QUESTION 1 –

(A) Discuss provisions relating to taxability of salary according to charging section 15 of the
Income Tax Act .

According to Section 15 of the Income Tax Act, the following income shall be chargeable to
income tax under the head “Salaries”—

(a)  Any salary due from an employer or a former employer to an assessee in the previous year,
whether paid or not;
(b)  Any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer though not due or before it became due to him;
(c)  Any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, if not charged to income-tax for any earlier previous year.
Section 15 states that salary should be taxed whenever it is due or paid, whichever is earlier. For
example, let us assume that an organization pays salary to its employees on the first day of each
month for the month which ended the previous day. One could then state that the salary for a month
falls due on the last day of the month while the date of payment is the first day of the next month.
As per Section 15, the salary should be taxed on the basis of the tax rates prevailing on the last day
of the month, which is the date of salary accrual.

(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 under Section 16 :

1. Standard Deduction
2. Entertainment Allowance Deduction
3. Professional Tax .

1. STANDARD DEDUCTION [SEC. 16(I)/(IA)] -

 Standard deduction is Rs. 40,000 or the Amount of Salary, whichever is Lower.

2. ENTERTAINMENT ALLOWANCE [SEC. 16(II)]-

Entertainment allowance is first included in salary income under the head “Salaries” and thereafter
a deduction is given on the basis enumerated in the following paragraphs:

(A). In the case of a Government employee (i.e., a Central Government or a State Government
employee), the least of the following is Deductible:

a. Rs. 5,000;
b. 20 % of Basic Salary;
c. Amount of Entertainment Allowance granted during the previous year.

In order to determine amount of entertainment allowance deductible from salary, the following
points need consideration:

1. For this purpose “salary” excludes any allowance, benefit or other perquisites.
2. Amount actually expended towards entertainment (out of entertainment allowance received)
is not taken into consideration.

(B). In the case of a Non-Government Employee (including employees of Statutory Corporation

and Local Authority), :

Entertainment Allowance is NOT deductible.

3. Professional Tax or Tax on Employment [Sec. 16(iii)] -

Professional Tax or Tax on Employment, levied by a State under article 276 of the Constitution,
is Allowed as Deduction.

The following points should be kept in view —

1. Deduction is available only in the year in which professional tax is paid.

2. If the professional tax is paid by the employer on behalf of an employee, it is first included in
the salary of the employee as a “perquisite” and then the same amount is allowed as deduction
on account of “professional tax” from gross salary.
3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a
State Government cannot impose more than Rs. 2,500 per annum as professional tax. Under the
Income-tax Act, whatever professional tax is paid during the previous year, is deductible.

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

According to Section 17(1) salary includes the following amounts received by an employee from
his employer, during the previous year :
 1. Wages;
2. Any annuity or pension; (Family pension received by heirs of an employee is taxable under
income from other sources);
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 by an employee in respect of any period of leave not availed of by
him; (Leave encashment or salary in lieu of leave);
7. The annual accretion to the balance at the credit of an employee participating in a
recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of part
A of the Fourth Schedule; and
8. The aggregate of all sums that are comprised in the transferred balance as referred to in sub-
rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a
recognised provident fund, to the extent to which it is chargeable to tax, under sub-rule (4)
there, i.e., taxable portion of transferred balance from unrecognised provident fund to
recognised provident fund.
9. 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 8OCCD.

The above definition of word ‘salary’ U/s 17(1) includes the above mentioned items. These
can be explained in following manner :

1. Wages—any amount received by a person for work done or job rendered is called wages. It
may be received under the name of ‘Pay’, ‘Basic Pay’, ‘Salary’, ‘Basic salary’ or
‘Remuneration’. It may be for actual work or leave salary or actually received or due during the
relevant previous year. Salary in lieu of Notice. It is fully taxable uls 15 if received during the
relevent previous year.
2. Any Annuity or Pension—Any amount received by employee from past employer after
attaining the age of retirement or superannuation is fully taxable. It may be received direct as
pension or out of a superannuation fund created by employer; in both cases it is taxable.
3. Any Gratuity—Any sum received by employee from his past employer as a token of gratitude
for services rendered in past is called gratuity. This amount is exempted upto certain limits
given u/s 10(10) and it is dealt with in this very chapter at a later stage.
4.  
a. any Fee—any amount received from employer under the name of fee is also fully
taxable.
b. any Commission—any commissions given by employer to employee is fully taxable.
Any commission received by a director for standing guarantee for repayment of loan,
and if he is not employee of the company, shall be taxable under “Income from other
sources”. In case commission is given to an employee and it is paid as a fixed
percentage of turnover achieved by such employee, such commission shall also be
treated as part of the salary for all practical purposes. [Gestener Duplicators (P) Ltd. vs.
C.I. T. (1979) SC).
c. any Bonus—Bonus is fully taxable under the head ‘Salaries’ on receipt basis. In case
arrears of bonus are received in a previous year, these are fully taxable. Bonus can be of
two types :
 Statutory Bonus—It is received under some legal or contractual obligation and is fully
taxable.
Gratuitous Bonus—It is a casual benefit and is taxable as a receipt from employer and
having no other implication.

d. any Perquisite—Any benefit or amenity allowed by employer to employee. These are

explained in detail later in this chapter u/s 17(2).
e. any Profit in lieu of or in addition to salary—any cash payment received by
employee from employer is called profit in lieu of salary and these are explained later in
this chapter u/s 17(3).
5. Any salary in lieu of leave received during service is fully taxable.
6. Any advance salary—In case an assessee receives some salary in advance in a previous year
and which was actually not due in that year shall be taxable in the year of receipt. It does not
include any loan or advance taken from employer.

