold the goods, with which they were entrusted as  legal owners in trust for the applicant. That being so, I  think the learned Magistrate was wrong in his decision  that the accused could not be guilty of criminal breach of  trust because the goods were their own property."

It is evident that the said observations were made on the peculiar  facts of that case where the Commissioner concluded that the goods  were held by the accused in trust as trustee in view of execution of a  ’Trust Receipt’ by the accused. The facts were somewhat similar to  example (viii) in Para 17 above. Further the Judicial Commissioner  finally observed that there was so much room for an honest difference  of opinion as to the rights and liabilities of the parties to the trust  receipt that no useful purpose could be served in interfering with the  order of discharge by the Magistrate. The said decision is therefore of  no assistance to the appellant.  

If the observations relied on by the appellant are to be interpreted as  holding that the debtor holds the hypothecated goods, in trust for the  creditor, then they are contrary to the decision of this Court in Duncan  Agro (supra) which specifically holds that when goods are  hypothecated, the owner  does not hold the goods in trust for the  creditor. A charge over the hypothecated goods in favour of the  creditor, cannot be said to create a beneficial interest in the creditor,  until and unless the creditor in exercise of his rights under the deed,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 14  

takes possession. The term ’beneficial interest’ has a specific meaning  and connotation. When a trust is created vesting a property in the  trustee, the right of the beneficiary against the trustee (who is the  owner of the trust property) is known as the ’beneficial interest’. The  trustee has the power of management and the beneficiary has the  right of enjoyment. Whenever there is a breach of any duty imposed  on the trustee with reference to the trust property or the beneficiary,  he commits a breach of trust. On the other hand, when the owner of a  goods hypothecates a movable property in favour of a creditor, no  ’beneficial interest’ is created in favour of the creditor nor does the  owner become a trustee in regard to the property hypothecated. The  right of the creditor under a deed of hypothecation is the right to  enforce the charge created under the deed of hypothecation in the  manner specified in the deed and by no stretch of imagination can  such right be equated to a beneficial interest of a beneficiary in a  property held in trust. Therefore, the first contention that a creditor  has a beneficial interest in the hypothecated property and the owner is  in the position of a trustee with reference to the creditor is liable to be  rejected.  

23.     The second ground on which learned counsel for the appellant  sought to distinguish Duncan Agro is that the said case dealt with a  hypothecation deed creating a floating charge, whereas the case on  hand related  to a fixed charge and therefore, the principle laid down  in Duncan Agro  will not apply. This contention is also without basis.  The principle stated in Duncan Agro will apply in regard to all types of  hypothecations. It makes no difference whether the charge created by  the deed of hypothecation is a floating charge or a fixed charge. Where  a specific existing property is hypothecated what is created is a ’fixed’  charge. The floating charge refers to a charge created generally  against the assets held by the debtor at any given point of time during  the subsistence of the deed of hypothecation. For example where a  borrower hypothecates his stock-in-trade in favour of the Bank  creating a floating charge, the stock-in-trade, held by the borrower as  on the date of hypothecation may be sold or disposed of by the debtor  without reference to the creditor. But as and when new stock-in-trade  is manufactured or received, the charge attaches to such future stock- in-trade until it is disposed of. The creditor has the right at any given  point of time to exercise his right by converting the hypothecation into  a pledge by taking possession of the stock-in-trade held  by the debtor  at that point of time. The principle in Duncan Agro  is based on the  requirement of ’entrustment’ and not with reference to the ’floating’  nature of the charge.  The second contention also has no merit.

24.     We accordingly hold that the basic and very first ingredient of  criminal breach of trust, that is entrustment, is missing and therefore,  even if all the allegations in the complaint are taken at their face value  as true, no case of ’criminal breach of trust’ as defined under section  405 IPC can be made out against NEPC India.  

Section 415

25.     The essential ingredients of the offence of ’cheating’ are : (i)  deception of a person either by making a false or misleading  representation or by other action or omission (ii) fraudulent or  dishonest inducement of that person to either deliver any property or  to consent to the retention thereof by any person or to intentionally  induce that person to do or omit to do anything which he would not do  or omit if he were not so deceived and which act or omission causes or  is likely to cause damage or harm to that person in body, mind,  reputation or property.  

26.     The High Court has held that mere breach of a contractual terms  would not amount to cheating unless fraudulent or dishonest intention  is shown right at the beginning of the transaction and in the absence

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 14  

of an allegation that the accused had a fraudulent or dishonest  intention while making a promise, there is no ’cheating’. The High  Court has relied on several decisions of this Court wherein this Court  has held that dishonest intent at the time of making the  promise/inducement is necessary, in addition to the subsequent failure  to fulfil the promise. Illustrations (f) and (g) to section 415 makes this  position clear :  

"(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." "(g). A intentionally deceives Z into a belief that A means to  deliver to Z a certain quantity of indigo plant which he does not  intend to deliver, and thereby dishonestly induces Z to advance  money upon the faith of such delivery. A cheats; but if A, at the  time of obtaining the money, intends to deliver the indigo plant,  and afterwards breaks his contact and does not deliver it, he  does not cheat, but is liable only to a civil action for breach of  contract."  

