Top Supreme Court Landmark Decisions on Criminal Misappropriation of Property – Section 403 and 404 IPC

Criminal misappropriation of property consists of two sections section 403 IPC and 404 IPC of the Indian Penal Code. This sub-chapter contains provisions which deal with only the criminal misappropriation of the property, but it is closely related and intertwined with chapter “Criminal Breach of Trust”, which are contained in Section 405 to Section 409 IPC; and “Cheating” covered under Sections 415 to 420 IPC.

Sections 403 IPC and 404 IPC are produced hereunder for easy reference:

Section 403. Dishonest misappropriation of property.—Whoever dishonestly misappropriates or converts to his own use any movable property, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both.


(a) A takes property belonging to Z out of Z’s possession in good faith, believing, at the time when he takes it, that the property belongs to himself. A is not guilty of theft; but if A, after discovering his mistake, dishonestly appropriates the property to his own use, he is guilty of an offence under this section.

(b) A, being on friendly terms with Z, goes into Z’s library in Z’s absence, and takes away a book without Z’s express consent. Here, if A was under the impression that he had Z’s implied consent to take the book for the purpose of reading it, A has not committed theft. But, if A afterwards sells the book for his own benefit, he is guilty of an offence under this section.

(c) A and B being joint owners of a horse, A takes the horse out of B’s possession, intending to use it. Here, as A has a right to use the horse, he does not dishonestly misappropriate it. But, if A sells the horse and appropriates the whole proceeds to his own use, he is guilty of an offence under this section.

Explanation 1.—A dishonest misappropriation for a time only is a misappropriation within the meaning of this section.


A finds a Government promissory note belonging to Z, bearing a blank endorsement. A, knowing that the note belongs to Z, pledges it with a banker as a security for a loan, intending at a future time to restore it to Z. A has committed an offence under this section.

Explanation 2.—A person who finds property not in the possession of any other person, and takes such property for the purpose of protecting it for, or of restoring it to, the owner, does not take or misappropriate it dishonestly, and is not guilty of an offence; but he is guilty of the offence above defined, if he appropriates it to his own use, when he knows or has the means of discovering the owner, or before he has used reasonable means to discover and give notice to the owner and has kept the property a reasonable time to enable the owner to claim it.

What are reasonable means or what is a reasonable time in such a case, is a question of fact.

It is not necessary that the finder should know who is the owner of the property, or that any particular person is the owner of it; it is sufficient if; at the time of appropriating it, he does not believe it to be his own property, or in good faith believes that the real owner cannot be found.


(a) A finds a rupee on the high road, not knowing to whom the rupee belongs. A picks up the rupee. Here A has not committed the offence defined in this section.

(b) A finds a letter on the road, containing a banknote. From the direction and contents of the letter he learns to whom the note belongs. He appropriates the note. He is guilty of an offence under this section.

(c) A finds a cheque payable to bearer. He can form no conjecture as to the person who has lost the cheque. But the name of the person, who has drawn the cheque, appears. A knows that this person can direct him to the person in whose favour the cheque was drawn. A appropriates the cheque without attempting to discover the owner. He is guilty of an offence under this section.

(d) A sees Z drop his purse with money in it. A picks up the purse with the intention of restoring it to Z, but afterwards appropriates it to his own use. A has committed an offence under this section.

(e) A finds a purse with money, not knowing to whom it belongs; he afterwards discovers that it belongs to Z, and appropriates it to his own use. A is guilty of an offence under this section.

(f) A finds a valuable ring, not knowing to whom it belongs. A sells it immediately without attempting to discover the owner. A is guilty of an offence under this section.

Section 404.  Dishonest misappropriation of property possessed  by deceased person at the time of his death.—Whoever dishonestly misappropriates or converts to his own use property, knowing that such property was in the possession of a deceased person at the time of that person’s decease, and has not since been in the possession of any person legally entitled to such possession, shall be punished with imprisonment of either description for a term which may extend to three years, and shall also be liable to fine; and if the offender at the time of such person’s decease was employed by him as a clerk or servant, the imprisonment may extend to seven years.


Z dies in possession of furniture and money. His servant A, before the money comes into the possession of any person entitled to such possession, dishonestly misappropriates it. A has committed the offence defined in this section.

