Criminal Breach of trust Under IPC: A Critical Analysis

Dr. Ram Manohar Lohiya National Law University

Introduction

Section 405.  of  IPC defines Criminal breach of trust in the following words- 

“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.”

That is to say that the beneficial interest in the property in respect of which the offence is alleged to have been committed was vested in some person other than the accused, and that the accused held the property on behalf of that person. A relationship is created between the transferor and transferee, whereunder the transferor remains the legal owner of the property and the transferee has only the custody of the property for the benefit of the transferor himself or someone else. At best the transferee, obtains in the property entrusted to him only a special interest limited to a claim for his charges in respect of safe retention, and under no circumstances does he acquire a right to dispose of that property in contravention of the entrustment[1].

The  offence of criminal breach of trust  is  committed when  a person who is entrusted in any manner with  property or With dominion over it, dishonestly misappropriates it, or converts  it  to  his own use, or-dishonestly uses  it  or disposes it of in violation of  any direction of law prescribing the mode in  which the trust  is  to  be discharged, or  of  any  lawful  contract, express or implied, made by him touching such discharge,  or willfully suffers any other person so to do[2]. 

It cannot however be said that it is impossible, under all circumstances, for a person to commit criminal breach of trust in respect of his own property. Where the accused who pledged promissory notes with the complainant as security for a loan, induced him to hand them over to him (i.e. the accused) by pretending that he required them to collect money from his debtors with the aid of which he would pay cash to him (i.e. the complainant), it was held that the possession of the promissory notes, even without endorsement, in the hands of the person, with whom they were pledged, was of some value to the complainant as it gave him control over the accused and so long as they remained with him, they prevented the accused from using them to discharge the debts due by him to other creditors in preference to him and the complainant had thus, some sort of beneficial interest in the property and when he gave the notesto the accused for a definite purpose and the accused dishonestly disposed of them in violation of the legal contract, there was both entrustment and dishonest misappropriation[3].

The following ingredients are necessary to attract the operation of section 405.

(a)  The accused must be entrusted with property or dominion over the property; and

(b)  The person so entrusted (i.e., the accused) must-    

(i)     dishonestly misappropriate, or convert to his own use, that property, or

(ii)   dishonestly use or dispose of that property or wilfilly suffer any other person to do so in violation of

(1)   any direction of law, prescribing the mode, in which such trust is to be discharged, or

(2)  any legal contract made touching the discharge of such trust.

What Is Criminal Breach Of Trust?

The offence of criminal breach of trust, as defined under this section, is similar to the offence of embezzlement under the English law. A reading of the section suggests that the gist of the offence of criminal breach of trust is ’dishonest misappropriation’ or ’conversion to own use’ another’s property, which is nothing but the offence of criminal misappropriation defined u/s 403. The only difference between the two is that in respect of criminal breach of trust, the accused is entrusted with property or with dominion or control over the property.

As the title to the offence itself suggests, entrustment or property is an essential requirement before any offence under this section takes place. The language of the section is very wide. The words used are ‘in any manner entrusted with property’. So, it extends to entrustments of all kinds-whether to clerks, servants, business partners or other persons, provided they are holding a position of trust. “The term “entrusted” found in a 405, IPC governs not only the words “with the property” immediately following it but also the words “or with any dominion over the property”.

In the case of State of Gujarat vs Jaswantlal Nathalal[4],  the government sold cement to the accused only on the condition that it will be used for construction work. However, a portion of the cement purchased was diverted to a godown. The accused was sought to be prosecuted for criminal breach of trust. The Supreme Court held that the expression ‘entrustment’ carries with it the implication that the person handing over any property or on whose behalf that property is handed over to another, continues to be its owner. Further, the person handing  over the property must have confidence in the person taking the property. so as to create a fiduciary relationship between them. A mere transaction of sale cannot amount to an entrustment. If the accused had violated the conditions of purchase, the only remedy is to prosecute him under law relating to cement control. But no offence of criminal breach of trust was made out.

 In Jaswant Rai Manilal Akhaney vs State of Bombay[5],It was held that when securities are pledged with a bank for specific purpose on specified conditions, it would amount to entrustment. Similarly, properties entrusted to directors of a company would amount to entrustment, because directors are to some extent in a position of trustee. However, when money was paid as illegal gratification, there was no question of entrustment.