(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).

(HRA) is received by the salaried class. A deduction is permissible under Section 10(13A) of the
Income Tax Act, in accordance with Rule 2A of the Income Tax Rules. You can claim exemption
on your HRA under the Income Tax Act if you stay in a rented house and get a HRA from your
employer.
The HRA deduction is based on salary, HRA received, the actual rent paid and place of residence.
The place of residence is important. For Mumbai, Kolkata, Delhi or Chennai, the tax exemption on
HRA is 50 percent of the basic salary, while for other cities it is 40 percent of the basic salary.
The city of residence is to be considered for calculating HRA deduction.
The least value of these is allowed as tax exemption on HRA:
Actual rent allowance the employer provides as part of salary in the relevant period during which
the rental accommodation was occupied Actual rent paid for the house, less 10 per cent of basic
pay 50 percent of basic salary if you reside in Mumbai, Calcutta, Delhi or Chennai, or 40 per cent
if you reside in other cities.
In order to claim the exemption, the rent must actually be paid for the rented premises which you
occupy.
Also, the rented premises must not be owned by you. As long as the rented house is not owned by
you, the exemption of HRA will be available up to the limits specified.
For the purpose of this deduction, salary means basic salary and includes dearness allowance, if the
terms of employment provide it, and commission based on a fixed percentage of turnover achieved
by the employee.
 The deduction is available only for the period during which the rented house is occupied by the
employee and not for any period after that. It is to be noted that the tax benefits for home loans and
HRA are two separate aspects.
In case you are paying rent for an accommodation, you can claim tax benefits on the HRA
component of your salary, while also availing tax benefits on a home loan.
You need to submit proof of rent paid through rent receipts, duly signed and stamped, along with
other details such as the rented residence address, name of the owner, period of rent etc.
How it applies :-For example, assume one earns a basic salary of Rs 20,000 per month and rents a
flat in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is eligible for 50 percent
of the basic pay for HRA exemption.
Least of:
 Actual HRA received – Rs 8,000
 50 percent of basic salary – Rs 10,000
 Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 – Rs 3,000.

As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA deduction.

(E) Mr P joined as Senior Manager in ABC Co Ltd on 1 st June 2019 working in Mumbai .
From the following information compute his taxable Salary for Previous year ended : 31 st
March,2020 relevant to A Y 2020-21.
Basic Salary 30,000 p.m
D.A. 10,000 p.m
City Compensatory Allowance 6,000 p.m
House Rent Allowance (HRA) 15,000 p.m
(He stays in rented premises and pays a monthly rent of 12,000/-)
Bonus (2 Months Salary )
Entertainment Allowance 2,000 p.m
Education Allowance ( He has one son) 1,000 p.m
Travelling Allowance 20,000 p.m
Profession Tax deducted 2,000 p.a
Perquisite Value of Motor Car 45,000 p.a
 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
  - 20000
Govt. 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
       
8,70,00
Gross Taxable Salary     0
       
Less: Deductions u/s 16      
16(i) Std. deduction   50,000  
16(ii) Not available   -  
16(iii) Professional Tax   2000 52,000
8,18,00
NET TAXABLE INCOME FROM SALARY
0
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 No 60 days No

or more & 365
days
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.— 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.

(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

(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
(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.
(E) Distinguish between an Offer and Invitation to make an Offer.

BASIS FOR
OFFER INVITATION TO OFFER
COMPARISON

Meaning When one person When a person expresses

expresses his will to
another person to do or
not to do something, to
take his approval, is
known as an offer.
something to another
person, to invite him to
make an offer, it is known as
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 An Invitation to offer,

agreement when becomes an offer when
accepted. responded by the party to
whom it is made.
QUESTION 5 –
(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.

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.
Notwithstanding anything contained in the Negotiable Instruments Act, 1881, (26 of 1881) no
person in India other than the Bank or, as expressly authorised by this Act, the Central
Government shall make or issue any promissory note expressed to be payable to the bearer of
the instrument.

According to Section 4 of the Negotiable Instruments Act a promissory note is an instrument

in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum
of money only to or to the order of, a certain person, or to the bearer of the instrument.’

The following is the usual form of a promissory note :

 Essential Requirement of a Valid Promissory Note: The definition given in Section 4
reveals certain essential characteristics of a promissory note:

1. It must be in writing: The promissory note should be in writing. An oral to promise

to pay does not become a promissory note. The writing may be in ink or in pencil and it
also implies printing, lithography or other modes of representing words in a visible form.

2. It must contain an express promise to pay: The promissory note must contain an

express promise to pay. A mere acknowledgement of debt is not a promissory note. The
following are valid promissory notes : (a) I promise to pay B or on order Rs. 20,000. (b) I
acknowledge myself to be indebted to B in Rs. 10,000 to be paid on demand for value
received.
3. The promise to pay must be unconditional: The promise to pay contained in the
note should be unconditional. Notes which are payable on a contingency are not negotiable
because it is not sure whether or not they will be paid.

4. It must be signed by the maker: Until the maker of a promissory note affixes his
signatures thereto, the instrument is incomplete and of no effect.

