The Supreme Court has held that criminal proceedings for cheating cannot be applied merely because a film investment failed to generate profits, reiterating that such arrangements inherently involved commercial risk. Quashing the criminal proceedings initiated in Tamil Nadu for the offence of cheating under section 420 of the Indian Penal Code, a bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra observed, “No one can be sure whether a movie would earn profits or would be a flop. If one agrees to share profits in lieu of his investment in a movie, he takes the risk of a possible zero return.”
The bench noted that the complainant had no allegation that the film was not made; he also did not claim that the film generated profits. Hence the failure to share profits, by itself, will not lead to an offence of cheating, when there is no allegation that the investment was sought with a dishonest intention.
The case relates to a financial arrangement relating to a film project. According to the prosecution, the appellant, a film producer, had approached the de facto complainant for financial assistance to produce a film. An agreement dated December 30, 2013 recorded that the complainant invested Rs. 19.60 lakh in the project on the promise of receiving 30% of the profits. Subsequently, on April 3, 2014, the complainant advanced an additional Rs. 27 lakh on the assurance that his share in profits would increase to 47%. Thus, the entire investment was linked to profit-sharing from the proposed film, and not to a fixed return at the outset.
The project faced financial constraints during production and hence further funds were sought to complete it. Before the film’s release, the complainant objected to its release. It was at this stage that the appellant issued two post-dated cheques of Rs. 24 lakh each towards repayment of the principal amount. The film was thereafter released, but the cheques were dishonoured due to insufficient funds. Based on this, a police report under section 173 CrPC was filed alleging offences under sections 406 and 420 of the IPC.
The appellant approached the Madras high court under section 482 CrPC, seeking quashing of the criminal proceedings on the ground that the dispute was purely civil in nature. The HC partly allowed the petition by quashing the charge under section 406 IPC on the ground that there was no entrustment. However, it declined to quash the charge under section 420 IPC, observing that the complainant had parted with money based on representations and that whether the case amounted to cheating required examination during trial.
The apex court disagreed with this approach and reiterated that cheating under section 415 IPC required deception coupled with dishonest or fraudulent intention at the time of making the promise. It observed that mere breach of contract or failure to fulfil a promise was not sufficient to constitute cheating unless it was shown that such intention existed at the inception of the transaction.
The Supreme Court noted that the agreement did not provide for a fixed return and that the returns were contingent upon the success of the film. It further found that there was no allegation that the appellant had failed to carry out the project or had misused the funds. In a film project, failure to generate profits cannot be treated as evidence of deception or dishonest intention, the apex court ruled.
As regards the dishonoured cheques, the apex court held that their dishonour may give rise to proceedings under section 138 of the Negotiable Instruments Act, but did not by itself establish the offence of cheating because those cheques were issued to discharge an existing liability and not as an inducement to obtain the investment.
Accordingly, the appeal was allowed, leading to quashing of criminal proceedings under section 420 IPC.