TaxTMI 
TaxTMI 
2026 (7) TMI 1777
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.... It is stated, during the financial year 2013-14, Petitioner No.1 acquired a USFDA-approved manufacturing facility from Actavis for a consideration exceeding Rs. 122 Crores and further invested approximately Rs. 100 Crores towards expansion of manufacturing capacity and development of new molecules. It is their case that stabilization of operations and receipt of regulatory approvals took longer than anticipated, thereby resulting in accumulated losses. During the course of such expansion, Respondent No.3 bank extended credit facilities to Petitioner No.1 company for financing its business expansion plans and the loans availed by the company were partly repaid. 1.2. Thereafter, petitioner No. 1 undertook various measures to repay its liabilities by liquidating assets which, according to Petitioners, exceeded the value of its debts. It is specifically contended that the company repaid Rs. 600 Crores by selling businesses and assets and by diluting its shareholding in its offshore subsidiary. Notwithstanding the aforesaid repayments, Petitioners were unable to clear the remaining outstanding loans amounting to Rs. 180.68 Crores on account of accumulated losses which, according to ....
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....e cut-off date for dues as 28.02.2025. The said notice further notified that e-auction would be held on 10.08.2025, which was subsequently extended to 12.08.2025 by corrigendum dated 04.08.2025. 1.6. According to petitioners, the said web notice was brought to their knowledge only on 09.08.2025 by third parties and said notice categorically referred to the account of Petitioner No. 1 company as "Fraud". It is contended that the web notice was intended only for Asset Reconstruction Companies intending to participate in the bidding process and therefore could neither constitute a valid public notice nor a valid communication of the alleged fraud classification to the Petitioners. Aggrieved by the alleged classification of the account as "Fraud", petitioners instituted Writ Petition No.24697 of 2025 wherein this Court, by order dated 20.08.2025, granted interim suspension of the operation and effect of the classification of the Petitioners account as "Fraud" and all further proceedings relating thereto. 1.7. It is further contended, by virtue of the aforesaid interim order, all proceedings arising from or connected with the fraud classification stood suspended and Respondents we....
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....ud classification stood suspended by this Court. Petitioners rely upon the principle that once an order or proceeding is stayed or suspended by a competent Court, the same becomes inoperative and incapable of implementation either directly or indirectly and that all consequential actions founded upon such stayed order must necessarily fall to the ground. Petitioners further contend that respondents are constitutionally and statutorily-bound to comply with the orders passed by this Court and that permitting authorities to override judicial orders would strike at the very foundation of the rule of law. 1.11. According to petitioners, the officials of Respondent Nos. 1 and 2 arrived at the premises connected with the petitioners without any prior notice or intimation and no search warrant or document evidencing authority to conduct the search was initially furnished to them. They allege that Respondents 1 and 2 obtained the signature of Petitioner No.2 on certain documents without disclosing the contents thereof and without furnishing copies of the said documents to petitioners. Despite being shown a copy of the interim order in, the officials of Respondent Nos.1 and 2 continued th....
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.... 2 filed a counter affidavit contending that the writ petition is wholly misconceived, legally untenable and founded upon a complete misunderstanding of the scope and effect of the interim order dated 20.08.2025 in Writ Petition No.24697 of 2025. According to Respondents 1 and 2, petitioners have deliberately sought to conflate an administrative classification under banking regulations with a statutory criminal investigation undertaken pursuant to registration of cognizable offences under the penal law. CBI, Banking Securities and Fraud Branch (BSFB), Bengaluru, registered a criminal case vide RC0782025E0003 (RC 03/E/2025/CBI/BSFB/BLR) on 19.11.2025 under Section 120-B read with Sections 420, 468, 471 and 477A of the Indian Penal Code and Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988 in relation to an alleged fraud of Rs. 424.43 Crores committed by M/s, Vivimed Labs Ltd. (A-1), represented by in Directors namely Shri Santosh Varalwar (A-2), Managing Director, Shri Sandeep Varalwar (A-3), Shri Manohar Rao Varalwar (A-4), Shri Subash Varalwar (A-5) and other unknown public servants and private individuals. FIR came to be registered on the basis of....
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....ents and thereafter diverted the sanctioned funds in furtherance of a criminal conspiracy. 2.3. Pursuant to the RBI Master Directions on Fraud Risk Management dated 15.07.2024 and after due authorization, Respondent No.3 lodged a written complaint before the CBI on 01.01.2025, which was received by the CBI, BSFB, Bengaluru on 17.02.2025. After scrutiny of the complaint and upon obtaining statutory consents under Section 6 of the Delhi Special Police Establishment Act from the Government of Telangana dated 25.08.2025 and the Government of India dated 03.11.2025, the CBI formally registered the FIR on 19.11.2025 and commenced investigation in accordance with law. 2.4. Although this Court passed interim order dated 20.08.2025 suspending the administrative classification of the Petitioners 'account as "Fraud", the said order was confined only to the administrative and regulatory consequences flowing from such classification and did not operate either expressly or impliedly as a stay of criminal proceedings, registration of FIR, investigation or search and seizure operations. It is further case of Respondents 1 and 2 that they were neither arrayed as parties in the above Writ ....
