Digital Gold Schemes Can Trigger the BUDS Act: “Deposit” Examined by Economic Substance; FIR Quashment Under Section 528 BNSS Remains Exceptional

Case: NISHCHAY BABU ARKALGUD v. STATE OF KARNATAKA
Court: High Court of Karnataka (Bengaluru)
Date: 04-03-2026
Coram: Hon’ble Mr. Justice M. Nagaprasanna

1) Introduction

This writ petition challenged the registration of an FIR (Crime No.25 of 2026) by Koramangala Police Station for offences under Sections 21(1) and 21(2) of the Banning of Unregulated Deposit Schemes Act, 2019 (“BUDS Act”). The petitioners were (i) a Director (accused no.3) and (ii) the company (accused no.4), Jar Gold Retail Private Limited, operating a mobile application/website (“JAR”) through which customers could purchase gold starting from ₹10, with features including storage in a third-party vault (asserted to be Brinks), and referral bonuses.

The FIR was suo motu (police as complainant), triggered by intelligence/inputs and regulatory communications, including an RBI market intelligence e-mail and a SEBI public caution on “Digital Gold”. Police searches were conducted, documents/devices were seized, and accounts were frozen.

Core issue: whether the petitioners could have the FIR quashed at the threshold on the premise that their activity was merely “sale of gold” and did not involve “deposits” as defined in Section 2(4) of the BUDS Act—and, more broadly, how courts should approach quashing at the investigation stage under Section 528 of the BNSS, 2023.

2) Summary of the Judgment

The High Court dismissed the petition and refused to quash the FIR. It held that:

  • The BUDS Act defines “deposit” in expansive terms; at the FIR stage the contention that the statute must be narrowly construed to exclude “digital gold” arrangements was not accepted.
  • Serious allegations and contested facts existed (including claims of non-delivery/withdrawal restrictions and concerns about traceability of physical gold), making investigation imperative.
  • Quashing under Section 528 BNSS (akin to Section 482 Cr.P.C.) is an exception; courts should not evaluate disputed facts or the probative value of material during investigation.
  • An FIR is not an encyclopedia and is meant to trigger investigation; additional or different offences may emerge after investigation.
  • Absence of direct RBI/SEBI regulation over such arrangements does not create a “safe harbor” against the BUDS Act.

3) Analysis

3.1 Precedents Cited

(a) KAPTAN SINGH v. STATE OF UTTAR PRADESH

The Court relied on KAPTAN SINGH v. STATE OF UTTAR PRADESH to reiterate the controlling principles on quashing:

  • Stage sensitivity: if the matter is only at the FIR stage, the court looks at whether allegations disclose a cognizable offence; once statements/evidence are collected, the court still must avoid deciding merits as if in appeal/trial.
  • No mini-trial: the High Court cannot “act like the investigating agency” or “exercise the powers like an appellate court”.
  • Quashing is exceptional: inherent powers (and by analogy, powers under Section 528 BNSS) are to be exercised sparingly and with caution.

Importantly, KAPTAN SINGH itself drew strength from (and this judgment expressly mentions) multiple Supreme Court decisions to cement the “hands-off during investigation” approach.

(b) Dineshbhai Chandubhai Patel v. State of Gujarat

Quoted within KAPTAN SINGH, Dineshbhai Chandubhai Patel v. State of Gujarat was used to underscore that the High Court cannot appreciate evidence or draw contested inferences at the quashment stage, especially where material is disputed. This supported the Karnataka High Court’s refusal to decide whether the petitioners’ “gold sale + vault storage” narrative conclusively negated the “deposit” allegation.

(c) Dhruvaram Murlidhar Sonar v. State of Maharashtra

Again via KAPTAN SINGH, Dhruvaram Murlidhar Sonar v. State of Maharashtra was invoked for the proposition that quashing is an exception, evidence appreciation is impermissible at that stage, and the jurisdiction is wide but must be exercised sparingly.

(d) State Of Haryana v. Bhajan Lal

State Of Haryana v. Bhajan Lal appears as a foundational reference (through Dhruvaram) for the well-known categories where quashing may be justified. The Karnataka High Court’s approach reflects a “Bhajan Lal discipline”: where allegations disclose triable issues and facts are contested, the matter should proceed to investigation/trial rather than be aborted at inception.

(e) CBI v. Arvind Khanna; State of Telangana v. Managipet; Xyz v. State Of Gujarat

These decisions, mentioned in KAPTAN SINGH, reinforce the same restraint principle: quashing is not meant to substitute for trial and should not be used to pre-judge disputed factual matrices.

(f) NEEHARIKA INFRASTRUCTURE (P) LTD. v. STATE OF MAHARASHTRA

The Court specifically quoted paragraph 33.12 of NEEHARIKA INFRASTRUCTURE (P) LTD. v. STATE OF MAHARASHTRA for two propositions:

  • FIR not an encyclopedia: it need not disclose every detail; investigation is the mechanism to fill in facts.
  • Prematurity of quashment: while investigation is in progress, courts should not reach conclusions on “hazy facts” that the FIR does not deserve investigation.

This precedent directly neutralized the petitioners’ plea that the FIR should be quashed because (as they argued) the transaction structure was simply a lawful purchase/sale of gold and not a “deposit”.