 In the case of State of UP vs Babu Ram[6], the accused, a sub-inspector (SI) of police, had gone to investigate a theft case in a village. In the evening, he saw one person named Tika Ram coming from the side of the cannal and hurriedly going towards a field. He appeared to be carrying something in his dhoti folds. The accused searched him and found a bundle containing currency notes. The accused took the bundle and later returned it. The amount returned was short by Rs. 250. The Supreme Court held that the currency notes were handed over to the SI for a particular purpose and Tika Ram had trusted the accused to return the money once the accused satisfied himself about it. If the accused had taken the currency notes, it would amount to criminal breach of trust..

In Rashmi Kumar vs Mahesh Kumar Bhada[7] the Supreme Court held that when the wife entrusts her stridhana property with the dominion over that property to her husband or any other member of the family and the husband or such other member of the family dishonestly misappropriates or converts to his own use that property, or willfully suffers and other person to do so, he commits criminal breach of trust.

 Entrustment

As the title to the offence itself suggests, entrustment of property is an essential requirement before any offence under this section takes place. The language of the section is very wide. The words used are ‘in any manner entrusted with property’. So, it extends to entrustments of all kinds- whether to clerks, servants, business partners or other persons, provided they are holding a position of trust. The word entrust is not a word of art. In common parlance, it embraces all cases in which a thing handed over by one person to another for specific purpose. It need not be express it may be implied. It not only covers the relationship of a trustee and beneficiary between the complainant and the accused, like master and servant, guardian and ward, and the pledgor and pledge. It connotes that the accused holds the property for, and on behalf of another. Hence in all such transactions like that of a consignor and consignee, bailor and bailee and hirer and hiree, there is an element of trust implied in the transaction because in all such relation, the property entrusted to the accused is ‘property of another person’.

 In order to constitute a legal entrustment, therefore, the complainant must be the owner of the property; there must be a transfer of possession; such transfer must be actual transfer, and not a fictional or notional one; such transfer should be made to somebody who has no right excepting that of a custodian, and such entrustment must be made to a person, and not to a company or a firm. These are the panchsheel of a legal entrustment. Mere transaction of sale cannot amount to an entrustment; entrustment means that the person handing over any property, or on whose behalf that property is handed over to another, must have confidence in the person, taking the property, so as to create a fiduciary relationship between them[8]. The word entrustment in this section, governs not only the words ‘with the property’ immediately following it, but also the word ‘or with any dominion over the property’, occurring thereafter. Similarly, the managing director of a company, including the amounts received from the subscribers, and dominion is as good as entrustment for the purpose of this section.

 For a valid entrustment it is not necessary that the accused should receive the money directly from the complainant. In the case of Dwarkadas Haridas v Emperor[9] Where under the terms of a contract, some goods were entrusted to the accused, who was to sell those goods, obtain money for them, and that money on account of the complainant, it was held that though he didn’t actually receive the money from the complainant, he was ‘entrusted’ with it within the meaning of this section.

Property

The definition in a 405 does not restrict the property to movables or immoveable alone. In the case of R K Dalmia vs Delhi Administration[10], the Supreme Court held that the word ‘property’ is used in the Code in a much wider sense than the expression ‘moveable property’. There is no good reason to restrict the meaning of the word ‘property’ to moveable property only, when it is used without any qualification in s 405. Whether the offence defined in a particular section of IPC can be committed in respect of any particular kind of property, will depend not on the interpretation of the word ‘property’ but on the fact whether that particular kind of property can be subject to the acts covered by that section.

The word ‘dominion’ connotes control over the property. In Shivnatrayan vs State of Maharashtra, it was held that a director of a company was in the position of a trustee and being a trustee of the assets, which has come into his hand, he had dominion and control over the same.

However, in respect of partnership firms, it has been held29 that though every partner has dominion over property by virtue of being a partner, it is not a dominion which satisfies the requirement of s 405, as there is no ‘entrustment of dominion, unless there is a special agreement between partners making such entrustment.

