The Himachal Pradesh High Court has refused to quash an FIR arising from alleged scrap transactions exceeding ₹21 crore, holding that contractual indemnity provisions cannot prevent criminal prosecution when the allegations disclose cheating, forgery, conspiracy and the use of fictitious firms to claim Input Tax Credit.

The bench of Justice Sandeep Sharma has observed that a civil agreement cannot be used as a shield against criminal liability where the allegations involve forged documents, fake KYC records, fraudulent GST registrations, bogus invoices and fabricated e-way bills.

The bench found that the allegations prima facie disclosed fraudulent and criminal intent and could not be characterised as a mere contractual or civil dispute.

“The existence of indemnity clause in the agreements nowhere bars or precludes criminal prosecution, especially when allegations disclose the commission of cognizable offences,” the Court observed.

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The petitioner/assessee had been engaged as an agent to arrange supplies of melting steel scrap required by the company. Agreements were executed for the supply of scrap either directly or through firms and agencies arranged and managed by the agent.

Under the arrangement, the agent was entitled to a commission of ₹50 per metric tonne. The agreement dated January 1, 2021 identified several proposed suppliers, including M/s Mahesh Trading Company and M/s Rajshree Trading Company.

According to the complaint, the agent introduced these two concerns and assured the company that the suppliers and their transactions were genuine. He allegedly agreed to indemnify the company against losses arising from any default or irregularity.

Documents purportedly furnished to establish the genuineness of the suppliers included PAN and Aadhaar details, address proofs, GST registration certificates, cancelled cheques, bank statements, purchase invoices, e-way bills and transport documents. The transactions were also reflected in the company’s GSTR-2A and GSTR-2B for claiming Input Tax Credit.

On the strength of the supplies and supporting documents, the company allegedly paid ₹11.03 crore to M/s Mahesh Trading Company and ₹10.44 crore to M/s Rajshree Trading Company. The agent received approximately ₹6.05 lakh as commission.

The controversy emerged after GST officers conducted a search at the company’s premises on July 20, 2021.

During the proceedings, the company allegedly discovered that the transactions and tax invoices issued by the two suppliers were considered bogus and illegal by the GST authorities.

The complainant alleged that the supplying firms did not exist and that fraudulent invoices had been generated in their names. The alleged irregular transactions reportedly resulted in the company depositing approximately ₹1 crore towards ITC and facing a further ITC demand of ₹2.66 crore.

The company further alleged that, instead of compensating it in accordance with the indemnity provisions, the agent issued a demand notice for ₹1.22 crore and initiated proceedings before the National Company Law Tribunal.

Following a preliminary inquiry, the police registered the FIR alleging cheating, criminal breach of trust and conspiracy.

The petitioner approached the High Court under Section 528 of the Bharatiya Nagrik Suraksha Sanhita, corresponding to Section 482 of the Code of Criminal Procedure.

It was argued that the dispute was governed entirely by the contractual agreements between the parties. The petitioner relied heavily on the clauses dealing with statutory liability, indemnification and the remedies available to the company in the event of non-payment of GST, bogus purchases or non-existent suppliers.

The petitioner submitted that, even if the company had suffered a loss due to denial of ITC or non-payment of GST by the suppliers, its remedy was to invoke the indemnity clause or institute civil proceedings.

It was contended that a mere failure to fulfil a contractual promise could not constitute cheating unless a fraudulent or dishonest intention existed when the promise was initially made.

The petitioner also alleged that the continued investigation, despite his cooperation, was causing prejudice and harassment.

The State and the complainant opposed the petition, contending that the case involved much more than a breach of contract.

They argued that the investigation had revealed the creation or use of bogus and untraceable firms, accompanied by fabricated GST invoices, e-way bills and related records. These documents were allegedly used to facilitate financial transactions and claim wrongful ITC.

According to the State, inquiries and verification undertaken by the Directorate General of GST Intelligence indicated fraudulent and criminal conduct. The allegations, it submitted, disclosed a coordinated attempt to cause wrongful loss to the company and the public exchequer.

The State informed the Court that the investigating agency had completed the investigation and prepared a chargesheet for offences under Sections 420, 467, 468, 469, 471 and 120-B of the IPC.

The High Court examined the relevant clauses of the agreements and noted that the agent had undertaken to compensate the company if liability arose because a supplier was not found at its registered address, failed to deposit GST, made bogus supplies or committed any other irregularity.

The agreements also allowed the company to cancel purchase orders, terminate its business relationship and recover damages resulting from a breach or default.

Significantly, the contractual remedies were not exclusive and were stated to be in addition to the remedies available to the company under law or equity.

The indemnity provision covered liabilities arising from negligent or wilful acts, fraudulent conduct and the agent’s or suppliers’ failure to comply with statutory requirements.

The Court consequently rejected the contention that these provisions prevented the complainant from initiating criminal proceedings.

While the indemnity clauses could make the agent liable to compensate the company, they did not create immunity from prosecution for alleged cheating, forgery or conspiracy.

The High Court reiterated that every breach of contract does not automatically amount to cheating. For the offence of cheating to be established, a fraudulent or dishonest intention must ordinarily exist when the representation or promise is made.

A subsequent failure to honour a promise, by itself, would not establish that the accused possessed a dishonest intention from the beginning.

However, the Court found that the allegations in the present case went beyond the subsequent non-performance of an agreement.

The petitioner had allegedly introduced firms which were later found to be bogus or non-existent and furnished documents, including GST registrations, KYC details, invoices and e-way bills, to establish the genuineness of those entities and transactions.

The Court held that the allegation of introducing non-existent suppliers and furnishing documents to support their supposed genuineness was sufficient, at the present stage, to indicate dishonest intention from the inception of the arrangement.

The alleged conduct could not be reduced to a simple refusal to honour an indemnity obligation.

“Forged documents, fake KYC and GST registrations along with misrepresentation amount to offences under the IPC and mere civil agreements cannot be used as a shield to evade criminal liability,” the Court said.

It added that civil and criminal liabilities may coexist where cheating, fraud and misrepresentation are apparent from the allegations.

The Court noted that the petitioner was accused of acting in connivance with the proprietors of the two supplier firms.

The material placed before the Court prima facie suggested that the petitioner was not acting independently and that the alleged transactions had been facilitated through bogus and untraceable firms.

The allegation that fabricated GST invoices and e-way bills were used to claim ITC reportedly caused substantial loss both to the complainant company and the public exchequer.

The Court held that whether the necessary ingredients of criminal breach of trust were ultimately established and whether the petitioner had acted in conspiracy with the other accused were matters requiring evidence at trial. Those questions could not be conclusively adjudicated in proceedings seeking the quashing of the FIR.

The petitioner relied on the Supreme Court’s decision in Vandana Jain and Others v. State of Uttar Pradesh and Others, in which criminal proceedings arising from a predominantly civil dispute were quashed.

The High Court distinguished that ruling on facts.

It observed that the Supreme Court case concerned the alleged non-fulfilment of contractual obligations, without material indicating that a dishonest intention existed from the beginning.

In the present case, however, there were specific allegations that the accused created or facilitated transactions through bogus and untraceable firms and fabricated GST invoices, e-way bills and other records. 

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