Quashing must not strangle an economic offence before the money trail is traced: Karnataka HC
Refusing to interdict proceedings over Rs 927 crore collected from 1,351 homebuyers, the Court holds a complex web of transactions cannot be examined microscopically at the threshold.
Six writ petitions asked the Karnataka High Court to stop an investigation into what happened to money paid by 1,351 homebuyers for apartments in a township at Devanahalli that was never delivered. On 21 September 2026, in a judgment running to 210 pages, Justice M. Nagaprasanna dismissed five of them.
The reasoning is stated in a sentence that will be quoted well beyond this case: quashment at an embryonic stage should not become an instrument by which an investigation into an economic offence is strangled before the investigating agency has had a fair opportunity to unravel the transactions and trace the trail of money.
What the Directorate alleges
The allegations are set out in the reasons to believe recorded in an attachment order of 4 October 2025 under the second proviso to Section 5(1) of the Prevention of Money Laundering Act, 2002, read with Section 5(1) and Section 2(1)(u).
M/s Ozone Urbana Infra Developers Pvt. Ltd., promoted and controlled by Shri S. Vasudevan, is said to have collected approximately Rs 927.22 crore from around 1,351 homebuyers in its Ozone Urbana township project at Devanahalli, Bangalore, apart from loans raised from financial institutions. The company failed to deliver possession of the apartments and units against that money, and is alleged to have dishonestly retained and diverted the funds.
According to the Directorate, the money collected from customers and banks, instead of being applied to construction and delivery, was diverted, layered and siphoned off to various group companies and to personal bank accounts. The diversions are said to include inter-corporate deposits of Rs 49.07 crore to several group concerns, and the transfer of over Rs 180 crore to M/s Tuscan Consultants and Developers Pvt. Ltd., out of which large sums were immediately routed to personal accounts.
The order records an admission on oath under Section 50 of the PMLA that escrow funds were used for purposes other than construction, including corporate overheads, salaries, loan repayments and marketing expenditure. Substantial amounts are alleged to have been layered through multiple entities and routed abroad into overseas ventures in Singapore, Laos and Dubai — a process the Directorate characterises as the layering and integration of proceeds of crime generated by cheating customers.
None of this has been tested. The judgment is careful to say so repeatedly, and what follows is about whether it may be tested at all, not about whether it is true.
Six crimes, and one ordered by the Supreme Court
The petitioners' central argument was that the foundation had fallen away: with no surviving predicate offence, the money laundering case could not stand.
The Court traced the trajectory. The 2025 ECIR arises from five regular FIRs, of which two were quashed on grounds of settlement or a technicality such as want of jurisdiction. The other three were challenged in the companion petitions — the ones now dismissed. The ECIR does not rest on a bald reproduction of the offences alleged in the predicate crimes; it records the material said to demonstrate involvement in acts of fraud and participation in an organised group, and refers to investigations by different agencies in which such allegations have surfaced.
The sixth crime stands differently. It was registered by the Central Bureau of Investigation as FIR No. RC2192025E0031 on 25 September 2025, for offences under Section 420 read with Section 120-B of the Penal Code and Sections 13(2) read with 13(1)(d) of the Prevention of Corruption Act — not on an independent complaint but pursuant to directions of the Supreme Court in Himanshu Singh v. Union of India. Those proceedings concerned the grievances of home buyers generally, and the manner in which transactions between home buyers, builders and lending banks had been structured; they were not confined to this company.
On that footing the submission failed. The predicate proceedings continue to subsist, and one of the crimes owes its genesis to a CBI investigation ordered by the Supreme Court. The allegations forming their substratum remain alive and are yet to undergo the rigours of investigation and trial; the Court could not presume their extinction and pull down the ECIR on that premise. So long as the scheduled offence subsists and proceedings concerning it have not been obliterated, the contention that the ECIR is foundationless is unavailable.
Attachment is provisional, and that is the point
The provisional attachment order of 4 October 2025, issued under Section 5(1) of the PMLA read with Rule 3 of the 2013 Rules, attached properties of the company and of Mr Vasudevan Sathyamoorthy and his wife to the extent of approximately Rs 423.38 crore.
Arguments on the merits of that order, and on whether the attached properties answer the description of proceeds of crime, were rejected for a reason of timing rather than substance. A provisional attachment is not the final word on the character of the property; it is an interim statutory measure subject to the further adjudicatory process the Act contemplates. The Court drew on JSW Steel Ltd. v. Enforcement Directorate, where the Supreme Court held that the Appellate Tribunal must first examine whether the attached property constitutes proceeds of crime.
Interference now would prejudge questions lying squarely within the province of the statutory authorities: whether the properties answer the description in Section 2(1)(u), whether the requisite nexus between property and alleged criminal activity exists, and whether the withdrawals or transactions complained of were contrary to law. Those are matters for the statutory forum on the material placed before it.
The limits of the threshold jurisdiction
The petitioners asked the Court to interdict both the predicate proceedings and the proceedings under the PMLA. The Court declined, and the grounds it gives are cumulative.
Where allegations disclose a complex web of financial transactions, diversion or siphoning of funds, a court at the threshold cannot undertake a microscopic examination of the material, weigh its probative worth, or pronounce upon defences which properly belong to the realm of investigation and trial. The distinction is between reading a complaint and trying it. A defence that a particular transfer was a legitimate inter-corporate deposit, or that escrow withdrawals were contractually permitted, is precisely the kind of question that has to be answered on evidence.
