The Karnataka High Court has quashed an FIR and subsequent criminal proceedings against the partners and directors of Shalimar Agarbatti Company, holding that a purely civil dispute arising from a Business Transfer Agreement (BTA) cannot be given a criminal colour. [2026 LiveLaw (Kar) 426]

The single-judge Bench of Justice M. Nagaprasanna observed that the complainant, a family member involved in the business dispute, was already challenging the validity of the BTA before an arbitrator while simultaneously alleging that the accused had committed cheating and forgery in connection with the same agreement.

“It is no doubt true that in a given circumstance an incident may give rise to a civil wrong as well as criminal law. This is not one such case. This is a case where criminal law is being set into motion on a business arising out of Business Transfer Agreement and monetary claims, all of which are pending before the Arbitrator not today, but for the last 8 years,” the Court observed.

Relying on Supreme Court judgments, the Court reiterated that an offence of cheating requires fraudulent or dishonest intention from the inception of the transaction. A mere breach of contract or failure to fulfil a promise, without such intention, does not by itself constitute cheating.

The case arose from disputes among family members associated with Shalimar Agarbatti Company, a registered partnership firm. The petitioners in the connected criminal petitions were Vinod Kanji Shah, Alkesh Vinod Shah, VKS Incense Private Limited (now known as Shalimar Incense Private Limited), and Sandeep Harakchand Shah. The complainant, Nitin Kanji Shah, is Vinod's brother and Alkesh's uncle.

In 2017, disputes arose between the partners, following which Nitin was expelled from the firm. Subsequently, VKS Incense Private Limited was incorporated and entered into a BTA with Shalimar Agarbatti Company on January 24, 2018.

Nitin initiated arbitration proceedings, claiming a 50% share in the firm's assets and seeking a declaration that the BTA was illegal and not binding on him. He also sought monetary reliefs, including approximately Rs. 14.77 crore towards his share in the firm and Rs. 86.84 crore towards goodwill.

While the arbitration proceedings were pending, Nitin filed a private complaint alleging that the accused had conspired to cheat him by transferring the firm's assets to the newly incorporated company.

The Magistrate referred the complaint for investigation under Section 156(3) of the Code of Criminal Procedure, leading to the registration of an FIR under Sections 120B, 403, 406, 420, 468 and 471 of the Indian Penal Code.

The police subsequently filed a 'B report', concluding that the dispute was civil in nature. However, the Magistrate rejected the report on December 27, 2023, and took cognizance of the alleged offences.

Aggrieved, the accused approached the High Court seeking quashing of the FIR and the subsequent proceedings.

Advocate Angad Kamath, appearing for the petitioners, argued that the dispute was essentially civil and already pending before an arbitrator appointed by the High Court. The petitioners contended that the criminal complaint was being pursued to pressure them despite the parties having settled and closed six other criminal cases arising from their disputes.

The complainant, on the other hand, argued that civil and criminal proceedings could proceed simultaneously and that the criminal case should be allowed to reach its logical conclusion.

After considering the submissions and the record, the Court held that the dispute centred on the BTA and the monetary claims arising from the business transaction, all of which were already before the arbitrator.

The Court noted that permitting the criminal proceedings to continue in these circumstances would amount to an abuse of the process of law. It reiterated that criminal law cannot be used as a means of settling commercial or contractual disputes where the allegations do not disclose the essential ingredients of the offences alleged.

Accordingly, the High Court allowed the criminal petitions and quashed the FIR, the Magistrate's order rejecting the 'B report' and taking cognizance of the alleged offences, and the consequential proceedings pending before the Additional Chief Metropolitan Magistrate, Bengaluru.