The Karnataka High Court has reaffirmed that investment agreements, even those based on profit-sharing arrangements, create legally enforceable debt under Section 138 of the Negotiable Instruments Act when cheques are issued acknowledging liability. The judgment underscores that the mere issuance of a cheque, coupled with an agreement to repay, suffices to establish liability, irrespective of whether profits were actually shared.
Background & Facts
The Dispute
The revision petitioner, Mrs. Keerthi Kiran, a dentist running Keerthi Dental Clinic in Mangaluru, approached the complainant, Mrs. Jacintha Philomina Vivian Pereira, and her deceased husband in late 2017 for an investment of Rs. 42,85,362 in her dental clinic. The accused promised a 40:60 profit-sharing ratio, with 40% of the profits going to the complainant and her husband. Between 2017 and 2020, the complainant and her husband invested the agreed sum. Despite repeated inquiries about profits, the accused consistently claimed that the clinic was not yet fully operational and no profits were available.
Key Facts
- Investment Amount: Rs. 42,85,362 invested by the complainant and her husband in the dental clinic
- Profit-Sharing Agreement: 40% of profits to the complainant, 60% to the accused
- Death of Complainant’s Husband: On 01.03.2021, the complainant’s husband passed away, leaving her as the sole breadwinner for her family
- Agreement of Understanding: On a subsequent date (not specified), the parties entered into an agreement (Ex.P13) acknowledging the debt
- Cheques Issued: Cheques were issued pursuant to Ex.P13, which were subsequently dishonoured
- Legal Notice: The complainant issued a legal notice demanding payment, which was served but not complied with
Procedural History
- 16.04.2025: Complaint filed before the IV JMFC, Mangaluru (CC No. 469/2025) under Section 138 NI Act
- 16.04.2025: Trial Court convicted the accused and sentenced her for the offence under Section 138 NI Act
- 07.01.2026: Criminal Appeal No. 244/2025 filed before the III Additional District and Sessions Judge, Dakshina Kannada, Mangaluru
- 07.01.2026: Appellate Court confirmed the Trial Court’s judgment
- 2026: Criminal Revision Petition No. 531 of 2026 filed before the Karnataka High Court
Relief Sought
The revision petitioner sought to set aside the orders of the Trial Court and the Appellate Court, contending that the issuance of cheques was not towards a legally enforceable debt but merely an investment agreement.
The Legal Issue
The central question before the Court was whether an investment agreement based on profit-sharing, where cheques are issued acknowledging liability, constitutes a legally enforceable debt under Section 138 of the Negotiable Instruments Act, or whether such agreements fall outside the purview of the statute.
Arguments Presented
For the Petitioner
The learned counsel for the petitioner contended:
- The issuance of cheques was not towards any legally enforceable debt but was part of an investment agreement based on profit-sharing
- The agreement (Ex.P13) did not create a liability, as the arrangement was contingent on profits, which were never realized
- Both the Trial Court and the Appellate Court failed to appreciate the factual nuances and erroneously convicted the accused
- The respondent did not adequately prove Ex.P13 by examining witnesses, and thus, the accused ought to have been acquitted
- The reply notice explicitly stated that there was no legally recoverable debt, and this defence was not considered by the lower courts
For the Respondent
The learned counsel for the respondent countered:
- The transaction and investment were not in dispute, nor was the existence of Ex.P13
- The accused failed to place any evidence on record to substantiate her defence, except her own testimony as D.W.1
- The scope of revision is limited, and the lower courts had rightly appreciated the evidence
- Once Ex.P13 acknowledged the liability and cheques were issued pursuant to it, the accused could not later contend that the debt was not legally enforceable
The Court's Analysis
The Court observed that the factual matrix was not in dispute: the complainant had invested Rs. 42,85,362 in the accused’s dental clinic, and the accused had issued cheques acknowledging the liability. The Court emphasized that the issuance of cheques, coupled with the agreement (Ex.P13), created a legally enforceable debt, irrespective of whether profits were actually shared.
"Once it is admitted that amount was invested in the business of the accused and though agreed to pay 40% of profit from the said business, whether that 40% was paid or not is immaterial when the cheque was acknowledged by the accused."
The Court further noted that the accused’s contention - that the arrangement was merely an investment and not a liability - could not be accepted. The Court held that the moment the accused issued cheques acknowledging the debt, the transaction fell within the ambit of Section 138 NI Act. The Court also rejected the argument that the lower courts had erred in their appreciation of facts, stating that there was no perversity in their orders.
The Verdict
The Karnataka High Court dismissed the revision petition, upholding the concurrent findings of the Trial Court and the Appellate Court. The Court held that the issuance of cheques pursuant to an agreement acknowledging liability constitutes a legally enforceable debt under Section 138 NI Act, and the accused’s conviction was accordingly confirmed.
What This Means For Similar Cases
Investment Agreements Create Legally Enforceable Debt
- Practitioners must note that investment agreements, even those based on profit-sharing, create legally enforceable debt under Section 138 NI Act if cheques are issued acknowledging liability
- The Court has clarified that the mere issuance of a cheque, coupled with an agreement to repay, suffices to establish liability, regardless of whether profits were actually shared
Burden of Proof Lies on the Accused
- The accused bears the burden of proving that the cheque was not issued towards a legally enforceable debt
- In this case, the accused failed to place sufficient evidence on record to substantiate her defence, leading to the dismissal of her revision petition
Scope of Revision Petitions
- The Court reiterated that the scope of revision is limited, and concurrent findings of fact by lower courts are generally not interfered with unless there is perversity
- Practitioners should ensure that all defences are raised and substantiated at the trial stage itself, as raising new arguments at the revision stage may not be entertained
