Q1(a) Discuss provisions relating to taxability of salary according to charging section 15 of

the Income Tax Act .

The chargeability section 15, the provisions explaining the meaning of Salary,

I. Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or
on ‘receipt’ basis, whichever is earlier.

II. However, where any salary, paid in advance, is assessed in the year of payment, it cannot
be subsequently brought to tax in the year in which it becomes due.

III. If the salary paid in arrears has already been assessed on due basis, the same cannot be
taxed again when it is paid.

Q1(b) Explain provisions of section 16 relating to deductions available while computing

income under the head salary.

The income chargeable under the head ‘Salaries’ is computed after making the
following deductions:
(1) Standard deduction [Section 16(i)]
(2) Entertainment allowance [Section 16(ii)]
(3) Professional tax [Section 16(iii)]

Standard deduction:-
A standard deduction of 50000 to be provided to the employees.
or the amount of salary, whichever is lower, is

Entertainment allowance:-

Entertainment allowance received is fully taxable and is first to be included in the salary and
thereafter the following deduction is to be made:

However, deduction in respect of entertainment allowance is available in case of Government

employees.

The amount of deduction will be lower of:

(i) One-fifth of his basic salary or

(ii) ` 5,000 or
 (iii) Entertainment allowance received.

Amount actually spent by the employee towards entertainment out of the entertainment
allowance received by him is not a relevant consideration at all.

Professional tax:-

Professional tax or taxes on employment levied by a State under Article 276 of the Constitution is
allowed as deduction only when it is actually paid by the employee during the previous year. The
total amount by way of professional tax payable in respect of any one person shall not exceed `
2,500 per annum.

If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the
amount so paid is first included as salary income and then allowed as a deduction u/s 16.

Q1 (c) Explain the term salary and different components taxable under salary as given in
section 17(1) of the Income Tax Act.

The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally
understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both
monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-
monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.).

Section 17(1), defined the term “Salary”. It is an inclusive definition and includes monetary as well
as non-monetary items.

1. Wages.
2. Any Annuity or Pension.
3. Any Gratuity.
4. Any Fees, Commission, Perquisites or Profits in lieu of or in addition to any Salary or
Wages.
5. Any Advance of Salary
6. Any payment received in respect of any period of leave not availed by him that is leave
salary or leave encashment
7. Provident find:- the proportion of the annual accretion in any previous year to the balance
at the credit of an employee participating in a recognized provident fund to the extent it is
taxable and transferred balanced in recognized provident fund to the extent it is taxable.
8. The contribution made by the central government or any other employer in the previous
year to the account of an employee under a pension scheme referred to in section 80CCD.
------------------------------------------------------------------------------------------------------------

Q1(d) Explain meaning of the term Allowances and provisions relating to exempt allowances
viz. House rent allowance section 10(13A) , Leave Travel Allowance section 10(5), Education
allowance section 10(14)
Allowances

Different types of allowances are given to employees by their employers. Generally allowances
are given to employees to meet some particular requirements like house rent, expenses on uniform,
conveyance etc. Under the Income-tax Act, 1961, allowance is taxable on due or receipt basis,
whichever is earlier. Various types of allowances normally in vogue.

Provisions relating to exempt allowances:-

House rent allowance [Section 10(13A)]:

HRA is a special allowance specifically granted to an employee by his employer towards payment
of rent for residence of the employee. HRA granted to an employee is exempt to the extent of least
of the following:

Metro Cities (Delhi, Kolkata, Mumbai, Chennai)

1. HRA actually received for the relevant period

2. Rent paid (-) 10% of salary for the relevant period
3. 50% of salary for the relevant period
Other cities

1. HRA actually received for the relevant period

2. Rent paid (-) 10% of salary for the relevant period
3. 40% of salary for the relevant period

Important points

Exemption is not available to an assessee who lives in his own house, or in a house for which he
has not incurred the expenditure of rent.

Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment
and commission as a fixed percentage of turnover.

Relevant period means the period during which the said accommodation was occupied by the
assessee during the previous year.

Leave Travel Allowance section 10(5)

Employees are allowed to take leave during the period of service. Employee may avail such leave
or in case the leave is not availed, then the leave may either lapse or be accumulated for future or
allowed to be encashed every year or at the time termination/ retirement. The payment received
on account of encashment of unavailed leave would form part of salary. However, section
10(10AA) provides exemption in respect of amount received by way of encashment of
unutilised earned leave by an employee at the time of his retirement, whether on superannuation
or otherwise.

Exemption of amount received by way of encashment:-

The provisions of this clause are mentioned below:

a. Government employees: Leave salary received at the time of retirement is fully exempt
from tax.

b. Non-government employees: Leave salary received at the time of retirement is exempt

from tax to the extent of least of the following:

I. 3,00,000
II. Leave salary actually received
III. 10 months’ salary (on the basis of average salary of last 10 months)
IV. Cash equivalent of leave (based on last 10 months’ average salary immediately preceding
the date of retirement) to the credit of the employee at the time of retirement or death.
Earned leave entitlement cannot exceed 30 days for every year of actual service rendered
for the employer from whose service he has retired.

Important Points

1. Leave salary received during the period of service is fully taxable.

2. Where leave salary is received from two or more employers in the same year, then the
aggregate amount of leave salary exempt from tax cannot exceed ` 3,00,000.
3. Where leave salary is received in any earlier year from a former employer and again
received from another employer in a later year, the limit of ` 3,00,000 will be reduced by
the amount of leave salary exempt earlier.
4. Salary for this purpose means basic salary and dearness allowance, if provided in the terms
of employment for retirement benefits and commission which is expressed as a fixed
percentage of turnover.
5. ‘Average salary’ will be determined on the basis of the salary drawn during the period of
ten months immediately preceding the date of his retirement whether on superannuation or
otherwise.
 Education allowance section 10(14)

Children Education Allowance is 100 per month per child upto a maximum of two children

Q1 (e) Mr P joined as Senior Manager in ABC Co Ltd on 1st June 2019 working in Mumbai .
From the following information compute his taxable Salary for Previous year ended : 31st
March,2020 relevant to A Y 2020-21.

COMPUTATION OF TAXABLE INCOME u/h SALARY for PY - 31/3//2020

Particulars W.N ₹ ₹
SALARY      
Basic Salary 30,000*10 300000  
Dearness Allowance 10,000*10 100000 400000
Total 40,000    
       
Bonus (2 months salary) 40,000*2   80000
City Compensatory Allowance 6,000*10   60000
Entertainment Allowance 2000*10 20000  

Less: Deduction u/s 16(ii) (Not a Govt.

  - 20000
employee)

       
Education Allowance 1000*10 10000  
Less: Deduction u/s 10(14) 100*10 1000 9000
100 p.m. per child      
       
Travelling Allowance 20,000*10 200000  
Less: Deduction u/s 10(14)(ii) 1600*10 16000 184000
       
       
House Rent Allowance 15,000*10 150000  
Less: Deduction u/s 10(13A) Min. of   80000 70000
the following figures      
a. Actual HRA 150000    
b. 50% of Salary (Mumbai) 200000    
c. Actual rent - 10% of Salary 80000    
       
Perquisite Value of Motor Car     45,000
Employers contribution to PF in excess      
of 12% of Salary      
Contribution by employer p.m 50000    
 12% of Salary 48000    
Excess 2000   2000
       
Gross Taxable Salary     8,70,000
       
Less: Deductions u/s 16      
16(i) Std. deduction   50,000  
16(ii) Not available   -  
16(iii) Professional Tax   2000 52,000
NET TAXABLE INCOME FROM SALARY 8,18,000

QUESTION 2 -

A) Residential status is significant from the view point of incidence of taxation and in case of
individuals the criteria of determining residential status is linked to physical presence of
an individual in India during the relevant previous year. Comment on the rationality of
physical presence as a criteria for determining residential status.

