The Supreme Court has clarified an important distinction between contractual disputes and criminal cheating allegations. the Court quashed criminal proceedings against a company’s Chief Executive Officer after finding that the complaint did not establish the dishonest intention required to make out the alleged offences of cheating.
The judgment also explains that although an arbitration clause does not automatically prevent criminal proceedings, courts must examine whether the allegations actually satisfy the essential ingredients of the alleged criminal offence.
Background
The dispute arose from a proposed transaction involving Jamguri Tea Estate in Assam. Indroneel Goho was serving as the Chief Executive Officer of Darjeeling Organic Tea Estates Private Limited. Razouvonuo Thong, proprietor of C.R. Traders, entered into negotiations with the company for the tea estate.
On June 1, 2021, the company and C.R. Traders signed a Memorandum of Understanding (MoU). Goho signed it as the company's authorised representative. Thong subsequently transferred ₹40 lakh directly into the company's bank account.
Disputes later arose over the agreement, which the company terminated on July 26, 2021. Thong subsequently filed a criminal complaint alleging that Goho had induced her to pay the money by misrepresenting the ownership of the tea estate. The Magistrate issued summons under Sections 417 and 420 of the Indian Penal Code (IPC).
The Gauhati High Court's Kohima Bench refused to quash the proceedings on May 13, 2025, prompting Goho to approach the Supreme Court.
A bench comprising Justice Vikram Nath and Justice Sandeep Mehta examined whether the complaint disclosed the essential ingredients of cheating. The Court emphasised that dishonest intention must exist when the representation is made, rather than being inferred merely from the subsequent failure of a contract.
The judgment stated:
"The distinction between a breach of contract and the offence of cheating is well settled. For an offence under Sections 417 and 420 of IPC, the fraudulent or dishonest intention must exist at the inception of the transaction and must have induced the complainant to part with property. A subsequent failure to perform a contractual obligation cannot, by itself, give rise to an inference of such intention."
The bench noted that the MoU was executed between Thong and the company, while Goho signed only in his official capacity. The ₹40 lakh was transferred to the company's account, and there was no allegation that Goho personally received or misappropriated any part of the amount.
The Court also considered that Thong knew about the mortgage with UCO Bank and that the MoU contemplated clearing the bank's outstanding dues and acquiring the estate.
Addressing the arbitration clause, the bench clarified:
"The High Court was correct in observing that the existence of an arbitration clause does not, by itself, bar criminal proceedings. That proposition, however, does not answer the real question. The Court must first determine whether the allegations disclose the essential ingredients of the criminal offence alleged."
The Court observed that questions concerning the validity of the agreement's termination and entitlement to a refund could be pursued through civil or contractual remedies.
The Supreme Court allowed the appeal, set aside the Gauhati High Court's order and quashed C.R. Case No. 17 of 2022 and the connected proceedings against Goho.
It clarified that Thong remained free to pursue any civil or contractual remedy available under law.
