Section 405 of Indian Penal Code, 1860 – Explained!
The section requires that the offender must be entrusted with either property or dominion over property in any manner. He must then dishonestly misappropriate the same or dishonestly convert the same to his own use, or he must dishonestly use or dishonestly dispose of that property in violation of law which has prescribed the mode in which such trust is to be discharged, or any legal express or implied contract which he has made touching the discharge of such trust, or he wilfully suffers any other person so to do. This offence is also known by the name ‘embezzlement’ even though that word has not been used in the Indian Penal Code.
There are two explanations attached to the section. The first explanation explains that a person being an employer of an establishment whether exempted under section 17 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or not, who deducts the employee’s contribution from the wages payable to the employee for credit to a Provident Fund or Family Pension Fund established by any law for the time being in force shall be deemed to have been entrusted with the amount for the contribution so deducted by him, and if he makes default in the payment of such contribution to the said fund in violation of the said law, shall be deemed to have dishonestly used the amount of the said contribution in violation of a direction of law as aforesaid.
While the first explanation was added by Act 40 of 1975 and came into existence with effect from November 1, 1975, the words ‘of an establishment…………… or not’ between the first and the second comma of this explanation were added by Act 33 of 1988 and came into existence with effect from August 1, 1988. The use of the words ‘shall be deemed to have’ at two places in the explanation has created fiction. This would make an employer, much more responsible than he has been in the past, and he would now try to see that there is no default on his part in this respect.
The second explanation states that a person, being an employer, who deducts the employee’s contribution from the wages payable to the employee for credit to the Employees State Insurance fund held and administered by the Employees’ State Insurance Corporation established under the Employees’ State Insurance Act, 1948, shall be deemed to have been entrusted with the amount of the contribution so deducted by him and if he makes default in the payment of such contribution to the said fund in violation of the said Act, shall be deemed to have dishonestly used the amount of the said contribution in violation of a direction of law as aforesaid.
The use of the words ‘shall be deemed to have’ at two places in the explanation has created fiction. This is bound to make an employer much more alert, and he would now try not to commit any default in this respect. The second explanation was inserted by Act 38 of 1975 and came into existence with effect from September 1, 1975.
The Patna High Court has observed that in every case of criminal breach of trust a breach of contract is implied. Whether a matter is a criminal breach of trust or criminal breach of contract must be judged by the factor as to whether the offender has acted dishonestly or not. If he has, it is criminal breach of trust, and if has not, it is a criminal breach of a contract.
It has been observed by the Supreme Court that the offence created under section 5 (1) (e) of the Prevention of Corruption Act, 1947 is distinct and separate from the offence of criminal breach of trust under section 405 of the Indian Penal Code, and, therefore, section 5 (1) (e) of the Act of 1947 does in no way repeal section 405 of the Code.
There must always be entrustment in criminal breach of trust. The entrustment could be either of property or of dominion over property. Thus, there must necessarily be at least two parties, one who entrusts and the other to whom the property or the dominion over property is entrusted.
The use of the words ‘in any manner’ shows that there is no fixed mode of entrustment. It may be a trust as provided under the Indian Trusts Act, 1882 or it may be any other kind of entrustment. Since the word ‘property’ and not ‘movable property’ has been used in section 405, it is quite clear that the offence of criminal breach of trust is not restricted to movable property only and this offence can be committed in respect of immovable property as well.
The entrustment must be of property or dominion over property. Where any person entrusts any property to another person, it is a case of entrustment of property. But one has dominion over property when he has supervision or control over property in the sense that it is he who has to take appropriate decisions concerning the same.
For instance, if a Municipal Water Works Inspector has the power to supervise or check the distribution of water from the municipal water works, in an area he has dominion over water belonging to his employers in that area. Similar is the case of an inspector of electricity who has the power to check or supervise the distribution of electricity in a defined area.
In all such cases, it must be proved, if a charge of criminal breach of trust has to be made out, that the accused inspector not only had the dominion over water or electricity in an area but also that he had been entrusted with that dominion by some authority. Dishonest intention on the part of the accused must be established before he can be held guilty of this offence.