The standard the Court applies is the familiar one, stated with the burden where it belongs. Unless the complaint or FIR, taken at its face value, fails to disclose the ingredients of any offence, or the continuation of the proceedings demonstrably amounts to an abuse of process, the investigative process ought ordinarily to be permitted to run its lawful course.
The judgment also explains why economic offences are treated differently, and the passage is the most quotable in it. Such offences stand on a footing distinct from conventional crimes, because their consequences are seldom confined to an identifiable victim — their ripples travel wider. Where money collected from members of the public, particularly home buyers, is alleged to have been diverted or siphoned away, the injury is not merely monetary: it strikes at the confidence ordinary citizens repose in the commercial and financial arrangements through which they commit, often, the savings of a lifetime towards securing a home.
The offences alleged here, the Court held, are not ordinary crimes confined to an individual complainant or an isolated transaction. They bear the unmistakable features of economic offences, concerning financial transactions of considerable magnitude and the deployment of funds for purposes other than those for which they were collected. They cannot be viewed through the narrow prism of individual contractual disputes.
To that the judgment adds a consideration about who else is affected. The allegations concern persons whose financial interests are intertwined with the projects in question, and possess far-reaching economic and societal ramifications warranting a full and unhindered investigation in accordance with law. At a stage when the allegations are yet to be tested in the manner known to law, interdiction of the proceedings would be wholly inappropriate.
What “proceeds of crime” requires
The judgment also works through the statutory anchor that any PMLA proceeding depends on, and the limits it carries.
Only property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence can be regarded as proceeds of crime. Authorities under the 2002 Act cannot act against a person for money laundering on an assumption that recovered property must be proceeds of crime and that a scheduled offence has been committed, unless that offence is registered with the jurisdictional police or is pending inquiry by way of complaint before a competent forum. The expression “derived or obtained” indicates criminal activity relating to a scheduled offence already accomplished.
That is a real constraint, and it is why the existence and status of the predicate proceedings mattered to the outcome. A money laundering case does not float free of the offence that generated the money; it is tethered to it. The petitioners’ difficulty was not that the constraint does not exist but that, on this record, it was satisfied.
Reading a definition that uses “any” five times
A substantial part of the judgment is given to statutory construction, and the method is worth noting because it recurs across depositor-protection legislation.
Where the legislature defines a word by saying it “means” something, the definition is intended to be exhaustive; where it says the word “includes” something, the definition is prima facie extensive. Applying that to the definition of “deposit”, the judgment observes how conspicuously broad the expression is: it covers not only any receipt of money but the acceptance of any valuable commodity by a financial establishment under any scheme or arrangement. The word “any” appears five times in the substantive part of the definition — any receipt of money, any valuable commodities, by any financial establishment, with or without any benefit, and in any other form.
That repetition, the Court holds, is a clear reflection of legislative intent to cast the net of the regulatory provisions broadly and comprehensively. The contrast with other States is drawn expressly: some depositor-protection statutes define a deposit only in terms of money and not commodity, and the judgment surveys the equivalent enactments in Odisha, Kerala, Himachal Pradesh, Goa, Telangana, Andhra Pradesh and Sikkim.
The second ingredient is that the money or commodity must be liable to be returned — though return need not be in cash or kind, and may take the form of a service, with or without a benefit such as interest. A financial establishment obliged to return a deposit without any increment still falls within the definition, provided the deposit does not fall within one of the exceptions, such as a security deposit, a dealership deposit or an advance amount.
The one petition that succeeded
Of the six petitions, one was allowed. In Writ Petition No. 20063 of 2022 the Court quashed all proceedings arising from a private complaint registered as P.C.R. No. 54725 of 2022, pending before the X Additional Chief Metropolitan Magistrate, as against those petitioners.
The contrast is instructive. A court that declines to interfere with an investigation is not abdicating; it is distinguishing between proceedings that disclose something to investigate and proceedings that do not. The same judgment that refuses to halt the Directorate’s inquiry ends a separate private complaint against a set of petitioners in the same batch.
What this means for the buyers
Nothing in the judgment returns a rupee or delivers a flat. What it does is keep open the only process by which either might eventually happen.
Homebuyers in a stalled township occupy an unusual position in an economic-offence case: they are neither complainants in the ordinary sense nor parties to the writ petitions, but the money the investigation is tracing is theirs. The judgment’s reference to persons whose financial interests are intertwined with the projects, and to the far-reaching economic and societal ramifications of the allegations, is an acknowledgment that quashing at the threshold would have foreclosed an inquiry conducted substantially on their behalf.
For developers and their advisers the message is narrower and firmer. Where an investigating agency alleges that money raised for a specific project has been layered through group entities and moved offshore, a writ petition is not the forum in which to establish that the transfers were innocent. That has to be done where evidence can be led and tested.
There is a wider pattern the judgment situates this case within. The sixth FIR exists because the Supreme Court, hearing a matter about home buyers across many projects, directed the CBI to investigate how transactions between buyers, builders and lending institutions had been structured. A single stalled township is the local instance of a question being asked nationally: what happens to money that buyers pay and banks lend for a specific project, and who is answerable when it does not end up there.
Order
Writ Petition No. 20063 of 2022 was allowed, and all proceedings arising from P.C.R. No. 54725 of 2022 pending before the X Additional Chief Metropolitan Magistrate were quashed as against those petitioners. All the other writ petitions were dismissed, with pending applications disposed of. The Court held that no circumstance was made out warranting the exercise of its extraordinary jurisdiction to interdict either the predicate proceedings or those under the Act, the allegations being yet to travel through investigation and adjudication.