The Rajasthan High Court has held that an individual cannot be charged with breach of trust under Section 405 of the IPC or cheating under Section 415 of the IPC solely for failing to repay a loan, unless there are additional circumstances that would warrant such charges.

The bench, led by Justice Rajendra Prakash Soni, was reviewing a quashing petition from an accused facing charges under Sections 405 and 415 of the IPC. These charges stemmed from an FIR filed after the complainant alleged that the accused took a loan with interest and subsequently failed to repay it.

The petitioner's counsel contended that the dispute was purely civil in nature and should have been addressed through a money recovery suit rather than being framed as a criminal offense. Additionally, they argued that the FIR served merely as a means to intimidate and harass the petitioner in an effort to recover the loan amount.

The Court emphasized that the basis of the FIR against the petitioner was solely the recovery of the money lent as a loan. It concurred with both arguments presented by the petitioner's counsel.

The Court noted that for a charge of criminal breach of trust to be valid, there must be an element of entrustment. It clarified that there is a distinction between merely advancing or investing money and the specific act of "entrusting" money to someone.

“In a case of advancement of money as a loan for consideration of interest, there is no question of entrustment and therefore, there would be no question of criminal breach of trust.”

The Court ruled that a mere breach of promise, agreement, or contract does not automatically constitute the offense of criminal breach of trust under the IPC unless there is a clear case of entrustment, which does not occur simply by lending money as a loan. Therefore, the charge of criminal breach of trust was not applicable.

Regarding the charge of cheating, the Court highlighted that the key distinction between a mere breach of contract and cheating lies in the presence of "fraudulent inducement" and mens rea that leads the complainant to part with their property. It concluded that the petitioner's inability to repay the loan alone could not satisfy the requirements for this offense unless it could be demonstrated that there was fraudulent or dishonest intent from the outset of the transaction that caused the complainant to involuntarily transfer money.

“The legislature intended to criminalise only those breaches which are accompanied by fraudulent, dishonest or deceptive inducements, which resulted in involuntary and in-efficient transfers, under Section 415 of Indian Penal Code.”

In the background of this analysis, Court quashed the FIR against Petitioner.

Case Title: Madanlal Pareek v State of Rajasthan & Anr.