Residential status is important in IT Act from the point of view of incidence of taxation. The
following point should be noted:-

1. Residential status is decided for each year and it may differ from previous year to
previous year

2. Residential status is decided according to no. of days- physical stay of an individual in

India during a particular previous year

3. Residential status is different from citizenship meaning an Indian citizen can be a non-
resident and a foreign resident can be a resident

4. Residential status under Income Tax is different from Residential Status FEMA
(Foreign Exchange Management Act)

Based on Residential status, an individual can be classified into the following categories:-
 Individual

Resident Non-Resident

Ordinary Not-Ordinary
Resident Resident

B) Explain the various test for Residence and scope of Taxability of Income according to
Residential Status.

Test of Residence
An individual is said to be a resident in a particular previous year, if he satisfies any one of
the 2 following conditions:-
1. If he stays in India for a period of 182 days or more in that particular previous year
OR
2. If he stays in India for a period of 60 days or more in that particular previous year
and 365 days or more in the preceding 4 previous years
If any one or both the conditions are satisfied, then the person is said to be a resident.
It is only when both the conditions are not satisfied, the individual is said to be a non-
resident.
 PY 18-19
182 days or more
in 18-19
60 days or more in
18-19

AND

365 days or more in preceding 4

previous years (17-18, 16-17, 15-16, 14-
15)

182 days or more 60 days & 365 days

No No

Non-
Residential

Yes Yes

Residential Residential

There are 2 exceptions to the above rule:-

1. An Indian citizen leaving India for the purpose of employment, a member of the crew of an
Indian ship will enjoy the facility 60 days in the second condition getting interpreted as 182
days
2. An Indian citizen working abroad, member of the crew of an Indian ship, a PIO (Person of
Indian Origin) coming to India on an occasion will also enjoy the facility of 60 days getting
interpreted as 182 days

In simple words, persons who are covered by the exceptions will have to face 182 days test
only, the 60 days won’t apply to them.
If an individual is a non-resident, there is no further classification required.
But, if he is a resident, he can be further classified into OR or NOR, for which separate tests
have been laid down.
Taxability of Income according to Residential Status:-

Sr.
Particulars of Income OR NOR NR
No.

1 Income received in India Yes Yes Yes

2 Income deemed to be received in India Yes Yes Yes
3 Income accrued in India Yes Yes Yes
4 Income deemed to be accrued in India Yes Yes Yes

Income of a business located outside India,

5 Yes Yes No
controlled inside

Income of a business located outside India,

6 Yes No No
controlled outside

C) Mr. Ajay provides you with the following information relating to income earned during
previous year ended 31st March 2019. Calculate taxable income assuming Mr. Ajay is OR,
NOR, NR

(i) Income from business in Nepal Control in India Rs 25,000/-

(ii) Agricultural Income earned in Canada Rs 40,000/-
(iii) Profits of Past years brought into India Rs 6,00,000/-
(iv) Dividend on shares of Amazon recd in US 5,000/-
(v) Profit on Sale of Building in Jaipur recd in UK Rs 4,50,000/-
CALCULATION OF TAXABLE INCOME OF MR.AJAY FOR THE PREVIOUS YEAR
ENDED MARCH 31ST 2019

Sr.No Particulars of Income OR NOR NR

Income from business in Nepal control in

25,000 25,000 X
1 India

Agriculture Income earned in Canada 40,000 X X

2

Profits of past years brought into India X X X

3
 Dividend on shares of Amazon received in
4 5,000 X X
U.S
Profit on sale of building in Jaipur received
5 4,50,000 4,50,000 4,50,000
in UK

TOTAL AMOUNT 5,20,000 4,75,000 4,50,000

NOTES:

1. Income from business located outside India, controlled in India is taxable for OR and NOR
only.
2. Income from business located outside India and controlled outside India is taxable for OR.
3. Profits earned in the past are not taxable as they are not related with the current year i.e.,
(18-19)
4. Dividend received in US is taxable only for OR as it is Income from business located
outside India and controlled outside India.
5. Profits on sale of building in Jaipur and received in UK is income accrued in India.

D) Under the Income Tax Act there are certain types of Incomes which are totally exempt
from Tax. Explain the ideology behind section 10 relating to exempted income under
Income Tax Act and discuss any 15 items under section 10 which are exempt from Income
Tax.

Section 10 of the Income Tax Act gives a list of items which are totally exempted from tax. The
ideology of this section is to:-
a. To bring about equity in taxation
b. To bring about balanced economic development in the country
c. To avoid double taxation of income
d. To channelize the savings of the country in a particular direction

List of items exempted under Section 10 are:-

1. Agricultural income earned in India
2. Share of profit received by a partner from partnership firm
3. Dividend on shares of Indian companies
4. Share of income received by a member of HUF
5. Compensation received by an employee at the time of VRS scheme up to Rs. 5 lakhs
6. Retrenchment compensation received by a workman up to Rs. 5 lakhs
7. Interest on PPF account is exempted
8. Interest on Post Office savings account
9. Interest on notified government securities
10. Leave encashment received by an employee at the time of retirement
11. Compensation received from the government at the time of disaster
 12. Awards and scholarships received from the government
13. Maturity proceeds of a life insurance policy
14. Income of a minor child up to Rs. 1500
15. Dividend on units of mutual fund

E) Under Income Tax Act definitions are either exhaustive or inclusive. Explain this
statement and define the following terms under Income Tax Act : Assessment Year,
Assessment , Previous year , Assessee, Person and Income

Section 2 of the Income Tax Act deals with definition of certain terms which are sued in the
Act. Definitions are of 2 types:-
a. Exhaustive
b. Inclusive
An Exhaustive definition is the one which defines the term with total clarity, doesn’t contain
any ambiguity and is successful in defining the term

Examples:- Assessment Year – Section 2 (9)

Previous Year – Section 2 (34) r.w.s 3
Assessment – Section 2 (8)

An Inclusive definition cannot be considered as a definition at all. It is illustrative list of items

which fall under the term. It is full of ambiguity, lacks clarity and one gets confused after
reading the definition

Examples:- Person – Section 2 (31)

Assessee – Section 2 (7)
Income – Section 2 (24)

Under the Income Tax Act,

 Assessment year – Section 2 (9)

Assessment Year can be defined as a period of 12 months starting from 1st April ending on
31st March every year. The current Assessment year which is running as AY2019-20. The
significance of this year is that income of a person is assessed.