Explanations (1) and (2) to the section provide that an employer of an establishment who deducts employee’s contribution from the wages payable to the employee to the credit of a provident fund or family pension fund or employees state insurance fund, shall be deemed to be entrusted with the amount of the contribution deducted and default in payment will amount of the contribution deducted and default in payment will amount to dishonest use of the amount and hence, will constitute an offence of criminal breach of trust. In the case  Employees State Insurance Corporation vs S K Aggarwal[11], the Supreme Court held that the definition of principal employer under the Employees State Insurance Act means the owner or occupier. Under the circumstances, in respect of a company, it is the company itself which owns the factory and the directors of the company will not come under the definition of ‘employer.’ Consequently, the order of the High Court quashing the criminal proceedings initiated u/ss 405 and 406, IPC was upheld by the Supreme Court

 Misappropriation

Dishonest misappropriations the essence of this section. Dishonesty is as defined in sec.24, IPC, causing wrongful gain or wrongful loss to a person. The meaning of wrongful gain and wrongful loss is defined in sec 23, IPC. In order to constitute an offence, it is not enough to establish that the money has not been accounted for or mismanaged. It has to be established that the accused has dishonestly put the property to his own use or to some unauthorized use. Dishonest intention to
misappropriate is a crucial fact to be proved to bring home the charge of criminal breach of trust.

              Proof of intention, which is always a question of the guilty mind or mens rea of the person, is difficult to establish by way of direct evidence. In Krishan Kumar V UOI[12], the accurse was employed as an assistant storekeeper in the Central Tractor Organisation (CTO) at Delhi. Amongst other duties, his duty was the taking of delivery of consignment of goods received by rail for CTO. The accused has taken delivery of a particular wagonload of iron and steel from Tata Iron and Steel Co, Tatanagar, and the goods were removed from the railway depot but did not reach the CTO. When questioned, the accused gave a false explanation that the goods had been cleared, but later stated that he had removed the goods to another railway siding, but the goods were not there. The defence version of the accused was rejected as false. However, the prosecution was unable to establish how exactly the goods were misappropriated and what was the exact use they were put to. In this context, the Supreme Court held that it was not necessary in every case to prove in what precise manner the accused person had dealt with or appropriated the goods of his master. The question is one of intention and not direct proof of misappropriation.

The offence will be proved if the prosecution establishes that the servant received the goods and that he was under a duty to account to his master and had not done so. In this case, it was held that the prosecution has established  that the accused received the goods and removed it from the railway depot. That was sufficient to sustain a conviction under this section. Similarly, in Jaikrishnadas Manohardas Desai vs State of Bombay[13], it was held that dishonest misappropriation or conversion may not ordinarily be a matter of direct proof, but when it is established that property, is entrusted to a person or he had dominion over it and he has rendered a false explanation for his failure to account for it, then an inference of misappropriation with dishonest intent may readily be made. Prosecution need not establish the precise mode of dishonest misappropriation of conversion.

 In Surendra Prasad Verma v State of Bihar[14], the accused was in possession of the keys to a safe. It was held that the accused was liable because he alone had the keys and nobody could have the access to the safe, unless he could establish that he parted with the keys to the safe.

The offence under section 405 can be said to have committed only when all of its essential ingredients are found to have been satisfied. As in the case of criminal misappropriation, even a temporary misappropriation could be sufficient to warrant conviction under this section. Even if the accused intended to restore the property in future, at the time misappropriation, it is a criminal breach of trust.

 Doctrine of Public Trust and Interpretation of Law Courts

In the case of Common Cause, A Registered Society v Union of India[15] and in the case of Shiva Sagar Tiwari v Union of India[16], it was held by the Supreme court that a minister is in a position of trustee in respect of public property under his charge and discretion, and he must therefore deal with people’s property in just and fair manner, failing which he or she would be personally liable for criminal breach of trust.

In the case of Common Cause, the apex court imposed a fine of Rs 50 lakh on Captain Satish Sharma, former petroleum minister in the P V Narsimha Rao’s government for arbitrary exercise of discretionary power of minister in allotment and distribution of petrol pumps and cooking gas agencies; and ordered the central Bureau of Investigation.  To probe into the allotment scam and institute criminal proceedings for committing breach of trust against Captain Satish Sharma for abuse of office during his tenure as minister.

The bench consisting of justices Kuldeep Singh and Faizanuddin, setting aside order of allotment of petrol pumps said”

Not only the relatives of most of the officials  working for Captain Satish  Sharma but  even     his  own driver  and   the        driver of  his  additional Private   Secretary have been allotted  a petrol  pump and a gas agency respectively……………. There  is nothing on the record to indicate that the Minister kept any criteria in  view  while  making  the  allotments………….. no criteria was fixed,  no guidelines  were kept  in view, none knew how many  petrol   pumps  were available   for allotment, applications were  not invite and the allotments of petrol pumps were made in an arbitrary and discriminatory manner.”