5. The maker must be a certain person: The promissory note should point out with
certainty the person who undertakes to pay.

6. The payee must be certain: The promissory note must point out with certainty the
party who is to receive the money. A promissory note cannot be made,payable to the bearer
(Section 31 of RBI Act). Only the Reserve Bank or the. Central Government can make or
issue a promissory note ‘payable to bearer’.

7. The sum payable must be certain: The amount expressed to be payable by the

instrument must be certain. The following cannot be termed valid promissory notes:
(a) I promise to pay B Rs. 2,500 and-all other sums which maybe due to him.
(b) I promise to pay B Rs. 2,500 and all fines according to rules.’ But the following is a
valid promissory note: I promise to pay B Rs. 3,000 with 1% p.a. interest.’

8. The promise should be to pay money only: The medium of payment in a

promissory note should be money and money only. An agreement to do something in
addition to or other than to pay money cannot be a promissory note.

9. Stamping: A promissory note must be properly stamped in accordance with the

provisions of Indian Stamp Act.

(B) Distinguish between a promissory note and bill of exchange.

 BASIS BILL OF EXCHANGE PROMISSORY NOTE

Meaning A bill of exchange is a written order A promissory note is a written

drafted by the drawer on drawee to promise made by the drawer to

pay a specific sum within a pay a definite amount to the payee

mentioned time period without any on a specified date.

condition.

Drawn by Creditor Debtor

Drawer, drawee and payee Drawer and payee

Parties Involved

Order/promise Order to pay Promise to pay

Drawn in sets Yes No

Need for Yes No

acceptance

Stamp duty Yes No

requirement

Payable to bearer Yes No

Defined under Section 5 of Negotiable Instrument Section 4 of Negotiable

Act, 1881 Instrument Act, 1881

Liability on drawer Secondary and conditional Primary and absolute

Printed form Not necessary Compulsory

 BASIS BILL OF EXCHANGE PROMISSORY NOTE

Protest in case of Yes No

dishonour

Notice of Yes No

dishonour

Can the same Yes No

person be drawer

and payee?

(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 A written document that shows

payments on demand and can be the indebtedness of the debtor
transferred through hand delivery is towards the creditor.
known as 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
 BASIS FOR
CHEQUE BILL OF EXCHANGE
COMPARISON

Grace Days Not Applicable, as it is always payable 3 days of grace are allowed.
at 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 If a bill of exchange is

be noted or protested dishonoured it can be noted or
protested.

(D) What do you mean by Crossing of cheque and discuss different types of Crossing.
Crossing of Cheques means to draw two lines transverse parallel on left hand corner of the
cheque.It directs the bank to deposit the money directly into the account and not to be pay
cash at the bank counter.

MODES OF CROSSING
Below are the modes of crossing of cheques and the effect of crossing of cheques:
(1) GENERAL CROSSING - When a cheque bears two transverse parallel lines at the left
hand of its top corner. Words such as 'and company' or any other abbreviation (such as & co.)
may be written between these two parallel lines, either with or without words 'not negotiable',
is called General Crossing. 

EFFECT - Payment can be paid through bank account only, and should not be made at
counter of paying bank.

(2) SPECIAL CROSSING - When a cheque bears the name of the bank in between the two
parallel lines, with or without the words 'not negotiable' is called Special Crossing.
 EFFECT - The bank will pay to the banker whose name is written in between the crossing
lines.

(3) RESTRICTIVE CROSSING / ACCOUNT PAYEE CROSSING - In this, crossing of

cheques is done by writing Account Payee or Account Payee only in between the crossing
lines.

EFFECT - Payment will be credited to the account of payee named in the cheque.

(4) DOUBLE CROSSING - When a cheque bears two special crossing, is called Double
Crossing. In this second bank act as agent of the first collecting banker. It is made when the
banker in whose favour the cheque is crossed does not have branch where the cheque is paid.

(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.
It is very correct statement which will understand by the act described below –
A cheque is a widely used method of payment and post-dated cheques are frequently used in
various transactions in business life. Post-dated cheques are given to provide a certain
accommodation to the drawer of the cheque. Therefore, it becomes necessary to ensure that
the drawer of the cheque does not abuse the accommodation given to him. The Negotiable
Instruments Act, 1881 (“Act”) deals with negotiable instruments, such as promissory notes,
bills of exchange, cheques etc. Chapter XVII containing Sections 138 to 142 was introduced
with the aim of inculcating confidence in the efficacy of banking operations and giving
credibility to negotiable instruments employed in business transactions. If a party issues a
cheque as a mode of deferred payment and the payee of the cheque accepts the sameon the
faith that he will get his payment on due date, then he should not suffer on account of non-
payment.
 
The penal provisions contained in Sections 138 to 142 of the Act have been enacted to ensure
that obligations undertaken by issuing cheques as a mode of deferred payment are honoured.
Section 138 of the Act provides for circumstances under which a case for dishonour of
cheques is filed. The ingredients required for complying with Section 138 are as follows:

 a person must have drawn a cheque for payment of money to another for the
discharge of any debt or other liability.
 that cheque has been presented to the bank within a period of three months;
 that cheque is returned by the bank unpaid, either because insufficient of funds or that
it exceeds the amount arranged to be paid from that account by an agreement made with the
bank;
 the payee makes a demand for the payment of the money by giving a notice in writing
to the drawer within 15 days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid;
  The drawer fails to make payment to the payee within 15 days of the receipt of the
notice.