 Assessment – Section 2 (8)

In the Income Tax Act, assessment is defined as including re-assessment. Assessment is
process comprising 2 stages:-
1. Stage 1: Computing the income of a person
 2. Stage 2: Calculating the tax liability on income computed in Stage 1

 Previous year – Section 2 (34) r.w.s. 3

Previous year can be defined as a period of 12 months, starting from 1st of April, ending on
31st March immediately preceding the assessment year. It is the year in which income is
earned which gets assessed in the assessment year. For example, Income earned in the
previous year 2018-19 will get assessed in assessment year 2019-20

 Assessee – Section 2 (7)

Assessee can be defined as a person who is liable to pay tax under the provision of Income
Tax Act. It further includes:-
1. Every person against whom proceedings have been initiated for recovery of taxes
2. Every person who can be taxed as Representative Assessee
3. Every person who can be considered as Assessee in default
4. Every person who is assumed to be an Assessee

 Person – Section 2 (31)

Person includes:-
1. Individual
2. Hindu Undivided Family (HUF)
3. Partnership firm including LLP (Limited Liability Partnership)
4. Company
5. Association of Person (AOP) OR Body of Individuals (BOI)
6. Local Authorities
7. Any other person not falling in the above 6 categories

 Income – Section 2 (24)

Income includes:-
1. Profits engaged from business
2. Profits from insurance business
3. Dividends
4. Capital gains
5. Voluntary contributions received by charitable institutions
6. Profits in lieu of salary
7. Duty drawback
8. Cash assistance

QUESTION 4 –

(A) All business dealings if successful end up in agreements with reciprocal promises . In
order that these promises are honoured the agreements must be legally enforceable . This
implies that all the conditions laid down in section 10 of the Contract Act should be satisfied.
Explain all the essential Conditions of Section 10 which convert an agreement into a valid
contract. Will it be correct to state that all contracts are agreements but all agreements are
not contract.

Agreement void, if considerations and objects unlawful in part.—If any part of a single
consideration for one or more objects, or any one or any part of any one of several considerations
for a single object, is unlawful, the agreement is void.

Agreement without consideration, void, unless it is in writing and registered or is a promise

to compensate for something done or is a promise to pay a debt barred by limitation law.—
An agreement made without consideration is void, unless—

1.It is expressed in writing and registered under the law for the time being in force for the
registration of 1[documents], and is made on account of natural love and affection
between parties standing in a near relation to each other ; or unless

2.It is a promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, or something which the promisor was legally compellable to do; or
unless;

3.It is a promise, made in writing and signed by the person to be charged therewith, or by his
agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which
the creditor might have enforced payment but for the law for the limitation of suits.
In any of these cases, such an agreement is a contract.

Explanation 1.—Nothing in this section shall affect the validity, as between the donor and donee,
of any gift actually made.

Explanation 2.—An agreement to which the consent of the promisor is freely given is not
void merely because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account by the Court in determining the question whether
the consent of the promisor was freely given.

Agreement in restraint of marriage, void.—Every agreement in restraint of the marriage of any

person, other than a minor, is void.

Agreement in restraint of trade, void.—Every agreement by which any one is restrained from
exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception 1.—Saving of agreement not to carry on business of which good-will is sold.—One
who sells the good-will of a business may agree with the buyer to refrain from carrying on a
similar business, within specified local limits, so long as the buyer, or any person deriving title to
the good-will from him, carries on a like business therein, provided that such limits appear to the
Court reasonable, regard being had to the nature of the business.

Agreements in restraint of legal proceedings, void.—2[Every agreement, by which any party

thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the
usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus
enforce his rights; or which extinguishes the rights of any party thereto, or discharges any party
thereto, from any liability, under or in respect of any contract on the expiry of a specified period so
as to restrict any party from enforcing his rights, is void to the extent.

Exception 1.—Saving of contract to refer to arbitration dispute that may arise.—This section
shall not render illegal a contract, by which two or more persons agree that any dispute which may
arise between them in respect of any subject or class of subjects shall be referred to arbitration,
and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute
so referred.

Exception 2.—Saving of contract to refer questions that have already arisen.—Nor shall this
section render illegal any contract in writing, by which two or more persons agree to refer to
arbitration any question between them which has already arisen, or affect any provision of any
law in force for the time being as to references to arbitration.

Exception 3.—Saving of a guarantee agreement of a bank or a financial institution.—This

section shall not render illegal a contract in writing by which any bank or financial
institution stipulate a term in a guarantee or any agreement making a provision for
guarantee for extinguishment of the rights or discharge of any party thereto from any
liability under or in respect of such guarantee or agreement on the expiry of a specified
period which is not less than one year from the date of occurring or non-occurring of a
specified event for extinguishment or discharge of such party from the said liability.

Explanation.—(i) In Exception 3, the expression “bank” means—

a) a “banking company” as defined in clause (c) of section 5 of the Banking

Regulation Act, 1949 (10 of 1949);
b) “a corresponding new bank” as defined in clause (da) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
c) “State Bank of India” constituted under section 3 of the State Bank of India Act, 1955
(23 of 1955);
d) “a subsidiary bank” as defined in clause (k) of section 2 of the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959);
e) “a Regional Rural Bank” established under section 3 of the Regional Rural Banks
 Act, 1976 (21 of 1976);
f) “a Co-operative Bank” as defined in clause (cci) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
g) “a multi-State co-operative bank” as defined in clause (cciiia) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949); and
In Exception 3, the expression “a financial institution” means any public financial institution
within the meaning of section 4A of the Companies Act, 1956 (1 of 1956).

Agreements void for uncertainty.—Agreements, the meaning of which is not certain, or capable
of being made certain, are void.

Agreements by way of wager void.—Agreements by way of wager are void; and no suit shall be
brought for recovering anything alleged to be won on any wager, or entrusted to any person to
abide the result of any game or other uncertain event on which any wager is made.

Exception in favour of certain prizes for horse-racing.—This section shall not be deemed to
render unlawful a subscription or contribution, or agreement to subscribe or contribute,
made or entered into for or toward any plate, prize or sum of money, of the value or amount
of five hundred rupees or upwards, to be awarded to the winner or winners of any horse-
race.

Section 294A of the Indian Penal Code not affected.—Nothing in this section shall be deemed
to legalize any transaction connected with horse-racing, to which the provisions of section
294A of the Indian Penal Code (45 of 1860) apply.

ALL AGREEMENTS ARE CONTRACTS IF THEY ARE MADE BY THE FREE CONSENT
OF PARTIES COMPETENT TO CONTRACT, FOR A LAWFUL CONSIDERATION AND
WITH A LAWFUL OBJECT, AND ARE NOT HEREBY EXPRESSLY DECLARED TO BE
VOID.

CITATION - uputd.gov.in › siteContent › i...PDF THE INDIAN CONTRACT ACT, 1872

ARRANGEMENT OF SECTIONS AND http://www.aaptaxlaw.com/contract-act/section-
10-indian-contract-act-what-agreements-are-contracts-section-10-of-indian-contract-act-
1872.html
(B) Certain contracts are invalid ab initio . This means that from start these contracts are not
recognised as valid in law. The contract Law refers to such contracts as VOID
CONTRACTS. Discuss in detail various void contracts.

EXPRESSLY VOID AGREEMENTS

The Indian Contract Act 1872 defines a void agreement as “an agreement that is not enforceable by
law”. And there can be many times of void agreements, some of which we have covered in the
previous articles. But the contract states certain agreements that are expressly declared as void
agreements. Let us take a look.

