Supreme Court sets aside quashing of FIR in cheating case involving shell companies: Dinesh Sharma vs. Emgee Cables and Communication Ltd. (2025)

Date of the Judgment: April 23, 2025

Citation: 2025 INSC 571

Judges: Bela M. Trivedi, J., Prasanna B. Varale, J.

Can a High Court quash an FIR involving allegations of cheating and fraud, especially when shell companies are involved? The Supreme Court of India recently addressed this question in a case involving Dinesh Sharma and Emgee Cables and Communication Ltd. The court emphasized that economic offenses affecting the country’s financial health warrant thorough investigation and should not be lightly dismissed, especially at the initial stages of investigation.

The Supreme Court bench, comprising Justice Bela M. Trivedi and Justice Prasanna B. Varale, delivered the judgment.

Case Background:

Dinesh Sharma, representing M/s BLS Polymers Ltd., filed a complaint against Emgee Cables and Communications Ltd. (Respondent No. 1) and its directors, alleging cheating and fraudulent activities. BLS Polymers was in the business of manufacturing and supplying plastic compounds used in making wires and cables, while Emgee Cables manufactured copper alloys and wires. The dispute arose from unpaid dues for the supply of PVC compounds from April 1, 2017, to July 31, 2018.

The appellant’s company supplied goods worth Rs. 2,20,82,000/- against purchase orders signed by Respondent No. 3. When payments were not cleared on time, the appellant was compelled to remind the accused directors. Subsequently, a director of Respondent No. 1 issued three cheques, one of which was dishonored. The appellant alleged that the Respondent Company’s office was found closed, and repeated attempts to contact the directors yielded false promises.

Consequently, the appellant filed FIR No. 218/2020 with the police, alleging offenses under Sections 420 (cheating), 406 (criminal breach of trust), and 120B (criminal conspiracy) of the Indian Penal Code, 1860. Additionally, a legal notice under Section 138 of the Negotiable Instruments Act and Form 4 Notices under Rule 5 of the Insolvency and Bankruptcy Rules were served, demanding repayment.

Timeline:

Course of Proceedings:

The High Court of Judicature for Rajasthan quashed the FIR No. 218/2018, observing that the matter appeared to be a business transaction with allegations of conflicting claims regarding the quality of goods supplied. The High Court noted that bankruptcy proceedings were pending against the accused company, and the complainant had presented claims in respect of the dues. The court concluded that there was no fraudulent intention at the commencement of the business transaction and that the case was purely civil in nature, given a criminal color to pressurize for payment.

Aggrieved by the decision of the High Court, the appellant approached the Supreme Court by way of these appeals.

Legal Framework:

The case involves the interpretation and application of the following sections of the Indian Penal Code, 1860:

• Section 420: Cheating and dishonestly inducing delivery of property.
• Section 406: Criminal breach of trust.
• Section 120B: Criminal conspiracy.

Additionally, the judgment refers to Section 482 of the Code of Criminal Procedure, 1973, which deals with the inherent powers of the High Court.

• Section 482 of CrPC: This section grants the High Court inherent powers to make orders necessary to prevent abuse of the process of any court or otherwise to secure the ends of justice.

The judgment also mentions the Prevention of Money Laundering Act, 2002 (PMLA), and Section 50 thereof, related to the powers of authorities regarding investigation, attachment, and confiscation of property involved in money laundering.

• Prevention of Money Laundering Act, 2002 (PMLA): This act deals with the prevention of money laundering and provides for the confiscation of property derived from, or involved in, money laundering.

Arguments:

Arguments by the Appellant:

• The High Court erred in quashing the FIR, as it was a clear case of fraud where the directors of the Respondent Company duped the appellant of Rs. 1.21 Crore under the guise of business transactions.
• None of the accused directors had filed a petition to quash the FIR.
• The Enforcement Directorate’s attachment order revealed the Respondent Company’s modus operandi of siphoning off funds.
• Respondent No. 3’s direct role in the fraud was evident as he continued to represent as the technical director and signed purchase orders despite his purported pre-resignation.
• The chargesheet filed in Dena Bank’s FIR showed that the appellant and other creditors were cheated, and the directors of the Respondent Company personally gained from the money transactions, issuing cheques from accounts with insufficient funds.
• Economic offenders should not be given leniency, and offenses of such nature should not be quashed.

Arguments by Respondent No. 2/State of Rajasthan:

• The High Court should not have exercised its extraordinary jurisdiction to quash the proceedings merely because the transaction involved contractual obligations.
• The availability of remedies under civil and criminal law are distinct.

Arguments by Respondent No. 3:

• The High Court correctly observed that there were business transactions going on between the parties for 7 years and concluded that the dispute is predominantly civil in nature, given a criminal color only to harass the accused.
• Respondent No. 3 was merely an employee of Respondent No. 1 and had resigned from the post of technical director on May 6, 2016.
• The Appellant Company continued to engage in business transactions with Respondent No. 1 even after the resignation of Respondent No. 3.
• The appellant is relying on allegations and material arising out of the FIR filed by Dena Bank, and hence the present FIR is not sustainable in the eyes of the law.

