The Supreme Court has quashed criminal proceedings initiated against textile exporters accused of cheating, forgery and criminal breach of trust, holding that the dispute essentially arose out of a business arrangement and was civil in nature. The Court also held that a third round of further investigation conducted without obtaining the Magistrate’s approval was legally unsustainable and amounted to abuse of the process of law. 

The Bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh has observed that the handwriting expert report relied upon by the complainant appeared inconsistent in chronology, making the allegations suspect at least at the present stage. However, it was not commenting upon the actual evidentiary value of the expert report itself. 

The matter originated from a long-standing business relationship between the accused, who operated a textile export business, and a businessman based in the United States and Canada. According to the complainant, the parties had entered into an arrangement under which he would invest money for expansion of textile operations into North American markets and in return would receive one-third of the profits generated through the venture. The complainant alleged that despite making substantial investments and facilitating market expansion through a company established under Illinois law, the accused failed to honour the agreement. 

The accused, however, disputed the existence of any joint venture and maintained that there was no agreement involving profit sharing. According to them, the complainant had sought exclusive supply arrangements which they had never accepted. 

The dispute had earlier travelled to the United States where proceedings were initiated before the District Court in Illinois. The foreign court passed an ex parte judgment awarding damages exceeding 2.2 million dollars in favour of the complainant on counts including breach of joint venture agreement, fraudulent inducement and unjust enrichment. 

Subsequently, criminal proceedings were initiated in India. During investigation, police twice filed closure reports stating that the dispute appeared to be entirely civil in nature. However, further investigations were repeatedly sought under Section 173(8) of the Code of Criminal Procedure and eventually a chargesheet came to be filed in 2013. 

Before the Supreme Court, the accused argued that the third round of further investigation had been initiated without obtaining proper judicial permission. They further contended that ingredients necessary to establish offences such as cheating and forgery were absent and that the entire matter represented a commercial disagreement dressed up as a criminal case. 

The complainant, on the other hand, relied on allegations that several documents produced by the accused had been forged and submitted that handwriting expert reports established fabrication of documents carrying his signatures. The State also supported the complainant’s position. 

Examining the issue of further investigation, the Supreme Court referred to earlier decisions including Vinay Tyagi v. Irshad Ali, Vinubhai Haribhai Malaviya v. State of Gujarat, and Robert Lalchungnunga Chongthu v. State of Bihar. The Court reiterated that although Section 173(8) CrPC does not expressly mandate judicial permission for further investigation, the settled legal position has evolved to require such permission as a matter of legal practice and judicial control. 

The Court found that while an application seeking further investigation had been filed, there was no material indicating that any order granting permission had been passed by the Magistrate. Consequently, the Court held that the third round of investigation itself suffered from a fundamental legal defect. 

Apart from procedural illegality, the Court also examined the substantive nature of the dispute and concluded that the controversy arose directly from business dealings and profit-sharing arrangements between the parties. The Bench observed that disagreements concerning the existence of a joint venture and entitlement to profits are matters falling squarely within the realm of civil law. 

The Court also expressed doubt over the forgery allegations. It noted that despite the alleged forged documents having been produced before the Illinois Court, no such allegations had been raised there.

Concluding that continuation of criminal proceedings would amount to abuse of process, the Supreme Court held that the matter fell within the principles laid down in State of Haryana v. Bhajan Lal regarding exercise of quashing powers. Accordingly, it set aside the FIR and all subsequent proceedings against the accused and allowed the appeal. 

Case Details

Case Title: Paliniswamy Veeraraja & Ors Versus The State Of Karnataka & Anr. 

Citation: JURISHOUR-1419-SC-2026

Case No.: Special Leave Petition (Crl.) 16149 of 2024

Date: 26/05/2026

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