Ozone Urbana Infra Developers Pvt. Ltd. Vs Directorate of Enforcement & Others (Karnataka High Court)
Money Paid but Home Never Delivered: Karnataka High Court Refuses to Quash FIRs and PMLA Proceedings Against Ozone Urbana
Homebuyers’ Allegations Cannot Be Reduced to Mere Contractual Disputes
The Karnataka High Court, in Ozone Urbana Infra Developers Pvt. Ltd. v. Directorate of Enforcement & Others, declined to quash multiple criminal proceedings and Enforcement Case Information Reports arising from allegations of diversion of homebuyers’ funds, failure to deliver apartments, multiple sale or mortgage of properties and non-payment of assured pre-EMIs.
Justice M. Nagaprasanna observed that where a developer receives substantial amounts from homebuyers but neither completes the project nor hands over possession, and the very apartment is allegedly sold or mortgaged again, the matter travels beyond an ordinary breach of contract.
The Court, however, quashed one separate criminal complaint filed by a civil contractor, holding that it was essentially an attempt to recover an outstanding contractual payment through the coercive machinery of criminal law.
Homebuyers Alleged Diversion of Funds and Multiple Sale of Flats
Ozone Urbana Infra Developers Pvt. Ltd. had undertaken development of a township consisting of twelve projects, including villas, low-rise and high-rise apartments and related infrastructure.
The homebuyers alleged that the company marketed the township as a “city within a city” and offered various attractive schemes, including subvention arrangements under which it promised to pay pre-EMIs until possession was delivered.
According to the complaints, substantial loan amounts were disbursed directly by banks to the developer. However, construction remained incomplete, possession was not delivered and the company allegedly stopped paying the pre-EMIs, leaving the purchasers to repay housing loans for homes they never received.
In one instance, a homebuyer claimed to have paid approximately Rs.1.32 crore, but neither received possession nor obtained a refund. It was further alleged that the same apartment had subsequently been sold to another purchaser and mortgaged with multiple financial institutions.
The High Court captured the situation by observing that while the money reached the developer, the home never reached the homebuyer; what remained with the homebuyer was only the burden of the EMI.
Allegations Prima Facie Disclosed Cheating and Breach of Trust
The developer contended that the disputes arose from agreements of sale and were essentially civil or contractual in nature. It argued that the complaints should not be permitted to continue as criminal prosecutions.
The High Court rejected this contention. It held that mere delay in construction or failure to perform a contract may, in an appropriate case, remain a civil dispute. But allegations of receiving almost the entire sale consideration, diverting project funds, selling the same flat to another person and creating multiple mortgages cannot be brushed aside as a simple contractual default.
At the stage of investigation, the Court cannot conduct a mini-trial or determine the truthfulness of the rival versions. The complaints contained sufficient allegations requiring an investigation into the flow of funds, multiple mortgages, subsequent alienation of allotted flats and the role of the company’s officers.
Quashing the FIRs at such a nascent stage would amount to stifling a legitimate investigation before the financial trail could be examined.
Company’s Non-Impleadment Was a Curable Defect
In one FIR, the company had not been formally arrayed as an accused, though the allegations principally concerned acts committed by it. The directors argued that they could not be prosecuted in isolation when the company itself was not an accused.
The High Court accepted that omission of the company was an infirmity, particularly in the context of Section 15 of the Karnataka Ownership Flats Act. However, it held that the defect was curable during investigation.
Since the company was specifically named in the complaint and the transactions were admittedly entered into with it, a curable omission in the array of accused could not eclipse allegations that otherwise disclosed cognizable offences. The police were therefore permitted to add the company as an accused and continue the investigation.
Payments by Flat Purchasers Can Constitute “Deposits”
The Court also rejected the argument that homebuyers could never be treated as depositors under the Karnataka Protection of Interest of Depositors in Financial Establishments Act.
It explained that the nomenclature assigned to a transaction is not conclusive. The substance of the arrangement must be examined. The statutory definition of “deposit” is broad and covers money received with an obligation to return value in cash, kind or through a specified service.
Relying upon precedents concerning similar depositor-protection legislation, the Court held that money paid by flat purchasers to a developer against the promise of constructing and delivering flats can constitute a deposit, with delivery of the promised flat being the stipulated return or service.
Therefore, the applicability of the KPIDFE Act could not be rejected at the threshold merely because the transaction was described as the purchase of an apartment.