Procedure that is followed in matters with regard to Section 138 of the Act is as follows: 

i. A legal notice is to be issued to the drawer within 15 days of dishonour of cheque by

registered post with all relevant facts. The drawer is given a time of 15 days to make the
payment, if the payment is made then the matter is served and the issue is settled. On the
other hand if the payment is not made then the complainant is to file a criminal case process
under Section 138 of the Act, against the drawer within 30 days from the date of expiry of 15
days specified the notice, with the concerned magistrate court within the jurisdiction.
ii. The complainant or his authorized agent should appear in the witness box and provide
relevant details for filing the case. If the court is satisfied and finds substance in the
complainant, then summons will be issued to the accused to appear before the Court.
iii. If after being served with the summons the accused abstains himself from appearing
then the court may issue a bail able warrant. Even after this if the drawer does not appear a
non-bail able warrant may be issued.
iv. On appearance of the drawer/accused, he may furnish a bail bond to ensure his
appearance during trial. After which the plea of accused is recorded. In case he pleads guilty,
the court will post the matter for punishment. If the accused, denies the charges then he will
be served with the copy of complaint.
v. The Complainant may present his evidence by way of affidavit and produce all
documents including the original in support of his complaint. The complainant will be cross
examined by the accused or his counsel.
vi. The accused will be given an opportunity to lead his evidence. The accused will also
be afforded an opportunity to submit his documents in support of his case, as well as
witnesses in his support. Accused and his witnesses will be cross examined by the
complainant.
vii. The last stage of the proceeding is that of the arguments after which the court will
pass a judgment. If the accused is acquitted then the matter ends, but the complainant can go
on further appeal in the High Court, similarly if the accused is convicted he can file an appeal
in the Sessions Court.

 It must be noted that the offence under Section 138 of the Act, has been made
compoundable.
 

RECENT SUPREME COURT RULINGS FOR SPEEDY DISPOSAL OF CASES

UNDER SECTION 138 OF THE ACT:

In 2017, Delhi High Court in Dayawati v. Yogesh Kumar Gosain took into account the
question whether an offence under Section 138, which is a criminally compoundable case,
could be settled by mediation. The Court held that even though an express statutory provision
enabling the criminal court to refer the complainant and accused persons to alternate dispute
redressal mechanisms has not been specifically provided by the Legislature. The Code of
Criminal Procedure (“Cr.P.C.”) does permit and recognize settlement without stipulating or
restricting the process by which it may be reached. Thus, there is no bar to utilizing the
alternate dispute mechanisms including arbitration, mediation, conciliation (recognized under
Section 89 of Civil Procedure Code, 1908) for the purposes of settling disputes which are the
subject matter of offences covered under Section 320 of the Cr.P.C. It also stated the
proceedings under Section 138 of the Act is distinct from other criminal cases and are really
in the nature of a civil wrong which has been given criminal overtones.
 
In Meters and Instruments (P) Ltd. v. Kanchan Mehta, the Honourable Supreme Court after
taking into consideration the object of introducing Section 138 and other provisions of
Chapter XVII of the Act, observed as under:
 
18. From the above discussion following aspects emerge:

18.1. Offence under Section 138 of the Act is primarily a civil wrong. Burden of proof is on
accused in view presumption under Section 139 but the standard of such proof is
"preponderance of probabilities". The same has to be normally tried summarily as per
provisions of summary trial under the Cr.P.C. but with such variation as may be appropriate
to proceedings under Chapter XVII of the Act. Thus read, principle of Section 258
Cr.P.C, will apply and the Court can close the proceedings and discharge the accused on
satisfaction that the cheque amount with assessed costs and interest is paid and if there is no
reason to proceed with the punitive aspect.

18.2. The object of the provision being primarily compensatory, punitive element being
mainly with the object of enforcing the compensatory element, compounding at the initial
stage has to be encouraged but is not debarred at later stage subject to appropriate
compensation as may be found acceptable to the parties or the Court.

18.3. Procedure for trial of cases under Chapter XVII of the Act has normally to be summary.
The discretion of the Magistrate under second proviso to Section 143, to hold that it was
undesirable to try the case summarily as sentence of more than one year may have to be
passed, is to be exercised after considering the further fact that apart from the sentence of
imprisonment, the Court has jurisdiction under Section 357(3) Cr.P.C. to award suitable
compensation with default sentence under Section 64 IPC and with further powers of
recovery under Section 431 Cr.P.C. With this approach, prison sentence of more than one
year may not be required in all cases.

18.4. Since evidence of the complaint can be given on affidavit, subject to the Court
summoning the person giving affidavit and examining him and the bank's slip being prima
facie evidence of the dishonour of cheque, it is unnecessary for the Magistrate to record any
further preliminary evidence. Such affidavit evidence can be read as evidence at all stages of
trial or other proceedings. The manner of examination of the person giving affidavit can be as
per Section 264 Cr.P.C. The scheme is to follow summary procedure except where exercise
of power under second proviso to Section 143 becomes necessary, where sentence of one
year may have to be awarded and compensation under Section 357(3) is considered
inadequate, having regard to the amount of the cheque, the financial capacity and the conduct
of the accused or any other circumstances."
 