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....criminating material. The search operations resulted in seizure and recovery of substantial incriminating documents and electronic evidence which are required to be scrutinized during the course of investigation. 2.7. Respondents 1 and 2 contend that the offences under investigation involve sophisticated siphoning and diversion of public funds held in trust by a Public Sector Bank and therefore continuation of the investigation is imperative to trace the flow of diverted funds, identify beneficiaries and ascertain the full extent of the conspiracy. According to them, any interference at this stage would seriously prejudice collection and preservation of evidence and adversely affect investigation into grave economic offences involving public money. 2.8. Respondents 1 and 2 specifically deny the Petitioners' contention that search and seizure operations were arbitrary, illegal or unconstitutional and contend that the searches were conducted strictly pursuant to judicial warrants and in accordance with the procedure prescribed under law. It is further contended that search warrants issued by the Court of the Principal Special Judge for CBI Cases, Hyderabad were duly produce....
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....nces under banking law and did not extend to criminal proceedings under penal law. It is further contended that the criminal investigation is neither a direct nor indirect implementation of the stayed administrative order, but a separate and independent statutory process undertaken pursuant to disclosure of cognizable offences. 2.12. Respondent Nos.1 and 2 deny that there was any breach, circumvention or overreaching of the interim order and assert that all investigative actions were undertaken strictly within the confines of statutory authority and judicial supervision. Allegations regarding obstruction in filing the writ petition are specifically denied by Respondents 1 and 2 and it is their stand that search team entered the premises at approximately 07:00 hours on 20.01.2026 and Petitioner No.2 adopted a non-cooperative attitude and attempted to delay the proceedings despite acknowledging the search warrant was issued by the Court of the Principal Special Judge for CBI Cases, Hyderabad. It is further contended that Shri R.K. Shivanna, Additional Superintendent of Police, CBI, BSFB, Bengaluru, permitted Petitioner No.2 to contact his legal counsel and facilitated a group What....
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.... Chairman) and was engaged in manufacture of pharmaceutical products. It is contended that Respondent No.3 had initially sanctioned fund-base working capital limits of Rs. 25.00 Crores and non-fund-based limits of Rs. 9.07 Crores in March, 2012 and the said facilities were enhanced from time to time. As per approval dated 19.07.2019, the facilities comprised FBWC limits of Rs. 152.00 Crores, NFBWC limits of Rs. 26.50 Crores, Credit Exposure Limit of Rs. 3.50 Crores and review of the Term Loan at the outstanding level of Rs. 40.26 Crores. 3.3. The account of petitioner/borrower company continuously exhibited serious irregularities and persistent non-compliance including non-submission of financial statements, non-routing of sales through lender accounts, failure to close current accounts maintained with non-lenders, non-submission of stock statements and audit clarifications, failure to adhere to commitments regarding pledge of shares, lack of transparency regarding sale of assets and failure to resolve discrepancies pointed out by auditors. Despite repeated reminders dated 13.01.2021, 21.01.2021, 29.01.2021, 02.02.2021, 19.02.2021, 22.02.2021, 01.03.2021, 16.03.2021 and 20.03.20....
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.... its directors/guarantors. Detailed show cause notices dated 16.08.2023 were accordingly issued and replies submitted by the Petitioners vide letters dated 08.09.2023 an 01.12.2023 were referred back to the forensic auditor for further examination and comments. Forensic auditor, after examination of the replies, submitted a further report dated 22.12.2023 opining that the clarifications offered by the borrower company did not materially alter the original findings except certain rectifications in FY 2023-24 relating to previously reported misstatements. Thereby the original conclusions regarding diversion of funds and financial irregularities therefore remained unchanged. 3.7. Thereafter, the matter was placed before the Fraud Identification Committee which, after considering the forensic audit report, supporting records and the replies submitted by the borrower company, declared the account as "Fraud" on 20.06.2024. It is contended that fraud intimation letter dated 10.09.2024 was dispatched to the company informing it about the existence of fraud indicators including diversion of funds, misstatements in financial statements, misleading disclosures and criminal breach of trust.....