1] Agreement in Restraint of Marriage

Any agreement that restrains the marriage of a major (adult) is a void agreement.  This does not apply
to minors. But if an adult agrees for some consideration not to marry, such an agreement is expressly a
void agreement according to the contract act. So A agrees that if B pays him 50,000/- he will not
marry such an agreement is a void agreement.

2] Agreement in Restraint of Trade

An agreement by which any person is restrained from plying a trade or practising a legal profession or
exercising a business of any kind is an expressly void agreement. Such an agreement violates the
constitutional rights of a person. However, there are a few exceptions to this rule. If a person sells his
business along with the goodwill then the buyer can ask the seller to refrain from practising the same
business at the local limits.

So if according to such an agreement as long as the buyer or his successor carry on such a business the
agreement to restrain the trade of the seller will be valid. Similarly, if an outgoing partner can enter
into such a restraint of a trade agreement with the partnership firm. Also, a contract between partners
not to carry out any competing business during the continuance of a partnership is also a valid
contract. One point to keep in mind regarding the above agreements is that the terms of such an
agreement have to be reasonable. Such reasonable terms are not defined under the act but are to be
judged according to each unique situation and circumstance.

Let us take for example the case of physician A who employs B as his assistant for three years. For
this duration of three years, B agrees not to practice medicine anywhere else. This is a valid agreement
even though it is in restraint of trade. But say A a lawyer sells his legal practice to B along with the
goodwill. And A agrees never to practice as a lawyer anywhere in the state for the next 20 years. This
is not a valid agreement since the terms are completely unreasonable.
 3] Agreement in Restraint of Legal Proceedings
An agreement that prevents one party from enforcing his legal rights under a contract through the
legal process (of courts, arbitration, etc) then such an agreement is expressly void agreement.
However, there are exceptions like, if the agreement states that any dispute between parties will be
referred to arbitration and the amount awarded in such arbitration will be final will be a valid contract.
Also if the parties agree that any dispute between them in the present or the future will be referred to
arbitration, then such an agreement is also valid. But such a contract has to be in writing.

4] An Agreement Whose Meaning is Uncertain

An agreement whose meaning is uncertain cannot be a valid agreement, it is a void agreement. If the
essential meaning of the contract is not assured, obviously the contract cannot go ahead. But if such
uncertainty can be removed, then the contract becomes valid.

Say for example A agrees to sell to B 100 kg of fruit. This is a void contract since what type of fruit is
not mentioned. But if A exclusively sells only oranges then the agreement would be valid because the
meaning would now be certain.

5] Wagering Agreement
According to the Indian Contract Act, an agreement to wager is a void agreement. The basis of a
wager is that the agreement depends on the happening or non-happening of an uncertain event. Here
each side would either win or lose money depending on the outcome of such an uncertain event.

The essentials of a wagering agreement are as follows. If all elements are met then the agreement will
be void.

 Must contain a promise to pay money or money’s worth

 Is conditional on the happening or non-happening of a certain event

 The event must be uncertain. Neither party can have any control over it

 Must be the common intention to bet at the time of making the agreement

 Parties should have no other interest other than the stake of the bet
The following agreements are not considered wagering agreements,

i. Chit Fund

ii. Commercial Transactions, i.e Transactions of the Share MArket

iii. Athletic Competition and Competitions involving Skills

iv. Insurance Contracts

CITATION - https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-
ii/expressly-void-agreements/

(C) What is Bailment. Explain essentials of a Valid Bailment and the duties of a Bailor and Bailee

Section 148 of the Indian Contract Act, 1872 defines bailment - A ‘bailment’ is the delivery of
goods by one person to another for some purpose, upon a contract that they shall, when the purpose
is accomplished, be returned or otherwise disposed of according to the directions of the person
delivering them. In bailment  the person delivering the goods is called the ‘bailor’ and the person to
whom they are delivered is called the ‘bailee’. There are five kinds of bailment.

Essential elements of bailment

• To constitute a contract of bailment, the following conditions are to be satisfied.

1. The delivery of possession - It is an essential and important element of the bailment that
the possession of the goods must be delivered by the bailor to the bailee. If the possession is
not delivered to the bailee, then there will not arise any contract of bailment.

2. The delivery should be on the basis of some contract - According to this element, the delivery
of the goods to the bailee should be made on the basis of some contract. This is so because
the bailmnet is always created by a contract between the bailor and the bailee. However the
contract may be express (that is oral or writing) or implied (that is infered from)

3. The delivery should be for some purpose - It is an essential element that the goods should be
delivered by the bailor to the bailee for some specific purpose. It is however, not necessary
that the purpose should be expressly stated, in that it may implied from the circumstances of
each particular case.

4. The delivery should be upon a condition to return - The goods must be delivered to the bailee
for some purpose and subject to the condition that the purpose is achieved, the goods should
be returned to the bailor of disposed of according to his directions. If the bailee is not bound
to return the goods or to dispose them according to bailor’s direction, there is no bailment at
all.

DUTIES

BAILOR
To disclose faults in the goods bailed
To bear extraordinary expenses
To indemnifying the bailee
To receive back the good
BAILEE
To take reasonable care of the goods bailed
Not to make unauthorised use of the goods
To return the goods to the bailer
To return the increase in the goods bailed

CITATION - https://www.slideshare.net/phakatinestar/bailment-unit-15?from_action=save

(D) Distinguish between a Bailment and a Pledge.

 BASIS FOR
BAILMENT PLEDGE
COMPARISON

Meaning When the goods are temporarily When the goods are delivered to act
handed over from one person to as security against the debt owed
another person for a specific by one person to another person, it
purpose, it is known as bailment. is known as the pledge.

Defined in Section 148 of the Indian Contract Section 172 of the Indian Contract
Act, 1872. Act, 1872.

Parties The person who delivers the goods The person who delivers the goods
is known as the Bailor while the is known as Pawnor while the
person to whom the goods are person to whom the goods are
delivered is known as Bailee. delivered is known as Pawnee.

Consideration May or may not be present. Always present.

Right to sell the The party whom goods are being The party whom goods are being
goods delivered has no right to sell the delivered as security has the right
goods. to sell the goods if the party who
delivers the goods fails to pay the
debt.

Use of Goods The party whom goods are being The party whom goods are being
delivered can use the goods only, delivered has no right to use the
for the specified purpose. goods.

Purpose Safe keeping or repairs, etc. As security against payment of

debt.

CITATION - https://keydifferences.com/difference-between-bailment-and-pledge.html
(E) Distinguish between an Offer and Invitation to make an Offer.

BASIS FOR
OFFER INVITATION TO OFFER
COMPARISON

Meaning When one person expresses his When a person expresses something
will to another person to do or not to another person, to invite him to
to do something, to take his make an offer, it is known as
approval, is known as an offer. invitation to offer.

Defined in Section 2 (a) of the Indian Not Defined

Contract Act, 1872.

Objective To enter into contract. To receive offers from people and

negotiate the terms on which the
contract will be created.

Essential to make Yes No

an agreement

Consequence The Offer becomes an agreement An Invitation to offer, becomes an

when accepted. offer when responded by the party to
whom it is made.