Recent amendment:
 
The Negotiable Instruments (Amendment) Act, 2018 which came into effect from
September 1, 2018 allows the Court trying an offence related to cheque bouncing, to direct
the drawer to pay interim compensation not exceeding 20% of the cheque amount to the
complainant within 60 days of the trial court’s order to pay such compensation. This interim
compensation may be paid either in a summary trial or a summons case where the drawer
pleads not guilty to the accusation made in the complaint; or upon framing of charge in any
other case. Furthermore, the Amendment also empowers the Appellate Court, hearing appeals
against conviction under s. 138, to direct the appellant to deposit a minimum 20 % of the
fine/compensation awarded, in addition to interim compensation

QUESTION 6 –
(A) Explain the provisions relating to incorporation of a Company under Companies
Act 2013.

The Ministry of Corporate affairs announced 98 section of the Companies Act, 2103 on 12th
September 2013. Important provisions are –

 SPECIAL RESOLUTION FOR BORROWING IN EXCESS OF PAID-UP

CAPITAL AND FREE RESERVE

Section 180 of the Act, requires that a company cannot borrow in excess of its paid – up
capital and free reserve unless it is approved by special resolution.

Section 180 does not exempt a private company. Hence, a private cpmpany is also required to
pass special resolution of its proposed borrowing with its existing borrowing exceeds its paid
up capital and free reserve

 ASSOCIATE COMPANY

Section 2(6) defines associate company as the company in which another company holds
atleast 20% of the total share capital or can have significance influence on business decision
due to agreement or joint venture.

As per section 2(76) related party includes associate company™. Hence, contract with
associate company will require disclosure/approval/entry in statutory register as is applicable
to contract with a related party.

 EXPERT

Section 2(38) defines an expert as a person who has authority to issue certificate.

A stakeholder may claim damage from the expert under the Act. Hence, an expert should take
utmost care while issuing certificate/giving advice to a company. An expert should maintain
records to defend his position if claim is made against him.

 FREE RESERVE
Section 2(43) defines free reserve as amount available for distribution as per the latest audited
balance sheet but excludes revaluation reserve and change due to change in carrying value of
it assets and liability routed through profit and loss account or otherwise.

 NET WORTH

Section 2(57), includes securities premium account but excludes write back of depreciation in
net worth.

 OFFICER WHO IS IN DEFAULT

Section 2(60) includes key managerial personnel. Hence, he should take utmost care while
discharging their respective responsibility to avoid damage claim penalty and prosecution
under the Act.

 PRIVATE COMPANY

Section 2(68) permits a private company to have total members upto 200.

It excludes restriction of not accepting deposits from public, as section 76 permits only
prescribed public company to accept deposit from public

As per circular dated 13th September, 2013, submission of Memorandum and Articles of
Associate of a private company to be incorporated must have clauses as per section 2(68).

 PUBLIC COMPANY

Section 2(71) defines public company to include a private company which is a subsidiary of a
public company. The private company may have specific clauses as provided in section
2(68).

 SMALL COMPANY

Section 2(85) defines a small company as a private company with paid up capital not
exceeding rs 50 lakhs or turnover not exceeding rs 2 cr during previous financial year.

Small company is given relaxation from complying with certain provisions of the Act.

 SUBSIDIARY COMPANY
Section 2(87) provides that if a company hold more than one half of total share capital of
other company, then the other company will be subsidiary of the farmer company. Hence,
target percentage is more than 50% and holding in total capital including preference share is
to be considered.

 AUTHENTICATION OF DOCUMENTS, PROCEEDING AND CONTRACTS

Section 21 provides that any key managerial personnel can sign a document or proceedings
requiring authentication or a contract on behalf of the company. Hence, CFO and CEO can
also sign certified true copy of resolution memorandum and articles and other documents.

 PROBHITION ON BUY BACKS OF SHARES

Section 70 prohibit buy back of shares through a subsidiary company or through an

investment company.

It also prohibits buy back of shares if default is made in repayment of Fixed Deposit, Interest
on Fixed Deposit, redemption of debenture or preference shares, payment of dividend and
repayment of term loan or interest there on to a financial institution. However, it exludes
default in payment of working capital facility form a bank.

 EXPLANATORY STATEMENT FOR SPECIAL BUSINESS

Section 102 provides that an explanatory statement for a special business must provide nature
of interest of every director.

If the proposed transaction is with a company then shareholding in other company bit its
promoter, directors, key managerial personnel is to be stated in the statement provided it
exceed 2% in other company.

 QUORUM FOR SHAREHOLDERS™ MEETING

Section 103 provides for quorum of 5 to 30 persons depending upon number of members of a
public company. For a private company, quorum will be 2 members.

 CHAIRMAN OF A GERNERAL MEETING

Section 104 provides that members present at the meeting will appoint one of them as
chairman for the meeting on show of hands unless the articles of the company provides
otherwise.

It is advisable to amend articles to provide that the chairman of the company™ board will be
the chairman of a general meeting.

 APPOINTMENT OF ADDITIONAL DIRECTORE

Section 161 permits appointment of a person as an additional director provided that the
person has not failed to get appointment as a director in general meeting.

 CONTRIBUTION TO POLITICAL PARTIES

Section 182 permits a company which is in existence for not less than three financial years –
to contribute, directly or indirectly, an amount not exceeding 7.5% of the last three years
average profit to political parties.

 LOAN TO DIRECTORS ETC.

