Not A Mere Breach Of Contract: Telangana High Court Refuses To Quash FIR In ₹73 Crore Garment Investment Fraud

"The factual matrix of the present case stands on an entirely different footing. It is not a case arising out of a mere breach of contract, recovery of money, or any other purely civil or commercial dispute." Telangana High Court has dismissed a petition seeking to quash criminal proceedings against a man accused of conspiring with his wife to orchestrate an alleged ₹73 crore investment fraud.

In a ruling delivered on August 12, 2026, a single-judge bench of Justice J. Sreenivas Rao held that allegations of fabricating work orders and diverting investor funds to personal accounts prima facie constitute cognizable criminal offences, placing the dispute beyond the scope of a mere civil breach of contract.

The prosecution arose out of a complaint lodged by a partner of M/s Touchstone Enterprises before the Commissioner of Police, Hyderabad, alleging that the petitioner along with his wife (Accused No. 1) and another associate induced the firm to invest ₹73 crores on a profit-sharing basis for executing school uniform supply contracts. Upon discovering that the purported work orders from reputed institutions were forged and that the funds had been systematically siphoned off through shell vendor firms into personal accounts, an FIR was registered under Sections 316(2), 318(4), 336(3), 338, and 340(2) read with Section 61(2) of the Bharatiya Nyaya Sanhita, 2023, along with Section 5 of the Telangana Protection of Depositors of Financial Establishments Act, 1999. The petitioner subsequently approached the High Court invoking Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023, seeking to quash the criminal proceedings against him.

The primary questions before the High Court were whether the dispute essentially constituted a commercial investment transaction devoid of criminal intent from inception, whether criminal liability could be fastened onto the husband without invoking impermissible vicarious liability, and whether the inherent powers under Section 528 BNSS ought to be exercised to quash the proceedings at the threshold stage of investigation.

Distinction Between Civil Breach And Criminal Deceit

The bench examined the petitioner’s reliance on several Supreme Court decisions, including Mohammad Ibrahim v. State of Bihar, Delhi Race Club (194) Ltd. v. State of U.P., Manish v. State of Maharashtra, Rikhab Birani v. State of Uttar Pradesh, and Shailesh Kumar Singh v. State of Uttar Pradesh, which held that pure contractual breaches cannot be given a criminal colour. Distinguishing those rulings, the High Court observed that while mere failure to honour a debt does not amount to cheating, the presence of dishonest intention from inception backed by fabricated documents creates distinct penal liability.

The court observed that the present case did not stem from an ordinary commercial default, as the accused persons allegedly generated forged work orders and fake invoices of reputed schools and institutions to induce trust and solicit massive investments.

Personal Role And Direct Diversion Dispel Vicarious Liability Defense

Addressing the defense based on Sunil Bharti Mittal v. CBI regarding the absence of vicarious criminal liability under penal statutes, the bench observed that the prosecution had demonstrated active, personal complicity rather than mere spousal association. The court highlighted specific material showing that funds transferred by the complainant to eleven vendor entities were directly routed to firms associated with the petitioner, including Indo Cotton LLP and NM Fashions, as well as personal bank accounts.

The bench noted that when an accused is shown to have actively participated in the creation of fictitious business transactions and directly benefited from diverted monies, criminal prosecution cannot be scuttled by invoking principles of corporate or familial separateness.

Applicability Of Protection Of Depositors Act

The High Court also rejected the petitioner's contention that commercial profit-sharing investments fall outside the definition of "deposit" under Section 2(b) of the TPDFE Act, 1999, thereby precluding the application of Section 5. The bench held that where investments are solicited from the public and commercial entities under deceptive promises of substantial returns, followed by dishonest misappropriation and fund diversion, statutory protections under special depositor laws are squarely engaged at the investigation stage.

The court observed that written instructions from the Investigating Officer revealed approximately 40 victim firms suffering cumulative losses exceeding ₹100 crores, with the petitioner also arrayed as an accused in five other criminal cases across Telangana and Andhra Pradesh.

Threshold For Quashing At Nascent Investigation Stage

Reiterating the settled principles laid down in State of Haryana v. Bhajan Lal and reaffirmed in Neeharika Infrastructure (P) Ltd. v. State of Maharashtra, the court held that police have a statutory duty to investigate cognizable offences, and courts should refrain from interdicting such probes unless no offence is disclosed on the face of the FIR.

Relying on Mahendra K.C. v. State of Karnataka, the bench underscored that at the quashing stage, the High Court cannot act as a trial court by evaluating the veracity of evidence, but must only examine whether the uncontroverted allegations disclose the essential ingredients of the alleged offences.

High Court Refuses Relief Under Section 528 BNSS

The bench concluded that the serious nature of allegations involving organized fraud, extensive fabrication of commercial records, and diversion of crores of rupees warranted an unimpeded investigation. Consequently, the High Court held that the case did not fall into the rarest of rare categories justifying the invocation of inherent powers to quash an ongoing probe.

Dismissing the criminal petition, the High Court affirmed that prima facie allegations of fraudulent inducement, document forgery, and systematic diversion of funds to personal and associate accounts preclude the quashing of an FIR at the nascent stage of investigation. The decision reinforces that commercial facades deployed in fraudulent investment operations will not insulate perpetrators from criminal accountability.

Date of Decision: 12 August 2026