The Karnataka High Court has clarified that an investment made in a business, when subsequently acknowledged as a repayable liability through a written agreement and supported by the issuance of cheques, transforms into a legally enforceable debt under Section 138 of the Negotiable Instruments Act. This ruling reinforces the principle that the nature of the underlying transaction is not decisive - what matters is the clear acknowledgment of liability and the subsequent dishonour of negotiable instruments.
Background & Facts
The Dispute
The petitioner, Mrs. Keerti Kiran, a dentist running a clinic in Falnir, Mangaluru, sought financial support from the complainant, Mrs. Jacinthah Philomena Vivian Pereira, and her late husband, Vivian Pereira, to establish her dental clinic. The parties, who had been friends for years, entered into an informal arrangement in late 2017 whereby the complainant and her husband agreed to invest Rs. 42,85,362/- in the petitioner’s clinic in exchange for a 40% share of the profits, with the petitioner retaining 60%. The investment was made in installments between 2017 and 2020.
Key Facts
- The complainant and her husband transferred Rs. 42,85,362/- to the petitioner between 2017 and 2020.
- The petitioner used the entire amount to set up and operate the "Keerthi Dental Clinic".
- Between 2018 and 2019, the complainant repeatedly inquired about profits, but the petitioner claimed the clinic had not yet become operational and no profits were available.
- The complainant’s husband passed away on 01.03.2021.
- Following his death, the complainant approached the petitioner for repayment of the invested amount.
- On 15.04.2021, the parties executed a written agreement, marked as Ex.P12, wherein the petitioner acknowledged the receipt of Rs. 42,85,362/- and undertook to repay the amount.
- In pursuance of Ex.P12, the petitioner issued three cheques dated 15.06.2021, 15.07.2021, and 15.08.2021, each for Rs. 14,28,454/- (totaling Rs. 42,85,362/-).
- All three cheques were presented for payment and returned unpaid with the reason "Insufficient Funds".
- A legal notice dated 20.09.2021 was issued under Section 138 NI Act, demanding payment within 15 days.
- The petitioner failed to respond or make payment.
- A criminal complaint under Section 138 NI Act was filed on 10.11.2021.
Procedural History
- 10.11.2021: Criminal Complaint No. 948/2023 filed before the IV JMFC, Mangaluru.
- 11.03.2025: IV JMFC convicted the petitioner under Section 138 NI Act, sentenced her to six months’ imprisonment (suspended), and imposed a fine of Rs. 50,000/-.
- 07.01.2026: Criminal Appeal No. 191/2025 before the 3rd Additional District and Sessions Judge, D.K., Mangaluru, dismissed the appeal and confirmed the conviction.
- 28.03.2026: Criminal Revision Petition No. 538/2026 filed before the Karnataka High Court under Section 397 CrPC read with Section 401 CrPC.
Relief Sought
The petitioner sought quashing of the conviction and sentence under Section 138 NI Act, arguing that the transaction was purely an investment and not a legally recoverable debt. She also sought reversal of the orders dated 11.03.2025 and 07.01.2026.
The Legal Issue
The central question was whether Section 138 of the Negotiable Instruments Act applies when a sum is initially advanced as an investment in a business, but later acknowledged as repayable through a written agreement and evidenced by cheques that are subsequently dishonoured.
Arguments Presented
For the Petitioner
The petitioner’s counsel argued that the Rs. 42,85,362/- was strictly an investment in the dental clinic, contingent on profit-sharing, and not a loan or debt. He contended that Section 138 NI Act requires a pre-existing legally enforceable debt or liability at the time of cheque issuance, which was absent here. He further argued that Ex.P12 was not properly proved, as no witness other than the petitioner herself was examined to authenticate it. He emphasized that the cheque issuance was not in discharge of a debt but as a security mechanism for a speculative business venture.
For the Respondent
The respondent’s counsel countered that the nature of the initial transaction was immaterial once the parties entered into Ex.P12, which explicitly acknowledged the receipt of the amount and the obligation to repay. He argued that the issuance of cheques in pursuance of this agreement transformed the investment into a legally enforceable liability. He pointed out that the petitioner had not challenged the authenticity of Ex.P12 or her signature on the cheques, and that the burden of proving absence of liability lay with her, which she failed to discharge.
The Court's Analysis
The Court examined the sequence of events and the legal effect of Ex.P12. It noted that while the initial transaction was framed as an investment, the subsequent conduct of the petitioner - specifically, the execution of a written agreement acknowledging receipt of the amount and the issuance of cheques - created a new and distinct legal obligation.
"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. Hence, there is no perversity in the order of both the Courts."
The Court held that Section 138 NI Act does not require the debt to have existed prior to the investment. What matters is whether, at the time of cheque issuance, there was a legally enforceable liability. The written agreement, Ex.P12, constituted such an acknowledgment. The Court further observed that the petitioner’s failure to examine any independent witness to rebut Ex.P12 or to challenge the authenticity of the cheques rendered her defence legally unsustainable.
The Court also rejected the argument that the scope of revision under Section 397 CrPC permits re-appreciation of evidence. It reiterated that revision jurisdiction is not an appellate forum and can only be invoked where there is a patent illegality or perversity, neither of which was present here.
The Verdict
The revision petition was dismissed. The conviction under Section 138 of the Negotiable Instruments Act and the sentence of six months’ imprisonment (suspended), along with a fine of Rs. 50,000/-, were upheld. The Court confirmed that the dishonour of cheques issued pursuant to a written acknowledgment of liability constitutes an offence under Section 138 NI Act, regardless of the original nature of the transaction.
What This Means For Similar Cases
Investment Can Become a Debt Through Acknowledgment
- Practitioners must now treat any written acknowledgment of repayment - regardless of initial intent - as a potential Section 138 NI Act liability.
- Oral assurances or profit-sharing arrangements alone are insufficient; a documented undertaking is critical.
- Cheques issued post-investment as part of a repayment plan will be treated as instruments of discharge of liability.
Burden of Proof Shifts to the Accused When Cheques Are Issued
- Once a cheque is issued and dishonoured, and a written agreement exists acknowledging receipt of funds, the accused must prove the absence of a legally enforceable debt.
- Mere assertion that the transaction was an "investment" is not a defence unless supported by contemporaneous documentation or credible testimony.
- Failure to examine independent witnesses to rebut documentary evidence (like Ex.P12) will result in adverse inference.
Judicial Restraint in Revision Jurisdiction
- Courts will not interfere with concurrent findings on evidence unless there is a manifest error or illegality.
- Revision petitions under Section 397 CrPC cannot be used to re-appreciate evidence or substitute appellate findings.
- Practitioners must ensure robust evidence collection at trial level, as appellate avenues are narrow.
