Guest Post — An Economic Interpretation of Criminal Misappropriation

(This is a guest post by Parv Tyagi)

The Indian Penal Code criminalises dishonest misappropriation of property under section 403. This essay studies the crime of misappropriation from an economic point of view. Economics dictates that the efficient allocation of goods is best served by having agents engage in voluntary transactions, rather than in involuntary or forced exchange. Thus, it is argued that misappropriation being a purely coercive transfer of property is criminalised because it is inefficient. Readers will note that this approach assumes that one, if not the principal, function of criminal law is to prevent people from bypassing the market - a system of voluntary, compensated exchange. If I covet my neighbour’s car, it is more efficient to nudge me to negotiate with him than it is to allow me to steal his car. 

The remainder of this post is structured as follows: first, I briefly explain the economic approach to criminal law. I then explain what constitutes misappropriation under section 403 of IPC and how misappropriation is inefficient. Dishonesty is the chief element of misappropriation, thus, I discuss the requirement of dishonesty and how that requirement serves an important economic function. Following which, I demonstrate the viability of this thesis by analysing case law on misappropriation. I specifically look at cases where the court required the prosecution to prove the precise manner or mode of misappropriation to establish a charge under section 403 and argue why that insistence was incorrect on both legal and economic grounds. Finally, I conclude.

An Economic Approach to Crime

The economic analysis of criminal law began with Beccaria and Bentham, but its systematic study dates only from 1968 when Becker wrote “Crime and Punishment: An Economic Approach”. The principal insight of that essay was that criminal law is a method of crime control; it is a service provided by the government and the provision of this service like any other service must be efficient. Efficiency dictates that criminal law must minimize the social loss resulting from offences. Social loss refers to the sum of (i) resources expended in the commission of crimes by offenders and (ii) resources expended in the prevention of crime by potential victims. Viewed economically, these expenditures are wasteful. 

To better understand, consider theft. At first glance, it might appear that, though immoral, theft is not inefficient. If I steal hundred rupees from you, I am hundred rupees richer, and you are hundred rupees poorer: the total wealth of society remains unchanged. In other words, theft is a mere transfer of property with the loss to the victim being compensated by an equal gain to the criminal. Thus, if judged in this way there is no social loss.

That seems obvious but is wrong. Opportunities to make money by stealing attract economic resources. If stealing is more profitable than, say, waiting on tables, workers will be attracted out of waiting on tables into theft. As the number of thieves increases, the returns from theft will fall. This is because (a) everything easy to steal would have been stolen and(b) victims would successfully defend themselves against the increased level of theft by installing locks, bars, alarms etc. The process of falling returns will stop only when the next person considering becoming a thief figures out that he will be just about as well off continuing to wait on tables. In economic terms, when the gains from becoming a thief are about equal to the costs.

In sum, the existence of theft makes society as a whole poorer not because money has been transferred from one person to another, but because productive resources have been diverted out of the business of producing into the business of stealing. In addition, the thief would have to expend resources on taking the property and potential victims would have to expend resources on preventing the property from being taken.

All this may appear to be a hopelessly laboured economic scaffolding of the obvious- that theft is bad. However, in the words of Posner, it is still useful to point out that economic analysis need not break down in the face of an apparently non-economic phenomena, like theft. We know judges often assign purpose to substantive provisions of law in order to solve interpretative questions. In acquisitive crimes generally and in misappropriation particularly, I argue that that purpose is essentially economic- minimising social loss- and it is that economic purpose which should guide their decisions. 

Misappropriation

IPC defines and provides for punishment for dishonest misappropriation of moveable property under Section 403. The essence of the offence is that the property of another person comes into the possession of the accused and is misappropriated or converted to his own use by the accused. If A takes a car belonging to B by mistake but returns the same when he finds out that it belongs to S, there is no misappropriation of property. But if A does not return the car even after knowing that it belonged to S, R commits the offense of misappropriation of property. To ‘misappropriate’ means ‘improperly setting apart for one's use to the exclusion of the owner’ [see: P. Durugappa v. State of Mysore, 1956 CriLJ 630, para 4].

Note that the offense of misappropriation under section 403 is distinguished from the foregoing offenses of theft, robbery, and extortion, for the taking of property is not necessarily dishonest here. An innocent taking could be followed by a dishonest misappropriation or conversion. Misappropriation under this section is different also from criminal breach of trust, contained in sections 405-409. Criminal breach of trust assumes that the original taking of possession was in pursuance of some pre-existing relation of trust between the parties.

Now if criminal law is, as Gary Becker claimed, an efficiency enhancing device, what criminal law forbids is a class of inefficient acts. On that account, then, misappropriation of property is an inefficient act and therefore forbidden. It is easy to understand using a simple example why misappropriation is indeed inefficient. 

If I happen to have no money but want a car, it would be inefficient to let me just take my neighbour’s car. This transfer does not improve the allocation of resources, that is, it does not move resources from a less to a more valuable employment. Note that value is a function of willingness to pay. Since I am unwilling to bid up or even match my neighbour’s price for the car, the car would be more valuable in his hands than in mine. In addition, someone who takes my car deprives me of a valuable property that costed me money to acquire, while he pays nothing. In other words, he free rides on my investment. Lastly, if I were to take the car, I would have to expend resources on taking it and my neighbour would have to expend resources on preventing it from being taken. These expenditures as a whole, yield no social product and are wasteful.