3.2 Legal Reasoning

(i) How the Court approached “Deposit” and “Money” under the BUDS Act

The petitioners’ main submission was that customer payments were consideration for concluded sale of physical gold (with invoices and taxes), with immediate transfer of ownership and storage by a third-party vault; hence, no “deposit” was accepted or solicited. The State contended that the structure was unregulated, involved inducements (referral bonuses), raised systemic risk, and warranted investigation under the BUDS Act.

The Court placed weight on the breadth of Section 2(4) defining “deposit” and emphasized the Act’s protective object. It rejected a “form-over-substance” approach, stating in substance that the law looks to intrinsic character and economic substance rather than the “cosmetic garb” of the transaction.

The judgment’s notable doctrinal move is its insistence on purposive, expansive and pragmatic interpretation of the BUDS Act in the face of “rapidly mutating” cyber-enabled fraud patterns. It declined to confine “money” to physical currency so as not to render the statute ineffective against modern, commodity-linked or digitally-mediated schemes.

(ii) Why quashment was refused despite the “gold sale” narrative

  • Triable factual controversy: the record contained complaints/observations alleging non-delivery, withdrawal limits, and doubts about actual gold backing. The Court noted searches allegedly yielded gold bearing company branding and that claims about third-party vault storage were matters for investigation, not writ adjudication.
  • Protective legislation + early-stage restraint: given the BUDS Act’s protective purpose, the Court viewed investigation as necessary to prevent potential harm to a large base of participants.
  • Jurisdictional posture: proceedings under Section 528 BNSS are not meant to adjudicate disputed facts or decide whether the petitioners’ characterization must prevail.
  • Regulatory silence is not legality: the Court rejected the argument that because RBI/SEBI may not regulate these products, the activity becomes immune from criminal scrutiny under BUDS.

(iii) FIR as an investigative trigger; offences may evolve

Reaffirming NEEHARIKA, the Court noted that an FIR is only a starting point; investigation may reveal additional offences and a final report will crystallize the legal framing. This reasoning directly supports allowing the police to proceed even where parties argue that, on their version, statutory ingredients are not satisfied.

3.3 Impact

  • Digital gold platforms under BUDS scrutiny: The judgment strengthens the proposition that “digital gold” business models—especially those combining easy “invest-from-₹10” entry, referral incentives, and promises of liquidity/return in kind—can attract BUDS Act investigation where the economic substance resembles deposit-taking.
  • Substance-over-form enforcement: Businesses structured to appear as simple sale of goods may still be probed as “deposit schemes” if allegations suggest a promise to return value (cash/kind/service) with associated inducements.
  • Lower threshold for investigation, not conviction: The ruling does not declare the business unlawful; it holds that quashing is inappropriate where serious allegations exist and factual verification (e.g., vault holdings, customer entitlements, delivery mechanics, refundability) is pending.
  • Investor-protection lens in emergent fintech: The Court’s reasoning signals judicial willingness to interpret protective statutes dynamically to keep pace with fintech/commodity-linked products operating outside traditional regulatory “boxes”.

4) Complex Concepts Simplified

  • BUDS Act (Banning of Unregulated Deposit Schemes Act, 2019): A protective law aimed at stopping schemes that take money from the public with promises of return but without proper regulation/authorization.
  • “Deposit” under Section 2(4): Very broadly, money received with a promise to return it (cash/kind/service), with or without benefits (interest/bonus/profit). The statute also lists exclusions (e.g., genuine business advances connected to supply of goods/services), but whether a transaction truly falls within an exclusion can depend on facts.
  • “Economic substance” vs “form”: Courts examine what a transaction really does in the market (its practical effect), not just how documents/apps describe it (sale, wallet, vault storage, etc.).
  • Quashing under Section 528 BNSS: A high-threshold power to stop criminal proceedings at the outset. It is used sparingly, typically when allegations even if taken at face value do not disclose an offence, or proceedings are clearly abusive. It is not meant for deciding contested facts.
  • “FIR is not an encyclopedia”: The complaint/FIR need not contain all details or final legal sections; it only needs enough to justify investigation.
  • Suo motu FIR: An FIR registered by police on their own information/inputs (not necessarily on a private complainant’s report).

5) Conclusion

The Karnataka High Court’s decision in NISHCHAY BABU ARKALGUD v. STATE OF KARNATAKA is significant for two reasons. First, it affirms a purposive, substance-driven application of the BUDS Act to modern, digitally-mediated commodity-linked offerings where allegations suggest deposit-like characteristics. Second, it reasserts the Supreme Court’s consistent line—anchored in KAPTAN SINGH v. STATE OF UTTAR PRADESH and NEEHARIKA INFRASTRUCTURE (P) LTD. v. STATE OF MAHARASHTRA—that quashing at the investigation stage is exceptional and courts must avoid resolving disputed facts in writ/inherent jurisdiction.

Net effect: the judgment does not pronounce guilt or illegality of “digital gold” per se; it holds that where the structure and complaints raise serious concerns, investigation under the BUDS Act should not be short-circuited merely because the product is packaged as “gold purchase” or sits outside conventional financial regulation.