It is seen that the words ‘entrustment’ and ‘dominion over the property’, which are found in the provisions of Section 405 to 409 are particularly absent in Section 403 and Section 404 IPC. Therefore, there is no need for entrusting the property or dominion over the property for attracting Section 403 or Section 404.

The essential element for attracting Section 403 had been decided in the foundational case of Surendra Bahadur Singh vs. State of UP Crl.A. 59/1955 decided on 4th November 1957:

“A person is said to have misappropriated some property, including money, if he has used it in a way different from what he was bound to do in virtue of a contract or a result of a legal relationship created through some process of law.”

We shall now see the important principles in appreciating cases of Section 403 culled from the decisions of the Apex Court.

Accused should have used the property that is belonging to someone else, in a way different from what he was bound to do by virtue of a contract or legal relationship

One of the landmark decisions that laid down the basic principle for Section 403 IPC is the case of RAMASWAMY NADAR VS THE STATE OF T.N AIR 1958 SC 56. The facts of the case is that the accused was running a bumper competition with crossword puzzle. He would advertise for the puzzles, the contestants would be paying a sum for taking part in the contest and the winners would be getting a prize. The case of the prosecution is that the accused failed to pay PW1 to PW3, who have taken part in the contest and although they have been declared as first prize winners in the same.

Prosecution case: The accused had actually collected a lesser sum compared to even the prize money, and he did not pay the entire amount collected less the advertising expenses. The gravamen of the charge against the accused was that in spite of his recent experience that none of these ‘bumper competitions’ attracted a sufficiently large number of competitors to yield that guaranteed prize money, the accused had advertised the competition No. 92 with a guaranteed prize money of Rs. 3,10,000 and that in spite of his having collected about one lac and fifteen thousand odd rupees by way of entry fees, none of the prizes declared to have been won by, prosecution witnesses 1 to 3 and others, had actually been paid.

It was, therefore, suggested by the prosecution that the recent history of the prize competitions conducted by the appellant, would show that he was actuated by a dishonest intention when the collected one lac and fifteen thousand odd rupees by way of entry fees, and did not utilize any part of the collected amount towards payment of the prizes offered. A large volume of documentary evidence furnished by the appellant’s registers and account books, was adduced in support of the prosecution case.

The Police registered a case under Section 420 IPC, which went into trial on the above allegations after the filing of chargesheet.

Defence: The defence case is that the accused had collected insufficient collections in the recent competitions, he was not able to respect all his obligations, so much so that he was forced to close down the business owing to loss; and that he had disbursed over one lakh rupees and there are less than one thousand person who he is unable to pay.

Trial Court observed that there was no evidence that the accused had used any part of the entry fees collected in any of the competitions, for his own use, or that he took any financial benefit out of the moneys. In other words, the Trial Court found that in order to meet the heavy demands of the prize winners in respect of the previous competitions, the accused had spent not only the amounts collected by him but also about one and a half lacs of rupees of his own capital. Thus, instead of making any gain for himself, the accused had incurred a total loss of about a lac and a half of rupees, and still he had to meet other prize winners’ demands, including those of the three prosecution witnesses aforesaid. On those considerations, his finding was that the accused may have been “absolutely foolish and reckless and far too optimistic” in expecting large sums of money by way of collections to entry fees, but that he had not been guilty of any fraudulent or dishonest conduct. Ultimately, he came to the following conclusion :

“The mere fact that the accused had been utterly reckless and irresponsible in his conduct of the Lotus Cross Words and thereby caused loss to certain persons cannot, however, impute a criminal liability to him. Hence I find that the prosecution has not proved beyond reasonable doubts the guilt of the accused.”

On an appeal by the prosecution, the High Court acquitted the Accused for the charge of Section 420, but convicted him under Section 403 IPC on the premise that the accused did not disburse the money in pro-rata basis of the total collection less the advertisement cost. Against the Judgment of the High Court, the accused came on appeal to the Supreme Court.

In the Supreme Court the first argument was that the High Court was wrong in convicting the accused for an offence for which he was not convicted of by the lower court and the order is per se illegal as per section 423 of the old criminal procedure code. After due deliberation, the supreme court rejected this contention.