CITATION - https://keydifferences.com/difference-between-offer-and-invitation-to-offer.html

Q5(a) No person in India can issue a Promissory note payable to bearer on demand. Throw
light on this statement discussing the essential characteristic of a Promissory note.
 Ans:No person in India other than the Bank or, as expressly authorized by this Act, the Central
Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or
engagement for the payment of money payable to bearer on demand, or borrow, owe or take up
any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such
person :

Provided that cheques or drafts, including hundis, payable to bearer on demand or otherwise may
be drawn on a person's account with a banker, shroff or agent.

A Promissory Note is a legal financial instrument which is issued by one party, promising to pay
the debt owed to another party.

It is written as well as a negotiable instrument that is duly signed it’s maker and contains an
unconditional promise of paying the stated amount of money to a particular person(exporter),
either on demand, specified date or within then given time as per the given terms.

Characteristics of Promissory Note

1 It is a written document.
2 There must be a clear and unconditional promise to pay a certain sum to a specified
person or on-demand.
3 It must be drawn and duly signed by the maker.
4 It must be properly stamped.
5 It specifies the name of the maker and payee
6 The amount to be paid must be certain, given in both figures and words.
7 Payment is to be made in the country’s legal currency.
A promissory note consists of various terms and conditions which are related to the indebtedness
such as principal amount to be paid, date of maturity, rate of interest on amount to be paid, terms
and instructions of repayment, issuing date, name along with the signature of the drawer, name
of the drawee and many more. No acceptance is needed by a promissory note.

Q5(b) Distinguish between a promissory note and Bill of Exchange.

Basis of Bill of Exchange Promissory Note

Comparison

Definition A negotiable instrument issued to A negotiable instrument issued by the

order the debtor to pay the creditor a debtor with a written promise to pay
certain sum of money within a the creditor a certain amount within a
specific date or on demand. specific date or on demand.
Section Mentioned in Section 5 of the Mentioned in Section 4 of the
Negotiable Instruments Act, 1881 Negotiable Instruments Act, 1881

Issued By Creditor Debtor

Parties Involved Three parties involved i.e a drawer, Two parties involved i.e a
the drawee and a payee. drawer/maker and the payee

Acceptance Drawee needs to accept the bill of No acceptance required from the
exchange before payment. drawee.

Liability Liability of drawer is secondary and Liability of drawer is primary and

conditional. absolute.

Dishonouring of Notice served to all the concerned No notice served to the drawer in case
instrument parties involved in the transaction of dishonouring the instrument.
on dishonouring the instrument.

Copies Bill of exchange can have copies. The promissory note allows no copies.

Is it Payable to Yes, the same person can be drawer The same person cannot be drawer and
drawer/maker and payee. payee.

Q5(c) What is the difference between a Bill of Exchange and a Cheque.

BASIS FOR CHEQUE BILL OF EXCHANGE

COMPARISON

Meaning A document used to make easy payments A written document that shows the
on demand and can be transferred indebtedness of the debtor towards
through hand delivery is known as the creditor.
cheque.

Defined in Section 6 of The Negotiable Instrument Section 5 of The Negotiable

Act, 1881 Instrument Act, 1881

Validity Period 3 months Not Applicable

Payable to bearer on Always Cannot be made payable on

demand demand as per RBI Act, 1934
 Grace Days Not Applicable, as it is always payable at 3 days of grace are allowed.
the time of presentment.

Acceptance A cheque does not require acceptance. Bill of exchange needs to be

accepted.

Stamping No such requirement. Must be stamped.

Crossing Yes No

Drawee Bank Person or Bank

Noting or Protesting If the cheque is dishonoured it cannot be If a bill of exchange is dishonoured

noted or protested it can be noted or protested.

Q5(d) What do you mean by Crossing of cheque and discuss different types of Crossing

Ans: Crossing of cheque:

Crossing of a cheque is nothing but instructing the banker to pay the specified sum through the
banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the
payee.

Hence, it is not instantly encashed by the holder presenting the cheque at the bank counter. If any
cheque contains such an instruction, it is called a crossed cheque.

The crossing of a cheque is done by making two transverse parallel lines at the top left corner
across the face of the cheque.

Types of Crossing:
The way a cheque is crossed specified the banker on how the funds are to be handled, to protect
it from fraud and forgery. Primarily, it ensures that the funds must be transferred to the bank
account only and not to encash it right away upon the receipt of the cheque. There are several
types of crossing

1. General Crossing: When across the face of a cheque two transverse parallel lines are
drawn at the top left corner, along with the words & Co., between the two lines, with or without
using the words not negotiable. When a cheque is crossed in this way, it is called a general
 crossing.

2. Restrictive Crossing: When in between the two transverse parallel lines, the words ‘A/c
payee’ is written across the face of the cheque, then such a crossing is called restrictive crossing
or account payee crossing. In this case, the cheque can be credited to the account of the stated
person only, making it a non-negotiable instrument.

3. Special Crossing: A cheque in which the name of the banker is written, across the face
of the cheque in between the two transverse parallel lines, with or without using the word ‘not
negotiable’. This type of crossing is called a special crossing. In a special crossing, the paying
banker will pay the sum only to the banker whose name is stated in the cheque or to his agent.
Hence, the cheque will be honoured only when the bank mentioned in the crossing orders the
same.

4. Not Negotiable Crossing: When the words not negotiable is mentioned in between the
two transverse parallel lines, indicating that the cheque can be transferred but the transferee will
 not be able to have a better title to the cheque.

5. Double Crossing: Double crossing is when a bank to whom the cheque crossed specially,
further submits the same to another bank, for the purpose of collection as its agent, in this
situation the second crossing should indicate that it is serving as an agent of the prior banker, to
whom the cheque was specially crossed.

The crossing of a cheque is done to ensure the safety of payment. It is a well-known mechanism
used to protect the parties to the cheque, by making sure that the payment is made to the right
payee. Hence, it reduces fraud and wrong payments, as well as it protects the instrument from
getting stolen or encashed by any unscrupulous individual.

Q5( e ) Every Dishonour of a cheque is a Quasi criminal Offence. Please comment on the
correctness of this statement in the light of provisions of section 138 of the Negotiable
Instruments Act 1881.Discuss the provisions at length.

Ans:

Over the years there have been many important changes in the way cheques are
issued/bounced/dealt with. Commercial globalisation has resulted in giving a big boost to our
country. With the rapid increase in commerce and trade, use of cheque also increased and so did
the cheque bouncing disputes. The object of Sections 138-142 of the Negotiable Instruments Act,
1881 is to promote the efficacy of banking operations and to ensure credibility in transacting
business through cheques.
Section 138 casts a criminal liability punishable with imprisonment or fine or with both on a
person who issues a cheque towards discharge of a debt or liability as a whole or in part and the
cheque is dishonoured by the bank on presentation. Section 138 was enacted to punish
unscrupulous drawers of cheques who, though purport to discharge their liability by issuing
cheque, have no intention of really doing so. Apart from civil liability, criminal liability is sought
to be imposed by the said provision on such unscrupulous drawers of cheques. However, with a
view to avert unnecessary prosecution of an honest drawer of the cheque and with a view to give
an opportunity to him to make amends, the prosecution under Section 138 of the Act has been
made subject to certain conditions. These conditions are stipulated in the proviso to Section 138.