The court explained that in a welfare state the Government provides a large number of benefits to the citizens and held:

“A Minister  who is the  executive  head  of the department  concerned distributed these benefits and largesse (generosity)s. He is elected by the people and is elevated to a position where he holds a trust on behalf of the people. He has to deal with the peoples’ property in a fair and just manner. He cannot commit breach of the trust reposed in him by the people.”

 In the case of Shiv Sagar Tiwara v Union of India[17], the apex court levied a fine of 60 lakhs on Mrs. Sheila Kaul, former Union Minister for Housing and Urban Development and former govermor of Himachal Pradesh and cancelled the allotment of 52 shops and kiosks (stalls) for arbitrarily, oppressively and un-constitutionally allotting the shops to her relatives, friends and staff members during her tenure as Minister. The court directed the Government to formulate an allotment policy within two months and complete the process of allotment within four months.

Justice Kuldeep Singh and Justice Hansaria, while imposing the fine said

“Since the properties she was dealing with were Government properties, the government by the people has to be compensated for breach of public trust. Mrs. Kaul should pay for causing pecuniary loss to the exchequer for action in an “oppressive and mala fide manner”, while making shop allotments.

However the apex court in a review petition filed by Mrs. Kaul, quashed the damages on compassionate ground having regard to the peculiar facts and circumstances of Mrs. Kaul, who was stated to be old, ailing and passing through great hardship[18].

It was thought that these decision have set at rest the controversy in respect of exercise of discretionary power by the Ministers, Governors etc., and have established jurisprudence of public accountability and transparency in the Government’s working and would be an eye opener to persons in high positions to exercise powers with restraint so as not to make it farce and mockery of rule of law and democratic process. But to the dismay of common man and disappointment to legal fraternity in a review petition, a three member bench of the Supreme Court consisting of the Justices Saghir Ahmed, Venkatswami and Rajendra Babu turned down its earlier decision of November 4 1996 and ordered for the refund of sum of Rs. 50 lakh to the petitioner and quashed the order of the court for launching of prosecution against Capt. Sharma for criminal breach of trust under section 406, IPC.

While endorsing the findings, it was found by the court that the conduct of the Minister was wholly unjustified, the court said nevertheless it falls short of “misfeasance”; and the petitioner “Common Cause”, not being an applicant for allotment, it could not claim to have suffered any damage or loss on account of conduct of Minister. There has to be an identifiable plaintiff or claimant whose interest are damaged by the public officer (tort feaser) maliciously or with the knowledge that the impugned section was likely to injure the interest of that person. As regards the imposition of pecuniary damages, it was said by the court:

“State cannot derive itself the right of being compensated by its officers on the ground that they had contravened or violated the fundamental rights of a citizen. Directing the Minister to pay, a sum of 50 lakh to the Government, would amount to asking the government to pay exemplary damages to itself, which is not tenable under law”.

Lastly, it was said by the court that the ‘Doctrine of Public Trust’ is not applicable in the case of ministers in discharging their duties.

I fail to understand the logic of such a farfetched argument that though the act of the Minister is wrong, it is not actionable, it also a derogation from the maxim of ‘Ubi jus ibi remedium’, this should not be so especially in a democratic country like India where public trust is the breath of the system. With due respect to the court that in a democracy the court cannot shirk from its constitutional responsibility by pleading its inability to provide remedy applying the colonial theory of “the king can do no wrong”. Another assumption of the court, that ‘the minister does not assume the role of a trustee’ in the real sense, nor does a trust comes into existence, is misleading. Moreover the fact that there is no injury to a third person in the present case is not enough to make the principle of public accountability inapplicable in as much as there was injury to the high principle of public law, that a public functionary has to use its power for the bona fide purpose and in a transparent manner.

 Criminal Breach of Trust by Public Servant or by Banker or by Agent

Section 409 of IPC says – Criminal breach of trust by public servant, or by banker, merchant or agent.– Whoever, being in any manner entrusted with property, or with any dominion over property in his capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, commits criminal breach of trust in respect of that property, shall be punished with [ imprisonment for life], or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.

