MANU/SC/3152/2006

Equivalent/Neutral Citation: 2006(44)AIC 37, AIR2006SC 2780, AIR2006SC 2780, 2006 (56) AC C 249, 2007(1)ALT(C ri)272,
III(2006)C C R128(SC ), 2006(3)C rimes182(SC ), 2006(4)C TC 60, 2006GLH(2)753, 2006 INSC 452, JT2006(6)SC 474, 2007-1-LW(C rl)80,
2006(II)OLR(SC )659, 2006(3)RC R(C riminal)740, RLW2006(4)SC 3380, 2006(7)SC ALE286, (2006)6SC C 736, [2006]Supp(3)SC R704

IN THE SUPREME COURT OF INDIA

Criminal Appeal Nos. 833 and 834 of 2002
Decided On: 20.07.2006
Indian Oil Corporation Vs. NEPC India Ltd. and Ors.
Hon'ble Judges/Coram:
H.K. Sema and R.V. Raveendran, JJ.
Case Note:
Civil - Contract - Breach - Section 8 of the Aircraft Act, 1934 - Agreements
entered into between the appellant and the respondent for supply of aviation
fuel - Deed of hypothecation executed by the respondent - Appellant moved
the High Court for grant of mandatory injunction on failure to pay
installments on the part of the respondents - Recovery suits filed for recovery
of the amounts due - Criminal complaints filed against the directors -Whether
existence or availment of civil remedy in respect of disputes arising from
breach of contract, bars remedy under criminal law - Held, availability of civil
remedies does not mean that criminal law remedy is barred or the appellant
was estopped from seeking such remedy - Defences that may be available, or
facts/aspects when established during the trial, may lead to acquittal, are not
grounds for quashing the complaint at the threshold - High Court justified in
rejecting the contention of the respondents that the criminal proceedings
should be quashed in view of the pendency of several civil proceedings - High
Court was not justified in quashing the complaints/criminal proceedings in
entirety - Appeals disposed of
Criminal - Cheating - Default in Payment - Allegation that the respondents
induced appellant to resume supply of aircraft fuel on cash and carry basis, by
entering into a further agreement - Allegation relating to removal of engines -
Held, allegations in the complaint constitute such an offence
Criminal - Criminal breach of trust - Hypothecation - Section 405 of the Indian
Penal Code, 1860 - Held, hypothecation was a mode of creating a security
without delivery of title or possession - When possession had remained with
the debtor/owner and when the creditor has neither ownership nor beneficial
interest, there could not be any entrustment by the creditor - First
requirement of Section 405 absent - No case of 'criminal breach of trust' made
out
Criminal - Mischief - Section 425 of the Indian Penal Code, 1860 - Complaints
alleged that the respondent removed the engines diminishing the value and
utility of the aircrafts and affected them adversely, causing loss and damage
to the appellant, which had the right to possess the entire aircraft - Held, if
the ingredients were made out, mischief is committed - Allegations constitute
the offence of 'mischief'

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 JUDGMENT
R.V. Raveendran, J.
1 . 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
installments 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
installments 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 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 installments 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 installments 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

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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 (Chennal) 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 - 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....
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:
...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 Meenambakkam Airport....
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 Meenambakkam 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:

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 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 welt 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....
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 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 MANU/SC/0261/1988 : 1988CriL J853 ,
State of Haryana v. Bhajanlal MANU/SC/0115/1992 : 1992CriL J527 ,Rupan Deol Bajaj
v. Kanwar Pal Singh Gill MANU/SC/0080/1996 : 1996CriL J381 ,Central Bureau of
Investigation v. Duncans Agro Industries Ltd. MANU/SC/0622/1996 : 1996CriL J3501 ,
State of Bihar v. Rajendra Agrawalla MANU/SC/1429/1996 : 1996CriL J1372 ,Rajesh
Bajaj v. State NCT of Delhi MANU/SC/0155/1999 : 1999CriL J1833 ,Medchl Chemicals
& Pharma (P) Ltd. v. Biological E. Ltd. MANU/SC/0128/2000 : 2000CriL J1487 ,Hridaya
Ranjan Prasad Verma v. State of Bihar MANU/SC/0223/2000 : 2000CriL J2983 ,M.
Krishnan v. Vijay Kumar MANU/SC/0630/2001 : 2001CriL J4705 , andZandu

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Phamaceutical Works Ltd. v. Mohd. Sharaful Haque MANU/SC/0932/2004 :
2005CriLJ92 . 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
maladies/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 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 v. State of UP MANU/SC/0045/2000 : 2000CriLJ824 , this Court
observed:
It is to be seen if a matter, which is essentially of civil nature, has been given a

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 cloak of criminal offence. Criminal proceedings are not a short cut of other
remedies available in taw. 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.
1 2 . 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, 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.
1 3 . 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.

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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:
405. Criminal breach of trust, - 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

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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 wilt, 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).
1 8 . I n Chelloor Mankkal Narayan Ittiravi Namhudiri v. State of Travancore, Cochin
MANU/SC/0091/1952 : AIR1953SC478 , this Court held:
... 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 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]
I n Jaswantrai Manilal Akhaney v. State of Bombay MANU/SC/0030/1956 :
1956CriL J1116 , this Court reiterated that the first ingredient to be proved in respect of
a criminal breach of trust is 'entrustment'. It, however, clarified:
...But when Section 405 which defines "criminal breach of trust" speaks of a
person being in any manner entrusted with property, it does not contemplate

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 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 fender 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 hypothecate (creditor) to the hypothecator (debtor) is 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 MANU/SC/0622/1996 : 1996CriL J3501 . 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 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:
... a serious dispute has been raised by the learned Counsel... 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

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 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, pledge 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 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-a-
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

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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, 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.
2 3 . 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

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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 merits.
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 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:

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 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....
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 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

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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 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.
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