In criminal law, commission of offence is one thing and prosecution is quite another.
Commission of offence is governed by Section 138 of the Act. Prosecution is governed by
Section 142 of the Act. It is also noteworthy that Section 138 while making dishonour of a
cheque an offence punishable with imprisonment and fine, also provides for safeguards to protect
drawers of such instruments where dishonour may take place for reasons other than those arising
out of dishonest intentions. It envisages service of a notice upon the drawer of the instrument
calling upon him to make the payment covered by the cheque and permits prosecution only after
the expiry of the statutory period and upon failure of the drawer to make the payment within the
said period.

Negotiable Instruments Act, 1881

Section 138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any
cheque drawn by a person on an account maintained by him with a banker for payment of any
amount of money to another person from out of that account for the discharge, in whole or in
part, of any debt or other liability, is returned by the bank unpaid, either because of the amount
of money standing to the credit of that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement made with that bank,
such person shall be deemed to have committed an offence and shall, without prejudice to any
other provision of this Act, be punished with imprisonment for a term which may extend to two
years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless —

(a) the cheque has been presented to the bank within a period of six months* from the date on
which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for
the payment of the said amount of money by giving a notice in writing, to the drawer of the
cheque, within thirty days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the
payee or as the case may be, to the holder in due course of the cheque within fifteen days of the
receipt of the said notice.

Explanation.—For the purposes of this section, “debt or other liability” means a legally
enforceable debt or other liability.

Classification of Offence

An offence committed under Section 138 is a non-cognizable offence (a case in which a police
officer cannot arrest the accused without an arrest warrant). Also, it is a bailable offence.

Cases

Ingredients

The ingredients of the offence under Section 138 are:

(a) cheque is drawn by the accused on an account maintained by him with a banker;

(b) the cheque amount is in discharge of a debt or liability; and

(c) the cheque is returned unpaid for insufficiency of funds or that the amount exceeds the
arrangement made with the bank, the offence standing committed the moment the cheque is
returned unpaid.

Further steps laid down by way of the proviso are distinct from the ingredients of the offence
which the enacting provision creates and makes punishable. Thus, an offence within the
contemplation of Section 138 is complete with the dishonour of the cheque but taking
cognizance of the same by any court is forbidden so long as the complainant does not have the
cause of action to file a complaint in terms of clause (c) of the proviso read with Section 142,
Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.

Conditions precedent for constituting an offence under S. 138

There are three distinct conditions precedent, which must be satisfied before the dishonour of a
cheque can constitute an offence and become punishable.

(i) The cheque ought to have been presented to the bank within a period of 6 months [3 months]*
from the date on which it is drawn or within the period of its validity, whichever is earlier.

(ii) The payee or the holder in due course of the cheque, as the case may be, ought to make a
demand for the payment of the said amount of money by giving a notice in writing, to the drawer
of the cheque, within 30 days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid.
(iii) The drawer of such a cheque should have failed to make payment of the said amount of
money to the payee or as the case may be, to the holder in due course of the cheque within 15
days of the receipt of the said notice.

It is only upon the satisfaction of all the three conditions mentioned above and enumerated under
the proviso to Section 138 as clauses (a), (b) and (c) thereof that an offence under Section 138
can be said to have been committed by the person issuing the cheque, MSR Leathers v. S.
Palaniappan, (2013) 1 SCC 177.

Q6(a) Explain the provisions relating to incorporation of a Company under Companies Act 2013.

Ans:

“A company is an association of many persons who contribute money or money’s worth to a

common stock and employs it in some trade or business and who share the profit and loss arising
therefrom. The common stock so contributed is denoted in money and is the capital of the
company. The persons who contributed to it or created it, or to whom it belongs, are members.
The proportion of capital to which each member is entitled is his “share”. The shares are always
transferable although the right to transfer them may be restricted”.  (Lord Justice Lindley)

The INC 29: Section 4, 7, 12, 152 and 153 of Companies Act 2013 deals with how to incorporate
a company. The new Companies (Amendment) Act, 2015 bring some new provisions relating to
the incorporation of a company.
Digital signature certificate

The first step towards the incorporation of the company is getting authorized signatories as
mentioned under the Information Technology Act, 2000. A digital signature is basically an
electronic signature which is duly issued by a certifying authority that shows the authority of a
person signing the same. Under MCA-21 there are four types of identified users of digital
signatures:

MCA Employees;

Professionals (CA, CS, cost accountants and lawyers);

Authorized signatories of the company including Managing Director or Manager or Directors or

Secretary;

Representatives of banks and financial institutions

Section 153 obtaining directors’ identification number

The next step is to obtain directors identification number, every individual who is appointed as a
director of a company will make an application for director identification number in form of Dir
3. It is mandatory for the directors to apply for the DIN. DIN is required before commencing the
incorporation of the company.

Name for proposed company

According to the Section 4(4) with rule 9 of Companies (Incorporation) rules, 2014 the name of
the company shall be in Form no. INC 1 with a payable fee of one thousand rupees and the name
should be in accordance with name guidelines given in Rule 8. After the company’s approval
name ROC will send a letter with respect to approval for the availability of name for a company.
The name will be valid for sixty days from the date on which application was made.

Preparation of important documents

After the company’s name is approved by ROC, then the next step is to prepare documents like a
memorandum of association and articles of association. It should be noted that main object of
both the documents should match the objects mentioned in e-Form INC. 1 these two documents
contain the rules and regulations of the company and, therefore, should be prepared with utmost
care drafted in a broader sense. Memorandum of Association shall be in the respective form as
prescribed in Tables A, B, C, D and E in schedule 1 and Article of Association in F, G, H, I and J
in schedule 1.

Documents required for the incorporation of a private company

A private company requires certain documents

Memorandum of Association, Articles of Association, Declaration in Form no INC 8 by
professionals, an affidavit from each subscriber, proof of residential address, verification
signature of the subscriber, NOC, proof of identity.

Commencement

After all the documents are submitted the company is finally registered, the company can start
the commencement from the date mentioned.

Q6(b) Distinguish between a Private Ltd Co and Public Ltd Co.

Ans:

Sr. No Private Limited Co Public Ltd Co

1. A private company is a company A public company is a company which is
which is owned and traded privately owned and traded publicly
2. A private limited company is a A public limited company is a full-fledged
partnership firm. corporate body.
3. They have minimum one director. They have minimum two directors.
4. Prior permission is required for Free transfer of shares is permitted.
transfer of shares.
5. Exempted from various legal It has to comply with many legal
formalities. formalities.
6. It has less compliance. It has more compliance.
7. Comparatively simple, certificate of Comparatively difficult as the procedure is
incorporation is adequate. lengthy.

Q6(c) Discuss Memorandum of Association and Articles of Association as the Basic Documents
in formation of a Company and briefly describe their contents.

Ans:

A memorandum of association contains a name clause, registered office clause, object (or
objective clause), objects clause, liability clause, capital clause, and association clause. An MOA
is a type of legal paper that is prepared when forming and registering a limited liability company
(LLC).
The MOA's purpose is to explain the LLC's relationship with its shareholders. The articles of
Association and MOA make up the company's constitution. An MOA isn't required in the United
States, but limited liability companies that are based in European countries, which include the
U.K., the Netherlands, France, and some Commonwealth Nations do require MOAs.
Name Clause
This clause states the company's proposed name.

 It must end in the word "limited" if it's a public company or "private limited" if it's a
private company.
 It can't be identical to any existing company's name.
 It can't allude to the new company doing the business of an existing company.
 It should not be misleading in any way.