Issues Framed by the Supreme Court:

1. Whether the High Court was justified in quashing the FIR under Section 482 of the CrPC, considering the allegations of cheating, criminal breach of trust, and criminal conspiracy against the respondents.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities:

The court referred to the following cases:

• State of Haryana v. Bhajan Lal [(1992) SCC (Cri) 426] – Supreme Court of India: Enumerated circumstances where the powers under Section 482 of the CrPC can be exercised to prevent abuse of the process of the court or to secure the ends of justice.
• Kurukshetra University and Anr. v. State of Haryana and Anr. [(1977) 4 SCC 451] – Supreme Court of India: Observed that inherent powers do not confer an arbitrary jurisdiction on the High Court to act according to whim or caprice and that statutory power has to be exercised sparingly, with circumspection, and in the rarest of rare cases.
• Parbatbhai Ahir v. State of Gujrat and Anr. [2017 (9) SCC 641] – Supreme Court of India: Observed that economic offenses by their very nature lie beyond the domain of mere dispute between private parties and the High Court would be justified in declining to quash where the offender is involved in an activity akin to a financial or economic fraud or misdemeanor.

Judgment:

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• State of Haryana v. Bhajan Lal [(1992) SCC (Cri) 426]: The Court used this authority to emphasize the circumstances under which the High Court can exercise its inherent powers under Section 482 of CrPC to quash an FIR, noting that these powers should be used sparingly.
• Kurukshetra University and Anr. v. State of Haryana and Anr. [(1977) 4 SCC 451]: The Court cited this case to reinforce that the High Court’s inherent powers under Section 482 of CrPC should be exercised with caution and circumspection, and not arbitrarily.
• Parbatbhai Ahir v. State of Gujrat and Anr. [2017 (9) SCC 641]: The Court referred to this case to highlight that economic offenses are distinct from private disputes and that the High Court should be cautious in quashing cases involving financial or economic fraud, as such offenses have wider ramifications.

What weighed in the mind of the Court?:

The Supreme Court’s decision was primarily influenced by the following factors:

• The creation and use of shell companies by the directors of the Respondent Company to circulate monetary transactions, indicating an intention of deceit.
• The fact that economic offenses have wider ramifications and pose a serious threat to the financial health of the country.
• The need for a thorough investigation, especially when there are allegations of criminal conspiracy and a large amount of money is involved.
• The premature quashing of the FIR by the High Court at the nascent stage of the investigation.

Fact:Law Ratio Table

The Supreme Court emphasized the significance of factual aspects, particularly the creation and use of shell companies, which heavily influenced its decision. Legal considerations, such as the interpretation of Section 482 of CrPC and the principles governing the quashing of FIRs, also played a crucial role, but the factual matrix of the case was more dominant in the Court’s reasoning.

Logical Reasoning:

Issue: Whether the High Court was justified in quashing the FIR under Section 482 of the CrPC.

The Supreme Court considered the alternative interpretations but rejected them, emphasizing the need for a thorough investigation and the serious nature of the allegations. The Court’s decision was based on the premise that the High Court had failed to appreciate the gravity of the economic offense and the implications of the shell companies being used to circulate monetary transactions.

The Supreme Court held that the High Court was not justified in exercising its jurisdiction under Section 482 of CrPC and accordingly allowed the appeals. The court clarified that its observations were only prima facie in nature and that the trial court should proceed without being influenced by the judgment and strictly in accordance with the law.

The Supreme Court stated:

“In the present case, in our opinion, the High Court committed a serious error, in quashing the proceedings on a premise, that there were long business transactions between the parties, and initiation of criminal proceedings was an arm-twisting tactic to extract the pending dues from respondent company.”

“Now the High Court failed to appreciate the factum that the act of the company creating/establishing shell companies and circulating monetary transaction through these companies itself was an indicator of an intention of deceit.”

“Economic offences by their very nature lie beyond the domain of mere dispute between private parties and the High Court would be justified in declining to quash where the offender is involved in an activity akin to a financial or economic fraud or misdemeanour.”

Key Takeaways:

• Economic offenses, especially those involving shell companies, are viewed seriously by the Supreme Court.
• High Courts should be cautious in quashing FIRs related to economic offenses at the initial stages of investigation.
• The creation and use of shell companies to circulate monetary transactions is a significant factor indicating an intention of deceit.
• The availability of remedies under civil law does not preclude criminal proceedings in cases involving allegations of cheating and fraud.

Directions:

The Supreme Court clarified that its observations were only prima facie in nature and directed the trial court to proceed without being influenced by the judgment and strictly in accordance with the law.

Development of Law:

The ratio decidendi of the case is that economic offenses involving shell companies should be thoroughly investigated, and High Courts should be cautious in quashing FIRs at the initial stages. This judgment reinforces the principle that economic offenses have wider ramifications and pose a serious threat to the financial health of the country.

Conclusion:

The Supreme Court’s judgment in Dinesh Sharma vs. Emgee Cables and Communication Ltd. sets aside the High Court’s decision to quash the FIR, emphasizing the need for a thorough investigation into allegations of cheating and fraud, especially when shell companies are involved. The ruling underscores the seriousness with which economic offenses are viewed and the importance of not prematurely terminating investigations in such cases.