The law clearly recognizes a difference between simple payment/investment of money and entrustment of money or property. A mere breach of a promise, agreement or contract does not, ipso facto, constitute the offence of the criminal breach of trust contained in Section 405 Indian Penal Code without there being a clear case of entrustment. In the context of contracts, the distinction between mere breach of contract and cheating would depend upon the fraudulent inducement and mens rea. The mere inability of a party to return the loan amount cannot give rise to a criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, as it is this mens rea which is the crux of the offence. The legislature intended to criminalise only those breaches which are accompanied by fraudulent, dishonest or deceptive inducements, which resulted in involuntary and inefficient transfers, under Section 415 Indian Penal Code. Satishchandra Ratanlal Shah v. State of Gujarat, (2019) 9 SCC 148.
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In Rashmi Jain v. State of U.P., 2014 (1) SCALE 415, the court said that mere failure of a person to keep up promise subsequently, a culpable intention right at the beginning, i.e., when he made the promises cannot be presumed. A distinction has to be kept in mind between mere breach of contract and the offence of cheating. It depends upon the intention of the accused at the time of inducement. The subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent, dishonest intention is shown at the beginning of the transaction.
In Vesa Holdings Pvt. Ltd. v. State of Kerala, 2015 CRLJ 2455 the court held that every breach of contract would not give rise to an offence of cheating and only in those cases breach of contract would amount to cheating where there was any deception played at the very inception. If the intention to cheat has developed later on, the same cannot amount to cheating. In other words, for the purpose of constituting an offence of cheating, the complainant is required to show that the accused had fraudulent or dishonest intention at the time of making promise. Even in a case where allegations are made in regard to failure on the part of the accused to keep his promise, in the absence of a culpable intention at the time of making initial promise being absent, no offence under Section 420 IPC can be said to have been made out. Suneel Galgotia v. State of U.P., 2016 (92) ACC 40.
Mere failure to fulfill a promise cannot be a ground to draw proceedings for prosecution under Section 420 Indian Penal Code. The essential ingredient for an offence punishable under Section 420 Indian Penal Code is dishonest misrepresentation on the part of the accused at the time of making promise. In the case of V.P. Srivastava v. Indian Explosives Ltd., (2010) 10 SCC 361, the Apex Court held that mere failure to perform the promise, by itself is not enough to hold a person guilty of cheating. It is necessary to show that at the time of making promise he had fraudulent or dishonest intention to deceive or to induce person so deceived to do something which he would otherwise not do. It was observed that such a culpable intention right at the time of entering into an agreement cannot be presumed merely from his failure to keep the promise subsequently. Govind Chandra Gupta v. State of U.P., 2014 (85) ACC 743.