Registered Office Clause

The registered office clause lists the name of the state where the company's registered office is
physically located.

 The registered office's physical location determines which jurisdiction the Registrar of
Companies and which court the company would fall under.
 It also confirms the company's nationality.
 The registered office's full address must be provided to the Registrar of Companies to
simplify further communications.

Objects or Objective Clause

The objects clause, also called the objective clause, is considered the most important in the
MOA.

 It defines and limits the scope of the company's operations.

 It details the company's scope of activity for the members and explains how the members'
capital will be used.
 It protects shareholders funds and ensures the funds will be used for the specific business
purposes for which they were raised and that they won't be risked in other endeavors.

Object Clause
The object clause explained why the company is establishing. Companies aren't legally allowed
to do any kind of business other than the kind of business that is specifically stated in this clause.
An object clause should contain:

 A list of the main objects the company will be pursuing after it's Incorporated
 Incidental objects that are necessary to achieve the main object
 Any other objects that aren't included in the main objects or incidental object
 Nothing illegal
 Nothing that's against the public interest
 Nothing that's against the country's general rule of law

Liability Clause
The liability clause explains what liability each of the company's members faces. If the company
is limited by shares, the liability that each member faces can be no more than the face value of
shares that he or she holds. If it's a company that's limited by guarantee, this clause must define
how much liability each individual company member holds. If it's an unlimited company, this
particular clause would not be included in the MOA.

Capital Clause
The capital clause lists information about the total capital held by the proposed company. This
amount is called the company's authorized capital. Companies aren't permitted to collect more
money than the amount listed under authorized capital. The way the capital is divided into equity
share capital and preference share capital also needs to be listed in the capital clause. The
number of shares the company puts in equity share capital and preference share capital,
alongside their value, needs to be included in the MOA.

Association Clause
The association clause explains that any individual signing the bottom of the MOA wants to be
part of the association that's being formed by the memorandum. The MOA has to be signed by at
least seven people or more if it's a public company. It has to be signed by at least two or more
people if it's a private company. The signatures also have to be affirmed by witnesses. There can
be one witness for all of the signatures, but none of the subscribers can witness the signatures of
the others. All subscribers and witnesses must provide their addresses and occupations in
writing.

Articles of Association (AOA) is the Company’s essential Rule Book which contains the set of
guidelines and regulations necessary for every Company to function. The document is set to
define the Company’s purpose as an organization and the tasks it is supposed to accomplish
internally; ie. handling official financial records; handling company meetings along with
defining the role and the powers of the Directors of the Company. The Articles also manage and
maintain the rights of the shareholders as well as their relationship with the Directors.
Companies who need mandatory Articles of Association are Unlimited Companies, Companies
Limited by Guarantee and Private Companies Limited by Shares.

CONTENTS OF ARTICLES OF ASSOCIATION

It is important to pay extra attention to the Contents of the Articles of Association (AOA) at the
initial phase since they are important for the ability of the Company to make profits and keep
their shareholders satisfied. It is also important to make sure that they are as per the Company's
interests because amending the Articles later require a two-thirds majority of the votes at the
general meeting of shareholders.

The following are the contents that a Company's Articles of Association (AOA) usually
possesses:
DIRECTORS

The AOA defines the guidelines of the Directors' appointment; their qualifications for
appointment; their remuneration once appointed and the powers of the Board of Directors in the
Company meetings.

GENERAL MEETINGS

The AOA provides the basic framework of all the General Meetings to be conducted as well as
all the provisions that are related to the functioning of the General Meetings in any manner.

ACCOUNTING AND AUDITING

The provisions in AOA will define the guidelines subjected to the Auditing of the accounting of
the Company.
SHAREHOLDERS

The AOA streamlines the sub-division of the Share capital of the Company including the rights
of the Shareholders and the relationship of these rights with other elements of the Company. The
shareholders have to pay the whole or part of the remaining unpaid amount on each share
purchased on the Company's demand; i.e Call on Shares.

LIEN OF SHARES

The Company is eligible to retain the Shares of any member of the Company in case they fail to
pay the debt to the Company. The member will not be allowed to transfer their shares unless they
pay their debt.

TRANSFER AND TRANSMISSION OF SHARES

The AOA defines the procedure during the process of transfer of shares between the transferee
and the shareholders. Transmission of shares comes into effect with death, insolvency,
marriage, succession, etc. It is also a part of AOA despite being involuntary.
FORFEITURE AND SURRENDER OF SHARES

The AOA provides for the rules of forfeiture of shares if the member is not able to meet the
purchase payments like paying call money or any allotment on the Shares. Shareholders may
choose to surrender or voluntary return their shares to the Company pertaining to the guidelines
of the AOA.

CONVERSION OF SHARES IN STOCK

The Company can pass an ordinary resolution in a General Meeting to convert their shares into
stock. The management of the decision and resolution passed should be in accordance with the
AOA.
ISSUING SHARE WARRANT

Public Limited Companies are eligible to issue a share warrant staying within the provisions
mentioned in AOA. A share warrant is a bearer document which is related to the title of shares
issued by the Company.

ALTERATION OF CAPITAL

Similar to the conversion of Shares into Stock, AOA provides the rules of the procedure to alter
capital as per the Company's interests. The Company can decide to increase, decrease or
rearrange the Capital.

VOTING RIGHTS

The AOA notes down the specific Company matters which calls for voting by members as well
as the procedure of voting whether by a poll or through proxies.

DIVIDENDS AND RESERVES

The AOA also provides the distribution of dividends among the Shareholders of the Company.

WINDING UP

Winding up of the Company means the liquidation of all the assets of the Company to pay its
debt. The remaining monies left after the payment of all debt and expenses are distributed among
the shareholders of the Company. The AOA also provides the provisions and procedure related
to the Winding Up of the Company and has to proceed in accordance with the AOA.

Q6(d) Explain Doctrine of ULTRAVIRES and Doctrine of INDOOR MANAGEMENT with

reference to MOA and AOA.

Ans:

Doctrine of ULTRAVIRES

A Memorandum of Association of a company is a basic charter of the company. It is a binding

document which describes the scope of the company among other things. If a company departs from
its MOA such an act is ultra vires. 

The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a
company, as specified in its Memorandum of Association, can be departed from only to the extent
permitted by the Act. Hence, if the company does an act, or enters into a contract beyond
the powers of the directors and/or the company itself, then the said act/contract is void and not
legally binding on the company.
The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the acts
performed in excess of the legal powers of the doer. This works on an assumption that the powers
are limited in nature. Since the Doctrine of Ultra Vires limits the company to the objects specified in
the memorandum, the company can be:

 Restrained from using its funds for purposes other than those specified in the
Memorandum

 Restrained from carrying on trade different from the one authorized.

The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a company
supplies goods or offers service or lends money on an ultra vires contract, then it cannot obtain
payment or recover the loan.

However, if a lender loans money to a company which has not been extended yet, then he can stop
the company from parting with it via an injunction. The lender has this right because the company
does not become the owner of the money as it is ultra vires to the company and the lender remains
the owner.

Further, if the company borrows money in an ultra vires transaction to repay a legal loan, then the
lender is entitled to recover his loan from the company.

Sometimes an act which is ultra vires can be regularized by the shareholders of the company. For
example,

 If an act is ultra vires the power of directors, then the shareholders can ratify it.