The foregoing account also explains why in section 403, the requirement of dishonesty is not attached at the level of original taking of possession of property. The initial taking of property may be innocent and lawful, and dishonest intention may develop subsequently. Yet, misappropriation will be made out under section 403. The economic logic of not requiring dishonesty at the level of original taking of possession is that regardless, the property still moves from a more to a lesser valuable employment, the offender still free rides on the investment of another, and the preventive expenditures are still incurred. 

Dishonesty

It is inefficient to allow pure coercive transfers of wealth- pure coercive implying that the transfer is neither an accident nor an incident of a productive act; it is dishonest. Note that this is an important qualification. The requirement of dishonesty serves an important economic function in cases of misappropriation. We will now turn to that discussion. 

A person is held guilty under section 403 only when it is proved that he dishonestly misappropriated or converted the property to his own use. This requirement is important. Mere retention of property short of evidence of dishonest intention does not amount to misappropriation. 'Dishonestly' is defined under Section 24 of the IPC as doing anything with the intention of causing wrongful gain to one person or wrongful loss to another person. Thrust of the provision is gain/loss. 

It may be argued that the cost of trying criminal cases would be significantly reduced by not making a distinction between a pure coercive transfer and an accident that it externally resembles. However, the result would be excessive penal consequences, leading to serious social costs from avoidance of lawful activity. To avoid these costs, dishonest intention is required to be proved. Second, it is only if one deliberately misappropriates property that he invests resources in its attainment. Recall that it is these wasteful expenditures that criminal law seeks to prohibit. Lastly, pure coercive transfers of wealth are advance-planning offenses. Here (a) the probability of commission of offence is maximized, and (b) the probability of apprehension and conviction is minimized (as one who plans in advance also takes steps to escape detection later). As a result, the state’s cost of catching the offender increases. This is another reason for punishing pure coercive transfers over accidental transfers. 

Actual Mode of Misappropriation

Let’s further concretize the foregoing discussion by looking at how case law has evolved on one particular aspect of misappropriation. Now, actual manner of misappropriation need not be proved to establish offense under section 403. However, it may be useful to note that till recently, some confusion persisted as to whether the prosecution was needed to show proof of actual mode of misappropriation. In P. Durugappa, the court ruled in the affirmative. In that case, the accused did not deposit a certain sum with the cooperative society that he was supposed to deposit by a specified date. The court quashed charges brought against him on the grounds that the possibility of his having kept the amount with himself without using the same for any other purpose could not at all be excluded [para 5]. In a similar case, Sardar Singh v. State of Haryana (1976, SC), the court ruled that the prosecution needed to show that the accused dishonestly misappropriated the property in question to his own use or dishonestly disposed of it [para 2]. Both rulings were faulty on two counts.

One, dishonestly is defined in section 24 of the IPC as doing anything with the intention of causing wrongful gain to one person or wrongful loss to another person. Commonly, ‘dishonestly’ is understood to involve an element of fraud or deceit, but in the IPC, the word does not carry this implication. Dishonesty is made out in a monetary circumstance: pecuniary or economic gain or loss. Hence the word is restricted in meaning to an intention to cause a wrongful gain or loss of property or pecuniary or economic gain or loss. More importantly, for an act to be dishonest, it is not necessary that the intention should be to cause both wrongful gain and wrongful loss. It is enough if the intention is to cause either wrongful gain or wrongful loss [Ajodhya Nath Parlu v Emperor, AIR 1920 Pat 582, p 583]. 

Therefore, dishonest misappropriation should be made out if either wrongful loss is caused or intended to be caused or wrongful gain is caused or intended to be caused. Determining the actual manner of misappropriation, i.e., what use the misappropriated property was put to, can be helpful in establishing wrongful gain to the offender. However, it does not directly help establishing wrongful loss. It is thus unclear as to why the court strictly insisted that the prosecution proves the actual mode or manner of misappropriation to establish dishonest misappropriation. In addition, Sardar Singh actually overlooked existing precedent on this point of law. In Jaikrishnadas Manohardas Desai (SC, 1960), the Supreme Court had clarified that misappropriation or conversion are not matters of direct proof and that the prosecution was not obliged to prove the precise mode of conversion or misappropriation [para 6]. 

There’s a further sense in which these rulings made little sense. Recall our discussion on efficiency. The law prohibits inefficient acts. Efficiency dictates that criminal law must minimize the social cost of crime. Thus, once resources have moved from a lesser valuable to a more valuable use, i.e., an inefficient act, in this case that of misappropriation, is committed, the law must spring into action to punish the offender. Therefore, any inquiry into what use the misappropriated property was put to thereafter becomes futile. It only increases the prosecution’s cost of establishing the offense. The Supreme Court also remarked something along these lines in Mustafikhan v. State of Maharashtra (2006, SC).

“Although onus lies on the prosecution to prove the charge against the accused, yet where the entrustment is proved or admitted it would be difficult for the prosecution to prove the actual mode and manner of misappropriation...” [Para 12].

Conclusion

If a conflict has occurred and the court is asked to resolve it, how should it do so? The Law & Economics view is that it makes more sense for the court to make an efficient ruling. Crimes result in social costs and criminal law should minimise these costs. Consequently, criminal law should punish acts considered inefficient. The analysis in this essay sought to demonstrate why dishonest misappropriation is inefficient, why criminalising it makes economic sense, how the requirement of dishonesty serves an important economic function in cases of misappropriation, and how taken together these explain the evolution of case law on one particular aspect of misappropriation, namely actual mode of misappropriation. This analysis, I believe, can be extended to other acquisitive crimes in the IPC. When interpretative doubts arise, judges look to the purpose of the substantive law. If the analysis in this essay holds true, one is forced to think that in acquisitive crimes generally, that purpose is essentially economic.