The word ‘dishonestly’ has the same meaning as given under section 24 of the Code. With such intention he must either misappropriate or convert to his own use that property. To misappropriate means to appropriate in an unlawful or wrongful manner, that is to say, to set apart for one’s use to the exclusion of the other in such a manner as is not permitted by the law. To convert to one’s own use means to utilise the property for his own benefit without any justification under law.
The offence is also committed where the offender dishonestly uses or disposes of that property by violating either any law which gives any direction prescribing the mode in which such trust is to be discharged, or any legal express or implied contract which he has made touching the discharge of such trust. The contract has to be legal, whether express or implied. It cannot be for a criminal purpose like, for instance, purchase of stolen property.
The accused is guilty of this offence also when he wilfully suffers any other person so to do. In other words, if an accused entrusted with property or dominion over property wilfully suffers any other person to use or dispose of the trust property in violation of law as stated above, the accused is guilty of committing this offence.
Where some jewellery is pledged in order to cover the repayment of an overdraft, there is an entrustment within the meaning of section 405. But a trust implies confidence by one in another and, therefore, where a person obtains possession of some property by trickery or fraud, it cannot be said to be an entrustment under this section.
Thus, where the accused represented to the victim that he was a tinner, which he was not, and the victim gave him certain utensils to be repaired but he neither repaired nor returned the same, it was held that he was guilty not of criminal breach of trust but of cheating under section 420 of the Code.
But where the superintendent of the Pakistan section of an insurance society which was a unit of the LIC collected premiums directly from policy holders, issued receipts and made false adjustments in the record, he was held guilty of criminal breach of trust.
Where the victim paid some money to a goldsmith to buy gold and make certain ornaments, it is an entrustment and if the goldsmith dishonestly converts the same to his own use in violation of the implied contract made with the victim, he is guilty of committing criminal breach of trust.
It needs to be noted that the section nowhere says that the property in respect of which this offence is committed must belong to the complainant. All that is necessary is that the property or dominion over property must be entrusted by one to another, and it is immaterial as to whether the complainant is its owner or not. Collecting bus fares from passengers but failing to deposit the same is not criminal breach of trust because being entrusted with doing a job and being entrusted with money are distinct and separate matters.
The Punjab and Haryana High Court has ruled that where the money deposited by members under a chit fund scheme started by the accused company was to be utilised by the company as its own money, and the depositor members would be entitled to get back their money along with interest after a certain time, this could not be held to be an entrustment within the meaning of section 405, and if the company failed to return the deposits of some members only a civil action would lie against the company.
But the Delhi High Court has held that where all the instalments of a chit fund were paid to the chit fund company by the subscribers, who were accordingly entitled to receive the amounts, for which the company did issue the cheques, but which were dishonoured on the ground that there was not enough money in the account of the company in the bank, the charge for committing criminal breach of trust against the managing director of the company was correctly framed because he had a prima facie dominion over the company’s property which was entrusted to him by the subscribers. The use of the words ‘in any manner’ in section 405 covers an entrustment of this kind also.
In Velji Raghavji v. State, the Supreme Court held that in order to establish ‘entrustment of dominion’ over property to an accused, the mere existence of that person’s dominion over that property is not enough. It must be shown that his dominion was the result of entrustment.
Therefore, for a prosecution of a partner it must be proved that dominion over the assets or a particular asset of the partnership was, by a special agreement between the parties, entrusted to the accused partner. If in the absence of such an agreement, a partner receives money belonging to the partnership, he cannot be said to have received it in a fiduciary capacity or cannot be held to have been entrusted with dominion over property.
In Anil Saran v. State of Bihar, a partner was entrusted with property under a special contract. The Supreme Court held that the property is held by him in a fiduciary capacity and if he misappropriates it he will be guilty of committing criminal breach of trust.
In Sardar Singh v. State, the accused, a Patwari, was admittedly entrusted with the receipt book, or in any event with dominion over it. He could not return it to his superior authorities. It was held that he could not be said to have committed criminal breach of trust because the prosecution failed to prove dishonest misappropriation of the same or conversion of it to his own use.
