2025 Supreme(Online)(Tel) 65453

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD
J. Sreenivas Rao, J
V. Murali Krishna – Appellant
Versus
State of Telangana – Respondent
CRIMINAL PETITION No.7258 OF 2020

Criminal proceedings arising from commercial disputes are maintainable if they disclose prima facie ingredients of cheating or breach of trust. Existence of arbitration clauses or potential civil remedies does not negate the criminal nature of fraudulent misappropriation, and courts should not exercise quashing powers to stifle legitimate investigation.

Headnote:(A) Code of Criminal Procedure, 1973 - Section 482 - Indian Penal Code, 1860 - Sections 406 and 420 - Quashing of criminal proceedings - Dispute arising out of commercial contract - Allegations of misappropriation of funds and diversion of construction materials - Whether criminal proceedings can be quashed when civil remedy and arbitration clauses exist - Held, power under Section 482 should be exercised sparingly and only in the rarest of rare cases where allegations do not disclose any offence - Existence of arbitration remedy does not bar criminal proceedings if ingredients of cheating and criminal breach of trust are disclosed - Mere breach of contract not amounting to cheating, but if fraudulent intention exists at inception, offence is triable. (Paras 16, 19, 31, 32)

(B) Criminal Procedure - Territorial Jurisdiction - Section 156(2) Cr.P.C. - Investigation - Challenge to territorial jurisdiction of police to investigate - Held, investigation cannot be quashed merely on grounds of lack of territorial jurisdiction as that is a matter for investigation; if found lacking, FIR can be transferred to the appropriate jurisdiction. (Paras 28, 29)

(C) Corporate Criminal Liability - Alter Ego - Directors cannot take shelter behind corporate veil when specific allegations of personal involvement, active participation, and dishonest intention exist - Misappropriation by individuals controlling the company attracts criminal liability regardless of corporate entity. (Paras 14, 15)

Facts of the case:
Petitioners, directors of a construction company, were accused of committing offences under Sections 406 and 420 IPC by the complainant company. It was alleged that large sums were transferred for material procurement and project execution, but funds were misappropriated and equipment was retained, with materials being diverted to private projects. Petitioners sought to quash the proceedings, arguing the dispute was purely civil, barred by limitation, lacked criminal intent at inception, and lacked territorial jurisdiction.

Findings of Court:
The court observed that prima facie allegations showing dishonest intent at inception and misappropriation of funds were sufficient to proceed with the investigation. The court noted that in cases of deliberate misappropriation and diversion of funds, the existence of civil remedies or arbitration clauses does not bar criminal prosecution. Regarding limitation and jurisdiction, the court found these issues did not warrant quashing at the initial stage.

Issues: Whether criminal proceedings are barred by the existence of civil/arbitration remedies; whether directors can be held vicariously liable; and whether the FIR should be quashed on grounds of limitation and territorial jurisdiction.

Ratio Decidendi: Criminal proceedings cannot be quashed for civil disputes if the complaint discloses prima facie ingredients of criminal offences like cheating and breach of trust. Powers under Section 482 are not for weighing evidence but for preventing abuse of process, and corporate directors are liable if specific allegations of their personal involvement in dishonest acts are made. Result : Criminal Petition dismissed.