Section 185 prohibit loan including any loan represented by book debt to its directors or to
any other person in whom the director is interested or give guarantee or security for a loan
taken by them unless it is given to MD or whole time director as per terms and condition
applicable to all its employees. The scheme should be approved by a special resolution.

 RESTRICTION ON NON CASH TRANSACTION WITH DIRECTORS

Section 192 prohibits purchase or sale of asset from company™ director or director of its
holding company, subsidiary company or associate company unless it is approved by
shareholders at general meeting.

 PROHIBITON ON FORWARD DEALING IN SECURITIES OF THE COMPANY

BY THE DIRECTOR AND KEY MANAGERIAL PERSONNEL

Section 194 prohibits a company™ director and its KMP to do forward trading in the
company™ securities.

CITATION - http://corporatelawreporter.com/2013/09/18/companies-act-2013-important-
provisions--effective-12th-septbecomeember-2013/

(B) Distinguish between a Private Ltd Co and Public Ltd Co.

According to the Companies Act, 2013, 'private company' means a company which,

1. restricts the right to transfer its shares, if any;

2. limits the number of its members to fifty not including

In simple words, the private limited company is a joint stock company. However, it is
governed under the ambit of the Indian Companies Act, 2013. It is formed by voluntary
association of persons with a minimum paid up capital of 1 lakh rupees. While the
maximum number of members is 200, it does not include the current employees or ex-
employees who were members during their employment terms. Employees may continue
to be the member after their termination of employment in the company. Transfer of
shares is restricted. It prohibits the entry of public through subscription of shares and
debentures. The term private limited is used at the end of its name.
According to the Companies Act, 2013, 'public company' means a company which is not
a private company.

A public limited company is a joint stock company. It is governed under the provisions
of the Indian Companies Act, 2013. While there is no limit on the number of members, it
is formed by the association of persons voluntarily with a minimum paid up capital of 5
lakh rupees. Transferability of shares have no restriction. The company can invite public
for subscription of shares and debentures. The term public limited is added to its name at
the time of incorporation.

Key points of difference between a private limited and a public limited company are:

1. A public limited company is a company listed on a recognized stock exchange and

the stocks are traded publicly. On the other hand, a private limited company is
neither listed on the stock exchange nor are they traded. It is privately held by its
members only.

2. The minimum number of members required to start a public company is seven. As

against this, the private limited can be started with a minimum of two members.

3. In case of a public company, it is compulsory to call a statutory general meeting of

members. There is no such compulsion in case of a private company.

4. The issue of prospectus or statement is mandatory in case of public company.

However, this is not the case of a private company.

5. The public company will require a certificate of commencement post incorporation to

begin its operation. In contrast to this, a private company can start its business right
after its incorporation.

6. The transferability of shares is restricted completely in private limited company.

While the shareholders of a public company can transfer their shares freely.

7. Since there is a limited number of people and fewer restrictions, the scope of a
private limited company is limited. In contrary, the scope of a public company is
vast. This is because the owners of the company can raise capital from the general
public and have to abide by may legal restrictions.

8. There is a greater regulatory burden on a public limited company. This is because a

great amount of information has to be made available to the public who are
shareholders or prospective shareholders. A lot of money has to be invested in order
to prepare reports and disclosures that match with the regulations provided by SEBI.
9. A signed written resolution is received by holding general meetings of a private
limited company.

10. While it mandatory for public companies to appoint a company secretary, private
companies may choose to do so only at their will.

Depending upon one's need a type of company is chosen to be registered. However, the
principal reason for choosing a public company is to have the ability to offer shares to
the public. One has to pay a price for this by complying with a greater number of
restrictions and considerable loss of privacy.

Here is a list of features that differentiate a public company from a private limited
company:

Features Public Limited Private Limited Company

Company

Minimum members 7 2

Minimum directors 3 2

Maximum members Unlimited 200

Minimum capital 5,00,000 1,00,000

Invitation to public Yes No

Issue of prospectus Yes No

Quorum at AGM 5 members 2 members

Certificate for commencement Yes No

of business

Term used at the end of name Limited Private limited

Managerial remuneration No restriction Cannot exceed more than 11%

of net profits

Statutory meeting (mandatory) Yes No

In situations where a public company no longer wishes to operate within the business
model, there is an option for it to return to the private limited company. This can be done
by buying back all outstanding shares form the current shareholders. The company is
delisted from the stock exchange where it has registered once this purchase is done. It
will then return to operate as a private limited company. Recent finance Bill has further
added a new clause relating to the value of assets held by private companies. According
to this, prior to three years of converting a private limited company, the value of assets
as detailed in the books of accounts should not exceed 5 crore rupees.

In situations where a private limited company thinks of converting into a public

company, it will make the compliances easier and a company will exercise greater
control. This means a company would no longer hold a meeting of shareholders and pass
a special resolution regarding part related transactions. Recent trends revealed by
Ministry of Corporate Affairs show a sharp increase in the number of companies that
have rushed to become private entities. This has been the scenario ever since the
enactment of the Companies Act, 2013.

(C) Discuss Memorandum of Association and Articles of Association as the Basic

Documents in formation of a Company and briefly describe their contents.
The Memorandum of Association or MOA of a company defines the constitution and
the scope of powers of the company. In simple words, the MOA is the foundation on which the
company is built.

OBJECT OF REGISTERING A MEMORANDUM OF ASSOCIATION

 The MOA of a company contains the object for which the company is formed. It
identifies the scope of its operations and determines the boundaries it cannot cross.

