Karnataka High Court Retains Ozone Urbana Buyer & ED Cases, Quashes Contractor's Criminal Proceedings

The Karnataka High Court on 21 September held that criminal proceedings cannot be used to recover alleged dues arising from a purely civil dispute, while refusing to quash proceedings against Ozone Urbana Infra Developers Private Limited and its office bearers over home buyers' complaints alleging non-delivery of flats, diversion of project funds and other financial irregularities.

Justice M. Nagaprasanna quashed the proceedings arising from a contractor's complaint alleging non-payment for excavation and civil works, but declined to interfere with proceedings arising from complaints by home buyers and the Enforcement Directorate (ED) concerning the Ozone Urbana township. He held:

“The complaint is sought to be given the colour and complexion of criminality by introducing an allegation that the petitioners threatened the complainant that, if he were to once again demand repayment, he would have to face consequences.”

The Court was dealing with six writ petitions concerning the Ozone Urbana township, a real estate project comprising 12 projects. Construction of the township commenced in 2012.

In the first petition, a contractor alleged that the Company's office bearers had engaged him for excavation and civil works worth Rs. 4.40 crore but paid only Rs. 2.49 crore. The Company argued that the contractor's complaint was purely civil, arising from work contracts, unpaid bills and alleged outstanding dues.

The Bench noted that the contractor's case did not involve siphoning of home buyers' funds, non-completion of projects or sale of apartments to third parties. On examining the complaint, it found that the primary purpose of initiating criminal proceedings was to recover the alleged outstanding money. It held that criminal law cannot be converted into an engine for money recovery and that continuing the proceedings would amount to an abuse of the process of law.

The second petition concerned complaints by home buyers who alleged that despite receiving substantial sale consideration and housing loan disbursements, the Company failed to complete the project and deliver possession. About 128 buyers also alleged diversion of project funds to other projects and sister concerns.

FIRs were registered following the complaints, after which the ED registered an Enforcement Case Information System in 2022 and issued summons under the Prevention of Money Laundering Act.

The Company contended that the home buyers' disputes were contractual, with the ingredients of Sections 406 and 420 of the Indian Penal Code absent. It argued that mere delay in completing the project could not constitute cheating.

The home buyers alleged that the Company and its directors were involved in large-scale diversion and misappropriation of buyers' funds, including through alleged double sales, fictitious loan agreements and transfers to related or offshore entities. They claimed that over Rs. 3,300 crore was involved and that the transactions amounted to laundering of funds, prompting the ED to initiate PMLA proceedings.

The Court observed that while the allegations would ultimately be tested at trial, they were sufficient at this stage to justify continuing the investigation. It held:

“The allegations, therefore, cannot, at this stage, be brushed aside as a mere contractual discord between a developer and its purchasers. The complaint narrates the inducement, the consequent parting with substantial monies by the home buyers and the failure to deliver possession despite receipt of almost the entirety of the consideration. These allegations, when taken at their face value and without embarking upon a mini-trial, prima facie exude the ingredients of the offences alleged.”

In the third and fourth petitions, home buyers alleged non-delivery of flats despite payments of Rs. 64.52 lakh and Rs. 1.32 crore respectively.

In the third complaint, filed against the Company's office bearers, including its Directors, Managing Director, Chairman and other officials, the Bench noted that although the Company itself was specifically named and its alleged acts formed the basis of the complaint, it was not arraigned as an accused. However, it held:

“A curable omission in the array of accused cannot be permitted to eclipse allegations which otherwise disclose a cognizable offence.”

The fifth petition was filed by the Ozone Urbana Buyers Welfare Association. It alleged that the project remained substantially incomplete and that buyers had been induced through subvention, tripartite and buy-back schemes, resulting in criminal proceedings under the Indian Penal Code and Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004.

The final petition challenged a fresh ECIR in 2025 and a provisional attachment order under the PMLA. The ECIR was based on five crimes concerning the Company and its office bearers.

The ED conducted searches in August 2025 and subsequently attached properties belonging to the Company and certain promoters, stating that Rs. 423.38 crore had been attached. The Company contended that there was no predicate offence.

The Court noted that the allegations in the 2025 ECIR, the proceedings pursuant to directions of the Supreme Court and the CBI investigation could not, at the threshold, be disregarded on the ground that there was no predicate offence. It observed:

“The predicate proceedings continue to subsist and, more importantly, one of the crimes owes its genesis to an investigation undertaken by the CBI pursuant to the directions of the Apex Court. The allegations forming the substratum of those crimes, therefore, remain alive and are yet to undergo the rigours of investigation and trial. At this stage, this Court cannot presume their extinction and, on that premise, pull down the consequential proceedings under the Act.”

Further, the Bench observed that the attachment by the ED was only provisional. It said questions concerning whether the attached properties constituted proceeds of crime and whether they had the requisite nexus with the alleged criminal activity could be examined by the competent statutory forum. It observed:

“Quashment at an embryonic stage should not become an instrument by which an investigation into an economic offence is strangled before the investigating agency has had a fair opportunity to unravel the transactions and trace the trail of money.”

Accordingly, the High Court quashed the complaint filed by the contractor and dismissed all other petitions filed by the Company seeking quashing of proceedings initiated by the home buyers and the ED.

For Petitioner: Senior Advocate M.S Shyam Sundar, Advocate Dr. Vandana P.L

For Respondents: Advocates K. Arvind Kamath, ASG, Annapurna Bordoloi, CGC, Akash Bantia, Reynold D.Souza, A Velan, Sathies Kumar, Navpreet Kaur, B.N Jagadeesha, SPP and S.K Ravi