Where money due to partnership was required to be deposited in bank in the name of the firm but the accused partner deposited the same in the name of a third party, it was held that he could not be held guilty of committing criminal breach of trust because in the absence of special agreement it could not be said to be an entrustment of dominion over partnership properties.
Where the victim handed over some money to a branch post master for opening a savings bank account, it amounted to entrustment, and so where the money was dishonestly misappropriated or converted to his own use by the post master, he would be guilty of this offence.
The Supreme Court quashed the conviction of an overseer who was convicted for shortage of some articles in open godowns which were in the physical charge of the watchmen on the grounds that the prosecution could neither establish that the godowns were under the charge of the overseer nor was misappropriation by him proved. Further the godowns being open, the entry there was unrestricted and consequently any one could just walk in and walk out, and there was thus possibility of pilferage and theft of the articles.
Where the accused cashier was in possession of a safe and the keys of the inner drawer were kept in the safe and the cash was removed by someone from the safe, it was quite safe to conclude that the accused was a party or privy to the taking away of the cash from the safe.
Where a tehsildar who was supposed to deposit treasury amounts of land revenue and fines etc. but failed to do so and these were not entered by him in the record also, he would be guilty of committing the offence of criminal breach of trust as he had been entrusted with the dominion over these properties and he dishonestly misappropriated or converted the same to his own use.
A fixed deposit made with a bank is not an entrustment as it is a money paid under a scheme to the bank by the depositor under the stipulation that the depositor would be entitled to receive his money with interest after the period of the deposit is over. Thus, if the bank fails to pay back the money a civil action is maintainable against it.
Where the accused received an article under a hire-purchase agreement and later on sold the same without making full payment to the person from whom he had hired it, he is guilty of criminal breach of trust. But where the accused hired an electric motor, paid the hiring charges for a few months during which he used the same, and then wrote a letter to its owner that he had purchased it on the condition that he would try it for three months and if it worked well during that time he would pay the money, and then claimed that he had paid the purchase money and had purchased it, it was held that the dispute was of a civil nature and no offence of criminal breach of trust was made out.
Similarly, where the accused violated a hire-purchase agreement and removed certain parts from a truck, he was held not guilty of criminal breach of trust though he would be liable for breach of contract. Depositing trust money in their own names but showing them as belonging to the trust to the auditors would not entail liability for criminal conspiracy to commit criminal breach of trust under sections 406 and 120-B of the Code.
A complaint against a registered society that it had committed criminal breach of trust is maintainable against the society where the case of the prosecution is that the society had guilty mind while acting through the second petitioner and other office bearers of the society.
But where the complainant had pledged certain articles of gold with a bank, and at the time of settlement he claimed that the articles returned to him were of inferior quality, and as such the manager, accountant and cashier of the bank should be held guilty of committing criminal breach of trust, it was held that since the bank had acted through the bank manager, he alone, and not the accountant and cashier, would be liable for the offence.
Where the contract between the government and the accused contractor stipulated that the former would supply construction material and the latter would be responsible for the construction, and the latter sold cement supplied for the purpose of construction, it was held that he had committed this offence. A dishonest misappropriation or conversion for the time being only is not exempted from liability, and as such whether the same is for a long duration or a short duration is of no consequence at all.
Where the accused, a traffic assistant in the office of the Indian Airlines, demanded certain excess amount from certain passengers as trunk call charges for making their reservations, and gave receipts of such amounts to them, but later on falsified the counter foils of receipts and dishonestly misappropriated the amount, he was held guilty of committing criminal breach of trust.
Where the secretary of a co-operative society, who was entrusted with certain amount of money of the society, gave away the same to the President of the society and bought a truck load of wheat for another member, and the President did not return the amount while the other member did not pay for the wheat, it was held that the secretary dishonestly misappropriated money and wilfully suffered the President and the other member to dishonestly convert to their own use property of the society and so he was guilty of committing criminal breach of trust. Where the accused had committed criminal breach of trust of government money, his guilt would not change simply because he refunded the amount when the act done by him came to be detected.