 It is a public document according to Section 399 of the Companies Act, 2013. Hence,

any person who enters into a contract with the company is expected to have knowledge of
the MOA.

 It contains details about the powers and rights of the company.

Under no circumstance can the company depart from the provisions specified in
the memorandum. If it does so, then it would be ultra vires the company and void.

FORMAT OF MEMORANDUM OF ASSOCIATION

According to Section 4 of the Companies Act, 2013, companies must draw the MOA in the form
given in Tables A-E in Schedule I of the Act. Here are the details of the forms:

 Table A: Form for the memorandum of association of a company limited by shares.

 Table B: Form for the memorandum of association of a company limited

by guarantee and not having a share capital.

 Table C: Form for the memorandum of association of a company limited by guarantee

and having a share capital.

 Table D: Form for the memorandum of association of an unlimited company.

 Table E: Form for the memorandum of association of an unlimited company and
having share capital.
CONTENT OF THE MOA

The following information is mandatory in an MOA:

NAME CLAUSE

1. For a public limited company, the name of the company must have the word ‘Limited’
as the last word

2. For the private limited company, the name of the company must have the words
‘Private Limited’ as the last words.
This is not applicable to companies formed under Section 8 of the Act who must include one of
the following words, as applicable:

 Foundation

 Forum

 Association

 Federation

 Chambers

 Confederation

 Council

 Electoral Trust, etc.

REGISTERED OFFICE CLAUSE
It must specify the State in which the registered office of the company will be situated.

OBJECT CLAUSE
It must specify the objects for which the company is being incorporated. Further, if a company
changes its activities which are not reflected in its name, then it can change its name within six
months of changing its activities. The company must comply with all name-change provisions.

LIABILITY CLAUSE
It should specify the liability of the members of the company, whether limited or unlimited.
Also,

1. For a company limited by shares – it should specify if the liability of its members is
limited to any unpaid amount on the shares that they hold.
2. For a company limited by guarantee – it should specify the amount undertaken by
each member to contribute to:
i. The assets of the company when it winds-up. This is provided that he is a
member of the company when it winds-up or the winding-up happens within one
year of him ceasing to be a member. In the latter case, the debts and liabilities
considered would be those contracted before he ceases to be a member.

ii. The costs, charges, and expenses of winding up and the adjustment of the rights
of the contributors among themselves.
CAPITAL CLAUSE
This is valid only for companies having share capital. These companies must specify the amount
of Authorized capital divided into shares of fixed amounts. Further, it must state the names of
each member and the number of shares against their names.

ASSOCIATION CLAUSE
The MOA must clearly specify the desire of the subscriber to form a
company. This is the last clause.

FOR ONE-PERSON-COMPANY
The MOA must specify the name of the person who becomes a member of the company in the
event of the death of the subscriber.

Keep in mind the following aspects before submitting the MOA:

1. Print the MOA

2. Divide it into paragraphs

3. Number the pages in sequence

4. Ensure that at least seven people sign it (2 in the case of a private limited company and
one in case of a One Person company).

5. Have at least one witness to attest the signatures

6. Enter particulars about the signatories and witnesses like address, description,
occupation, etc.
A FEW THINGS TO REMEMBER

 A company can subscribe to an MOA through its agent

 A minor cannot sign an MOA. However, the guardian of a minor, who subscribes to the
MOA on his behalf, will be deemed to have subscribed in his personal capacity.

 Companies can attach additional provisions as required apart from the mandatory ones
mentioned above.
Articles of Association (AOA) specifies the internal regulations of the company. In this post,
we will look at the Articles of Association (AOA) in detail.The AOA contains the bye-laws of
the company. Therefore, the director and other members must perform their functions as regards
the management of the company, its accounts, and audits in accordance with the AOA.

Content and Model of Articles of Association

According to Section 5 of the Companies Act, 2013, the AOA must have the following
components:

REGULATIONS
The AOA must contain the regulations for the management of the company.

INCLUSION OF MATTERS
The Articles must specify all matters, in accordance with the rules. Furthermore, a company can
include additional matters deemed necessary for its management.

PROVISIONS FOR ENTRENCHMENT

Entrenchment means fortification or protection. The AOA can contain provisions for
entrenchment for specific provisions. The provisions for entrenchment can ensure that the
specified provisions are altered only if certain conditions or procedures are met or complied
with. These conditions are usually more restrictive than those applicable for a special resolution.

The inclusion of the provisions for entrenchment is possible:

 On the formation of the company

 Also, by amending the Articles with approval from all members of the company.
Further, in the case of a public limited company, with a special resolution.
Regardless of whether the provisions for entrenchment are added on the formation or after an
amendment, the company must give a notice to the Registrar of the same.

FORMS OF AOA
Schedule I of the Companies Act, 2013 provides forms for AOA in tables F, G, H, I and J for
different types of companies. Further, the articles must be in the respective form.

MODEL ARTICLES
A company can adopt all or any of the regulations specified in the model articles.
 COMPANY REGISTERED AFTER THE COMMENCEMENT
OF THE ACT
IF… The registered articles of such a company do not exclude or modify the regulations
contained in the model articles applicable to such company

THEN… Those regulations are the regulations of that company as if they were contained in the
duly registered articles of the company.