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....Court in Union of India vs. W.N. Chadha (1993 SCC (Cri) 1171) and Anju Chaudhary vs. State of U.P. (2013) 6 SCC 384 to contend that criminal law does not contemplate grant of pre-investigation hearing to the accused and that requiring such hearing would frustrate investigation and defeat the criminal administration. 3.11. Respondents 3 and 4 further place reliance upon the judgment of the Hon'ble Supreme Court in CBI vs. Surendra Patwa (2025 INSC 572) to contend that criminal investigation pursuant to FIR can proceed independently of administrative proceedings undertaken by banks under RBI Master Directions. According to them, the Hon'ble Supreme Court has specifically held that even if administrative action relating to fraud classification is set aside on procedural grounds, criminal investigation into cognizable offences is not rendered invalid. It is contended that the principles of audi alteram partem apply to classification of an account as fraud but not to registration of FIR which merely triggers criminal investigation. 3.12. It is further case of Respondents 3 and 4 that the interim order dated 20.08.2025 in Writ Petition No. 24697 of 2025 pertained only to su....
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....CBI itself proceeded on the basis of the fraud classification and the forensic audit findings which formed part of the fraud declaration process. 4.2. Pursuant to the arrangement entered into between Respondent No.3 Bank and the Asset Reconstruction Company (ARC), the entire debt together with all rights, title and interest in the financing documents, security interests and related records stood transferred to the ARC upon payment of purchase consideration of Rs. 153.33 Crores by the ARC to the Respondent Bank. Upon such transfer, no outstanding debt remained payable to Respondents 3 and 4 and all original documents, title deeds and records presently remain in the custody and control of the ARC. It is therefore, contended that any information required for purposes of investigation could have been obtained directly from the ARC and there existed no justification whatsoever for resorting to coercive search and seizure proceedings against petitioners. 4.3. Assuming without admitting that registration of the FIR constitutes an independent statutory exercise, the coercive measures undertaken pursuant thereto including search and seizure must independently satisfy the statutory req....
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....on No. 24697 of 2025 is denied. Once the operation and effect of the fraud classification stood suspended by order of this Court, no authority, whether party to the proceedings or otherwise, could derive jurisdiction or legal benefit from such suspended classification. It is contended that orders passed by constitutional courts operate in rem to the extent they suspend the legal effect of an action and therefore, all consequential coercive measures based upon such suspended classification are rendered without jurisdiction. 4.7. Search warrants relied upon by Respondents 1 and 2 were obtained in January, 2026, subsequent to the interim order dated 20.08.2025. The counter filed by Respondents 1 and 2 is conspicuously silent as to whether the subsistence of the interim order suspending the fraud classification was disclosed to the learned Court which issued the search warrants under Section 96 of the Bharatiya Nagarik Suraksha Sanhita, 2023. It is specifically denied that search warrants were duly produced and disclosed to them in the manner asserted by Respondents 1 and 2 and that neither copies of the warrants were furnished nor were the contents thereof disclosed at the time of ....
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....es. 7. Before adverting to the rival contentions, it would be apposite to briefly notice the factual backdrop in which the present writ petition has arisen. Petitioners contend that the account of Petitioner No.1 was classified as "Fraud" by Respondents 3 and 4 pursuant to proceedings initiated under the RBI Master Directions on Fraud Risk Management in Commercial Banks and All India Financial Institutions. Challenging the said classification, petitioners instituted Writ Petition No. 24697 of 2025, wherein interim order dated 20.08.2025 came to be passed suspending the operation and effect of the fraud classification and all further proceedings pursuant thereto. 8. It is the specific case of petitioners that during the subsistence of the aforesaid interim order, Respondents 1 and 2-CBI conducted coordinated search and seizure operations on 20.01.2026 at various premises connected with petitioners, allegedly on the basis of the fraud classification itself. According to petitioners, once the fraud classification stood suspended, all consequential proceedings founded thereon also automatically stood interdicted and therefore, the impugned search and seizure operations are render....
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.... became unenforceable and legally impermissible. This Court is unable to accept the said contention in the broad and sweeping manner canvassed by the Petitioners. 13. A careful and contextual reading of the interim order dated 20.08.2025 in W.P. No.24697 of 2025 leaves no manner of doubt that the said order was rendered in proceedings concerning the legality of the administrative classification of the Petitioners' account as "Fraud" under the RBI Master Directions. The order suspended the operation and effect of such classification and all further proceedings pursuant thereto insofar as the regulatory and administrative consequences flowing from such classification were concerned. The interim order cannot, by interpretative expansion, be converted into a blanket embargo against exercise of statutory powers under criminal law. 14. The distinction between administrative proceedings undertaken under the RBI regulatory framework and criminal proceedings initiated in relation to cognizable offences is too well settled to admit any serious controversy. Administrative classification of an account as "Fraud" under banking regulations operates within the regulatory and financial s....