Where the husband or the wife dishonestly misappropriates or converts to his or her own use the exclusive property of the other spouse, he commits the offence of criminal breach of trust. The stridhan, which is a separate property of the wife, does not become the property of the husband on her entering the matrimonial home.
Thus, dishonest conversion of the same by her parents-in-law is punishable as criminal breach of trust. The Punjab and Haryana High Court has ruled that where a married woman dies intestate and without leaving any children, taking of her dowry gifts by her husband would not amount to criminal breach of trust as he is entitled to that property under section 15 (2) of the Hindu Succession Act, 1956.
In Khuman Chand v. State of Rajasthan the Rajasthan High Court held that gifts in cash or kind customarily given to in-laws at the time of engagement, tilak or marriage according to prevalent custom cannot be regarded as entrustment or dowry and so no offence under section 406 can be complained of against the donees.
With reference to the first explanation under section 405 the Calcutta High Court has ruled that the prosecution of an accused under section 14 (1) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and section 406, Indian Penal Code is not a case of double jeopardy as the two offences are separate even though based on similar facts.
There can be entrustment of provident fund contributions of the teachers as deductions and retention of their contribution is made even in the absence of rules under the West Bengal Board of Secondary Education Act, 1963. In Employees’ State Insurance Corporation v. S. K. Agarwal, criminal proceedings against an employer for default in payment of contribution to Employees’ State Insurance were started under explanation 2 of section 405 of the Code.
The Supreme Court held that section 2 (17) of the Employees’ State Insurance Act, 1948 defines the ‘principal employer’ as either owner or occupier taking care of all eventualities, and thus when the owner of the factory is the ‘principal employer’ there is no need to examine as to who is the occupier. The owner will be the principal employer under section 40. Therefore, even if no definition of ‘principal employer’ under the Employees’ State Insurance Act, 1948 is read in explanation 2 to section 405 of the Code, the Directors of the Company would not be covered under ‘principal employer’.
In Ravi B. Jadeja v. State of Uttar Pradesh, allegations were made by the complainant, who had supplied consignment to the accused company, that he was duped by the company. There was no dispute regarding payment of price and the dispute related only to non-conveyance of Form-H. Observing that intention to deceive the complainant was not evident on the part of the accused company the Allahabad High Court held that the dispute being of civil nature continuance of proceeding was an abuse of process of the court.
In Sham Lai v. State of Punjab, the Punjab and Haryana High Court ruled that the presence of arbitration clause in the agreement between parties cannot bar criminal proceedings under section 406 of the Code and both civil and criminal proceedings could go side by side.
In Jaswantrai Manilal Akhaney v. State of Bombay the Supreme Court held that a deprivation even for a short period is within the meaning of the expression ‘criminal breach of trust’. If the Managing Director of a bank entrusted with securities owned by the pledger disposes of those securities against the stipulated terms of the contract entered into by the parties, with the intention of causing wrongful loss to the pledger and wrongful gain to the bank, there can be no question but that the Managing Director has the necessary mens rea required by section 405.
In Ram Narain Poply v. Central Bureau of Investigation, the Supreme Court held that misappropriation is dishonest even though there was an intention to restore the money already siphoned off at some future point of time.
In Natural Sugar and Allied Industries v. Razzak Gaffar the Bombay High Court has expressed the opinion that a company being a juristic person and not a natural person cannot have the mens rea to commit the offence of criminal breach of trust.
In S. K. Alagh v. State of Uttar Pradesh, demand drafts were drawn in the name of a company for supply of goods. There was allegation that the company neither sent the goods nor returned the money. The Supreme Court held that managing director of the company cannot be said to have committed the offence under section 406. In absence of any provision laid down under a statute, a director of a company or an employee cannot be held vicariously liable for any offence committed by the company.
Difference between criminal misappropriation of property and criminal breach of trust
In the offence of criminal misappropriation the offender is already in possession of the property in an innocent manner before he dishonestly misappropriates or converts the same to his own use. whereas in criminal breach of trust he is entrusted with property or dominion over property in any manner before the dishonest misappropriation or conversion of the property or before he 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. The offence of criminal misappropriation of property can be committed only with respect to movable property, while criminal breach of trust can be committed with respect to both movable and immovable property.