The second point that was raised before the Supreme Court was that the High Court cannot convict the accused for section 403 IPC as there is no misappropriation. Considering this, the Supreme Court stated the following:

In order to prove an offence under S. 403, Indian Penal Code, the prosecution has to prove that the property, in this case, the net amount of ninety- six thousand odd rupees, was the property of the prosecution witnesses 1 to 3 and others, and (2) that the accused misappropriated that sum or converted it to his own use, and (3) that he did so dishonestly.

The Apex Court came to the conclusion that Section 403 is not made out as the funds of ninety- six thousand odd rupees was not the property of PW1 to PW3 who are the participants of the Scheme, but it is the entire surplus collection. Further, there was no legal obligation on the part of the Accused to repay this sum of monies to Subscribers of the scheme. Therefore, there is no misappropriation as such.

Contractor, who was paid by the Principal, not paying sub-contractor is not misappropriation – Quash

Shorn of details, the issue in the case of U. Dhar v. State of Jharkhand, (2003) 2 SCC 219 : 2003 SCC (Cri) 490 is whether a contractor who had not paid sub-contractor after completion of work, although the contractor received the amounts from the principal, be liable for Section 403, 406, 420 and 120B IPC? The Supreme Court held that the contact between the Principal and the contract is different from the contract of contractor with sub-contractor and there is no case of misappropriation, being a civil transaction. The element of dishonest was missing in the case of the prosecution and at the most, it is a recovery of money issue. The Supreme Court went on to quash the proceeding. The relevant portion of the decision in U. Dhar v. State of Jharkhand, (2003) 2 SCC 219 : 2003 SCC (Cri) 490 is as follows

5. In our view, what is relevant is that the contract between TCPL and the complainant is an independent contract regarding execution of certain works and even assuming the case of the complainant to be correct, at best it is a matter of recovery of money on account of failure of TCPL to pay the amount said to be due under the contract. The complainant has alleged that TCPL has already received the money from SAIL for the work in question and it has misappropriated the same for its own use instead of paying it to the complainant and it is for this reason that the offences are alleged under Sections 403, 406 and 420 etc.

6. The courts below have overlooked the fact that the contract between Bokaro Steel (a unit of SAIL) and TCPL is a separate and independent contract. The contract between the complainant and TCPL is altogether a different contract. The contractual obligations under both the contracts are separate and independent of each other. The rights and obligations of the parties i.e. the complainant and TCPL are to be governed by the contract between them for which the contract between TCPL and Bokaro Steel (SAIL) has no relevance. Therefore, even if Bokaro Steel has made the payment to TCPL under its contract with the latter, it will not give rise to plea of misappropriation of money because that money is not money or movable property of the complainant.

7. Further, Section 403 uses the words “dishonestly” and “misappropriate”. These are necessary ingredients of an offence under Section 403 IPC. Neither of these ingredients is satisfied in the facts and circumstances of the case. In para 14 of the complaint, the complainant has stated as under:

“… Release of payments to the complainant was never dependent on the payment released by Bokaro Steel Plant, a unit of SAIL to TISCO growth shop and TCPL.”

8. Thus, admittedly, the two contracts are independent of each other and payment under one has no relevance qua the other. It cannot be said that there is any dishonest intention on the part of the appellants nor can it be said that TCPL or the appellants have misappropriated or converted the movable property of the complainant to their own use. Since the basic ingredients of the relevant section in the Penal Code, 1860 are not satisfied, the order taking cognizance of the offence as well as the issue of summons to the appellants is wholly uncalled for. Such an order brings about serious repercussions.

So far as the appellants are concerned, when no case is made out for the alleged offences even as per the complaint filed by the complainant, there is no reason to permit the appellants to be subjected to trial for the alleged offences. Hence, the appeal is allowed. The impugned orders of the High Court as well as of the Chief Judicial Magistrate are hereby ordered to be quashed.

Whether a partner can be held responsible for misappropriation of the properties of the firm?

The case of Velji Raghavji Patel v. State of Maharashtra, (1965) 2 SCR 429 : AIR 1965 SC 1433 : (1965) 2 Cri LJ 431 primarily relates to Section 409 IPC, wherein the facts were a partner of a firm misappropriated property of the firm. The Supreme Court was satisfied that Section 409 IPC would not be made out as a partner of a firm is a co-owner of the property of the firm. An alternative argument was made that in the case that a partner who had misappropriated property of the firm may be liable for Section 403. Justice J.R.Mudholkar went on to reject the said contention in the following words:

9. Mr Chatterjee finally contends that the act of the appellant will at least amount to dishonest misappropriation of property even though it may not amount to criminal breach of trust and, therefore, his conviction could be altered from one under Section 409 to that under Section 403.