Quashing of Predicate FIR on Technical Grounds Does Not Automatically End ECIR
The developer also sought quashing of an ECIR registered in 2022, arguing that the two predicate FIRs forming its basis had subsequently been quashed.
The Court found that one FIR had been quashed following settlement before RERA, while another had been quashed on a technical ground because the Magistrate had referred the complaint for investigation without proper application of mind. Importantly, the underlying private complaint by 128 homebuyers had not been quashed and continued to subsist.
The Court held that quashing an FIR on a procedural or technical ground does not automatically obliterate the allegations constituting the scheduled offence. There is a material difference between quashing on merits, which exonerates the accused, and quashing because of a procedural defect while leaving the underlying complaint alive.
Consequently, the 2022 ECIR and the summons issued under Section 50 of the PMLA were allowed to continue.
The challenge to the 2025 ECIR and provisional attachment order was also rejected. The Court noted that the predicate offences continued to subsist and included a CBI case registered pursuant to proceedings before the Supreme Court. The provisional attachment reportedly covered properties valued at approximately Rs.423.38 crore, while the alleged proceeds of crime were stated to be about Rs.927.22 crore.
Whether the attached properties actually constituted proceeds of crime had to be examined under the statutory adjudicatory mechanism provided by the PMLA. The writ court could not pre-empt that process.
Contractor’s Recovery Complaint Quashed as Purely Civil
The only petition allowed concerned a civil contractor claiming an outstanding payment of approximately Rs.1.32 crore for excavation and civil works.
The Court found that the predominant object of the complaint was recovery of contractual dues, with allegations of threats apparently added to give the dispute a criminal colour.
It reiterated that criminal law cannot be converted into an engine for recovery of money. Accordingly, the proceedings arising from the contractor’s private complaint were quashed.
Author’s Comments
The judgment draws a clear distinction between a genuine commercial recovery dispute and allegations of organised diversion of homebuyers’ money. Mere non-payment of a contractor’s bill cannot ordinarily justify criminal prosecution. However, receipt of substantial consideration from numerous homebuyers, coupled with alleged diversion of funds, double sale and multiple mortgages, cannot be dismissed as a simple breach of contract.
The ruling is also important on PMLA proceedings. Every quashing of a predicate FIR does not automatically destroy the ECIR. The reason for quashing is crucial. Where the accused is exonerated on merits and the scheduled offence is completely extinguished, PMLA proceedings may lose their foundation. But where an FIR is quashed only for a procedural defect and the underlying complaint survives, the ECIR need not automatically fall.
Thus, except for the contractor’s recovery complaint, the High Court permitted the criminal investigations, ECIRs and provisional attachment proceedings to continue in accordance with law.
Cases Discussed
- Anukul Singh Vs State of Uttar Pradesh And Anr. (Supreme Court)— civil disputes should not be given criminal colour where ingredients of the alleged offences are absent.
- State of Haryana v. Bhajan Lal, 1992 Supp (1) SCC 335 — principles governing quashing of criminal proceedings.
- Priyanka Srivastava & Anr. v. State of U.P. & Ors., (2015) 6 SCC 287 — procedural safeguards for applications seeking investigation under Section 156(3) Cr.P.C.
- Vijay Madanlal Choudhary & Ors. Vs Union of India & Ors. (Supreme Court), (2023) 12 SCC 1 — relationship between scheduled offences, proceeds of crime and PMLA proceedings.
- Vijayraj Surana v. Enforcement Directorate, 2024 SCC OnLine Mad 8404 — effect of quashing a predicate FIR on technical grounds upon an ECIR.
- State of Maharashtra v. 63 Moons Technologies Limited, (2022) 9 SCC 457 — interpretation of “deposit” and “financial establishment” under depositor-protection legislation.
- Alka Agrawal v. State of Maharashtra, 2026 SCC OnLine SC 866 — scope and object of depositor-protection legislation.
- Manohar Bhimraoji Mahalle v. State of Maharashtra, 2020 SCC OnLine Bom 368 — treatment of flat purchasers’ payments under depositor-protection law.
- Shukul s/o Dharamaji Makde v. State of Maharashtra, Criminal Application No.673 of 2021, disposed on 17-02-2026 — meaning and application of “deposit”.
- Himanshu Singh v. Union of India, SLP(C) No.7649 of 2023 — Supreme Court proceedings concerning homebuyers, builders/developers and lending institutions.
- JSW Steel Ltd. v. Enforcement Directorate, 2025 SCC OnLine SC 2150 — statutory adjudication concerning whether attached property constitutes proceeds of crime.
