The Jammu & Kashmir and Ladakh High Court has refused to quash criminal proceedings against Ambience Group promoter Raj Singh Gehlot, his family members, associated companies and other accused in the alleged ₹289.28-crore Jammu & Kashmir Bank loan fraud.

The court observed that where investigation prima facie reveals fraudulent procurement and diversion of loan funds, the existence of civil remedies or a subsequent One Time Settlement (OTS) cannot obliterate criminal liability.

The Court was hearing a batch of petitions under Section 482 of the Code of Criminal Procedure seeking quashing of charge-sheets arising out of FIR registered by the Anti-Corruption Bureau, Srinagar, and the supplementary charge-sheet filed by the Central Bureau of Investigation after further investigation into the sanction, utilisation and subsequent settlement of loans advanced by J&K Bank to Aman Hospitality Private Limited (AHPL) and its promoters.

A Bench of Justice Sanjay Dhar, while dismissing all the petitions, observed:

“Merely because the Bank has agreed to enter into a One-Time Settlement with the borrower company, the criminal liability of the borrower company and its Directors cannot be wiped away once it is shown from the material annexed with the charge sheet that there has been fraudulent conduct on the part of the borrower company.”

Background:

The prosecution's case, initiated by an Anti-Corruption Bureau (ACB) report, alleges that J&K Bank officials at its Ansal Plaza Branch conspired with AHPL's promoters to sanction substantial loans for a five-star hotel project. This conspiracy allegedly culminated in an illegal One-Time Settlement that caused the bank a massive loss of ₹289.28 crore, while conferring an undue advantage of ₹160.34 crore upon the borrower.

The investigation revealed that despite receiving multiple credit facilities totaling over ₹100 crore, the funds were systematically diverted through a network of companies controlled by accused promoter Raj Singh Gehlot for unrelated purposes like tax payments and fixed deposits, rather than for the hotel project.

Following the transfer of the case to the CBI, their supplementary charge-sheet detailed how Gehlot continued to seek further loan tranches while falsely representing compliance, despite ongoing diversion of funds after each disbursement.

The petitioners contended that the dispute essentially arose from a commercial loan transaction and that criminal law could not be invoked merely because the borrower defaulted in repayment. It was argued that the Bank had adequate securities, had voluntarily accepted a One Time Settlement and that recovery proceedings under banking laws constituted the appropriate remedy.

They further submitted that the allegations did not satisfy the ingredients of offences such as cheating, criminal breach of trust or conspiracy and that continuation of the criminal proceedings amounted to abuse of the process of Court.

The investigating agencies, on the other hand, submitted that the material collected during investigation established a deliberate scheme whereby loan funds were dishonestly procured and thereafter diverted through several related entities in breach of the very conditions upon which the financial assistance had been sanctioned. It was argued that the fraudulent diversion of public money constituted distinct criminal offences irrespective of the Bank's subsequent recovery measures or settlement.

Court's Observation

Adjudicating the matter the court at its outset clarified that at the stage of considering quashing of a charge-sheet, the Court is only required to examine whether the material collected during investigation, if accepted on its face value, discloses commission of cognizable offences.

The Bench noted that the charge-sheets and the accompanying documents contained detailed material regarding the sanction conditions governing the loan, including the requirement that all project expenditure should be routed through the designated account and utilised exclusively for implementation of the sanctioned hotel project. The Court found that the investigation had placed on record substantial material alleging systematic deviation from these conditions.

Referring to the investigation, the Court observed that there was prima facie material indicating that successive loan disbursements were transferred to various companies and entities allegedly controlled by Raj Singh Gehlot and his associates instead of being utilised for the project for which the loan had been sanctioned.

The Court observed,

“There is material on record to show that petitioner Raj Singh Gehlot made requests to the J&K Bank for release of tranches of sanctioned loan from time to time making representations that the loan amount upon its disbursement is to be utilized for the purposes as mentioned in the conditions of the sanction but actually the amount disbursed has been utilized for the purposes which fall outside the purview of the conditions of the sanction.”

The Bench held that these allegations, if ultimately established during trial, would constitute dishonest inducement within the meaning of the offence of cheating.

The Court further observed,

“Thus, there is material on record to prima facie show that the Bank has been dishonestly induced to release the tranches of loan in favour of the borrower company and upon release, the loan amount has been utilized for a purpose for which it was not sanctioned. Thus, prima facie, offence of cheating is made out against the petitioners.”

Rejecting the argument that the dispute was purely civil in nature, the Court held that merely because a transaction gives rise to civil consequences or recovery proceedings does not exclude criminal prosecution where the factual allegations disclose the ingredients of penal offences.

The Court also rejected the submission that the One Time Settlement accepted by the Bank extinguished criminal liability. It observed that the OTS merely settled the financial liability between the borrower and the Bank and could not erase the criminal consequences arising from fraudulent conduct allegedly committed at the stage of obtaining and utilising the loan.

The Bench remarked,

“Merely because the Bank has agreed to enter into a One-Time Settlement with the borrower company, the criminal liability of the borrower company and its Directors cannot be wiped away once it is shown from the material annexed with the charge sheet that there has been fraudulent conduct on the part of the borrower company, inasmuch as it has used the loan amount for a purpose other than the purpose for which it was sanctioned.”

The Court further held that the supplementary investigation conducted by the CBI furnished additional material tracing diversion of subsequent loan tranches through various entities allegedly connected with the principal accused. Such material, according to the Court, strengthened the prosecution case and could not be discarded at the threshold merely because the accused disputed its correctness.

Holding that the charge-sheets disclosed a prima facie commission of offences under the Ranbir Penal Code and the Prevention of Corruption Act, the Court concluded that interference at the threshold would amount to conducting a mini trial, which is impermissible in law.

Finding sufficient prima facie material to proceed against the accused, the High Court dismissed all eight petitions challenging the ACB and CBI charge-sheets. Consequently, the criminal proceedings arising out of the alleged ₹289.28-crore J&K Bank loan fraud were permitted to continue in accordance with law.

Case Title: Madhu Bakshi & Ors. v. Anti-Corruption Bureau & Anr. (Connected Matters)

Citation: 2026 LiveLaw (JKL) 287

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