The acts of criminal breach of trust done by strangers is treated less harshly than acts of criminal breach of trust on part of the persons who enjoy special trust and also in a position to be privy to a lot of information or authority or on account of the status enjoyed by them, say as in the case of a public servant. That is why section 407 and 408 provide for enhanced punished of up to seven years (which is generally three years or/with fine)  in the case of commission of offence of criminal breach of trust by persons entrusted with property as a carrier, wharfinger or warehouse-keeper.

In respect of public servants a much more stringent punishment of life imprisonment or imprisonment up to 10 years with fine is provided. This is because of special status and the trust which a public servant enjoys in the eyes of the public as a representative of the government or government owed enterprises. Under section 409, IPC, the entrustment of property or dominion should be in the capacity of the accused as a public servant, or in the way of his business as a banker, merchant broker, etc. The entrustment should have nexus to the office held by the public servant as a public servant. Only then this section will apply.

In the case of Superintendent and Remembrance of Legal Affairs v. S K Roy[19], the accused a public servant in his capacity as a Superintendent of Pakistan unit of Hindustan Co-operative Insurance Society in Calcutta, which was a unit of LIC, although not authorized to do so, directly realized premiums in cash from Pakistani policy holders and misappropriated the amounts after making false entries in the relevant registers.

To constitute an offence of criminal breach of trust by a public servant under sec 409, IPC, the acquisition of dominion or control over the property must also be in the capacity of a public servant. The question before the court was whether the taking of money directly from the policy holders, which was admittedly unauthorized, would amount to acting in his capacity as a public servant. The Supreme Court held that it is the ostensible or apparent scope of a public servant’s authority when receiving the property that has to be taken into consideration. The public may not aware of the technical limitations of the powers of the public servants, under some internal rules of the department or office concerned. It is the use made by the public servant of his actual official capacity, which determines whether there is sufficient nexus or connection between the acts complained of and the official capacity, so as to bring the act within the scope of the section. So, in this case it was held that the accused was guilty of the offence under sec 409. 

 Dishonest Intention

Unless dishonest intention is shown, an offence under sec 405, IPC, cannot be committed. Every breach of trust in the absence of mens rea, is not criminal. The court should ascertain whether the state of mind in which the accused was, did not exclude the existence of dishonest intention which is an essential ingredient of the offence of criminal breach of trust. Evidence is certainly relevant for purpose of ascertaining whether the state of mind of accused render it possible or likely for him to have entertained dishonest intention when he dealt with the moneys entrusted to him. If the accused was really unable to form the criminal intention, he cannot be guilty of the offence under section 406.

In the case of Mohanlal Mulchand v Mehta Kanaiyalal Pranshanker[20], certain title deeds were entrusted to the accused for the purpose of making enquiries about some land. The accused did not return the documents and said that he had lost the bundle and that the task was not completed. It was found that the accused had used the title deeds to harm the transferee. Under these facts, it was held that the offence was complete when the documents were used to harm the transferee and that taking of money was not necessary to constitute the offence.

The prosecution is not bound to establish the mode in which the accused has appropriated the amount of entrustment. Dishonest misappropriation may be inferred from the established facts. Dishonest intention was held to have been proved in the case of a post master who entered an amount in the saving bank pass book of a depositor without entering the same in his account book[21].Where the accused took a gold jewel from a goldsmith for showing it to his wife and placing an order for a similar jewel but failed to return it and retained it with him towards some debt due to him by the goldsmith and claimed it to be his own, it was held that the accused was guilty of dishonestly retaining it and claiming it to be his by misappropriating it[22].

Every breach of trust gives rise to a suit for damages, but it is only when there is an evidence of mental act of fraudulent misappropriation that the commission of embezzlement of any sum of money becomes a panel offence punishable as criminal breach of trust. A mere breach of contract is not synonymous with criminal breach of trust. It is the mental act of fraudulent misappropriation that distinguishes an embezzlement, amounting to a civil wrong or tort, from the offence of criminal breach of trust. If there is no mens rea, or if other essential ingredients are lacking, the same set of facts would not sustain a criminal prosecution though a civil action may lie. A mere failure to repay the loan would not constitute a criminal breach of trust. Where the managing agents acted dishonestly, it was held that they were not liable for criminal breach of trust even though there has been a breach of contract causing loss to the policy holders of the company[23]. The mere fact that the payment was delayed in no ground for imputing a criminal intention on the part of the accused, when there is no particular obligation to pay it at a certain date.