 If an act is ultra vires the Articles of the company, then the company can alter the Articles.
Remember, you cannot bind a company through an ultra vires contract. Estoppel, acquiescence,
lapse of time, delay, or ratification cannot make it ‘Intravires’.

Summing up the Doctrine of Ultra Vires

1. An act, legal in itself, but not authorized by the object clause of the Memorandum of
Association of a company or statute, is Ultra Vires the company. Hence, it is null and void.
2. An act ultra vires the company cannot be ratified even by the unanimous consent of all
shareholders.
3. If an act is ultra vires the directors of a company, but intra vires the company itself, then
the members of the company can pass a resolution to ratify it.
4. If an act is Ultra Vires the Articles of Association of a company, then the same can be
ratified by a special resolution at a general meeting.
Doctrine of INDOOR MANAGEMENT

There are various principles in the corporate world that help determine the relationship
which ensures the safety of various stakeholders in the company in the transactions that they
undertake. The doctrine of indoor management is one such principle. It is also popularly referred
to as Turquand’s rule. The other principle that is commonly referred to in this context is the
principle of constructive notice.
The principle of constructive notice protects the company from frivolous claims by
outsiders’. The third party cannot claim to not having been notified of the Company’s procedures
or practices if they are a party to the MOA and the AOA. It is deemed to have been understood
that a prudent person would have read the MOA and the AOA before agreeing to enter into an
agreement with the company. The doctrine of constructive notice is limited to the external
position of the company.

The doctrine of indoor management protects the outsiders. If there is no notification as to

a change in the internal dealings of the Company to the third party (usually subscribers)
especially in the Memorandum and Articles of Association then the third party cannot be
expected to know of such changes and any loss to such effect shall be made not be to the
detriment if the business operates to protect the interests of the outsiders. This doctrine can be
invoked by any person that is dealing with the company.

Q6(e) Explain the duties and Powers of Directors under the Companies Act.

Ans:

Duties of Director

Major Corporate Debacles of recent times like Kingfisher, Sahara, Satyam etc has again and
again proved the inability of Company Act 1956 to be ineffective in upholding Corporate
Governance. Every time it is the Directors who are responsible in breaking Shareholders
expectation and sometimes betraying the sentiments of stakeholders under a false veil of
charisma, while using the corporate mechanism to fulfill personal welfare. To meet this
challenge Companies Act 2013 has been enacted almost 50 years after the last amendment. It is
built on the principles of responsibility of the Board, protection of interests of the Shareholders,
self- regulation and openness through disclosures. The 2013 amendment has ensured several
effective measures through clearly defining liabilities and responsibilities of the Directors and
penal actions on failure to follow the same.
  The duties, liabilities and responsibilities which promotes corporate governance
through the sincerest efforts of directors in efficient management and swift resolution
of critical corporate issues and sincere and mature decision making to avoid
unnecessary risks to the corporate entity and its shareholders.
 Keeping the interests of company and its stakeholders ahead of personal interests.

1. A director must act in accordance with the Articles of Association of the company
2. A director must pursue the best interests of the stake holders of the company, in good
faith and to promote the objects of the company.
3. A director shall use independent judgement to exercise his duties with due and
reasonable care , skill and diligence.
4. A director should always be aware of conflict of interest situations and should try and
avoid such conflicts for the interest of the company.
5. Before approving related party transactions the Director must ensure that adequate
deliberations are held and such transactions are in interest of the company.
6. To ensure vigil mechanism of the company and the users are not prejudicially affected
on account of such use.
7. Confidentiality of sensitive proprietary information, commercial secrets, technologies,
unpublished price to be maintained and should not be disclosed unless approved by the
board or required by law.
8. A Director of a Company shall not assign his office and any assignment so made shall
be void.
9. If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one Lakh Rupees but which
may extend to five Lac Rupees.

To ensure independence and equitableness of the Board, the Companies Act 2013 also casts
various responsibilities on the Independent Directors. An Independent Director is a member of
the Board of Directors, but doesn’t owns any share of the company nor does have any financial
relationship with the company other the sitting fees it receives. As per Schedule IV of the
Companies Act 2013

1. Protecting and promoting interests of all and specially for Minority Stakeholders
2. Acting as a mediator in case of Conflict of Interest amongst the stakeholders
3. Assistance in forwarding independent and equitable judgement to the Board of
Directors
4. Adequate attention towards related party transactions
 5. Honest and impartial reporting of any unethical behavior, violation of code of conduct
or any suspected fraud in the company.

Powers of directors 
On incorporation, a company becomes a legal artificial person but it cannot act by itself and
consequently it has to depend upon some human agency to act in its name. The members have no
inherent right to participate in the management of the company. A large sized company may
have its members running into lakhs, who are dispersed all over the country and they even lack
the expertise to manage the affairs of the company, which makes it impossible to give the
management of the company in their hands. Therefore a specialized body of persons called as
directors are appointed by the members to manage the affairs of the company. The directors must
act as a body without improper exclusion of any of the directors. The directors collectively
referred to as BOARD. The board is the managerial body constituted by the members to whom is
entrusted the whole management of the company.

The powers which vest in the board can be classified under three different heads:
1) General Powers: General powers are those which can be exercised in accordance with the
articles. These powers are laid down in sec. 179 of the Companies Act, 2013. It empowers the
board to exercise all such powers and do all such acts and things, as the company is authorised to
exercise and do. There are, however, two limitations upon their powers:
• First, the Board shall not do any act which is to be done by the company in general meeting
• Second, the Board shall exercise its powers subject to the provisions contained in the
Companies Act, or in the Memorandum or the Articles of the company or in any regulations
made by the company in general meeting.

2) Powers to be exercised at Board meetings [Sec. 179 (3)]: The Board of directors of a

company shall exercise the following powers on behalf of the company by means of resolutions
passed at the meetings of the Board, viz, the power to:
(a) Make calls on shareholders in respect of money unpaid on their shares
(b) Issue debentures
(c) Borrow money otherwise than on debentures
(d) Invest the funds of the company
(e) Make loans
(f) To approve financial statement and the board’s report
(g) To diversify the business of the company.

3) Powers to be exercised with the approval of company in general meeting (Sec. 180)
(a) Sale or lease of the company’s undertaking
(b) Extension of the time for payment of a debt due by a director
(c) Investment of compensation received on acquisition of the company’s assets in securities
other than trust securities
(d) Borrowing of money beyond the paid-up capital of the company
(e) Contributions to any charitable fund beyond Rs.50,000 in one financial year or 5% of the
average net profits during the preceding three financial years, whichever is greater.
4) Powers under rule 8: Rule 8 of the Companies rule, 2014 provides that, the following powers
shall be exercised only by means of resolutions passed at meeting of the board, namely:
a) To make political contribution;
b) To appoint or remove key managerial personnel;
c) To appoint internal auditors and secretarial auditors;
d) To take note of the disclosure of director’s interest and shareholding
e) To accept or renew or review the terms and conditions of public deposits.

5) Other powers: In addition to the items referred above, there are various other matters, as
illustrated below in the routine working of a company which are considered by the board at
board meeting:
(a) Issuance of shares;
(b) Allotment of shares and debentures;
(c) Appointment of directors and managing directors;
(d) Merger and acquisition of companies;
(e) Capitalisation of reserves and issuance of bonus shares.