27.     In Rajesh Bajaj (supra), this Court held :

"It is not necessary that a complainant should verbatim  reproduce in the body of his complaint all the ingredients of the  offence he is alleging. Nor is it necessary that the complainant  should state in so many words that the intention of the accused  was dishonest or fraudulent. \005..

The crux of the postulate is the intention of the person who  induces the victim of his representation and not the nature of  the transaction which would become decisive in discerning  whether there was commission of offence or not. The  complainant has stated in the body of the complaint that he was  induced to believe that respondent would honour payment on  receipt of invoices, and that the complainant realised later that  the intentions of the respondent were not clear. He also  mentioned that respondent after receiving the goods have sold  them to others and still he did not pay the money. Such  averments would prima facie make out a case for investigation  by the authorities."

28.     In Hridaya Ranjan Prasad Verma (supra), this Court held :  "On a reading of the section it is manifest that in the definition  there are set forth two separate classes of acts which the person  deceived may be induced to do. In the first place he may be  induced fraudulently or dishonestly to deliver any property to  any person. The second class of acts set forth in the section is  the doing or omitting to do anything which the person deceived  would not do or omit to do if he were not so deceived. In the  first class of cases the inducing must be fraudulent or dishonest.  In the second class of acts, the inducing must be intentional but  not fraudulent or dishonest. In determining the question it has to be kept in mind that the  distinction between mere breach of contract and the offence of  cheating is a fine one. It depends upon the intention of the  accused at the time to inducement which may be judged by his  subsequent conduct but for this subsequent conduct is not the  sole test. Mere breach of contract cannot give rise to criminal  prosecution for cheating unless fraudulent or dishonest intention  is shown right at the beginning of the transaction, that is the  time when the offence is said to have been committed.  Therefore it is the intention which is the gist of the offence. To  hold a person guilty of cheating it is necessary to show that he  had fraudulent or dishonest intention at the time of making the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 14  

promise. From his mere failure to keep up promise subsequently  such a culpable intention right at the beginning, that is, when he  made the promise cannot be presumed."

29.     In this case, the complaints clearly allege that the accused with  fraudulent intention to cheat and defraud the IOC, had induced IOC to  resume supply of aircraft fuel on cash and carry basis, by entering into  a further agreement dated 20.9.1997 and undertaking to clear the  outstanding amount of Rs.18 crores approximately within the time  stipulated in the Hypothecation Agreements. The sum and substance  of the said allegation read with other averments extracted above, is  that NEPC India, having committed default in paying the sum of Rs.18  crores, entered into a fresh agreement dated 20.9.1997 agreeing to  clear the outstanding as per a fresh schedule, with the dishonest and  fraudulent intention of pre-empting and avoiding any action by IOC in  terms of the hypothecation deeds to take possession of the aircrafts.  Though the supplies after 20.9.1997 were on cash and carry basis, the  fraudulent intention is alleged to emanate from the promise under the  said agreement to make payment, thereby preventing immediate  seizure (taking possession) of the aircrafts by IOC. This allegation  made in addition to the allegation relating to removal of engines, has  been lost sight of by the High Court. All that is to be seen is whether  the necessary allegations exist in the complaint to bring the case  within section 415. We are clearly of the view that the allegations in  the complaint constitute such an offence. We are not concerned with  the proof of such allegations or ultimate outcome of trial at this stage.  

Section 425

30.     Section 425 IPC provides : "Whoever, with intent to cause, or  knowing that he is likely to cause, wrongful loss or damage to the  public or to any person, causes the destruction of any property, or any  such change in any property or in the situation thereof as destroys or  diminishes its value or utility, or affects it injuriously, commits  "mischief". The three ingredients of the Section are : (i) intention to  cause or knowledge that he is likely to cause wrongful loss or damage  to the public or to any person; (ii) causing destruction of some  property or any change in the property or in the situation thereof; and  (iii) the change so made destroying or diminishing the value or utility  or affecting it injuriously. For the purpose of section 425, ownership or  possession of the property are not relevant. Even if the property  belongs to the accused himself, if the ingredients are made out,  mischief is committed, as is evident from illustrations (d) and (e) to  section 425. The complaints clearly allege that NEPC India removed  the engines thereby making a change in the aircrafts and that such  removal has diminished the value and utility of the aircrafts and  affected them injuriously, thereby causing loss and damage to IOC,  which has the right to possess the entire aircraft. The allegations  clearly constitute the offence of ’mischief’. Here again, we are not  concerned with the proof or ultimate decision.  

Conclusion :

31.     In view of the above discussion, we find that the High Court was  not justified in quashing the complaints/criminal proceedings in  entirety.  The allegations in the complaint are sufficient to constitute  offences under sections 415 and 425 of IPC. We accordingly allow  these appeals in part and set aside the order of the High Court insofar  it quashes the complaint under sections 415 and 425. As a  consequence, the Judicial Magistrate, Coimbatore and the Judicial  Magistrate, Alandur before whom the matters were pending, shall

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 14  

proceed with the matters in accordance with law in regard to the  complaints filed by IOC in so far as offences under sections 415 and  425 of IPC. Parties to bear their respective costs.