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....ot reasonably be interpreted as an omnibus interdiction against criminal investigation into allegations of cheating, forgery, criminal conspiracy and diversion of public funds. 19. Petitioners have repeatedly relied upon the principle that when the basis of an action is stayed, all consequential proceedings must necessarily fall. There can be no quarrel with the aforesaid proposition in an appropriate factual context. However, the principle cannot be mechanically extended to criminal investigation into cognizable offences undertaken pursuant to statutory powers and judicial authorization. Such investigation cannot be equated with purely consequential administrative action mechanically flowing from the fraud classification, 20. The allegations contained in the FIR pertain to offences punishable under Sections 120-B, 420, 468, 471 and 477A IPC together with offences under the Prevention of Corruption Act, 1988 involving allegations of diversion and siphoning of substantial public funds. Investigation into such allegations cannot ordinarily be interdicted in exercise of writ jurisdiction merely because the administrative classification of the account as "Fraud" is under challeng....
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....R or investigation cannot, by itself, lead to an inference that the entire investigation stands vitiated by bias or pre-determination. The allegations raised by petitioners regarding non-furnishing of search warrants, obtaining signatures without disclosure, obstruction in securing legal assistance and other alleged procedural irregularities during the conduct of search operations involve seriously disputed questions of fact. Such disputed factual controversies ordinarily cannot be adjudicated in proceedings under Article 226 of the Constitution on the basis of competing affidavits, particularly when the investigation is still at a nascent stage. Petitioners are not remediless in this regard and it remains open to them to avail remedies available under criminal law in accordance with law. 24. This Court also finds considerable force in the reliance placed by Respondents 1 to 4 upon the judgment of the Hon'ble Supreme Court in CBI vs. Surendra Patwa. The said decision arose out of a batch of matters wherein various High Courts had quashed not only the administrative action of classification of accounts as "Fraud" under the RBI Master Directions, but also the consequential FIR....
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.... present writ petition. In the case on hand, the principal contention advanced by petitioners is that once the fraud classification stood suspended by the interim order dated 20.08.2025, all consequential criminal proceedings including search and seizure operations also automatically stood interdicted. The ratio laid down in Surendra Patwa, however, clearly negates such a proposition and recognizes the independent statutory character of criminal proceedings. The said judgment therefore, substantially supports the stand of Respondents and militates against the principal contention urged on behalf of petitioners. 28. Respondent No. 1 further placed reliance upon the judgment of the Hon'ble Supreme Court in CBI vs. Sarvodaya Highways Ltd.. The said case pertained to allegations involving fraudulent procurement of credit facilities from a bank by furnishing fabricated work orders and forged documents. The High Court had quashed the FIR and criminal proceedings on the basis of a one-time settlement entered into between the borrower company and the bank. The Hon'ble Supreme Court reversed the said decision and held that economic offences involving public funds cannot ordinaril....
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....ersion of public funds, cheating, forgery and conspiracy cannot ordinarily be interdicted in exercise of writ jurisdiction merely because parallel civil, administrative or settlement proceedings exist. Though the factual matrix in the said case pertained to one-time settlement and quashing of FIR, the broader principle emphasized therein regarding the independent and serious nature of economic offences is clearly attracted to the present case as well. 32. Respondents 1 and 2 also placed reliance upon the judgment of the Hon'ble Supreme Court in Anil Bhavarlal Jain v. State of Maharashtra (2024 INSC 1039). The said case involved allegations of diversion of loan funds, fraudulent valuation of collateral security and offences under Sections 409, 420 and 120-B IPC read with provisions of the Prevention of Corruption Act. The accused therein sought quashing of FIR and consequential proceedings inter alia on the ground that settlement had been arrived at with the bank and that the dispute was predominantly civil in nature. The Hon'ble Supreme Court emphasized that economic offences involving banks and public financial institutions cannot lightly be quashed merely because civil....
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....ition is concerned. The issue involved in the present proceedings is not the legality of the fraud classification itself, but whether suspension of such classification automatically nullifies criminal investigation undertaken in respect of cognizable offences. On that specific issue, the subsequent judgment in Surendra Patwa's case expressly clarifies that administrative proceedings and criminal proceedings stand on different footings. Accordingly, while Rajesh Agarwal's case supports petitioners on the aspect of natural justice in fraud classification proceedings, it does not support the broader proposition canvassed by petitioners that criminal proceedings automatically become unenforceable upon suspension of the fraud classification. 36. Petitioners also relied upon the judgment reported in Gian Singh vs. State of Punjab to contend that criminal proceedings arising out of predominantly civil or commercial disputes may, in appropriate cases, be quashed where continuation thereof would amount to abuse of process. A careful consideration of the principles laid down in Gian Singh vs. State of Punjab demonstrates that the Hon'ble Supreme Court itself carved out a clear distinc....