It is obvious that an owner of property, in whichever way he uses his property and with whatever intention will not be liable for misappropriation and that would be so even if he is not the exclusive owner thereof. As already stated, a partner has, undefined ownership along with the other partners over all the assets of the partnership. If he chooses to use any of them for his own purposes he may be accountable civilly to the other partners. But he does not thereby commit any misappropriation. Mr Chatterjee’s alternative contention must be rejected.

From the above it is clearly seen that the partner of the firm cannot misappropriate property that was belonging to the firm as he is the co-owner of the said property.

Temporary Misappropriation

One of the cases that has clearly brought in the issue of temporary misappropriation is the case of Khandu Sonu Dhobi v. State of Maharashtra, (1972) 3 SCC 786 : 1972 SCC (Cri) 854 at page 789 decided by the Supreme Court in the year 1972. The first appellant was an agricultural assistant who was working under the second appellant who was an agricultural supervisor. The government had gained a contract for construction of bundhs. Out of the Rs.5000 received from the government, work for only Rs. 4400 had been completed but the remaining rectification work had not been completed. However the second appellant made enquiries into the account book showing as though he had checked 28 payments and the measurements of the work. Further, the first appellant created paysheet with thumb impression of the labourers who had not done the work. The second appellant initialled the pay-sheets and also signed in the last page as though he checked the same. Though documents had been created, work had not been done.

Case of the defence is that the PW1 had asked A1 and A2 to first create the documents even prior to completion of work for recovering the money from the Government and that the work had been completed subsequently.

Three major contentions had been rejected by the Supreme Court:

  • Fabricated documents had been created even before the completion of the work
  • Subsequent completion of the work is not a defence as temporary misappropriation is covered under Section 403
  • Investigation irregularity cannot be taken into consideration unless prejudice is shown to the accused.

For the above reasons, the case came to be dismissed. The relevant portion in the Khandu Sonu Dhobi v. State of Maharashtra, (1972) 3 SCC 786 : 1972 SCC (Cri) 854 for the reasoning is as follows:

8. We have heard Mr Kotwal on behalf of the appellants and are of the opinion that there is no merit in the appeal. It has not been disputed before us that the accused made various entries and prepared documents on March 11, 1966, about their having got the rectification work done as well as about the payment of Rs 369.07 on that account. It has also not been disputed before us that the amount of Rs 369.07 was not paid to any one by the accused in March or April, 1966.

According to Ghate (PW 1) and Inamdar (PW 11), no work relating to the rectification of the Bundh was found to have been done till May 11,1966, when they visited the site in question. Inamdar’s evidence also shows that according to the measurement book prepared by the accused, 83 pits had been recently dug although the witness could not find a single pit on the spot. In view of the above, we find no cogent ground to disagree with the trial court and the High Court that the accused had prepared false documents and had also committed criminal breach of trust in respect of the amount of Rs 369.07. We also agree with the trial court and the High Court that the accused were in the discharge of their duties guilty of criminal misconduct as defined in Section 5 of the Prevention of Corruption Act.

9. Mr Kotwal has argued that the accused completed the rectification work after May 11, 1966. There is, however, no direct evidence as may show that the rectification work was completed after May 11, 1966. Even if it may be assumed that the accused completed the rectification work in May 1966, that fact, in our opinion, would not absolve the accused of their criminal liability. The charge against the accused relates to preparation of false documents because even though no work had been done till March 11, 1966, and no amount had been disbursed, they prepared documents showing the doing of that work and the payment of that amount.

It is no answer to that charge that after the matter had been reported to the higher authorities, the accused in the month of May 1966, got the rectification work done. It is also no answer to a charge of criminal misappropriation that the money was subsequently, after the matter had been reported to the high authorities, disbursed for the purpose for which it had been entrusted. According to Explanation 1 to Section 403 of the Penal Code, 1860, a dishonest misappropriation for a time only is “misappropriation” within the meaning of that section.


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