DIFFERENCE BETWEEN MEMORANDUM AND ARTICLES OF ASSOCIATION

Parameter MOA AOA

It lays down the rules and regulations for

It defines and delimits the objectives of a
the internal management of the
Objectives company. Further, it specifies
company. Hence, it also contains the
the conditions of incorporation.
bye-laws of the company.

It defines the relationship of the It defines the relationship between the

Relationship
company with the outside world. company and its members.

It can be altered only under special

circumstances. Also, it usually requires It can be altered by passing a special
Alteration
the permission of the resolution.
Regional Director or the Tribunal.

Acts beyond the scope of the MOA are
ultra vires and void. Furthermore, even
Ultra Vires
unanimous consent of all shareholders
cannot ratify it.
Acts which are ultra vires the AOA can
be ratified by a special resolution of
the shareholders. However, such acts
should not be ultra vires the MOA.
(D) Explain Doctrine of ULTRAVIRES and Doctrine of INDOOR MANAGEMENT
with reference to MOA and AOA.
DOCTRINE OF ULTRAVIRES

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.

THE FLIP-SIDE
While the main advantage of the Doctrine of Ultra Vires is the
protection of shareholders and creditors, it has disadvantages too. This
doctrine prevents the company from changing its activities in a direction
agreed by all members. Further, a special resolution can alter the object
clause of the Memorandum. This defeats the core purpose of the doctrine.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management is an exception to the earlier doctrine of constructive notice.
It is important to note that the doctrine of constructive notice does not allow outsiders to have
notice of the internal affairs of the company.

Hence, if an act is authorized by the Memorandum or Articles of Association, then the outsider
can assume that all detailed formalities are observed in doing the act. This is the Doctrine of
Indoor Management or the Turquand Rule. This is based on the landmark case between The
Royal British Bank and Turquand. In simple words, the doctrine of indoor management means
that a company’s indoor affairs are the company’s problem.

Therefore, this rule of indoor management is important to people dealing with a company
through its directors or other persons. They can assume that the members of the company are
performing their acts within the scope of their apparent authority. Hence, if an act which is valid
under the Articles, is done in a particular manner, then the outsider dealing with the company
can assume that the director/other officers have worked within their authority.

EXCEPTIONS TO THE DOCTRINE OF INDOOR

MANAGEMENT
The Turquand rule or the law of indoor management is not applicable to the following cases:
 THE OUTSIDER HAS ACTUAL OR CONSTRUCTIVE KNOWLEDGE OF AN
IRREGULARITY
In such cases, the rule of indoor management does not offer protection to the outsider dealing
with the said company.

THE OUTSIDER BEHAVES NEGLIGENTLY

The rule of Indoor management does not protect a person dealing with a company if he does not
initiate an inquiry despite suspecting an irregularity. Further, this rule does not offer protection if
the circumstances surrounding the contract are suspicious. For example, the outsider should get
suspicious if an officer purports to act in a manner outside the scope of his authority.

FORGERY
The doctrine of indoor management is applicable to irregularities that affect a transaction except
for forgery. In case of a forgery, the transaction is deemed null and void.

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

 POWERS OF DIRECTORS –

1. To make call on shares in respect of unpaid money.

2. To authorize lack of shares.
3. To issue debenture, whether in or outside India.
4. To invest in funds.
5. To borrow money otherwise than on debentures.
6. To make loans or give guarantee in respect of loans.
7. To approve the financial statement and board report.
8. To diversify the business of the company.
9. To approve amalgamation, merger or reconstruction
10. To take over a company or acquire a company or substantial stake in another company.
11. To fill casual vacancy
12. To appoint the first auditor of the company.
13. Make political contribution
14. To appoint alternate and additional directors.
15. To declare interim dividend.
16. To appoint or remove key managerial personnel
17. To declare solvency where the company winds up voluntarily.
18. To recommend the rate of dividend on the shares of the company subjected to approval by
shareholders of the company.
19. To sell or lease any asset of the company.
20. To allow time to the director for the repayment of the loan.
21. To borrow money in excess of paid up capital and free reserves.
22. To appoint a sole agent for more than five years.

 DUTIES OF DIRECTORS –

1. To form policy and determine objectives of a company.

2. To delegate power to any committee if the Articles permit.
3. To issue instruction to subordinates for the implementation of policy to review company
progress.
4. To appoint their subordinate officer, managing director, Manager, Secretary, other
employees.
5. To act in accordance with the Articles of the company providing that articles are subject
to the provision of this Act.
6. To act in good faith in order to promote the objects of the company.
7. To perform duties with due and reasonable care and diligence.
8. Try not to achieve or attempt to achieve any undue gain or advantage either to himself or
to his relatives.
9. Disclose his shareholding in a company.
10. Disclose his interest in contracts of the company.
11. Disclose their name, address and occupation.
12. Duty to take up qualification shares within two months after his appointment.
13. Decide the minimum subscription and issue prospectus. It must not contain any false or
misleading statement.
14. To call statutory and anuual general meeting of the company.
15. To ensure full and correct disclosure in prospectus of all matters as required by law.
16. To sign the prospectus before it has been delivered to the registrar.
17. To deliver the prospectus to the registrar before the prospectus is issued to the public.
18. To deposit application money in a scheduled bank. They shall not utilize money other
than purposes mentioned in the Act.
19. To file return of allotment of securities with the registrar.
20. To declare dividend and arrange for the payment.
21. To file with registrar the reports and resolution as required by the act.
22. To issue forfeit and transfer shares.